Prospectus May 1, 1996
o The Park Avenue Portfolio(R)
This Prospectus sets forth important information which a prospective
investor should know before investing in The Park Avenue Portfolio (the
"Portfolio"), a diversified open-end management investment company. Shares of
the Portfolio are currently offered in six series. Each series is called a
"Portfolio Fund." Each of the Portfolio Funds offers Class A shares. Four of the
Portfolio Funds also offer a second class of shares, Class B shares. Each class
of shares within a Portfolio Fund has the same investment objective and
policies, but is sold at an offering price that reflects differing sales charges
and expense levels. The Class A shares are sold subject to an initial sales
charge or "load" and the Class B shares are sold subject to a contingent
deferred sales load. Each class has distinct advantages and disadvantages, and
investors should choose the class that best suits their individual needs and
circumstances.
The Portfolio Funds are:
o The Guardian Park Avenue Fund (Class A and Class B) which invests in U.S.
equity securities;
o The Guardian Asset Allocation Fund (Class A and Class B) which actively
allocates its investments among equity securities, debt obligations and money
market instruments;
o The Guardian Baillie Gifford International Fund (Class A and Class B)
which invests in equity securities issued by foreign companies;
o The Guardian Investment Quality Bond Fund (Class A only) which invests in
investment grade debt obligations and U.S. government securities;
o The Guardian Tax-Exempt Fund (Class A only) which invests in investment
grade obligations issued by state and local authorities; and
o The Guardian Cash Management Fund (Class A and Class B) which invests in
money market instruments.
A Statement of Additional Information for the Portfolio, dated May 1, 1996,
has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated into this Prospectus by reference. A free copy of the Statement of
Additional Information may be obtained and further inquiries can be made by
writing Guardian Investor Services Corporation, 201 Park Avenue South, New York,
New York 10003 or by calling 1-800-221-3253.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, and the shares are not federally insured
by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency. Investment in a Portfolio Fund involves investment risk, including
possible loss of the principal amount invested. Investments in shares of the
Cash Fund are neither insured nor guaranteed by the U.S. government. While the
Cash Fund seeks to maintain a stable price of $1.00 per share, there is no
assurance that it will be able to do so.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PLEASE
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
1
<PAGE>
o Contents
o Prospectus Summary 3
o Transaction Costs and Fund Expenses 7
o Financial Highlights 9
o Investment Objectives and Policies 13
o Risk Considerations 19
o Special Investment Techniques 20
o Management 24
o How to Purchase Shares 27
o How to Redeem Shares 30
o Special Purchase and
Redemption Plans 32
o Exchanges 33
o Calculation of Net Asset Values 35
o Performance Results 35
o Dividends and Distributions 36
o Taxes 36
o Voting Rights and Liabilities 38
o Shareholder Services 39
2
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Prospectus Summary
Important information about investing in the Portfolio Funds and their
features is summarized below. This summary is qualified in its entirety by the
more detailed information contained within this Prospectus. Cross-references in
this summary are to headings in the body of the Prospectus.
o The Portfolio Funds
Shares of the Portfolio are currently offered in six series or "Portfolio
Funds". Each of the Portfolio Funds offers Class A shares. Four of the Portfolio
Funds, namely, The Guardian Park Avenue Fund, The Guardian Asset Allocation
Fund, The Guardian Baillie Gifford International Fund and The Guardian Cash
Management Fund, are offered in two classes of shares. These Portfolio Funds are
referred to as the "Multiple Class Funds". Both classes are described in this
Prospectus. In general, the Class A shares are sold subject to an initial sales
load and lower operating expenses and the Class B shares are sold subject to a
contingent deferred sales load and higher operating expenses. The Class A shares
of The Guardian Cash Management Fund are offered without an initial sales load.
Shares of one class of Portfolio Funds may only be exchanged for shares of the
same class of another Portfolio Fund.
o Investment Objectives of the Portfolio Funds
Each Portfolio Fund has a separate and distinct investment objective (see
below). Each Portfolio Fund is managed separately, so the risks and
opportunities of each Portfolio Fund should be examined separately. A Portfolio
Fund's investment objective may not be changed without shareholder approval.
The Guardian Park Avenue Fund
The "Park Avenue Fund" seeks long-term growth of capital. Current income is
of lesser importance to the Park Avenue Fund; however, it is expected that
growth of capital will be accompanied by growth in income. The Park Avenue Fund
normally invests at least 80% of its assets in U.S. common stocks or convertible
securities.
The Guardian Asset Allocation Fund
The "Asset Allocation Fund" seeks long-term total investment return
consistent with moderate risk. The Asset Allocation Fund uses theoretical models
to allocate its assets among the following asset classes: equity securities,
debt obligations and money market instruments. The Asset Allocation Fund's
investments in each asset class are separately and actively managed, and are the
same types of securities acquired for the Park Avenue Fund, the Bond Fund and
the Cash Fund.
The Guardian Baillie Gifford International Fund
The "International Fund" seeks long-term growth of capital. Income is not a
specific objective, although it is anticipated that growth of capital will be
accompanied by dividend income. The International Fund ordinarily invests at
least 80% of its net assets in common stocks issued by companies domiciled
outside of the United States and in convertible securities which carry the right
to buy such common stocks.
The Guardian Investment Quality Bond Fund
The "Bond Fund" seeks a high level of current income and capital
appreciation without undue risk to principal. The Bond Fund normally invests at
least 80% of the value of its assets in (1) corporate bonds and other debt
obligations rated in one of the four highest rating categories established by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
("S&P") (commonly referred to as investment grade bonds); and (2) U.S.
government securities and obligations of U.S. government agencies and
instrumentalities. The Bond Fund's assets typically include mortgage-backed
securities.
The Guardian Tax-Exempt Fund
The "Tax-Exempt Fund" seeks to maximize current income exempt from federal
income taxes, consistent with preservation of capital. The Tax-Exempt Fund
invests at least 80% of its net assets in intermediate-term and long-term
investment grade municipal obligations. These are debt securities that are
issued by or on behalf of states, territories and possessions of the United
States and the District of Columbia, and their political subdivisions, agencies,
authorities and instrumentalities, the interest on which is, in the opinion of
bond counsel to the issuer, exempt from federal income tax ("Municipal
Obligations").
3
<PAGE>
The Guardian Cash Management Fund
The "Cash Fund" seeks as high a level of current income as is consistent
with liquidity and preservation of capital. The Cash Fund primarily invests in
short-term money market instruments such as commercial paper, certificates of
deposit, bankers acceptances, U.S. government securities, repurchase agreements
and other corporate obligations. Although not guaranteed, the Cash Fund is
expected to maintain a stable price of $1.00 per share.
SEE "INVESTMENT OBJECTIVES AND POLICIES" FOR INFORMATION ABOUT EACH
PORTFOLIO FUND'S INVESTMENT PROGRAM. THERE CAN BE NO ASSURANCE THAT A PARTICULAR
PORTFOLIO FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE.
o Who Should Invest; Risk Factors
An investor should select the Portfolio Funds which reflect his or her
financial goals, time horizon and risk tolerance. No single Portfolio Fund is
intended to provide a complete or balanced investment program, but each can
serve as one component of an investor's program to accumulate assets for
retirement, college tuition or other major goals.
By investing in a Portfolio Fund, an investor assumes the risks of
investing in the types of securities acquired by such Portfolio Fund. Investing
in securities involves varying degrees of market risk, credit or financial risk,
and prepayment risk. Foreign securities present additional special risks. For
example, political, social and economic developments abroad might adversely
affect foreign investments. Often, there is less information publicly available
about foreign issuers, so it can be more challenging to assess the viability and
prospects of foreign companies. And the value of investments that are
denominated in foreign currencies may be adversely affected by fluctuations in
foreign currency values.
Each Portfolio Fund's net asset value per share (i.e., share price) will
fluctuate to reflect changes in the value of the securities in its portfolio.
The value a shareholder receives upon redemption of a Portfolio Fund's shares
may be higher or lower than original cost.
An investor considering the purchase of shares of a Multiple Class Fund
should choose the class that best suits their needs and circumstances. An
investor should keep in mind that Class B shares have higher overall operating
expenses than Class A shares, a difference that will be reflected in the net
asset values and investment experience of each class. Also, it should be noted
that investors in Class B shares will have the full amount of their purchase
initially invested since there is no initial sales load, while the initial
investment made by investors in Class A shares will reflect the deduction of an
initial sales load. At redemption, Class B shares may be subject to a contingent
deferred sales load, while no such charge is imposed on Class A shares.
THE TABLE BELOW SUMMARIZES CERTAIN CHARACTERISTICS OF EACH PORTFOLIO FUND.
HOWEVER, THERE CAN BE NO ASSURANCE THAT A PORTFOLIO FUND WILL SHOW THESE
CHARACTERISTICS AT ALL TIMES. IN ADDITION, SEE "RISK CONSIDERATIONS,"
"INVESTMENT OBJECTIVES AND POLICIES" AND "SPECIAL INVESTMENT TECHNIQUES."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
The Park Avenue Portfolio -- Characteristics of the Funds
- ------------------------------------------------------------------------------------------------------------------------------------
Risk of Share
Fund Growth Potential Income Potential Price Change Typical Investments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Park Avenue Higher Lower Higher U.S. common stocks and convertible securities
- ------------------------------------------------------------------------------------------------------------------------------------
Common stocks and convertible securities issued
International Higher Lower Higher by foreign companies
- ------------------------------------------------------------------------------------------------------------------------------------
Investment grade debt obligations and U.S.
Bond Lower Higher Moderate government securities, including mortgage-backed
securities
- ------------------------------------------------------------------------------------------------------------------------------------
Investment grade debt obligations issued by state and
Tax-Exempt Lower Higher Moderate local authorities
- ------------------------------------------------------------------------------------------------------------------------------------
Cash N/A Low-Moderate Low Money market instruments
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. common stocks and convertible securities;
investment grade debt obligations and U.S.
Asset Allocation Moderate Moderate Moderate government securities including mortgage-backed
securities; money market instruments
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
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o Investment Advisers and Distributor
Guardian Investor Services Corporation ("GISC") and Guardian Baillie
Gifford Limited ("GBG") are the Portfolio Funds' investment advisers. GISC is
wholly owned by The Guardian Insurance & Annuity Company, Inc. ("GIAC") which,
in turn, is wholly owned by The Guardian Life Insurance Company of America
("Guardian Life"). GBG was formed by GIAC and the Scottish investment management
firm of Baillie Gifford Overseas Limited ("BG Overseas"). BG Overseas, which
serves as the International Fund's sub-investment adviser, is wholly owned by
Baillie Gifford & Co., a Scottish firm which provides investment management
services to institutional investors. GISC also acts as principal underwriter and
distributor of all of the Portfolio Funds' shares, provides services to the
Funds pursuant to an administrative services agreement and provides additional
distribution-related services to the Class B shares of the Multiple Class Funds
under a 12b-1 plan. See "Management." The investment advisory and administrative
services fees paid by all of the Funds and the 12b-1 fees paid by the Funds
which offer Class B shares are set forth in the "Transaction Costs and Fund
Expenses" table.
o Purchases
Shares of a Portfolio Fund may be purchased at the "public offering price" which
is a Fund's net asset value per share ("NAV"), plus any applicable sales load.
Each Portfolio Fund's NAV is calculated as of the close of business on each day
that the New York Stock Exchange ("NYSE") is open. Investors may select either
Class A shares of any Portfolio Fund or Class B shares of the Multiple Class
Funds. Investors who are considering whether to purchase Class A or Class B
shares of the Multiple Class Funds should evaluate factors such as the amount of
their investment and the length of time it is expected that the shares will be
held. See "How to Purchase Shares."
o Minimum Initial Investment
The minimum initial investment is $1,000 per Portfolio Fund unless shares
are purchased for individual retirement plans or through payroll deduction
plans. Additional payments must be at least $100. The minimum initial investment
for qualified retirement plan accounts is $250 and additional payments must be
at least $50. The minimum for both initial and additional payments through
payroll deduction plans is $50. See "Calculation of Net Asset Values" and "How
to Purchase Shares".
o Class A Shares
Class A shares of the Portfolio Funds, other than the Cash Fund, are
offered at net asset value plus any applicable initial sales load. The maximum
load is 4.50% of the NAV as of the close of business on the date of purchase (or
4.71% of the amount invested). Class A shares of the Cash Fund are offered at
NAV without a sales load. Class A shares may be more beneficial to larger
investors, who will be able to qualify for the lower sales loads which are
applicable to larger investments. See "Class A Shares -- Initial Sales Load
Alternative".
o Class B Shares
Class B shares of the Multiple Class Funds are offered at NAV, without any
initial sales load. Class B shares are, however, sold subject to a contingent
deferred sales load ("CDSL") which is imposed if the shares are redeemed within
the first six years of the anniversary date of purchase. The maximum CDSL
imposed is 4.0% in the first year. Thereafter, the CDSL declines annually to
1.0% in the sixth year following purchase to 0% after the sixth anniversary of
purchase. Class B shares acquired pursuant to dividend reimbursement or
distribution will not be subject to a CDSL upon their redemption. Class B shares
automatically convert into Class A shares (which pay lower ongoing operating
expenses) after the eighth anniversary of purchase. The maximum investment which
will be accepted for the purchase of Class B shares of a Portfolio Fund is
$250,000. See "Class B Shares -- Contingent Deferred Sales Load Alternative".
o Redemptions
Shares of a Portfolio Fund may be redeemed at the NAV next determined after
the transfer agent receives a proper redemption request. Each Multiple Class
Fund may impose a CDSL on redemptions of Class B shares. See "Class B Shares --
Contingent Deferred Sales Load Alternative". Redemption requests may be made in
5
<PAGE>
writing, by telephone (if such privilege has been previously requested), or, for
Class A shares of the Cash Fund only, by check. Shares of the Portfolio Funds
may also be redeemed through selected broker-dealer firms. Such broker-dealers
may charge fees for their services in addition to any other currently applicable
sales loads. See "How to Redeem Shares".
o Special Purchase and Redemption Plans
The Portfolio Funds offer the following special purchase and redemption
programs: Automatic Investment Plan, Rights of Accumulation, Investment by
Letter of Intent, Automatic Withdrawal Plan and Checkwriting from the Class A
shares of Cash Fund. See "Special Purchase and Redemption Plans."
o Dividends
Net investment income is normally distributed semi-annually by the Park
Avenue, International and Asset Allocation Funds, and monthly by the Bond and
Tax-Exempt Funds. Net realized short-term and long-term capital gains for these
Portfolio Funds are distributed at least annually. The Cash Fund declares
dividends of net investment income and net realized capital gains daily, and
such dividends are distributed monthly.
Income and capital gains dividends can be automatically reinvested in
additional shares of the distributing Portfolio Fund without a sales load. See
"Dividends and Distributions" and "Shareholder Services".
o Exchanges
Shares of one class of a Portfolio Fund may generally be exchanged for
shares of the same class of another Portfolio Fund without the imposition of an
initial sales load or CDSL. Shares of one class of a Portfolio Fund may not be
exchanged for shares of another class of any Portfolio Fund. Shares are
exchanged at their relative NAV's as next determined after the transfer agent
receives a proper exchange request, except that a sales load may be imposed upon
certain exchanges from the Class A shares of the Cash Fund to the shares of the
other Class A Portfolio Funds. Any applicable CDSL payable upon the redemption
of Class B shares following an exchange will be calculated from the date of the
initial purchase of Class B shares, not from the date of the exchange. The
Portfolio Funds also offer Dollar Cost Averaging, an automatic exchange program.
See "Exchanges" and "Taxes".
6
<PAGE>
The Park Avenue Portfolio
Transaction Costs and Fund Expenses
================================================================================
This table is intended to assist investors in understanding the expenses
associated with investing in Class A and Class B shares of the Portfolio Funds.
Information presented in the table is just an example, and actual expenses can
be higher or lower than those shown. The percentages shown below representing
management fees and other expenses for the Class A shares are based on
annualized expenses incurred for the year ended December 31, 1995, except that
the percentages have been adjusted to reflect, effective May 1, 1996, (i) the
imposition of a .25% administrative service fee on Class A shares (see
"Management-Administrative Services Agreement"), (ii) the elimination of 12b-1
fees on Class A shares, and (iii) the elimination of expense reimbursements for
the Cash Fund. The percentages for the Class B shares are based on estimated
expenses for their first year of operations. The "Examples" assume a 5% annual
rate of return. This hypothetical rate of return does not represent the past or
future performance of any Portfolio Fund or class thereof.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Park Avenue International Asset Tax-Exempt Bond
Fund* Fund Allocation Fund Cash Fund Fund*** Fund***
----------------- ----------------- ----------------- ----------------- ------- -------
Class A Class B Class A Class B Class A Class B Class A Class B Class A Class A
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed
on Purchases (as a
percentage of NAV) .............. 4.50% None 4.50% None 4.50% None None None 4.50% 4.50%
Maximum Sales Load Imposed
on Reinvested Dividends ........... None None None None None None None None None None
Deferred Sales Load (as a
percentage of redemption
proceeds) ........................ None 4.00% None 4.00% None 4.00% None 4.00% None None
Exchange Fee ........................ None None None None None None None** None None None
Annual Portfolio Fund Operating
Expenses (as a percentage of
average net assets)
Management Fees ..................... .50% .50% .80% .80% .65% .65% .50% .50% .50% .50%
12b-1 Fees .......................... .00% .75% .00% .75% .00% .75% .00% .75% .00% .00%
Other Expenses + .................... .31% .70% .94% 1.26% .60% .84% .72% 1.03% .25% .25%
--- --- --- ---- --- --- --- ---- ---- ----
Total Fund Operating Expenses
(after expense
reimbursements) ................... 0.81% 1.95% 1.74% 2.81% 1.25% 2.24% 1.22% 2.28% 0.75% 0.75%
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
* This table does not reflect deductions for expenses which relate to owning
Class A Park Avenue Fund shares through a Value Guard variable annuity
contract. The Value Guard prospectus provides information about such
expenses.
** A sales load may be imposed upon certain exchanges from the Class A Cash
Fund to the other Class A Portfolio Funds. See "Exchanges."
*** The fees and expenses shown for the Class A Bond and Tax-Exempt Funds
reflect GISC's assumption of some or all of these Funds' "Other Expenses."
If these Funds paid all of their expenses, their "Other Expenses" would be
0.64% and 1.04% and their "Total Portfolio Fund Operating Expenses" would
be 1.14%and 1.54%, respectively, based on actual results for the year ended
December 31, 1995.
+ Includes Administrative Service Fee.
7
<PAGE>
Examples of Fund Expenses
You would pay the following expenses on a hypothetical $1,000 investment in
each Fund, assuming(1) a 5% annual return and (2) redemption at the end of each
time period
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Park Avenue Fund
Class A $53 $ 70 $ 88 $141
Class B $59 $ 87 $111 $202
- --------------------------------------------------------------------------------
International Fund
Class A $62 $ 98 $136 $242
Class B $70 $120 $167 $316
- --------------------------------------------------------------------------------
Asset Allocation Fund
Class A $57 $ 83 $111 $190
Class B $64 $103 $138 $259
- --------------------------------------------------------------------------------
Cash Fund
Class A $12 $ 39 $ 67 $148
Class B $63 $106 $147 $235
- --------------------------------------------------------------------------------
Tax-Exempt Fund
Class A $52 $ 68 $ 85 $134
- --------------------------------------------------------------------------------
Bond Fund
Class A $52 $ 68 $ 85 $134
- --------------------------------------------------------------------------------
You would pay the following expenses on a hypothetical $1,000 investment in
each Fund, assuming (1) a 5% annual return and (2) no redemption at the end of
each time period
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Park Avenue Fund
Class A $53 $ 70 $ 88 $141
Class B $17 $ 54 $ 93 $202
- --------------------------------------------------------------------------------
International Fund
Class A $62 $ 98 $136 $242
Class B $29 $ 88 $150 $317
- --------------------------------------------------------------------------------
Asset Allocation Fund
Class A $57 $ 83 $111 $190
Class B $23 $ 71 $121 $259
- --------------------------------------------------------------------------------
Cash Fund
Class A $12 $ 39 $ 67 $148
Class B $23 $ 72 $123 $235
- --------------------------------------------------------------------------------
Tax-Exempt Fund
Class A $52 $ 68 $ 85 $134
- --------------------------------------------------------------------------------
Bond Fund
Class A $52 $ 68 $ 85 $134
- --------------------------------------------------------------------------------
8
<PAGE>
Financial Highlights
The following tables provide selected data, total returns and ratios for
one Class A share of each Portfolio Fund, and have been audited by Ernst & Young
LLP, independent auditors. This information is supplemented by the audited
financial statements for the Portfolio Funds, and their accompanying notes,
which appear in the 1995 Annual Report to Park Avenue Portfolio shareholders.
The 1995 Annual Report includes further information about the Fund's 1995
performance and the unqualified report of Ernst & Young LLP on the Portfolio's
1995 financial statements. The Annual Report is incorporated by reference into
the Statement of Additional Information. Comparable information concerning Class
B shares is not available since the public offering of this class of shares had
not commenced as of the date of this Prospectus. Free copies of the Statement of
Additional Information and the Annual Report may be obtained by calling
1-800-221-3253 or by writing to GISC, 201 Park Avenue South, New York, New York
10003.
o The Guardian Park Avenue Fund
Selected data for a Class A share of beneficial interest outstanding
throughout the periods indicated:
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended December 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $26.89 $28.63 $25.17 $22.23 $18.26 $21.56 $20.46 $18.63 $20.74 $21.20
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations
Net investment income 0.33 0.31 0.50 0.45 0.65 0.68 0.92 0.60 0.47 0.35
Net realized and
unrealized gain/(loss)
on investments 8.87 (0.72) 4.56 4.05 5.71 (3.28) 3.88 3.23 0.20 3.33
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease)
from investment
operations 9.20 (0.41) 5.06 4.50 6.36 (2.60) 4.80 3.83 0.67 3.68
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to
shareholders
Dividends from net
investment income (0.33) (0.31) (0.50) (0.44) (0.66) (0.70) (0.98) (0.55) (0.60) (0.33)
Distributions from net
realized gain on
investments (1.79) (1.02) (1.10) (1.12) (1.73) -- (2.72) (1.45) (2.18) (3.81)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.12) (1.33) (1.60) (1.56) (2.39) (0.70) (3.70) (2.00) (2.78) (4.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $33.97 $26.89 $28.63 $25.17 $22.23 $18.26 $21.56 $20.46 $18.63 $20.74
- ------------------------------------------------------------------------------------------------------------------------------------
Total return* 34.28% (1.44%) 20.28% 20.48% 35.16% (12.21%) 23.66% 20.78% 2.95% 18.38%
====================================================================================================================================
Ratios/supplemental data:
Net assets, end of year
(000's omitted) $972,275 $640,917 $560,193 $335,660 $270,095 $216,457 $228,190 $176,000 $157,045 $136,243
Ratio of expenses to
average net assets 0.81% 0.84% 0.81% 0.68% 0.67% 0.69% 0.70% 0.69% 0.68% 0.71%
Ratio of net investment
income to average
net assets 1.07% 1.15% 1.89% 1.94% 2.96% 3.51% 4.01% 2.82% 2.08% 1.79%
Portfolio turnover 78% 54% 46% 64% 57% 47% 47% 58% 50% 48%
====================================================================================================================================
</TABLE>
* Excludes effect of sales load.
9
<PAGE>
o The Guardian Cash Management Fund
Selected data for a Class A share of beneficial interest outstanding
throughout the periods indicated:
<TABLE>
<CAPTION>
====================================================================================================================================
Three
Months
Ended
Year Ended December 31, Dec. 31 Year Ended September 30,
1995 1994 1993 1992 1991 1990 1989 1988 1988 1987 1986
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment
income 0.051 0.034 0.021 0.030 0.053 0.076 0.086 0.024 0.066 0.053 0.063
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders
Dividends from net
investment
income (0.051) (0.034) (0.021) (0.030) (0.053) (0.076) (0.086) (0.024) (0.066) (0.053) (0.063)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
- ------------------------------------------------------------------------------------------------------------------------------------
Total return 5.22% 3.48% 2.15% 3.06% 5.70% 7.91% 8.60% 2.40%** 6.60% 5.30% 6.30%
====================================================================================================================================
Ratios/Supplemental Data:
Net assets, end of
period (000's
omitted) $69,913 $56,730 $34,731 $37,780 $44,054 $47,143 $33,821 $21,961 $20,603 $19,618 $20,451
Ratio of expenses
to average
net assets 0.85% 0.87% 1.02% 0.70% 0.67% 0.65% 0.65% 1.00%* 1.00% 1.00% 1.00%
Ratio of expenses
subsidized by
GISC 0.37% 0.50% 0.42% 0.44% 0.35% 0.41% 0.52% 0.38%* 0.28% 0.35% 0.22%
Ratio of net
investment income
to average
net assets 5.10% 3.54% 2.13% 3.01% 5.30% 7.57% 8.56% 7.63%* 6.32% 5.34% 6.36%
====================================================================================================================================
</TABLE>
* Ratios are annualized.
** Not annualized.
10
<PAGE>
o The Guardian Asset Allocation Fund and
The Guardian Baillie Gifford International Fund
Selected data for a Class A share of beneficial interest outstanding
throughout the periods indicated:
<TABLE>
<CAPTION>
====================================================================================================================================
The Guardian
The Guardian Baillie Gifford
Asset Allocation International
Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
February 15, February 15,
Year Ended Year Ended 1993* to Year Ended Year Ended 1993* to
December 31, December 31, December 31, December 31, December 31, December 31,
1995 1994 1993 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.23 $10.98 $10.00 $13.01 $13.19 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income/(loss) 0.23 0.28 0.19 0.04 0.01 (0.02)
Net realized and unrealized gain/(loss)
on investments and foreign
currency related transactions 2.29 (0.52) 1.02 1.40 (0.09) 3.32
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from
investment operations 2.52 (0.24) 1.21 1.44 (0.08) 3.30
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders
Dividends from net investment
income (0.23) (0.28) (0.18) (0.04) (0.01) --
Distributions in excess
of net investment income -- -- -- (0.23) -- --
Distributions from net realized gain
on investments and foreign
currency related transactions (0.33) (0.23) (0.05) (0.61) (0.09) (0.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.51) (0.23) (0.88) (0.10) (0.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $12.19 $10.23 $10.98 $13.57 $13.01 $13.19
- ------------------------------------------------------------------------------------------------------------------------------------
Total return** 24.51% (2.13%) 12.16% 11.14% (0.55%) 32.98%
====================================================================================================================================
Ratios/supplemental data:
Net assets, end of period
(000's omitted) $70,591 $54,875 $50,200 $44,546 $37,542 $20,809
Ratio of expenses to average
net assets 1.25% 1.30% 1.29%+ 1.74% 1.91% 2.35%+
Ratio of net investment income
to average net assets 1.98% 2.72% 2.07%+ 0.19% 0.20% (0.21%)+
Portfolio turnover 219% 216% 165% 51% 33% 9%
====================================================================================================================================
</TABLE>
* Commencement of operations.
** Excludes effect of the sales load.
+ Annualized.
11
<PAGE>
o The Guardian Investment Quality Bond Fund and
The Guardian Tax-Exempt Fund
Selected data for a Class A share of beneficial interest outstanding
throughout the periods indicated:
<TABLE>
<CAPTION>
====================================================================================================================================
The Guardian
Investment The Guardian
Quality Bond Tax-Exempt
Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
February 15, February 15,
Year Ended Year Ended 1993* to Year Ended Year Ended 1993* to
December 31, December 31, December 31, December 31, December 31, December 31,
1995 1994 1993 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.12 $10.04 $10.00 $8.86 $10.20 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
Net investment income/(loss) 0.59 0.46 0.37 0.44 0.40 0.34
Net realized and unrealized gain/(loss)
on investments and foreign
currency related transactions 0.88 (0.90) 0.18 0.83 (1.30) 0.40
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) from
investment operations 1.47 (0.44) 0.55 1.27 (0.90) 0.74
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders
Dividends from net investment
income (0.59) (0.46) (0.37) (0.44) (0.40) (0.34)
Distributions from net realized gain
on investments and foreign
currency related transactions -- (0.02) (0.14) -- (0.04) (0.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.59) (0.48) (0.51) (0.44) (0.44) (0.54)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.00 $9.12 $10.04 $9.69 $8.86 $10.20
- ------------------------------------------------------------------------------------------------------------------------------------
Total return** 16.64% (4.50%) 4.13% 14.59% (8.98%) 5.55%
====================================================================================================================================
Ratios/supplemental data:
Net assets, end of period
(000's omitted) $53,706 $43,487 $23,310 $17,501 $15,967 $21,135
Ratio of expenses to average
net assets 0.75% 1.46% 1.42%+ 0.75% 1.09% 1.36%+
Ratio of net investment income
to average net assets 6.11% 4.94% 3.68%+ 4.66% 4.26% 3.35%+
Ratio of expenses
subsidized by GISC 0.39% -- -- 0.79% 0.47% --
Portfolio turnover 401% 186% 167% 194% 107% 108%
====================================================================================================================================
</TABLE>
* Commencement of operations.
** Excludes effect of the sales load.
+ Annualized.
12
<PAGE>
Investment Objectives and Policies
Each Portfolio Fund has its own investment objective and policies. A
Portfolio Fund's investment objective is a fundamental policy which may not be
changed without shareholder approval. Certain investment restrictions are also
fundamental policies that may not be changed without shareholder approval.
Non-fundamental investment techniques, policies and restrictions may be changed
by the Portfolio's Board of Trustees without shareholder approval.
Each Portfolio Fund's investment program is highlighted below. The
Portfolio Funds' investment restrictions, additional investment techniques
andcertain other features are described under "Special Investment Techniques"
and in the Statement of Additional Information.
o The Guardian Park Avenue Fund
The Park Avenue Fund seeks long-term growth of capital. Income is not a
specific objective, although it is anticipated that long-term growth of capital
will be accompanied by growth of income.
The Park Avenue Fund attempts to achieve its objective by normally
investing at least 80% of the value of its assets in a diversified portfolio of
U.S. common stocks and convertible securities. Convertible securities are bonds
or preferred stock issues which may be converted at a specified time and price
into shares of common stock of the same or different issuers. Convertible
securities are typically senior to common stock in a corporation's capital
structure, so they may entail less risk than common stocks. Convertible
securities purchased by the Park Avenue Fund will primarily be rated in one of
the top four rating categories established by nationally recognized statistical
rating organizations, making them investment grade. However, the Fund may
acquire convertible securities without regard to their ratings. See the
Statement of Additional Information.
GISC employs a proprietary multi-factor stock- scoring system to analyze
and evaluate each security which may be purchased, held or sold by the Park
Avenue Fund. This stock-scoring system is based on quantitative methodologies
and is used to identify those securities that represent good relative value in
the marketplace and have reasonable prospects for superior relative price
performance. GISC uses information from numerous sources and value, momentum and
other market factors to modify and refine the stock-scoring system over time.
GISC can also change the proportion of the Park Avenue Fund's assets which are
invested in particular companies and industries based on its evaluation of the
outlook for specific industries, companies and the economy.
If adverse market conditions necessitate a defensive posture, the Park
Avenue Fund may temporarily invest some or all of its assets in debt
obligations, including U.S. government securities, investment grade corporate
bonds, commercial paper rated Prime-2 or higher by Moody's or A-2 or higher by
S&P, repurchase agreements, cash and cash equivalents.
From time to time, the Park Avenue Fund may invest up to 5% of its net
assets in securities of U.S. or foreign companies which are issued and settled
overseas. All such investments will be U.S. dollar-denominated. The Park Avenue
Fund may also invest in repurchase agreements. (See "Special Investment
Techniques.")
o The Guardian Baillie Gifford
International Fund
The International Fund seeks long-term growth of capital. Income is not a
specific objective, although it is anticipated that growth of capital will be
accompanied by dividend income, which may vary depending on the location of the
investments.
The International Fund attempts to achieve its objective by ordinarily
investing at least 80% of its net assets in a diversified portfolio of common
stocks issued by companies that are domiciled outside of the United States and
in securities which are convertible into such common stocks.
The International Fund does not normally concentrate its investments in any
particular industry or country. Under normal circumstances, at least 65% of the
International Fund's total assets will be invested in companies which are
domiciled in at least three different countries outside of the United States.
However, there are no limitations on the percentage of portfolio assets which
may be invested in securities of issuers from any one country at any given time.
13
<PAGE>
By investing in several countries, the International Fund should, in theory,
decrease the degree to which events in any one country can affect its entire
portfolio. It is anticipated that a significant portion of the International
Fund's investments will normally be divided among four main geographic areas --
Continental Europe, the United Kingdom, Japan and the markets of the Far East
(including Australia and New Zealand).
The International Fund varies its geographic scope based on continuous
evaluations of economic, market and political trends worldwide. To determine how
portfolio assets will be geographically allocated, the International Fund's
advisers consider the conditions and growth potential of various economies and
securities markets, currency exchange rates, technological developments in
various countries, and other pertinent financial, social, national and political
information. The International Fund attempts to distribute its assets among
securities issued by companies at different stages of development, ranging from
large, well-established companies to smaller and newer companies. Securities
issued by smaller companies may be less liquid and subject to greater market
volatility and credit risk than those issued by larger companies.
The International Fund may invest in foreign issuers through sponsored
American Depository Receipts ("ADRs") and European Depository Receipts ("EDRs"),
or similar investment vehicles. An ADR is a dollar-denominated security issued
by a U.S. bank or trust company which represents, and may be converted into, a
foreign security. An EDR is similar, but is issued by a European bank. ADRs and
EDRs may not be denominated in the same currency as the securities into which
they may be converted. Typically, ADRs, in registered form, are designed for
issuance in U.S. securities markets and EDRs, in bearer form, are designed for
issuance in European securities markets.
For liquidity purposes, the International Fund may hold cash in U.S.
dollars and foreign currencies, or invest in short-term securities, including
repurchase agreements and domestic and foreign money market instruments. In
addition, the International Fund may enter into forward foreign currency
transactions, or acquire other currency instruments to attempt to minimize the
effects of changes in foreign exchange rates. The Fund may use options or
financial futures to hedge against market or currency risks. (See "Special
Investment Techniques.")
The International Fund may significantly alter its portfolio as a temporary
defensive measure if its advisers believe that investments in international
equity securities are at risk because of current or anticipated political or
economic conditions. In such event, the International Fund may, without any
percentage limit, acquire investment grade non-convertible preferred stock, debt
obligations, foreign or U.S. government securities, and domestic or foreign
money market instruments.
The International Fund's operating expenses are typically higher than the
expenses incurred by mutual funds that invest exclusively in U.S. equity
securities. Brokerage commissions and custodial fees related to foreign
investments are often higher than those associated with investments in U.S.
securities.
If the U.S. government restricts any type of foreign investment which may
be made by or through the International Fund, the Portfolio's Board of Trustees
will promptly take steps to determine whether significant changes in the Fund's
portfolio are appropriate.
o The Guardian Investment Quality Bond Fund
The Bond Fund seeks a high level of current income and capital appreciation
without undue risk to principal.
The Bond Fund normally invests at least 80% of the value of its assets in
(1) investment grade corporate bonds and other debt obligations and (2) U.S.
government securities and obligations of U.S. government agencies and
instrumentalities. The Bond Fund's assets typically include mortgage-backed
securities. Under normal conditions, at least 65% of the Bond Fund's total
assets will be invested in debt obligations. A debt obligation is a certificate
or evidence of debt. The issuer of a debt obligation promises to pay interest
for a specified period and to repay the debt on a specified date.
Investment grade bonds are secured and unsecured debt obligations which are
either assigned ratings within the four highest rating categories established by
14
<PAGE>
nationally recognized statistical ratings organizations ("NRSROs"), such as
Moody's or S&P, or which are deemed by GISC to be comparable to such securities.
Obligations rated Baa by Moody's or BBB by S&P are deemed medium grade and are
considered more speculative than higher- grade obligations. Changes in economic
conditions or other circumstances could lessen the ability of the issuers of
medium grade debt securities to make principal and interest payments.
A portion of the Bond Fund's assets may be rated lower than investment
grade, typically when ratings assigned to investment grade debt obligations
acquired by the Fund are downgraded. Low-quality debt is considered to be
predominantly speculative with respect to the issuer's ability to make principal
and interest payments. (See "Risk Considerations.") The Bond Fund is not
required to sell a security automatically when its rating is downgraded below
investment grade. Normally, less than 10% of the Bond Fund's assets will be
invested in such low-quality debt.
The Bond Fund may invest in mortgage-backed securities, such as mortgage
pass-throughs and collateralized mortgage obligations ("CMOs"). A mortgage
pass-through is collateralized by a pool of mortgages that have a common coupon
rate (i.e., interest rate) and maturity. The holders of a particular mortgage
pass-through share the rights to receive interest and principal payments from
the underlying pool of mortgages, net of servicing fees, as payment for debt
service on the pass-through. CMOs are collateralized by pooled mortgage loans
that may not share coupon rate and maturity characteristics, and are sold as
multi-class bonds. CMO classes have different interests in the stream of
interest and principal payments from the underlying pool of mortgages. Hence,
the classes are typically paid sequentially according to the payment structure
of the CMO. CMOs may be issued or guaranteed by the U.S. government and its
agencies or instrumentalities, or by private entities.
Mortgage-backed securities issued by the Government National Mortgage
Association ("GNMA") are backed by the full faith and credit of the U.S.
government. Privately owned, government sponsored agencies like the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC") issue their own guarantees for interest and principal
payments on the mortgage-backed securities and other obligations they issue.
These guarantees are supported only by the issuer's credit or the issuer's right
to borrow from the U.S. Treasury. Accordingly, such investments may involve a
greater risk of loss of principal and interest than other U.S. government
securities since the Bond Fund must look principally or solely to the issuing or
guaranteeing agency or instrumentality for repayment.
Privately issued mortgage-backed securities purchased by the Bond Fund must
be fully collateralized by GNMA certificates, other government mortgage-backed
securities, or by whole loans. Whole loans are securitized mortgage pools backed
by fixed or adjustable rate mortgages originated by private institutions.
Mortgage-backed securities may be more sensitive to interest rate changes
than conventional bonds which can result in greater price volatility. Because
the collateral underlying mortgage-backed securities may be prepaid at any time,
mortgage-backed securities are also subject to greater prepayment risks than
conventional bonds. Accelerated prepayments of mortgage-backed securities
purchased at a premium impose a risk of loss of principal because the premium
may not have been fully amortized when the principal is repaid. Prepayments tend
to accelerate when interest rates decline, so prepaid mortgage-backed security
proceeds are then likely to be reinvested at lower interest rates. The Statement
of Additional Information contains more information about mortgage-backed
securities, including securities known as "interest only" and "principal only"
stripped mortgage securities.
Some of the Bond Fund's investments may have variable interest rates. When
an instrument provides for periodic adjustments to its interest rate,
fluctuations in principal value may be minimized. However, changes in the coupon
rate can lag behind changes in market rates, which may adversely affect the Bond
Fund's performance.
The Bond Fund also invests in Treasury bills, Treasury notes and Treasury
bonds, all of which are backed by the full faith and credit of the U.S.
15
<PAGE>
government. From time to time, the Bond Fund may also invest up to 10% of its
total net assets in securities of U.S. or foreign companies which are issued and
settled overseas. All such investments will be U.S. dollar-denominated. (See
"Risk Considerations.")
The Bond Fund may invest its available cash in: repurchase agreements;
commercial paper which is issued in reliance on the "private placement"
exemption from registration afforded by Section 4(2) of the Securities Act of
1933 ("Section 4(2) paper"); and commercial paper which satisfies the Cash
Fund's credit quality requirements. (See "The Guardian Cash Management Fund.")
Additional investment techniques used by the Bond Fund are described under
"Special Investment Techniques."
o The Guardian Tax-Exempt Fund
The Tax-Exempt Fund seeks to maximize current income exempt from federal
income taxes, consistent with preservation of capital. The Tax-Exempt Fund has
adopted a fundamental investment policy to invest at least 80% of its net assets
in a diversified portfolio of investment-grade Municipal Obligations.
Municipal Obligations are securities which are issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies, authorities and
instrumentalities, the interest on which is, in the opinion of bond counsel to
the issuer, exempt from federal income tax. GISC relies on such opinions without
independent verification.
Municipal Obligations are generally issued to obtain funds for public
purposes, such as the construction of highways, bridges, schools, hospitals and
roads. They may also be issued to refinance outstanding obligations, to obtain
funds for general operating expenses, or to provide funds to other public
institutions and facilities. Certain industrial development bonds issued by or
on behalf of public authorities to build or operate sports arenas, airports, and
pollution control sites are also Municipal Obligations.
Municipal Obligations are classified as general or specific obligation
bonds, revenue bonds and notes. General obligation bonds are secured by the
issuer's full faith, credit and taxing power. Specific obligation bonds and
revenue bonds are payable from the proceeds of a special excise tax or other
specific revenue source. Tax-exempt industrial development bonds are typically
revenue bonds that are guaranteed solely by the corporate entity on whose behalf
they are issued. Notes are short-term obligations which are sold by
municipalities in anticipation of a bond sale, collection of taxes or receipt of
revenues. Notes are issued to meet short-term funding requirements. The
Tax-Exempt Fund is not limited with respect to which category of Municipal
Obligations it may purchase, though it will limit its investments in industrial
development bonds to 20% of its net assets.
The Tax-Exempt Fund primarily invests its assets in intermediate-term
Municipal Obligations, which have an average weighted maturity of 7 to 12 years,
and in long-term Municipal Obligations, which have an average weighted maturity
of 15 to 25 years. The Tax-Exempt Fund does not have percentage limitations on
the amount of its assets to be allocated to each term category. Thus,
substantially all of the Tax-Exempt Fund's assets may be invested in either
intermediate-term or long-term Municipal Obligations at any one time.
Bonds and short-term Municipal Obligations purchased by the Tax-Exempt Fund
must be investment grade when acquired. Municipal Obligations which carry the
lowest investment-grade rating may have some speculative characteristics.
Changes in economic conditions or other circumstances could lessen the ability
of an issuer of such bonds to make principal and interest payments. The
Tax-Exempt Fund's portfolio may include securities that are downgraded after
acquisition. The Tax-Exempt Fund is not required to sell a security
automatically when its rating is reduced below investment grade. Normally, less
than 10% of the Tax-Exempt Fund's assets will be invested in such low-quality
debt. (See "Risk Considerations.")
The Tax-Exempt Fund may invest more than 25% of the value of its total
assets in Municipal Obligations which pay interest from the same or similar
revenue sources or securities which are offered within a single state. When
Municipal Obligations are related in these ways, an economic, business or
16
<PAGE>
political development which affects one security could also affect the other
related securities. This investment practice may subject the Tax- Exempt Fund to
greater risks than a fund which does not concentrate its assets in this manner.
From time to time, the Tax-Exempt Fund may invest up to 20% of its net
assets in obligations which pay interest that is subject to regular federal
income tax, or in private activity bonds. The interest on private activity bonds
is a tax preference item for the purpose of the alternative minimum tax ("AMT").
The AMT is a special tax that applies only to certain taxpayers. If the
Tax-Exempt Fund receives interest which is treated as a tax preference item, a
proportionate share of any exempt-interest dividend which it pays to its
shareholders may be treated as a preference item for those shareholders who are
subject to the AMT. (See "Taxes.")
The Tax-Exempt Fund may also purchase tax- exempt floating and variable
rate demand notes and bonds. Variable rate demand notes include master demand
notes. Master demand notes are frequently secured by letters of credit or other
credit supports, which are not expected to adversely affect the tax- exempt
status of these obligations. Master demand notes are redeemable at face value,
but there is no established secondary market for them. Accordingly, when these
obligations are not secured, the Tax-Exempt Fund's right to redeem depends on
the borrower's ability to pay principal and interest on demand. GISC
continuously considers the creditworthiness of the issuers of any floating and
variable rate demand obligations in the Tax-Exempt Fund's portfolio to attempt
to minimize this risk. Master demand notes with a demand feature extending for
more than seven days are treated as illiquid securities. (See "Special
Investment Techniques.")
The Tax-Exempt Fund may also invest in zero coupon securities ("Zeros").
Zeros are issued or sold at a steep discount from their face value, and do not
pay interest prior to maturity or a specified redemption date. The market prices
of zero coupon securities generally are more volatile than the market prices of
interest-bearing securities. Accordingly, zeros are more likely to respond to
interest rate changes than interest-bearing securities having similar maturities
and credit qualities.
The Tax-Exempt Fund may acquire "stand-by commitments" with respect to
Municipal Obligations to facilitate liquidity in its portfolio. The Tax-Exempt
Fund may also purchase tender option bonds and similar securities. (See the
Statement of Additional Information.) Additional investment techniques used by
the Tax-Exempt Fund are described under "Special Investment Techniques."
o The Guardian Cash Management Fund
The Cash Fund seeks as high a level of current income as is consistent with
liquidity and preservation of capital.
To attempt to achieve this objective, the Cash Fund invests in U.S.
dollar-denominated money market instruments which satisfy the credit quality
requirements described below and mature in 13 months or less or which have a
variable rate of interest that is readjusted no less frequently than every 13
months. Such money market instruments include U.S. government securities (such
as agency obligations and U.S. Treasury notes, bills or bonds), commercial
paper, certificates of deposit or bankers acceptances issued by banks or savings
and loan associations, repurchase agreements and other corporate obligations.
The Cash Fund may also invest in unregistered commercial paper which is issued
in reliance on the "private placement" exemption afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper"). The Cash Fund may not invest more
than 5% of its total assets in the securities of any one issuer except U.S.
government securities. The Cash Fund maintains a dollar-weighted average
portfolio maturity of 90 days or less.
The Cash Fund may invest up to 25% of its net assets in certificates of
deposit issued by foreign branches of U.S. banks (known as "Euro CDs") and by
U.S. branches of foreign banks (known as "Yankee CDs"), provided that each
issuing bank's net worth is at least $100,000,000. Such investments present
additional and different risks than U.S. obligations, and correspondingly expose
the Cash Fund to risks which are not faced by money market mutual funds which
invest only in domestic obligations. (See "Risk Considerations.")
In addition, the Cash Fund may invest in other instruments which are fully
secured or collateralized by the types of obligations described above. Such
17
<PAGE>
instruments will generally be limited to repurchase agreements with domestic
branches of domestic banks.
The Cash Fund's investments consist only of obligations that GISC
determines to present minimal credit risks. GISC follows guidelines adopted by
the Portfolio's Board of Trustees to make such determinations, and the Board
receives reports about GISC's adherence to such guidelines. The guidelines
prescribe that the instruments acquired by the Cash Fund be rated within the two
highest short-term ratings categories assigned by the requisite number of
NRSROs, or, if unrated, be deemed by GISC to be of comparable quality.
Instruments or issuers that have received the highest short-term ratings from at
least two NRSROs, or which have received the highest rating from the single
NRSRO assigning a rating, are considered to be "First Tier Securities" under
Rule 2a-7 of the 1940 Act. Such investments may not yield as high a level of
current income as longer term or lower grade investments, which are generally
less liquid and fluctuate more in value.
The Cash Fund intends to invest primarily in First Tier Securities.
However, it may from time to time buy securities that are rated within the two
highest short-term ratings categories, but which are not First Tier Securities.
Such "Second Tier" investments will be limited to no more than 5% of the Cash
Fund's total assets, based on amortized cost, with investments relating to any
one issuer limited to the greater of 1% of total assets or $1,000,000.
The Cash Fund's rate of return will vary with the returns on its portfolio
investments. Although the Cash Fund seeks to maintain a stable NAV of $1.00 per
share, the prices of its portfolio investments typically vary with interest rate
movements. A national credit crisis or the insolvency of an issuer of an
instrument held by the Cash Fund could precipitate sufficient price declines to
cause the Fund to fail to maintain its stable NAV.
o The Guardian Asset Allocation Fund
The Asset Allocation Fund seeks long-term total investment return
consistent with moderate investment risk. Total investment return consists of
income and changes in the market value of the Asset Allocation Fund's
investments.
The Asset Allocation Fund uses theoretical models to allocate its assets
among: U.S. common stocks and convertible securities; investment grade corporate
debt securities and U.S. government securities, including mortgage-backed
securities; and money market instruments. GISC may use theoretical models
developed and maintained by a third party, or may use its own models. The Asset
Allocation Fund's investments are separately and actively managed, and are the
same types of securities acquired for the Park Avenue Fund, the Bond Fund and
the Cash Fund. The Asset Allocation Fund may not necessarily invest in the same
issues of securities as these other Portfolio Funds, but by investing in the
same types of securities it is subject to the same types of risks.
The distribution of the Asset Allocation Fund's assets among asset classes
fluctuates from a "neutral position" of 60% allocated to the equity class and
40% allocated to the debt class. Shifts are expected to be modest in magnitude
and gradual in occurrence, but there is no limit on the portions of the Asset
Allocation Fund's assets which may be shifted at any one time. Nor does the Fund
have percentage limitations on the amount to be allocated to any asset class.
Accordingly, from time to time, substantially all of the Asset Allocation Fund's
assets may be invested in equity securities, or debt obligations, or money
market instruments. Generally, however, the models provide for the following
ranges: 20% to 80% equity securities; 20% to 70% debt obligations; and 0% to 60%
money market instruments.
The theoretical models evaluate information about the economy, the markets
and other financial and technical factors on a daily basis to provide "signals"
about portfolio allocations. There can be no assurance that allocations among
asset classes made by GISC in response to the signals will result in the most
favorable return to investors. However, by allocating assets among different
classes and adjusting the mix to reflect the models' perceptions of economic and
market trends, it is anticipated that the Asset Allocation Fund's performance
will be less volatile than that of mutual funds which concentrate their
investments in one asset class.
The Asset Allocation Fund may use financial futures contracts and options
on securities or securities indices to reallocate its assets among asset
18
<PAGE>
classes. GISC believes that engaging in these transactions may generally provide
a hedge against changes in market conditions while minimizing the transaction
costs which the Fund can incur when its portfolio is reallocated. For example,
if the Asset Allocation Fund reallocates 10% of its assets from equities to
debt, it might sell stock index financial futures and purchase bond futures.
Because the transaction costs associated with options and futures tend to be
lower than the costs of buying and selling securities, it is expected that using
options and futures may reduce the Asset Allocation Fund's total transaction
costs. The risks associated with engaging in options and futures transactions
and other investment techniques used by the Asset Allocation Fund are described
under "Special Investment Techniques."
Risk Considerations
The levels and types of risks associated with investing in a Portfolio Fund
generally correspond to the risks associated with the types of investments it
makes. Those risks are generally described throughout this Prospectus and the
Statement of Additional Information. In addition, investors should consider the
risks described below.
Market risk is the chance that an equity security's price will be
influenced by stock market trends, and the risk that a debt obligation's price
will fall as interest rates rise and rise as interest rates fall. Generally, the
prices of bonds with longer maturities fluctuate more than shorter-term bonds
when interest rates change. U.S. government securities, Municipal Obligations
and mortgage-backed securities, like other debt obligations, are subject to
market risk.
Financial or credit risk relates to an issuer's financial condition. In
general, equity securities issued by weakening companies have declining prices,
and there is a higher likelihood that such issuers will fail to make principal
and interest payments under their debt obligations. NRSROs may downgrade the
ratings assigned for such issuers, highlighting their higher credit risk. U.S.
government securities are substantially protected from financial or credit risk.
However, certain agency obligations, while of the highest credit quality, do not
have a direct U.S. government guarantee.
Prepayment risk is the possibility that a debt security will be prepaid (or
"called") prior to its expected maturity date, and that the proceeds could be
invested at lower interest rates. Intermediate- term and long-term bonds
commonly provide call protection, but mortgage-backed securities can be prepaid
whenever their underlying collateral is prepaid. When a security is called
early, the potential for additional appreciation is lost. If a premium was paid
to acquire a called security, there may even be principal losses. Prepayments
occur more frequently when interest rates decline.
A security that is rated lower than investment grade may be somewhat or
predominantly speculative with respect to its issuer's ability to make principal
and interest payments. While lower rated obligations generally offer higher
current yields than higher grade issues, they also involve higher market and
credit risks. Low quality debt can be particularly sensitive to adverse changes
in general economic conditions, the financial condition of its issuer, or
stresses in its issuer's industry.
Securities issued or settled overseas present additional and different
risks to the Portfolio Funds which invest in them. Foreign securities may be
affected by political, social and economic developments abroad. Foreign
companies and foreign financial institutions may not be subject to accounting
standards or governmental supervision comparable to their U.S. counterparts, and
there may be less public information about their operations. Foreign markets may
be less liquid or more volatile than U.S. markets and may offer less protection
to investors. Foreign countries may impose withholding taxes on interest income
from investments in securities issued there, or may enact confiscatory taxation
provisions targeted to certain investors. The time period for settling
transactions in foreign securities may be longer than the time period permitted
for the settlement of domestic securities transactions. And, as described in the
Statement of Additional Information, the market prices for foreign securities
are not determined at the same time of day as the NAVs for the Funds that hold
such securities. It may be difficult to obtain and enforce judgments against
foreign entities, and the expenses of litigation are likely to exceed those
which would be incurred in the United States. Investments in foreign securities
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that are not denominated in U.S. dollars may be subject to special risks, such
as governmental regulation of foreign exchange transactions and changes in
currency exchange rates. Exchange rates can affect the value of securities and
the interest or earnings thereon irrespective of the performance of such
securities.
Future federal tax law changes may adversely affect the tax-exempt status
of interest on Municipal Obligations acquired by the Tax-Exempt Fund or of the
exempt-interest dividends paid by that Fund to its shareholders. Opinions
relating to the validity and tax-exempt status of Municipal Obligations are
rendered by the issuer's bond counsel when the obligations are issued. GISC
relies on such opinions without independent verification or update.
Leverage may be involved when more than 100% of a Portfolio Fund's assets
are invested. This can occur when a Fund enters into when-issued or
delayed-delivery transactions. The Portfolio Funds' investment advisers believe
that these transactions do not present the risks associated with other types of
leverage because, as required by SEC rules, the Funds segregate cash or liquid
high-grade debt securities with the Portfolio's custodian when using these
investment techniques. (See "Special Investment Techniques.")
Portfolio turnover rates for the Portfolio Funds are likely to vary from
year to year. Historical portfolio turnover rates for each of the Portfolio
Funds are set forth under "Financial Highlights." A higher portfolio turnover
rate can result in correspondingly greater transaction costs to a Portfolio
Fund, and increase its short-term capital gains or losses. A Portfolio Fund's
turnover rate will not be a limiting factor when its adviser wants to make
portfolio changes. However, a Fund may refrain from certain sales to comply with
the Internal Revenue Code provision which currently requires that less than 30%
of the gross income of a regulated investment company be derived from securities
held for less than three months. The Asset Allocation Fund may not be able to
reallocate its assets among asset classes as indicated by the theoretical models
if such action would cause it to fail to comply with the foregoing Internal
Revenue Code provision.
For the year ended December 31, 1995, the Bond Fund and the Asset
Allocation Fund each experienced a portfolio turnover rate in excess of 100%.
The Bond Fund's higher portfolio turnover rate was attributable to GISC's
decision to replace certain treasury bonds with higher-yielding corporate bonds
and asset-backed securities. The Asset Allocation Fund's higher portfolio
turnover rate was also attributable to GISC's decision to replace certain lower
yielding debt obligations in the fixed income portion of the portfolio.
Special Investment Techniques
This section describes various investment techniques which may be used to
manage some or all of the Funds' portfolios of investments. The Statement of
Additional Information contains more detailed information about the Portfolio
Funds' investment practices.
o Repurchase Agreements (All Portfolio Funds)
In a repurchase agreement transaction, a Portfolio Fund purchases a debt
security and obtains a simultaneous commitment from the seller (i.e., a bank or
securities dealer) to repurchase that debt security at an agreed time and price,
reflecting a market rate of interest. The repurchase agreement's yield may be
unrelated to the coupon rate or maturity of the underlying security. Repurchase
agreements are fully collateralized (including the interest earned thereon) by
U.S. government securities, bank obligations, cash or cash equivalents, and are
marked-to-market daily during their respective terms. Deposits of additional
collateral may be required from the seller if the market value of a security
that is subject to a repurchase agreement falls below the resale price set forth
in the repurchase agreement. Costs, delays or losses could result if the seller
becomes bankrupt or is otherwise unable to repurchase a security that is subject
to a repurchase agreement. To minimize this risk, the Portfolio's Board of
Trustees periodically receives and reviews information about the
creditworthiness of securities dealers and banks which enter into repurchase
agreements with the Portfolio Funds. No Portfolio Fund will enter into a
repurchase agreement which matures in more than seven days, if, as a result,
more than the applicable portion of its net assets would be invested in illiquid
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securities. (See "Illiquid Securities and Exempt Commercial Paper.")
o Financial Futures Transactions (International,
Bond, Tax-Exempt and Asset Allocation Funds)
To attempt to hedge against fluctuations in interest rates or securities
prices, these Portfolio Funds may purchase or sell interest rate futures
contracts and securities index futures contracts (collectively, "financial
futures contracts"). Interest rate futures contracts obligate the long or short
holder to take or make delivery of a specified quantity of a financial
instrument during a specified future period at a specified price. Securities
index futures contracts are similar in economic effect, but they are based on a
specific index of securities (rather than on specified securities) and are
settled in cash. These Portfolio Funds may also purchase and write put and call
options on financial futures contracts as an attempt to hedge against market
risks.
There are special risks associated with entering into financial futures
contracts. There may be an imperfect correlation between the price movements of
financial futures contracts and the price movements of the securities in which a
Portfolio Fund invests. There is also a risk that a Portfolio Fund will be
unable to close a futures position when desired because there is no liquid
secondary market for it.
The skills needed to use financial futures contracts effectively are
different from those needed to select a Portfolio Fund's investments. If a
Portfolio Fund's investment adviser misjudges the general direction of interest
rates or markets, the Fund's overall performance may be poorer than if no
financial futures contracts had been entered into. It is possible that a
Portfolio Fund could lose money on a financial futures contract and also on the
price of related securities, adversely affecting the Portfolio Fund's
performance.
The risk of loss in trading financial futures contracts can be substantial
due to the low margin deposits required and the extremely high degree of
leverage involved in futures pricing. A relatively small price movement in a
financial futures contract could have an immediate and substantial impact, which
may be favorable or unfavorable to a contractholder. It is possible for a
price-related loss to exceed the amount of a Portfolio Fund's margin deposit.
The Bond Fund and the Tax-Exempt Fund may only engage in financial futures
transactions on commodities exchanges or boards of trade. A Portfolio Fund will
have the Portfolio's custodian segregate either cash or liquid high-grade debt
securities that are marked-to-market daily to the extent required to comply with
the 1940 Act whenever it engages in futures transactions. Segregating assets may
limit a Portfolio Fund's ability to pursue other investment opportunities.
None of the Portfolio Funds named above will enter into financial futures
contracts for speculative purposes.
o Options Transactions (International, Bond, Tax-
Exempt and Asset Allocation Funds)
These Portfolio Funds may purchase or write (sell) options on individual
securities, securities indices and financial futures contracts to attempt to:
(1) reduce the overall risk of their investments; (2) manage foreign currency
exposure (International Fund only); (3) protect unrealized gains; (4) produce
additional revenue; or (5) facilitate the sale of portfolio securities for
investment purposes. The Portfolio Funds engage in options transactions as a
hedging technique, and not for speculative purposes. Using options as a
successful hedge depends on the ability of the Funds' investment advisers to
predict pertinent market movements. Incorrect predictions may make engaging in
such transactions riskier to the Portfolio Funds than trading in the securities
which each Portfolio Fund is authorized to buy and sell.
Basically, there are two types of options: call options and put options.
The purchaser of a call option acquires the right to buy a security at a fixed
price during a specified period. The writer (seller) of such an option is then
obligated to sell the security if the option is exercised, and bears the risk
that the security's market price will increase over the purchase price set by
the option. The purchaser of a put option acquires the right to sell a security
at a fixed price during a specified period. The writer of such an option is then
obligated to buy the security if the option is exercised, and bears the risk
that the security's market price will decline from the purchase price set by the
option. Options are typically purchased subject to a premium which can reduce
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the risks retained by the option writer.
As the writer of a covered call option or the purchaser of a secured put
option, a Portfolio Fund must own securities that can be used to cover or secure
any such outstanding options. Also, when a Portfolio Fund writes a put option,
it must segregate with the Portfolio's custodian either cash or liquid,
high-grade debt securities that are marked-to-market daily. The value of such
segregated assets must at least equal the exercise price of the put option.
Segregating assets may limit the Fund's ability to pursue other investment
opportunities while options are outstanding. The cover for a call option that is
related to a foreign currency can be short-term debt securities having a value
equal to the option's face that are denominated in the same currency as the
call.
Options transactions can be voluntarily terminated before the exercise or
expiration of the options only by entering into closing transactions. The
ability to close out an option depends, in part, upon the liquidity of the
option market. If a Portfolio Fund cannot close an option when it wants, it may
miss alternative investment opportunities.
Options trade on U.S. or foreign securities exchanges and in the
over-the-counter ("OTC") market. Exchange listed options are three-party
contracts issued by a clearing corporation. They generally have standardized
prices, expiration dates and performance mechanics. In contrast, all the terms
of an OTC option, including price and expiration date, are set by negotiation
between the buyer and seller (e.g., a Portfolio Fund and a securities dealer or
other financial institution). A Portfolio Fund could lose any premium it paid
for an OTC option, as well as any anticipated benefits of the transaction, if
its counterparty fails to perform under the option's terms. To minimize this
risk, the Portfolio Funds' investment advisers consider the creditworthiness of
any counterparties with whom the Funds may engage in OTC options transactions.
However, there can be no assurance that a counterparty will remain financially
stable while an OTC option is outstanding.
Generally, the staff of the SEC currently requires OTC options and any
assets used to cover such options to be treated as illiquid assets because OTC
options may not be actively traded. Until the SEC staff revises this position,
no Portfolio Fund will engage in OTC option transactions if, as a result, more
than the permitted portion of its net assets is invested in illiquid securities.
(See the Statement of Additional Information.)
No Portfolio Fund intends to write covered call options on more than 25% of
its net assets; nor write secured put options on more than 25% of its net
assets; nor purchase put and call options if more than 5% of its total assets
are invested in premiums on such options.
o When-Issued or Delayed-Delivery Transactions
(International, Bond, Tax-Exempt and
Asset Allocation Funds)
In when-issued or delayed-delivery transactions, a Portfolio Fund commits
to purchase or sell particular securities, with payment and delivery to take
place at a future date. Although a Portfolio Fund does not pay for the
securities or start earning interest on them until they are delivered, it
immediately assumes the risks of ownership, including the risk of price
fluctuation. If a Fund's counterparty fails to deliver a security purchased on a
when-issued or delayed-delivery basis, there may be a loss, and the Fund may
have missed an opportunity to make an alternative investment.
Any Portfolio Fund which purchases securities on a when-issued or
delayed-delivery basis must segregate cash or liquid high-grade debt securities
that are marked-to-market daily with the Portfolio's custodian. The value of
such segregated assets must at least equal the Fund's forward commitments. If a
Portfolio Fund sells securities on a delayed-delivery basis, it must hold the
subject securities in a segregated account while the commitment is outstanding.
Segregating cash or securities can limit a Portfolio Fund's ability to pursue
other investment opportunities.
A Portfolio Fund engages in these transactions to acquire securities that
are appropriate for its portfolio while securing prices or yields that appear
attractive when the transactions occur. The Portfolio Funds do not engage in
these transactions to speculate on interest rate changes. However, each Fund
reserves the right to sell securities acquired on a when-issued or
delayed-delivery basis before settlement.
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o Lending of Portfolio Securities (Bond, Tax-
Exempt and Asset Allocation Funds)
These Portfolio Funds may lend their portfolio securities to securities
dealers, banks or other institutional investors to earn additional income. Such
loans must be continuously secured by collateral, and the loaned securities must
be marked-to-market daily. The Portfolio Funds will generally continue to be
entitled to all interest earned or dividends paid on the loaned securities,
though lending fees may be paid to the borrower from such interest or dividends.
The Portfolio Funds can increase their income through securities lending by
investing the cash collateral deposited by the borrower in short-term
interest-bearing obligations that meet the Funds' credit quality requirements
and investment policies. As with any extension of credit, however, there are
risks of delay in recovery of the loaned securities and collateral should a
borrower fail financially.
No Portfolio Fund will continue to lend securities if, as a result, the
aggregate value of securities then on loan would exceed 331/3% of that Fund's
total net assets. A significant portion of a Portfolio Fund's loan transactions
may be with only one or a few institutions at any given time. This practice can
increase the risk to the Fund should a borrower fail.
Apart from lending their securities and acquiring debt securities, the
Portfolio Funds will not make loans to other persons.
o Forward Foreign Currency Transactions
(International Fund)
Forward foreign currency exchange contracts are used to try to manage the
risks associated with changes in exchange rates. A forward foreign currency
exchange contract is an agreement to exchange a specified amount of U.S. dollars
for foreign currencies at a specified future date. GBG generally uses currency
exchange contracts to fix definite prices for securities it has agreed to buy or
sell for the International Fund. These contracts are also used to hedge the
International Fund's investments against adverse exchange rate changes. The
profitable use of forward foreign currency transactions depends on GBG's ability
to predict changes in exchange rates between the U.S. dollar and foreign
currencies. The International Fund may incur either a gain or loss on these
transactions, which require skills that are different from those needed to
select the International Fund's investments. While forward foreign currency
transactions may help reduce losses on securities denominated in foreign
currencies, they may also reduce gains on such securities depending on the
actual changes in the subject currencies. The International Fund will not enter
into forward foreign currency transactions for speculative purposes.
o Illiquid Securities and Exempt Commercial
Paper (All Portfolio Funds)
Illiquid securities are securities which are not readily marketable at
their approximate value within seven days, or which are not registered under the
Securities Act of 1933 (the "1933 Act"), or which are otherwise viewed as
illiquid by the SEC staff. As noted above, repurchase agreements which mature in
more than seven days, certain variable rate master demand notes and OTC options
are treated as illiquid securities.
The absence of a trading market can make it difficult to ascertain the
value or dispose of illiquid securities, which, in turn, can adversely affect a
Portfolio Fund's ability to calculate its NAV or manage its portfolio. In
addition, if a significant portion of the Cash Fund's assets are or become
illiquid, that Fund may be unable to maintain a stable NAV of $1.00 per share.
The Statement of Additional Information sets forth each Portfolio Fund's upper
limit for investments in illiquid securities.
Securities which qualify under the exemption from registration for resales
to institutional investors provided by Rule 144A under the 1933 Act may be
treated by the Portfolio Funds as liquid, and purchased without regard to the
illiquidity limits set forth in the Statement of Additional Information unless
the Fund's adviser determines that any such paper is illiquid under guidelines
adopted by the Board of Trustees. Similarly, the Portfolio Funds typically treat
commercial paper which is issued in reliance on the "private placement"
exemption from registration provided by Section 4(2) of the 1933 Act as liquid.
If the institutional markets for such securities decline when a Portfolio Fund
has invested in them, the Fund could exceed its illiquidity limit.
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o Borrowing (All Portfolio Funds)
The Statement of Additional Information sets forth the restrictions on
borrowing adopted for each of the Portfolio Funds. Under normal circumstances,
no Portfolio Fund intends to borrow money in excess of 5% of its total assets.
o Other (All Portfolio Funds)
New financial products and risk management techniques continue to be
developed. Each Portfolio Fund may use these instruments and techniques to the
extent and when consistent with its investment objectives or regulatory and
federal tax considerations.
Management
o The Board of Trustees
The Portfolio's Board of Trustees (the "Board") meets regularly to review
each Portfolio Fund's investments, performance, expenses, and other business
affairs. The Board elects the Portfolio's officers. The Board has nine members.
Five Trustees are not "interested persons" of the Portfolio, as that term is
defined in the 1940 Act. The names and business experience of the Trustees and
officers of the Portfolio are set forth in the Statement of Additional
Information.
o Investment Advisers and Distributor
GISC serves as investment adviser and provides certain administrative
services and facilities necessary to conduct the ongoing business of the Park
Avenue, Bond, Tax-Exempt, Cash and Asset Allocation Funds. GISC selects, buys
and sells securities for these Portfolio Funds; chooses brokers and dealers to
effect the transactions; and negotiates any brokerage commissions. Each of these
Portfolio Funds pays GISC an investment management fee for the services GISC
provides. The Asset Allocation Fund pays this fee at an annual rate of 0.65% of
its average daily net assets. The other Portfolio Funds managed by GISC pay
investment management fees at an annual rate of 0.50% of their respective
average daily net assets. All payments are due on a quarterly basis.
GISC is located at 201 Park Avenue South, New York, New York 10003. GISC is
wholly owned by GIAC, which is, in turn, wholly owned by Guardian Life, a mutual
life insurance company organized in the State of New York in 1860. GISC is the
investment adviser to three other open-end management investment companies; is
the manager of another open-end investment company; and is the co-adviser of a
separate account of GIAC. GISC is also the principal underwriter and distributor
of all six of the Portfolio Funds' shares and of variable annuity and variable
life insurance contracts issued by GIAC. (See the Statement of Additional
Information.)
GBG is responsible for the overall investment management of the
International Fund's portfolio, and furnishes the Board with reports and
recommendations about the International Fund's investment program. The
International Fund pays GBG an investment management fee at an annual rate of
0.80% of the Fund's average daily net assets. Payments are due quarterly. This
management fee is higher than that paid by most investment companies to their
investment advisers. However, the Board believes that this fee is justified by
the international scope of this Portfolio Fund's investment activities.
Additionally, this fee is appropriate in light of the fees paid by other
investment companies which have similar objectives and policies.
GBG has appointed BG Overseas to be the International Fund's sub-investment
adviser. BG Overseas selects, buys and sells securities for the International
Fund, and selects brokers to effect the transactions. One-half of the fee paid
by the International Fund to GBG is paid by GBG to BG Overseas for its services
as the International Fund's sub-investment adviser. The sub-investment advisory
fee is not separately or additionally paid by the International Fund.
GBG is a Scottish investment management company. It was incorporated in
November 1990 by GIAC and BG Overseas. GIAC owns 51% of GBG's voting stock. BG
Overseas owns the remaining 49% of such voting stock. BG Overseas is wholly
owned by Baillie Gifford & Co., and was incorporated in Scotland to manage money
for institutional clients situated outside of the United Kingdom. Baillie
Gifford & Co., which was founded in 1909, manages money for institutional
clients primarily within the United Kingdom. Baillie Gifford & Co. is a Scottish
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partnership. Presently, it is one of the largest independently owned investment
management firms in the United Kingdom.
GBG, BG Overseas and Baillie Gifford & Co. are located at 1 Rutland Court,
Edinburgh, EH3 8EY, Scotland. GBG and BG Overseas provide investment management
and advisory services in the manner described above to the two series funds
which comprise one other open-end management investment company.
o Portfolio Managers
Charles E. Albers, CFA, Executive Vice President of the Portfolio, has
managed the Park Avenue Fund since its inception in June 1972. Mr. Albers also
manages The Guardian Stock Fund, Inc., and the equity assets of the Asset
Allocation Fund and Guardian Life. Mr. Albers is a Senior Vice President of
Guardian Life.
R. Robin Menzies, Vice President of the Portfolio, has been primarily
responsible for the geographical diversification of the International Fund's
assets since the Fund's inception in February 1993. Investment teams at BG
Overseas make the securities selections for the International Fund. Mr. Menzies
provides similar services to Baillie Gifford International Fund, one of two
series funds comprising GBG Funds, Inc. Mr. Menzies is a Director of BG Overseas
and a Partner of Baillie Gifford & Co.
Michele S. Babakian, Vice President of the Portfolio, has managed the Bond
Fund since its inception in February 1993. Ms. Babakian also manages The
Guardian Bond Fund, Inc., and a portion of Guardian Life's fixed-income assets.
Ms. Babakian became a Vice President of Guardian Life in January 1995, and was a
Second Vice President prior thereto.
Alexander M. Grant, Jr., Second Vice President of the Portfolio, has
managed the Tax-Exempt Fund since December 1993, and the Cash Fund since October
1986. Mr. Grant also manages The Guardian Cash Fund, Inc. and the money market
assets of the Asset Allocation Fund. Since February 1993, Mr. Grant has also
been responsible for managing Guardian Life's tax-exempt assets. Mr. Grant is an
Assistant Vice President of Guardian Life. From October 1990 to September 1993
he was an Investment Officer.
Frank J. Jones, Ph.D., President of the Portfolio, has been responsible for
the allocation of the Asset Allocation Fund's assets since the Fund's inception
in February 1993. Mr. Jones was named Executive Vice President and Chief
Investment Officer of Guardian Life in January 1994. From August 1991 through
December 1993, he was Senior Vice President and Chief Investment Officer of
Guardian Life. Prior to joining Guardian Life, Mr. Jones held senior positions
at Merrill Lynch & Co. and Barclays de Zoete Wedd, GSI.
Since May 1, 1995, Mr. Jones has shared the responsibility for the
allocation of the Asset Allocation Fund's assets with Jonathan C. Jankus, CFA,
Vice President of the Portfolio. Mr. Jankus is also responsible for managing the
fixed-income assets of the Asset Allocation Fund. Mr. Jankus has been a Second
Vice President of Guardian Life since March 1995. From January 1994 to March
1995, Mr. Jankus was Chief Investment Strategist for Global Bonds for Barclays
Investments. Prior thereto, he was a Senior Vice President at Kidder Peabody &
Co.
o Administrative Services Agreement
Pursuant to the Administrative Services Agreement adopted by the Portfolio
Funds on behalf of both classes of shares, GISC provides information and
administrative services for the benefit of the Portfolio and its shareholders.
These services include providing office space, equipment and personnel,
maintenance of shareholder account records, responding to routine shareholder
inquiries regarding the Portfolio and assisting in the processing of shareholder
transactions and any other services which the Portfolio may reasonably request.
GISC may also enter into related agreements with other broker-dealers or other
financial services firms that provide such services and facilities for their
customers who are shareholders of the Portfolio.
Each of the Portfolio Funds pays GISC an administrative services fee for
the services that GISC provides. The Park Avenue Fund pays this fee at an annual
rate of 0.25% of the average daily net assets of those fund assets for which a
"dealer of record" has been designated. The other Portfolio Funds pay an
administrative services fee at an annual rate of 0.25% of their respective
average daily net assets. All payments are due on a monthly basis.
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o Distribution Plan and Agreement
Under a Distribution Plan adopted by the Portfolio pursuant to Rule 12b-1
under the 1940 Act (the "12b-1 Plan"), each Multiple Class Fund is authorized to
pay a monthly 12b-1 fee at an annual rate of up to 0.75% 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 those Funds.
The 12b-1 fees may be paid by the Multiple Class Funds to third parties,
including GISC, which enter into Distribution Agreements with the Portfolio.
Under the 12b-1 Plan, distribution fees may be used to compensate brokers and
dealers who engage in or support the distribution of the Class B shares of the
Multiple Class Funds. The 12b-1 fees may also be used to pay other
distribution-related shareholder servicing expenses incurred, such as
communications equipment charges, the costs of printing sales literature and
advertising and other overhead. The 12b-1 Plan, in conjunction with the CDSL,
permits an investor to purchase Class B shares through a distributor without the
imposition of an initial sales load.
The 12b-1 Plan is not intended to reimburse any third parties which enter
into Distribution Agreements with the Portfolio (including GISC) for specific
expenses incurred in the distribution of the Class B shares. Thus, if a
distributor's expenses exceed the amount of 12b-1 fees collected, the multiple
class Funds are not obligated to pay more. Conversely, if the expenses are less
than the amount of 12b-1 fees collected from a multiple class Fund, the
distributor is entitled to retain the difference.
In order to effect the 12b-1 Plan, the Portfolio, on behalf of the Multiple
Class Funds, has entered into a Distribution Agreement with GISC. GISC intends
to use these fees to pay for distribution-related shareholder servicing
expenses, and payments to registered representatives for the sale of Class B
shares. GISC also intends to use the 12b-1 fees to advance payments of up to
3.0% of the proceeds of sales of Class B Shares to its registered
representatives and other authorized broker-dealers.
The Board receives quarterly reports about the operation of the 12b-1 Plan
and annually considers whether the 12b-1 Plan should be renewed for each
Multiple Class Fund. The 12b-1 Plan may not be amended to increase materially
the amount of the 12b-1 fees to be paid by a Portfolio Fund without the approval
by a majority of the affected Fund's outstanding Class B shares.
The Portfolio has also entered into a Distribution Plan pursuant to Rule
12b-1 under the 1940 Act with GISC on behalf of the Class A shares. At present,
this Plan has been made dormant and no 12b-1 fees are authorized to be paid in
connection with sales of Class A Shares.
o Expenses of the Portfolio Funds
Each Portfolio Fund pays investment advisory and administrative fees,
brokerage commissions, transfer taxes and other fees related to selecting,
buying and selling its investments. Each Portfolio Fund also pays its
proportionate share of: the fees and expenses of Trustees who are not
"interested persons" of the Portfolio; auditing and legal fees and expenses; the
costs of printing and mailing reports and other materials to shareholders; bank
transaction charges and custodian's fees; any unreimbursed proxy solicitors'
fees and expenses; SEC filing fees; any applicable taxes; fidelity bond
insurance premiums; costs of shareholder and Trustees meetings; and any other
extraordinary expenses which may be incurred.
The fees and expenses incurred by the Portfolio Funds and classes within
Funds, where applicable, are set forth as a percentage of each such Portfolio
Fund's average daily net assets in the "Transaction Costs and Fund Expenses"
table.
From time to time and at their discretion, GISC or GBG may voluntarily
assume some or all of the ordinary operating expenses of the Portfolio Funds
which they manage. GISC is also assuming expenses that exceed 0.75% of the Bond
and Tax-Exempt Funds' respective average daily net assets through December 31,
1996. When GISC ceases to subsidize these Portfolio Funds' expenses, the
expenses actually paid by the Funds will increase and returns to shareholders
will correspondingly decrease.
GISC paid organizational expenses of $16,400 per Portfolio Fund for each of
the International, Bond, Tax-Exempt and Asset Allocation Funds. These Funds
repaid these expenses, which are now being amortized over a five year period to
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end in 1998. (See "Portfolio Affiliates and Principal Holders of Fund Shares" in
the Statement of Additional Information.)
How to Purchase Shares
Four of the six series of the Portfolio offer two classes of shares, Class
A and Class B. The two classes represent interests in the same portfolio of Fund
investments, have the same rights and are otherwise identical, except that each
class bears its own distribution costs and may bear certain transfer agency and
other costs attributable to its sales arrangements or unique to its class. The
Class B shares have an active 12b-1 Plan described under "Distribution Plan and
Agreement" above and have exclusive voting rights with respect to the 12b-1
Plan.
Class A shares are sold with an initial sales load and have lower total
operating expenses than Class B shares. However, because an initial sales load
is deducted at the time of purchase, not all funds will be initially invested.
Class A shares may also qualify for either a reduction or waiver of the initial
sales load. Investors who qualify for reduced or waived initial sales loads
should consider the purchase of Class A shares.
Class B shares are sold subject to a contingent deferred sales load and
have higher total operating expenses. Investors who prefer to have all of their
funds initially invested should consider the purchase of Class B shares.
The Portfolio will not accept a purchase order in excess of $250,000 for
Class B shares, and will recommend that such investors purchase Class A shares
of the same Portfolio Fund. Class B shares may not be purchased through payroll
deduction accounts.
Shares of the Portfolio Funds are available through (1) Guardian Life
agents who are registered representatives of GISC and (2) registered
representatives of other selected broker-dealer firms. The "public offering
prices" of the shares of the Portfolio Funds are calculated on each day the NYSE
is open, as of the earlier of 4:00 p.m. Eastern time or the close of trading on
the NYSE (the "Close of Business"). The public offering price per share on any
day is the current NAV plus any applicable sales load. (See "Calculation of Net
Asset Values.")
GISC may from time to time provide, at its expense, promotional incentives
either to its own registered representatives or to certain dealers whose
registered representatives have sold, or are expected to sell, significant
amounts of the Portfolio Funds.
o Minimums
The minimum initial investment for each Portfolio Fund (including any
applicable sales load) is $1,000, and the minimum for additional purchases is
$100. For an individual retirement account, the minimum initial investment is
$250, and additional purchases must be at least $50. For each payroll deduction
plan account, the minimum for initial and subsequent purchases is $50. These
minimums may be changed at any time at GISC's discretion.
o Purchase Orders
A purchase order consists of the purchase payment and investment
instructions. An initial purchase order must include a properly completed Park
Avenue Portfolio application. (See "Shareholder Services.") Initial purchases
must be made through a registered representative. Subsequent purchase orders may
be sent directly to NFDS, the Portfolio's transfer agent. Checks must be made
payable to the Portfolio. Third party checks endorsed to the Portfolio and money
orders will not be accepted. The purchase price will be the public offering
price next determined after the purchase order is received. Purchase orders that
are received before the Close of Business will be confirmed at the public
offering price determined that day. Registered representatives of GISC and
broker-dealer firms that have entered into selling agreements with GISC are
obligated to transmit orders promptly. Broker-dealer firms other than GISC may
impose a charge for assisting investors in placing purchase orders. Any such
charge would be in addition to the sales load described below. Each Portfolio
Fund and GISC reserve the right to reject any purchase order and to suspend the
offer of a Fund's shares.
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o Purchases by Wire
Purchase payments may be wired in federal funds after an investor has
opened an account with a Portfolio Fund. The minimum wire purchase is $1,000.
The wire address is:
State Street Bank and Trust Company
ABA Routing Number 0110-000-28
Boston, Massachusetts 02101;
Attention: Guardian A/C 9904-713-6
[Name of Portfolio Fund];
Account of [Name of Shareholder and
Shareholder Account Number].
The price per share for a wired order will be the public offering price
next determined after the wired funds are received. Information about wiring
federal funds is available at any bank which is a member of the Automated
Clearing House. Each Portfolio Fund reserves the right to charge the investor's
account a fee for this service. The investor's bank may also charge a fee for
wiring federal funds.
o Class A Shares -- Initial Sales Load Alternative
Class A shares of all of the Portfolio Funds (except the Cash Fund) are
offered at the public offering price, which is NAV per share, plus an initial
sales load. Class A shares of the Cash Fund are offered at NAV.
The sales load on purchases varies with the size of the purchase as shown
in the following table.
Initial Sales Load on Purchases
of Class A Shares of the Portfolio Funds*
================================================================================
Sales Sales Concession
Load as Load as to Dealers
Percentage Percentage as Percentage
Amount of of Offering of Amount of Offering
Purchase Payment Price Invested Price**
- --------------------------------------------------------------------------------
Less than $100,000 4.50% 4.71% 4.50%
- --------------------------------------------------------------------------------
$100,000 but less
than $250,000 3.75% 3.90% 3.50%
- --------------------------------------------------------------------------------
$250,000 but less
than $500,000 2.75% 2.83% 2.50%
- --------------------------------------------------------------------------------
$500,000 but less
than $1,000,000 2.00% 2.04% 1.80%
- --------------------------------------------------------------------------------
$1,000,000 but less
than $2,500,000 1.00% 1.01% 0.90%
- --------------------------------------------------------------------------------
$2,500,000 but less
than $5,000,000 0.50% 0.50% 0.45%
- --------------------------------------------------------------------------------
$5,000,000 or more None None ***
================================================================================
* There is no sales load on purchases of Class A shares of the Cash Fund.
** GISC may reallow up to 100% of the applicable sales load to certain
dealers. Any dealer who receives 90% or more of the sales load may be
deemed to be an "underwriter" under the 1933 Act.
*** GISC will use its own resources to pay dealers a concession of at least
0.15%.
o Waiver of Initial Sales Load (Purchases at NAV)
Class A shares of the Portfolio Funds may be purchased without an initial
sales load by: (1) Guardian Life, its subsidiaries or any separate account
thereof; (2) present and retired directors, officers, employees, general agents
and field representatives of Guardian Life or its subsidiaries; (3) directors or
trustees and officers of any open-end management investment company within the
Guardian Fund Complex (as defined in the Statement of Additional Information);
(4) the spouses, parents, siblings, children and grandchildren of the
individuals in (2) or (3) above; (5) present and retired directors, trustees,
officers, partners and employees of broker-dealer firms that have written sales
agreements with GISC, and the spouses, parents, siblings, children and
grandchildren of such individuals; (6) trustees or custodians of any employee
benefit plan, IRA, Keogh plan or trust established for the benefit of persons in
(2) or (3) above; (7) employee benefit plans that either (a) invest at least
$1,000,000 in the Portfolio Funds over a period of 13 months, or (b) cover at
least 200 eligible participants; (8) investors who purchase Portfolio Fund Class
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A shares with the redemption proceeds from other mutual fund complexes on which
the investor has paid a front-end sales charge, paid a contingent deferred sales
charge upon redemption or held shares of such fund or funds for the period
required not to pay the otherwise applicable contingent deferred sales charge,
provided that such redemption has occurred no more than 60 days prior to the
purchase; (9) any trust company or bank trust department which exercises
discretionary investment authority and holds unallocated accounts in a
fiduciary, agency, custodial or similar capacity; (10) broker-dealers, financial
institutions and registered investment advisers which have entered into an
agreement with GISC providing for the sale of Portfolio Fund Class A shares to
the clients of such entities participating in a "wrap account" or similar
program under which clients pay an account management fee or transaction fee to
such entity; and (11) investors who purchase Portfolio Fund Class A shares with
the surrender proceeds from annuity contracts funded by insurance company
separate accounts on which the investor has paid a contingent deferred sales
charge upon redemption or owned the annuity contract for the period required not
to pay the otherwise applicable contingent deferred sales charge, provided that
such surrender has occurred no more than 60 days prior to the purchase.
Generally, sales commissions are not paid when shares are purchased without
a sales load. However, GISC may pay a sales concession to a broker-dealer firm
or GISC registered representative in an amount not to exceed 0.50% of the amount
invested for the sale of Portfolio Fund Class A shares (except Cash Fund shares)
which are purchased at net asset value by employee benefit plans which fall
within category (7) above.
GISC requires anyone who may be eligible to purchase Class A shares without
a sales load to complete an NAV purchase certification form. This form is
available through registered representatives, or by calling 1-800-221-3253.
Shares purchased under this privilege can only be resold through redemption by
the issuing Portfolio Fund. This privilege may be modified or withdrawn at any
time and without notice.
o Class B Shares -- Contingent Deferred
Sales Load Alternative
Class B shares of the Multiple Class Funds are offered at the next
determined NAV, and no initial sales load is imposed. However, a contingent
deferred sales load or "CDSL", may be imposed upon the redemption of Class B
shares. When redeeming Class B shares, a shareholder authorizes the Portfolio's
Transfer Agent to redeem an additional amount of shares sufficient to cover the
CDSL. Class B shares held longer than six years and Class B shares acquired
through the reinvestment of dividends or capital gains distributions are not
subject to a CDSL. The CDSL on redemptions of Class B shares decreases over time
as shown in the following table.
Contingent Deferred Sales Load on Class B
Shares of the Portfolio Funds
================================================================================
Year Since CDSL as a Percentage of Amount
Purchase Redeemed Subject to Charge
- --------------------------------------------------------------------------------
First Year 4.0%
Second Year 3.5%
Third Year 3.0%
Fourth Year 2.0%
Fifth Year 1.5%
Sixth Year 1.0%
Thereafter None
================================================================================
If the redemption request plus any applicable CDSL exceeds the
shareholder's current Class B share account balance, it will be treated as a
redemption in full, thereby reducing the amount of the net proceeds payable to
the shareholder. In determining the CDSL applicable to a redemption, it will be
assumed that the redemption is made first of shares acquired pursuant to
dividend reinvestments and distributions and then of shares held by the
shareholder for the longest period of time. This will result in the imposition
of a CDSL at the lowest possible rate. For federal tax purposes, the amount of
the CDSL will reduce the gain or increase the loss, as the case may be, realized
on the redemption.
o CDSL Waivers
The CDSL will be waived for exchanges into the Class B shares of the other
Multiple Class Funds, including exchanges into Class B shares of the Cash Fund.
In addition, the CDSL will be waived for a total or partial redemption
29
<PAGE>
made within one year of the death of the shareholder. The CDSL waiver is
available when the decedent is either the sole shareholder or owns the shares
with his or her spouse as a joint tenant with the right of survivorship. This
waiver is applicable only to redemptions of shares held at the time of death.
How to Redeem Shares
o General Information
Shares of any of the Portfolio Funds may be redeemed at the NAV next
calculated after a proper redemption request has been received. For Class B
shares, a CDSL may be imposed at the time of such redemption, if applicable.
Such requests may be made in writing, by telephone or, for the Class A shares of
the Cash Fund only, by check. However, shares held in certificate form or
qualified retirement plan accounts may only be redeemed by written request.
Redemption proceeds will normally be paid within three business days of the
receipt of a redemption request. The Portfolio Funds may delay sending
redemption proceeds for shares purchased by check until such check has been
cleared for payment. This may take up to 15 days. Also, a Portfolio Fund may
postpone payments or suspend redemptions: when the NYSE is closed (besides
weekends and holidays); when trading on the NYSE is restricted; when an
emergency makes it not reasonably practicable for the Fund to sell assets or
calculate its NAV; or as permitted by the SEC. As and when permitted under SEC
rules, a Portfolio Fund may, for example, postpone payments or suspend
redemptions when significant portions of its assets could be affected by
simultaneous redemption and/or exchange requests. At such times, a Portfolio
Fund may restrict or refuse redemption or exchange requests. (See "Exchanges.")
A Portfolio Fund's NAV can fluctuate from day to day, so the redemption
price may be higher or lower than original cost.
o Redemption by Wire
Redemption proceeds may be wired to a predesignated bank account if the
shareholder has completed the authorization on the Park Avenue Portfolio
application or Shareholder Privilege form. (See "Shareholder Services.") The
receiving bank must be a member of the Automated Clearing House. Each Portfolio
Fund reserves the right to charge shareholders for wire redemptions. NFDS will
deduct any charges that it may assess for wire redemptions from the account from
which shares are redeemed. Applicable taxes are withheld from redemption
proceeds, as and when required. (See "Taxes.")
o Written Redemption Requests
Written redemption requests sent by regular U.S. mail should be addressed
to:
NFDS [Name of Portfolio Fund]
P.O. Box 419611
Kansas City, MO 64141-6611.
Registered, certified or express mail should be sent to:
NFDS [Name of Portfolio Fund]
1004 Baltimore Avenue, Floor DW-05
Kansas City, MO 64105-2112.
Certificates for any shares being redeemed must be properly endorsed and
delivered with the written redemption request.
o Signature Guarantee Requirements
Shareholder signatures on written redemption requests must be guaranteed
when: (1) the request is for $50,000 or more; (2) the request is made by a
shareholder who is not a natural person; or (3) the proceeds are to be made
payable or mailed to a payee or address that is not reflected on the account
records. Signature guarantees can be obtained from most banks, broker-dealer
firms, credit unions or other financial institutions, but not from a notary
public. Signature guarantees are not typically required for redemptions by check
from the Cash Fund or pursuant to an automatic withdrawal plan. (See "Redemption
by Check" and "Automatic Withdrawal Plan.")
o Telephone Redemption Requests
Shares of a Portfolio Fund which are worth at least $1,000 may be redeemed
by calling NFDS at 1-800-343-0817 before the Close of Business. NFDS will not
accept telephone redemption requests after the Close of Business. Redemption by
telephone is available only if the shareholder has elected this privilege and an
appropriate authorization is on file at NFDS. New investors may authorize the
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<PAGE>
telephone redemption privilege on the Park Avenue Portfolio application. Current
shareholders can complete the applicable item on the Shareholder Privilege form
and submit the form directly to NFDS. Signatures on the Shareholder Privilege
form must be guaranteed by an eligible guarantor institution to authorize the
telephone redemption privilege. Redemption by telephone is not available for
qualified retirement plan accounts or for shares for which certificates have
been issued.
Callers are asked to provide precise information about the account from
which shares will be redeemed and other identifying information. The $1,000
minimum redemption requirement will be waived for shareholders who close out
accounts via telephone. Telephone redemption instructions may be accepted from
any caller who can provide the requested information. Shareholders risk possible
loss of principal, interest and capital appreciation in the event of
unauthorized or fraudulent telephone redemption instructions.
The Portfolio Funds, GISC, GBG, BG Overseas, NFDS and State Street Bank and
Trust Company shall not be liable for any loss, damage, cost or expense
resulting from following the foregoing procedures to implement telephone
redemption instructions which any of them reasonably believed to be genuine. If
the procedures are not followed, however, one or more of such parties may be
liable for losses related to following fraudulent instructions. Telephone
redemption requests are typically recorded, and such recording may be made
without prior disclosure to the caller.
During periods of drastic economic or market changes, it may be difficult
to contact NFDS to request a telephone redemption. If this occurs, written
redemption requests can be sent to NFDS by regular or express mail or through a
broker-dealer firm.
The telephone redemption privilege may be suspended, modified, withdrawn or
made subject to a charge at any time following at least 7 days notice to
shareholders.
o Redemption by Check (Cash Fund Only)
Class A shareholders of the Cash Fund may redeem shares by writing checks
against their Cash Fund accounts. The minimum payable amount is $250 per check.
Shares are redeemed to pay a check on the day that the check is presented for
payment. A shareholder will continue to receive dividends on such shares until
then. The Cash Fund will not honor checks which are payable in amounts that
exceed a Cash Fund shareholder's account balance. Such checks will be returned
without payment, and marked "Insufficient Funds." Any check written for less
than the $250 minimum will also be returned to the shareholder as unpayable,
regardless of the value of the shareholder's Cash Fund account.
Currently, there is no fee for writing checks. Since the value of a
shareholder's Cash Fund account changes daily and may not be determined in
advance, a shareholder should not attempt to close a Cash Fund account by
writing checks.
Checkwriting privileges are not available to Cash Fund shareholders who
purchase shares for qualified retirement plan accounts.
The Cash Fund, GISC and State Street Bank reserve the right to modify or
withdraw the checkwriting privilege at any time, or to impose a service charge
for this privilege.
o Repurchase by Broker-Dealer Firms
on Behalf of Shareholders
Shareholders may communicate repurchase requests through GISC or
broker-dealer firms that have entered into selling agreements with GISC. GISC
does not charge a fee for repurchases, but other broker-dealer firms may charge
for this service. Broker-dealer firms are obligated to transmit orders promptly.
The repurchase price will be the NAV next determined after receipt of the
request. Repurchase requests received before the Close of Business will be
priced at the NAV computed that day. The offer to repurchase may be suspended or
discontinued at any time. Repurchases are subject to the same general
requirements set forth in this Prospectus for other redemptions.
o Minimum Account Balance
A Portfolio Fund may close a shareholder's account if the account balance
falls below $1,000 for any reason other than market factors. Exchanges among
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<PAGE>
Portfolio Funds may cause an account balance in a Fund to fall below $1,000, as
shares of one Fund are redeemed to purchase shares of another. (See
"Exchanges.") A shareholder will be notified and given at least 30 days to
increase an account balance to at least $1,000 before the account is closed. A
shareholder account opened in connection with an Automatic Investment Plan,
Dollar Cost Averaging program, qualified retirement plan or payroll deduction
plan is not subject to the minimum account balance requirement.
o Reinstatement Privilege
A shareholder who has redeemed shares may reinvest as much as the
redemption amount at NAV. Shareholders who wish to reinstate Class B shares will
receive pro rata credit for any CDSL paid in connection with the redemption of
the Class B shares. This privilege can be used by a shareholder only once, and
the reinvestment must be effected within 30 days of the redemption date. NFDS
must be notified in order to take advantage of this privilege. Reinstatement
will be at the NAV next calculated after receipt.
The tax status of a gain realized on a redemption will not be affected
through the reinstatement privilege, although the effects of a loss may be
lessened or nullified by reinvestment in the same series.
Special Purchase and Redemption Plans
The Portfolio Funds offer four special purchase and redemption plans. The
Portfolio Funds may modify or withdraw any of these plans at any time and
without notice, or charge participating shareholders fees to cover
administrative costs. These special plans are not available to anyone who owns
Park Avenue Fund shares through a Value Guard variable annuity contract. For
further information on any of these plans, call toll free at 1-800-343-0817.
o Automatic Investment Plan
Under an Automatic Investment Plan, money is withdrawn each month from a
shareholder's predesignated bank account for investment in the Portfolio Funds.
The minimum investment is $100 per Portfolio Fund. A shareholder must make an
initial investment of at least $50 in each receiving Fund and invest at least
$1,000 in each such Fund during each 12-month period that his or her automatic
investment plan is in effect. By investing the same dollar amount each month, a
shareholder will purchase more shares when a Portfolio Fund's NAV is low and
fewer shares when the NAV is high. This means that the shareholder's average
purchase price per share can be lower than if he or she purchased the same total
number of shares in a single transaction. While periodic investing can help
build significant savings over time, it does not assure a profit or protect
against loss in a declining market.
An investor must complete the appropriate item on the Park Avenue Portfolio
application or Shareholder Privileges form to establish an automatic investment
plan, and his or her bank must be a member of the Automated Clearing House. The
shareholder may revoke the plan at any time, but it may take up to 15 days from
the date a written revocation notice is received to terminate the plan. Any
purchases of Portfolio Fund shares made during this period shall be considered
authorized. If an automatic withdrawal cannot be made from the shareholder's
predesignated bank account to provide funds for automatic share purchases, the
shareholder's plan will be terminated.
o Rights of Accumulation
A shareholder can aggregate proposed purchases of Portfolio Fund shares
with current holdings to reduce the initial sales load that would otherwise
apply to the new purchases. Shares held in the name(s) of the shareholder's
spouse or minor children can be included in the aggregated amount, as may any
shares acquired for which a sales load may be applicable (e.g., Class B shares).
Shares acquired without sales load (e.g., shares acquired through the
reinvestment of dividends or distributions or Cash Fund purchases) are not
includible. To exercise accumulation rights, a shareholder must notify NFDS or
GISC that a purchase will qualify for a reduced initial sales load, and provide
the names and account numbers of any family members whose holdings are to be
aggregated for this purpose.
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<PAGE>
o Investment by Letter of Intent
An investor who intends to invest $100,000 or more over a period of 13
months can reduce the initial sales load on each of his or her intended
purchases by completing the letter of intent item on the Park Avenue Portfolio
application or Shareholder Privileges form. The sales load charged for each
purchase will be at the reduced rate which would apply to a single investment in
the intended aggregate amount. Current holdings of both Classes of shares and
shares held in the name(s) of the shareholder's spouse or minor children can be
used as an accumulation credit towards the completion of a letter of intent, but
shares not otherwise subject to a sales load (e.g., shares acquired through the
reinvestment of dividends or distributions or purchases of Class Ashares of the
Cash Fund) are not eligible for accumulation credit.
A letter of intent does not bind the shareholder to purchase the entire
intended amount, but the shareholder must complete his or her intended
investment to remain eligible for the reduced sales load. NFDS will escrow
shares valued at 5% of the intended investment to assure payment of additional
sales loads if the intended purchases are not made and the shareholder fails to
pay the additional sales load within 20 days after NFDS requests payment.
Escrowed shares that are not needed to pay additional sales loads will be
released from escrow.
o Automatic Withdrawal Plan
A shareholder who owns shares of a Portfolio Fund which are worth at least
$10,000 may arrange for monthly, quarterly, semi-annual or annual redemptions of
a predesignated amount from his or her account. The minimum withdrawal amount is
$100. Payment may be made to the shareholder, a predesignated bank account or to
another payee. Under this plan, sufficient shares are redeemed from the
shareholder's Portfolio Fund account(s) in time to either send a check in the
amount requested on or about the first day of a month, or to be wired to a
predesignated bank account. If the wire option is chosen, the receiving bank
must be a member of the Automatic Clearing House. No CDSL with respect to Class
B shares of a Multiple Class Fund will be imposed on withdrawals made under the
plan, provided that the amounts withdrawn do not exceed on an annual basis 10%
of the account value at the time the shareholder establishes an automatic
withdrawal plan. Redemptions under the automatic withdrawal plan will reduce and
may ultimately exhaust the value of the designated Portfolio Fund account(s).
Taxable gains or losses may be realized when shares are redeemed under the
automatic withdrawal plan.
Purchasing additional shares concurrently with automatic withdrawals is
likely to be disadvantageous to the shareholder because of tax liabilities and
sales loads. Consequently, the Portfolio Funds will not normally accept
additional purchase payments in single amounts of less than $5,000 from a
shareholder who has this plan in effect. Any charges made by NFDS to operate an
automatic withdrawal plan will be assessed against the shareholder's account(s)
when each withdrawal is effected.
An investor must complete the applicable item on the Park Avenue Portfolio
application or Shareholder Privilege form to establish an automatic withdrawal
plan. Forms must be properly completed and received at least 30 days before the
first payment date. An automatic withdrawal plan may be terminated at any time,
by written notice from the shareholder, GISC, NFDS or the Portfolio Funds.
Exchanges
These privileges are not available to anyone who owns Park Avenue Fund
shares through a Value Guard variable annuity contract.
o General Information and Procedures
Shares of each Portfolio Fund may be exchanged for shares of the
corresponding class of any other Portfolio Fund. Exchanges are effected by
redeeming shares of one Portfolio Fund and purchasing shares of another
designated Portfolio Fund with the redemption proceeds. No sales load is imposed
on the shares to be acquired if a load was paid when the exchanged shares were
originally purchased, or if the exchanged shares were acquired through the
reinvestment of dividends or distributions declared by a Portfolio Fund. While
no CDSL is imposed on the shares being redeemed as part of an exchange, a CDSL
may apply at the time the shares acquired as part of an exchange are redeemed.
Any applicable CDSL payable upon the redemption (without an exchange) of the
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<PAGE>
Class B shares received as part of the exchange will be calculated from the date
Class B Shares are originally purchased, rather than from the date such shares
are exchanged for shares of another Fund. Shares purchased without a sales load
(e.g., Class A Cash Fund Shares) may be exchanged for shares of other Class A
Funds, but any applicable sales load must be paid to acquire shares of another
Portfolio Fund through the exchange. All exchanges are subject to the conditions
and considerations described under "How to Purchase Shares" and "How to Redeem
Shares."
Class B shares of the Multiple Class Funds will automatically convert to
Class A shares of the same Fund approximately eight years after the anniversary
of purchase, together with any additional Class B shares representing dividend
reinvestments and distributions. Following their conversion, the shares will be
subject to the lower expenses borne by Class A shares.
For federal income tax purposes, an exchange involves a sale upon which
taxable gains or losses may be realized. Exchanges are effected at the relative
NAVs for each Portfolio Fund next determined after the exchange request is
received. However, a Portfolio Fund may delay payment of the redemption proceeds
and the corresponding purchase of shares for up to 3 business days. During this
period of delay, the redemption proceeds are not invested. Shares may not be
exchanged until after the settlement date for their purchase. Neither GISC nor
the Portfolio Funds presently assess fees or charges in connection with
exchanges, but nominal exchange fees may be charged in the future.
Shareholders may request exchanges in writing or by telephone. A
shareholder may also initiate an exchange by contacting his or her registered
representative. Broker-dealer firms other than GISC may charge for their
assistance in effecting exchange transactions. Any share certificates held by
the shareholder must be properly endorsed and deposited before an exchange will
be effected.
Telephone exchange privileges can only be elected by completing the
applicable item on the Park Avenue Portfolio application or Shareholder
Privileges form. NFDS will not honor telephone exchange requests unless an
authorization is on file.
Callers who request exchanges by telephone are asked to provide precise
information about the account from which shares will be exchanged and other
identifying information. Telephone exchange requests may be accepted from any
caller who can provide the requested information. Shareholders risk possible
loss of principal, interest and capital appreciation in the event of
unauthorized or fraudulent telephone exchange requests.
The Portfolio Funds, GISC, GBG, BG Overseas, NFDS and State Street Bank and
Trust Company shall not be liable for any loss, damage, cost or expense
resulting from following the foregoing procedures to implement telephone
exchange instructions which any of them reasonably believed to be genuine. If
the procedures are not followed, however, one or more of such parties may be
liable for losses related to following fraudulent instructions. Telephone
exchange requests are typically recorded, and such recording may be made without
prior disclosure to the caller.
During periods of drastic economic or market changes, it may be difficult
to contact NFDS to request a telephone exchange. If this occurs, written
exchange requests can be sent to NFDS by regular or express mail.
This Prospectus describes the respective investment objectives and policies
of the Portfolio Funds and should be carefully reviewed prior to instituting an
exchange.
GISC reserves the right to reject or limit the amount of a specific
exchange request at any time. Exchange privileges may be modified or withdrawn
at any time, upon at least 60 days notice when such notice is required by SEC
rules.
o Dollar Cost Averaging
A shareholder may have predesignated dollar amounts of $100 or more
automatically exchanged (or transferred) among Portfolio Funds of the
corresponding class on a monthly or quarterly basis. By regularly transferring
the same dollar amount, a shareholder will acquire more shares when a receiving
Portfolio Fund's NAV is low and fewer shares when that Fund's NAV is high. This
means that the shareholder's average price per share can be lower than if he or
she acquired the same number of shares of the receiving Portfolio Fund in a
34
<PAGE>
single exchange transaction. However, periodic investing through automatic
exchanges does not assure a profit or protect against loss in a declining
market.
Before automatic exchanges begin, a shareholder must either have: (1) a
balance of at least $1,000 in both the originating and the receiving Portfolio
Funds; or (2) a balance of at least $5,000 in the originating Portfolio Fund.
The other general rules and considerations governing exchanges also apply to
automatic exchanges effected under the Dollar Cost Averaging program, including
tax considerations.
Calculation of Net Asset Values
A Portfolio Fund's NAV is determined as of the Close of Business by
subtracting the Fund's liabilities, including expenses which are accrued daily,
from its total assets and dividing the result by the total number of shares
outstanding.
Each Portfolio Fund values its assets at their current market value when
market quotations are readily available. If a market value cannot be
established, assets are valued at fair value as determined in good faith by or
under the direction of the Portfolio's Board of Trustees. Short-term securities
which mature in 60 days or less and all of the assets of the Cash Fund are
valued by using the amortized cost method, unless the Board determines that this
does not represent fair value. All investments by the International Fund are
valued daily in U.S. dollars based on the then prevailing exchange rate.
Specific information about how the Portfolio Funds value certain assets is set
forth in the Statement of Additional Information.
Performance Results
From time to time, the Portfolio Funds may provide performance information
in advertisements, sales literature or materials furnished to existing or
prospective shareholders. All such information is based upon historical earnings
and is not necessarily representative of future performance. More detailed
information about the calculation of each Portfolio Fund's performance appears
in the Statement of Additional Information.
o Total Returns
Both average annual total return and total return reflect the change in the
value of an investment in a Portfolio Fund over a specified period, assuming the
reinvestment of all income dividends and capital gains distributions. Average
annual total returns show the average change in value for each annual period
within a specified period. Total returns, which are not annualized, show the
total percentage change in value over a specified period.
Promotional materials relating to a Portfolio Fund's investment performance
will always at least provide the average annual total returns for one, five and
ten years, or the life of such Portfolio Fund, if shorter. Such required average
annual total returns will reflect the effects of all recurring and non-
recurring charges, as well as the maximum initial sales load paid when shares
are purchased. However, the Portfolio Funds may also show average annual total
returns and total returns which do not reflect the effects of the sales load.
o Yields
Yields may be quoted for the Bond, Tax-Exempt and Cash Funds. Current yield
is a measure of the net investment income earned on a hypothetical investment
over a specified base period of seven days for the Cash Fund and 30 days (or one
month) for the other Funds which may advertise yields. Yield is expressed as a
percentage of the value of a share at the beginning of the base period. Yields
are annualized, which means that they assume that a Portfolio Fund will generate
the same level of net investment income over a one year period. However, yields
actually fluctuate daily.
The Tax-Exempt Fund may quote its tax equivalent yield, which will be based
on the maximum federal income tax rate then in effect.
The Cash Fund may also quote its "effective yield," which assumes that the
net income earned during a base period will be earned and reinvested for a year.
The effective yield will be slightly higher than the Cash Fund's current yield
due to the compounding effect created by assuming reinvestment of the Fund's net
income.
35
<PAGE>
o Distribution Rates
On occasion, the Bond and Tax-Exempt Funds may quote historical or
annualized distribution rates. A distribution rate is simply a measure of the
level of income dividends and short-term capital gains distributed for a
specified period. A distribution rate is not a complete measure of performance,
and may be higher than yield for certain periods.
o Comparative and Other Information
Advertisements and sales literature for the Portfolio Funds may compare the
Funds' performance to that of other investment vehicles or other mutual funds
having similar investment objectives or programs. Promotional materials may also
compare a Portfolio Fund's performance to one or more indices of the types of
securities which the Fund buys and sells for its portfolio, and be illustrated
by tables, graphs or charts. Promotional materials may additionally contain
references to types and characteristics of certain securities; features of a
Portfolio Fund's portfolio; financial markets; or historical, current or
perceived economic trends within the United States or overseas. Topics of
general investor interest, such as personal financial planning, may also be
discussed.
In addition, advertisements and sales literature may refer to or reprint
all or portions of articles, reports, or independent rankings or ratings which
relate to the Portfolio Funds specifically, or to other comparable mutual funds
or investment vehicles. None of the contents of such materials will be used to
indicate future performance.
Further information about each Portfolio Fund's performance is contained in
the Portfolio's Annual Report, which may be obtained from GISC free of charge.
Dividends and Distributions
Each Portfolio Fund distributes substantially all of its net realized
capital gains and net investment income to its shareholders. A capital gain or
loss is the difference between the purchase and sale prices of a security. The
Portfolio Funds will have net capital gains if their capital gains exceed their
capital losses, which cannot be assured. Net investment income is determined by
subtracting expenses from any interest and dividend income earned by a Portfolio
Fund. When computing interest income, the Portfolio Funds do not amortize
premiums or accrue discounts on long-term debt securities, except as required
for federal income tax purposes.
All of the Portfolio Funds (except the Cash Fund) distribute any net
realized short and long-term capital gains at least annually. The Cash Fund
distributes any short-term gains monthly. It is not expected that the Cash Fund
will realize any long-term capital gains.
The Park Avenue, International and Asset Allocation Funds distribute any
net investment income to their shareholders twice a year. The Bond, Tax-Exempt
and Cash Funds declare dividends daily and distribute any net investment income
to their shareholders monthly.
Each Portfolio Fund pays its dividends and other distributions in
additional Fund shares at NAV unless the shareholder requests cash payments.
Shareholders who wish to receive dividends and/or other distributions in cash
should contact their registered representatives or complete the applicable item
on the Park Avenue Portfolio application or Shareholder Privileges form.
Dividends and/or other distributions in amounts of less than $10 will
automatically be reinvested in additional shares of the Fund.
Taxes
Each Portfolio Fund is separate for investment and accounting purposes and
will be treated as a separate entity for federal income tax purposes. Each
Portfolio Fund intends to continue to qualify as a regulated investment company
under the Internal Revenue Code so that it will not be subject to federal income
taxes on net investment income and net capital gains distributed to its
shareholders.
o Taxes on Redemptions
When shares of any of the Portfolio Funds are redeemed, including by
exchange into another Portfolio Fund, a shareholder may realize a taxable gain
or a loss. The gain or loss is measured by the difference between the redemption
proceeds and the shareholder's adjusted basis for the redeemed shares.
36
<PAGE>
o Taxes on Portfolio Fund Distributions
The following summary does not apply to accounts that are opened for
qualified retirement plans or by tax-exempt investors. Taxes on Portfolio Fund
distributions to qualified retirement plan accounts are deferred until money is
withdrawn from those accounts. This summary also does not apply to distributions
from the Tax- Exempt Fund. Information about distributions from the Tax-Exempt
Fund appears separately below.
Dividends and capital gains distributions from the Portfolio Funds are
taxable whether received in cash or additional Fund shares. If such dividends
and distributions are declared in October, November or December, they are
taxable for the year in which they were declared, if paid by February 1 of the
following calendar year. Net investment income dividends and short-term capital
gains distributions are taxable as ordinary income. Long-term capital gains
distributions are taxable at a maximum federal rate of 28% for individual
shareholders. A capital gain distribution is short-term or long-term depending
on how long the Portfolio Fund held the securities that produced it, not how
long the shareholder held his or her shares in the Portfolio Fund. Dividends
paid by Portfolio Funds that are attributable to the Funds' investments in U.S.
government securities may be exempt from state and local income taxes.
Among other things, a Portfolio Fund's NAV reflects undistributed income
and capital gains. When such income and gains are distributed, the NAV is
reduced. An investor who acquires shares near or on the record date for
distributions is entitled to receive these distributions. The distributions are
taxable as income, even though, in effect, the investor has received a return of
capital.
o Distributions from the Tax-Exempt Fund
Net investment income dividends declared and paid by the Tax-Exempt Fund
are, for the most part, "exempt-interest" dividends, whether received in cash or
additional shares of the Fund. Exempt-interest dividends are not subject to
federal income tax, but they may affect the tax liabilities of taxpayers who are
subject to the alternative minimum tax ("AMT"). Exempt-interest dividends are
also includible in the modified income of shareholders who receive Social
Security benefits for purposes of determining the extent to which such benefits
may be taxed. Generally, exempt-interest dividends are not exempt from state or
local taxes. However, a state or locality may provide tax exemptions for its
residents who receive exempt-interest dividends that relate to Municipal
Obligations issued within that state or locality.
Net investment income dividends derived from taxable obligations held in
the Tax-Exempt Fund's portfolio and any capital gains distributions by the Fund
are normally taxable as ordinary income, whether received in cash or additional
shares of the Fund. Gains attributable to market discount on Municipal
Obligations acquired after April 30, 1993 are also treated as ordinary income.
GISC intends to manage the Tax-Exempt Fund to minimize taxable distributions to
the Fund's shareholders. However, there can be no assurance that the Fund will
never make such distributions.
Certain individuals and corporations may be subject to the AMT. For them,
exempt-interest dividends derived from private activity bonds are treated as a
tax preference item. In addition, for corporate shareholders only, all other
exempt-interest dividends are a component of the adjusted current earnings
preference item for purposes of the AMT, and a component for computing the
corporate environmental tax.
Corporations and Social Security beneficiaries should consult their tax
advisers about the possible consequences to them of investing in the Tax- Exempt
Fund.
o Withholding
The Portfolio Funds are currently required to withhold 31% of all taxable
distributions and redemption proceeds payable to any shareholder who has not
provided a correct taxpayer identification number, or who is otherwise subject
to backup withholding. Corporate and governmental entities are generally exempt
from withholding requirements.
o Tax Information for Shareholders
Following the end of each calendar year, each Portfolio Fund notifies its
shareholders of the amount of dividends and capital gains distributions paid (or
37
<PAGE>
deemed paid) during that year, and shows the portion of those dividends that
qualifies for the corporate dividends-received deduction. The Funds identify
amounts taxable as ordinary income and amounts taxable as capital gains, and
indicate whether any portion of such income is possibly exempt from state or
local taxes. The Tax-Exempt Fund provides its shareholders with information
about the exempt-interest dividends paid to them (since they must disclose it on
their federal income tax returns), and reports the amount that relates to
private activity bonds which could be subject to the AMT. Under certain
circumstances, notices provided to the International Fund's shareholders also
specify their respective shares of any foreign taxes paid by that Fund.
International Fund shareholders are required to include their pro-rata share of
those taxes in gross income, but may be entitled to claim a credit or deduction
for them.
o A Special Note
The foregoing is only a summary of some important federal tax law
provisions that can affect the Portfolio Funds and their shareholders. There may
be other federal, state or local tax law provisions which affect some or all
investors. Prospective investors and current shareholders are urged to consult
their tax advisers about their individual circumstances.
Voting Rights and Liabilities
The Portfolio is registered with the SEC as an open-end management
investment company, and organized as a Massachusetts business trust. It may
issue an unlimited number of shares of beneficial interest in one or more
series, and classes within such series. Presently, the Portfolio offers shares
of six series. The Park Avenue Fund, the International Fund, the Asset
Allocation Fund and the Cash Fund currently offer two classes of shares,
designated Class A and Class B shares.
Neither the Portfolio nor its Portfolio Funds are required to hold annual
meetings of shareholders, but special meetings may be called to elect or remove
Trustees, change fundamental policies or the 12b-1 plan applicable to a class of
shares, or to approve an investment advisory agreement. Shareholders holding at
least 10% of the Portfolio's outstanding shares may call a special meeting for
the purpose of voting to remove any Trustee(s), and the Trustees shall
facilitate communications among shareholders as provided under Section 16(c) of
the 1940 Act. All shares of the Portfolio have equal voting rights. Shares are
voted in the aggregate, unless voting by series or class is required by law, or
when an issue affects the series or class separately. Shares of each Portfolio
Fund are fully paid and nonassessable when issued, are transferrable without
restriction and have no preemptive or conversion rights.
Under Massachusetts law, shareholders of the Portfolio could be held
personally liable for the Portfolio's obligations. However, the Declaration of
Trust expressly disclaims shareholder liability for acts or obligations of the
Portfolio, and requires each instrument entered into or executed by the
Portfolio to provide notice of this disclaimer. The Portfolio's property may
also be used to indemnify any shareholder who is held personally liable for any
obligation of the Portfolio. Thus, the risk of an individual being personally
liable for obligations of the Portfolio or of incurring financial loss because
of shareholder liability is limited to the unlikely circumstance in which both
inadequate insurance existed and the Portfolio was unable to meet its
obligations.
38
<PAGE>
Shareholder Services
o Important Addresses and Telephone Numbers
For Prospective Investors:
Guardian Investor Services Corporation
(GISC)
1-800-221-3253
Executive Office:
201 Park Avenue South
New York, New York 10003
Administrative Office:
P.O. Box 26205
Lehigh Valley, Pennsylvania 18002-6205
For Existing Shareholders:
National Financial Data Services (NFDS)
1-800-343-0817
First class mail:
P.O. Box 419611,
Kansas City, Missouri 64141-6611.
Express, registered and certified mail:
1004 Baltimore Avenue, Floor DW-05
Kansas City, Missouri 64105-2112
o Applications and Shareholder Privilege Forms
A copy of the Park Avenue Portfolio application is bound into this
Prospectus. The application is also available from registered representatives of
GISC and broker-dealer firms that have entered into selling agreements with
GISC. NFDS will open one or more shareholder accounts for a prospective investor
upon receipt and acceptance of the application and payment for his or her
initial investment. Copies of the Shareholder Privilege form are available
directly from GISC. Shareholders can use this form to add or change privileges
for their shareholder accounts.
o Account and Confirmation Statements
Shareholders receive confirmations of purchases and redemptions of shares
of the Portfolio Funds, and quarterly statements that show all transactions year
to date. Information for tax filing needs is also provided following the end of
each calendar year. (See "Taxes.") Audited annual financial statements and
unaudited semi-annual financial statements for the Portfolio are mailed to
shareholders by the end of February and August of each year.
o Retirement Plans
The Portfolio Funds are suitable for IRAs, SEP-IRAs, Keoghs (profit sharing
or money purchase pension plans), and 401(k) and 403(b) retirement plans. GISC
can provide forms and information about the fees and procedures for establishing
retirement plan accounts. However, GISC does not supply prototype forms for the
establishment of retirement plans other than IRAs. GISC does not serve as either
trustee or custodian for retirement plans that acquire shares of the Portfolio
Funds.
o Custodian
State Street Bank and Trust Company, Custody Division, 1776 Heritage Drive,
North Quincy, Massachusetts 02171, is the custodian of each Portfolio Fund's
assets. State Street employs foreign sub-custodians to provide custody of the
Portfolio Funds' foreign assets. The Portfolio's Board of Trustees annually
approves the foreign sub-custodians selected for the Portfolio Funds. However,
there can be no assurance that the Portfolio Funds will not be affected by any
non-investment risks associated with holding assets abroad.
o Transfer and Dividend Paying Agent
NFDS is the Portfolio Funds' transfer and dividend paying agent. NFDS is an
affiliate of State Street Bank and Trust Company.
39
<PAGE>
o Distributor
Guardian Investor Services Corporation(R)
201 Park Avenue South
New York, New York 10003
o Custodian of Assets
State Street Bank and Trust Company
Custody Division
1776 Heritage Drive
North Quincy, Massachusetts 02171
o Shareholder Servicing Agent, Transfer Agent &
Dividend Paying Agent for State Street Bank
and Trust Company
National Financial Data Services
P.O. Box 419611
Kansas City, Missouri 64141-6611
[Logo]
Guardian Investor Services Corporation(R)
201 Park Avenue South
New York, NY 10003
(C) 1996 Guardian Investor Services Corporation
EB-010163 5/96
- ----------------------------------
Prospectus and Account Application
- ----------------------------------
The
Park Avenue
Portfolio
---------------------
Prospectus and
Account Application
May 1, 1996
---------------------
o The Guardian
Park Avenue Fund
o The Guardian
Baillie Gifford
International Fund
o The Guardian
Asset Allocation Fund
o The Guardian
Investment Quality
Bond Fund
o The Guardian
Tax-Exempt Fund
o The Guardian
Cash Management Fund
[LOGO]
----------
Guardian Investor
Services Corporation(R)
<PAGE>
The Park Avenue Portfolio(R)
--------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
--------------------------------------------------------
This Statement of Additional Information contains information about the six
series funds that comprise The Park Avenue Portfolio(R) series trust (the
"Portfolio"). The six series are: The Guardian Park Avenue Fund (the "Park
Avenue Fund"), The Guardian Baillie Gifford International Fund (the
"International Fund"), The Guardian Investment Quality Bond Fund (the "Bond
Fund"), The Guardian Tax-Exempt Fund (the "Tax-Exempt Fund"), The Guardian Cash
Management Fund (the "Cash Fund") and The Guardian Asset Allocation Fund (the
"Asset Allocation Fund"). The series funds are referred to in this Statement of
Additional Information as the "Funds" and each separately as a "Fund." This
Statement of Additional Information is not a prospectus, but should be read in
conjunction with the Prospectus for the Portfolio dated May 1, 1996. Much of the
information contained herein expands upon subjects discussed in the Prospectus.
No investment in shares of any of the Funds should be made without first reading
the Prospectus. A free copy of the Prospectus may be obtained by writing to
Guardian Investor Services Corporation, 201 Park Avenue South, New York, New
York 10003 or by telephoning 1-800-221-3253. This Statement of Additional
Information has been incorporated by reference into the Prospectus. Please
retain this document for future reference.
The terms used in this Statement of Additional Information are the same as
defined in the Prospectus for the Portfolio.
Table of Contents
Page
Investment Restrictions ............................................ B-2
The Park Avenue Fund .......................................... B-2
The International Fund ........................................ B-3
The Bond Fund ................................................. B-4
The Tax-Exempt Fund ........................................... B-6
The Cash Fund ................................................. B-7
The Asset Allocation Fund ..................................... B-8
Additional Investment Restrictions ............................ B-10
Investment Objectives and Policies ................................. B-10
Special Investment Techniques ...................................... B-13
Investment Advisers and Distributor ................................ B-18
Portfolio Transactions and Brokerage ............................... B-23
Redemption of Shares ............................................... B-24
Performance Results ................................................ B-25
Net Asset Value .................................................... B-27
Portfolio Management ............................................... B-28
Portfolio Affiliates and Principal Holders of Fund Shares .......... B-33
Taxes .............................................................. B-33
Shareholder Voting Rights .......................................... B-35
Trustee Liability .................................................. B-35
Custodian .......................................................... B-36
Transfer Agent ..................................................... B-36
Financial Statements ............................................... B-36
Legal Opinions ..................................................... B-36
Independent Auditors ............................................... B-36
Appendix ........................................................... B-37
<PAGE>
INVESTMENT RESTRICTIONS
In addition to the restrictions described in the section of the Prospectus
entitled "Special Investment Techniques," the Park Avenue Fund and the Cash Fund
have each adopted the following fundamental investment restrictions. These
restrictions cannot be changed without the approval of the holders of a majority
of the outstanding shares of the affected Fund. Under the Investment Company Act
of 1940, as amended (the "1940 Act"), the vote of a majority of the outstanding
voting securities of a Fund means the lesser of the vote of: (1) 67% of the
shares of the Fund at a meeting where more than 50% of the outstanding voting
shares are present in person or by proxy; or (2) more than 50% of the
outstanding voting shares of the Fund. Under the 1940 Act, certain investment
restrictions for each of the International Fund, the Bond Fund, the Tax-Exempt
Fund and the Asset Allocation Fund can only be changed with the approval of the
holders of a majority of the outstanding shares of the affected Fund. Others are
non-fundamental operating policies which can be changed with the approval of a
majority of the Board of Trustees, and without shareholder approval.
If a percentage restriction is adhered to at the time of investment, a
later violation of the specified limit that results from a change in the value
of the investment or a change in the Fund's net assets will not constitute a
violation of the applicable investment restriction.
The Park Avenue Fund
The following investment restrictions provide that the Park Avenue Fund may not:
1. Make any purchase which would result in more than 5% of the value of
its total assets being invested in the securities of any one issuer
except U.S. government securities.
2. Purchase the securities of any issuer if such purchase would result in
more than 10% of the voting securities, or the securities of any class
of such issuer, being held by the Fund.
3. Borrow money, except as a temporary measure for emergency purposes, in
an aggregate amount exceeding 5% of the total assets of the Fund.
4. Purchase any security other than those discussed under "Investment
Objectives and Policies," as set forth in the Prospectus.
5. Invest more than 5% of the value of its total assets in companies
(including predecessors) having a record of less than 3 years
continuous operation.
6. Invest in the securities of any company for the purpose of exercising
control or management.
7. Purchase a security if as a result thereof more than 25% of its total
assets will be invested in a particular industry.
8. Purchase the securities of any other investment company.
9. Purchase any put, call, straddle, spread or any combination thereof.
10. Purchase any interest in oil, gas or other mineral exploration or
development programs.
11. Engage in the purchase or sale of real estate or interests therein or
interests in real estate investment trusts, commodities or commodity
contracts.
12. Purchase or retain the securities of any issuer if, to the knowledge
of the Fund, officers or trustees of the Fund or of the Fund's
investment adviser who own individually more than one-half of 1% of
the securities of such issuer together own more than 5% of such
securities.
13. Act as a securities underwriter except to the extent that it may be
regarded as an underwriter upon disposition of any of its securities
which are subject to legal or contractual restrictions on re-sale or
are otherwise not readily saleable.
14. Invest more than 15% of the value of its net assets in securities
which are not readily marketable or which are restricted as to resale
under federal securities laws, excluding any such securities that have
been determined by the Trustees (or the person(s) designated by them
to make such determinations) to be readily marketable.
15. Purchase securities on margin or make any short sales of securities.
B-2
<PAGE>
16. Make loans of money or other assets except through the purchase of
privately issued notes, bonds, debentures or other debt securities
either from the issuer or others. Purchases of a portion of an issue
of publicly distributed debt securities and repurchase agreements are
not deemed to be loans for purposes of this limitation. Under a
repurchase agreement, the Fund may purchase and simultaneously resell
for later delivery (normally within seven days) obligations issued or
guaranteed as to principal and interest by the U.S. government, its
agencies or instrumentalities.
17. Pledge, mortgage or hypothecate its assets to an extent greater than
10% of the Fund's total asset value. However, in order to comply with
certain state statutes or investment restrictions, the Fund will not
as a matter of operating policy, pledge, mortgage or hypothecate its
assets to the extent that at any time the percentage of pledged assets
plus the sales load will exceed 10% of the offering price of the
Fund's shares.
Since shares of the Park Avenue Fund are available as an underlying
investment for certain variable annuity contracts issued by The Guardian
Insurance & Annuity Company, Inc. ("GIAC"), the Fund's investments may be
subject to additional restrictions imposed by the insurance laws and regulations
of the states where GIAC offers such contracts.
The International Fund
The following investment restrictions provide that the International Fund
may not:
1. Borrow money, except that the Fund may borrow from banks up to 20% of
the value of its total assets as a temporary measure for extraordinary
or emergency needs, for example, to enable the Fund to meet redemption
requests or to settle transactions on different stock markets where
different settlement dates apply which might otherwise require the
sale of portfolio securities at a time when it would not be in the
Fund's best interests to do so. Up to 5% of the Fund's total assets
may be borrowed from non-banking institutions. The Fund may not,
however, borrow money for investment purposes.
2. Mortgage, pledge or hypothecate more than 5% of the value of its total
assets, and then only to secure borrowings effected within the above
restriction. For purposes of this restriction, collateral arrangements
with respect to options, financial futures contracts, options on
futures contracts, when-issued or delayed delivery securities, forward
contracts, or similar collateral arrangements which may be required in
connection with securities transactions by the 1940 Act are not
considered a pledge of assets.
3. Make loans of money or portfolio securities, except through the
purchase of debt obligations or repurchase agreements in which the
Fund may invest consistent with its investment objective and policies.
4. Purchase any securities if, immediately after such purchase, more than
25% of the value of the Fund's total assets would be invested in the
securities of issuers in the same industry. For purposes of this
restriction, the obligations of each foreign government are deemed to
constitute an industry.
5. Invest more than 5% of the value of its total assets in the securities
of any one issuer or purchase more than 10% of the outstanding voting
securities, or any class of securities, of any one issuer. For
purposes of this restriction, all outstanding debt securities of an
issuer are considered as one class, and all preferred stock of an
issuer is considered as one class. (This restriction does not apply to
obligations issued or guaranteed by the U.S. or foreign governments,
or their respective agencies or instrumentalities.)
6. Invest more than 10% of the value of its total assets in warrants or
more than 2% of such value in warrants which are not listed on the New
York Stock Exchange, American Stock Exchange, or one of the major
foreign stock exchanges, except that warrants attached to other
securities in which the Fund invests are not subject to these
limitations.
7. Invest more than 15% of the value of its net assets in securities
which are not readily marketable or which are restricted as to resale
under the U.S. federal securities laws, excluding any such securities
that have been determined by the Trustees (or the person(s) designated
by them to make such determinations) to be readily marketable.
8. Engage in the underwriting of the securities of other issuers, except
to the extent that the Fund may be deemed to be an underwriter under
the Securities Act of 1933 in selling its portfolio securities.
B-3
<PAGE>
9. Invest in securities of other U.S. or foreign investment companies,
except that: (a) the Fund may purchase such securities in the open
market, without regard to section (b) below, provided that immediately
thereafter (i) not more than 10% of the Fund's total assets would be
invested in such securities, (ii) not more than 5% of the Fund's total
assets would be invested in securities of any one investment company,
and (iii) not more than 3% of the total outstanding voting stock of
any one investment company would be owned by the Fund; or (b) the Fund
may acquire such securities as part of a merger, consolidation,
reorganization, acquisition of assets, offer of exchange or as a
dividend.
10. Purchase securities on margin, sell securities short, maintain a short
position or participate on a joint or a joint and several basis in any
trading account in securities, except that the Fund may (i) obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities; (ii) purchase or sell futures
contracts; and (iii) deposit or pay initial or variation margin in
connection with financial futures contracts or related options
transactions.
11. Purchase or sell put options, call options, or combinations thereof,
except that the Fund may (i) write covered call and secured put
options and enter into closing purchase transactions with respect to
such options, (ii) purchase put and call options, provided that the
premiums on all outstanding options do not exceed 5% of its total
assets, and enter into closing sale transactions with respect to such
options; and (iii) engage in financial futures contracts and related
options transactions to seek to hedge against either a decline in the
value of securities included in the Fund's portfolio or an increase in
the price of securities which the Fund plans to purchase in the
future.
12. Purchase or sell commodities or commodity contracts, except that the
Fund may enter into financial futures contracts, options contracts,
options on futures contracts and forward foreign currency exchange
contracts as described in the Prospectus and Statement of Additional
Information.
13. Purchase or sell real estate (although it may purchase securities of
issuers that engage in real estate operations, securities that are
secured by interests in real estate, or securities that represent
interests in real estate, including real estate investment trusts).
14. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may
invest in the securities of companies which invest in or sponsor such
programs.
15. Purchase or retain the securities of any issuer if, to the knowledge
of the Fund, the officers, trustees and employees of the Fund or of
the Fund's investment adviser or sub-investment adviser who
individually own more than one half of 1% of the outstanding
securities of such issuer together own more than 5% of the securities
of such issuer.
16. Purchase securities for the purpose of exercising control over another
company.
17. Issue any "senior securities" as defined in the 1940 Act (except for
engaging in futures and options transactions as well as any other
investment techniques set forth in the Prospectus or Statement of
Additional Information, and except for borrowing subject to the
restrictions set forth under Investment Restriction 1, above).
The Bond Fund
The following investment restrictions provide that the Bond Fund may not:
1. Purchase any security other than those discussed under "Investment
Objectives and Policies," as set forth in the Prospectus.
2. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than
three years of continuous operation. This restriction does not apply
to any obligation issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
3. Borrow money, except that the Fund may borrow up to 10% of the value
of its total assets as a temporary measure for extraordinary or
emergency needs, such as enabling the Fund to meet redemption requests
which might otherwise require the sale of portfolio securities at a
time when it is not in the Fund's best interests. The Fund may not,
however, borrow money for investment purposes.
B-4
<PAGE>
4. Mortgage, pledge or hypothecate more than 5% of the value of its total
assets, and then only to secure borrowings effected within the above
restriction. For purposes of this restriction, collateral arrangements
with respect to options, financial futures contracts, options on
futures contracts, when-issued or delayed delivery securities, forward
contracts, or similar collateral arrangements which may be required in
connection with securities transactions by the 1940 Act are not
considered a pledge of assets.
5. Make loans to others, except through the purchase of debt obligations
or repurchase agreements, or by lending the Fund's portfolio
securities, consistent with its investment objectives, policies and
techniques as set forth in the Prospectus or Statement of Additional
Information.
6. Purchase any securities other than the obligations of U.S. branches of
domestic banks or of the U.S. government, or its agencies or
instrumentalities, if, immediately after such purchase, more than 25%
of the value of the Fund's total assets would be invested in the
securities of issuers in the same industry. For the purpose of this
restriction, gas, electric, water and telephone utilities will each be
treated as a separate industry.
7. Invest more than 5% of the value of its total assets in the securities
of any one issuer or purchase more than 10% of the outstanding voting
securities, or any other class of securities, of any one issuer. For
purposesof this restriction, all outstanding debt securities of an
issuer are considered as one class, and all preferred stock of an
issuer is considered as one class. This restriction does not apply to
obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities.
8. Invest more than 5% of the value of its total assets in warrants or
more than 2% of such value in warrants which are not listed on the New
York or American Stock Exchanges, except that warrants attached to
other securities in which the Fund invests are not subject to these
limitations.
9. Invest more than 15% of the value of its net assets in securities
which are not readily marketable or which are restricted as to resale
under federal securities laws, excluding any such securities that have
been determined by the Trustees (or the person(s) designated by them
to make such determinations) to be readily marketable.
10. Engage in the underwriting of the securities of other issuers, except
to the extent that the Fund may be deemed to be an underwriter under
the Securities Act of 1933 in selling portfolio securities.
11. Purchase securities on margin or sell securities short, or participate
on a joint or a joint and several basis in any trading account in
securities, except that the Fund may (i) obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities; (ii) purchase or sell futures contracts; and (iii)
deposit or pay initial or variation margin in connection with
financial futures contracts or related options transactions.
12. Purchase or sell commodities or commodity contracts, except that the
Fund may invest in financial futures contracts, options and options on
financial futures contracts as described in the Prospectus and
Statement of Additional Information.
13. Purchase or sell real estate (although it may purchase securities of
issuers that engage in real estate operations), securities that are
secured by interests in real estate, or securities that represent
interests in real estate, including real estate investment trusts.
14. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may
invest in the securities of companies which invest in or sponsor such
programs.
15. Purchase or retain the securities of any issuer if, to the knowledge
of the Fund, the officers, trustees and employees of the Fund or of
the Adviser who individually own more than one-half of 1% of the
outstanding securities of such issuer together own more than 5% of the
securities of such issuer.
16. Purchase securities for the purpose of exercising control over another
company.
17. Issue any "senior securities" as defined in the 1940 Act, except for
engaging in futures and options transactions as well as any other
investment techniques set forth in the Prospectus or the Statement of
Additional Information, and except for borrowing subject to the
restrictions set forth under Investment Restriction 3, above.
B-5
<PAGE>
18. Purchase or sell put options, call options, or combinations thereof,
except that the Fund may (i) write covered call and secured put
options and enter into closing purchase transactions with respect to
such options, (ii) purchase put and call options, provided that the
premiums on all outstanding options do not exceed 5% of its total
assets, and enter into closing sale transactions with respect to such
options; and (iii) engage in financial futures contracts and related
options transactions to seek to hedge against either a decline in the
value of securities included in the Fund's portfolio or an increase in
the price of securities which the Fund plans to purchase in the
future.
19. Invest in securities of other investment companies, except that: (a)
the Fund may purchase such securities in the open market, without
regard to section (b), below, provided that immediately thereafter (i)
not more than 10% of the Fund's total assets would be invested in such
securities, (ii) not more than 5% of the Fund's total assets would be
invested in securities of any one investment company, and (iii) not
more than 3% of the total outstanding voting stock of any one
investment company would be owned by the Fund; or (b) the Fund may
acquire such securities as part of a merger, consolidation,
reorganization, acquisition of assets, offer of exchange or as a
dividend.
The Tax-Exempt Fund
The following investment restrictions provide that the Tax-Exempt Fund may
not:
1. Purchase securities other than Municipal Obligations (as that term is
defined in the Prospectus) and certain taxable obligations as set
forth in the Prospectus and Statement of Additional Information.
2. Borrow money, except that the Fund may borrow up to 10% of the value
of its total assets as a temporary measure for extraordinary or
emergency needs, such as enabling the Fund to meet redemption requests
which might otherwise require the sale of portfolio securities at a
time when it is not in the Fund's best interests. The Fund may not,
however, borrow money for investment purposes.
3. Mortgage, pledge or hypothecate more than 5% of the value of its total
assets, and then only to secure borrowings effected within the above
restriction. For purposes of this restriction, collateral arrangements
with respect to options, financial futures contracts, options on
futures contracts, when-issued or delayed delivery securities, forward
contracts, or similar collateral arrangements which may be required in
connection with securities transactions by the 1940 Act are not
considered a pledge of assets.
4. Purchase securities on margin, sell securities short or participate on
a joint or a joint and several basis in any trading account in
securities, except that the Fund may (i) obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities; (ii) purchase or sell futures contracts; and (iii)
deposit or pay initial or variation margin in connection with
financial futures contracts or related options transactions.
5. Underwrite the securities of other issuers, except to the extent that
the Fund may be deemed to be an underwriter under the Securities Act
of 1933 in selling portfolio securities and except that the Fund may
bid separately or as part of a group for the purchase of Municipal
Obligations directly from an issuer for its own portfolio to take
advantage of the lowest purchase price available.
6. Invest more than 15% of the value of its net assets in securities
which are not readily marketable or which are restricted as to resale
under federal securities laws, excluding any such securities that have
been determined by the Trustees (or the person(s) designated by them
to make such determinations) to be readily marketable.
7. Purchase or sell real estate or real estate limited partnerships, but
this shall not prevent the Fund from investing in Municipal
Obligations secured by real estate or interests therein.
8. Purchase or sell commodities or commodity contracts, except that the
Fund may enter into financial futures contracts, options contracts and
options on futures contracts as described in the Prospectus and
Statement of Additional Information.
9. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may
invest in the securities of issuers which invest in or sponsor such
programs.
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10. Make loans to others, except through the purchase of debt obligations
or repurchase agreements or by lending the Fund's portfolio securities
consistent with its investment objectives, policies and techniques as
set forth in the Prospectus or Statement of Additional Information.
11. Invest more than 5% of its assets in the obligations of any issuer,
except that up to 25% of the value of the Fund's total assets may be
invested, and securities issued or guaranteed by the U.S. government
or its agencies or instrumentalities may be purchased, without regard
to any such limitations. For purposes of this Investment Restriction,
identification of the "issuer" will be based on a determination of the
source of assets and revenues committed to meeting interest and
principal payments of each security.
12. Invest more than 25% of its assets in the securities of issuers in any
single industry; provided that there shall be no limitation on the
purchase of Municipal Obligations. For purposes of this Investment
Restriction, industrial development bonds, where the payment of
principal and interest is the ultimate responsibility of companies
within the same industry, are grouped together as an "industry."
13. Purchase more than 10% of the voting securities of any issuer or
invest in companies for the purpose of exercising control.
14. Invest in securities of other investment companies, except that: (a)
the Fund may purchase such securities in the open market, without
regard to section (b), below, provided that immediately thereafter (i)
not more than 10% of the Fund's total assets would be invested in such
securities, (ii) not more than 5% of the Fund's total assets would be
invested in securities of any one investment company, and (iii) not
more than 3% of the total outstanding voting stock of any one
investment company would be owned by the Fund; or (b) the Fund may
acquire such securities as part of a merger, consolidation,
reorganization, acquisition of assets, offer of exchange or as a
dividend.
15. Purchase or retain the securities of any issuer if, to the knowledge
of the Fund, the officers, trustees and employees of the Fund or of
the Fund's investment adviser who individually own more than one-half
of 1% of the outstanding securities of such issuer together own more
than 5% of the securities of such issuer.
16. Issue any "senior securities" as defined in the 1940 Act, except for
engaging in futures and options transactions as well as any other
investment techniques set forth in the Prospectus or Statement of
Additional Information, and except for borrowing subject to the
restrictions set forth under Investment Restriction 2, above.
17. Purchase or sell put options, call options, or combinations thereof,
except that the Fund may (i) write covered call and secured put
options and enter into closing purchase transactions with respect to
such options, (ii) purchase put and call options, provided that the
premiums on all outstanding options do not exceed 5% of its total
assets, and enter into closing sale transactions with respect to such
options; and (iii) engage in financial futures contracts and related
options transactions to seek to hedge against either a decline in the
value of securities included in the Fund's portfolio or an increase in
the price of securities which the Fund plans to purchase in the
future.
The Cash Fund
The following investment restrictions provide that the Cash Fund may not:
1. Purchase the securities of any issuer if, immediately after such
purchase, more than 5% of the Fund's total assets, taken at market
value, would be invested in such securities.
2. Purchase any securities, other than obligations of the U.S. government
or its agencies or instrumentalities, if, immediately after such
purchase, more than 10% of the outstanding voting securities of one
issuer would be owned by the Fund.
3. Purchase any securities, other than obligations of U.S. branches of
domestic banks or of the U.S. government, or its agencies or
instrumentalities, if, immediately after such purchase, more than 25%
of the value of the Fund's total assets would be invested in the
securities of issuers in the same industry.
4. Make loans to others, except through the purchase of debt obligations
and repurchase agreements in which the Fund may invest, consistent
with its investment objective and policies.
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<PAGE>
5. Purchase or retain the securities of any issuer if any officer or
trustee of the Fund is an officer or director of such issuer and owns
beneficially more than one-half of 1% of the securities of such issuer
and all of the officers and trustees of the Fund and its investment
adviser together own more than 5% of the securities of such issuer.
6. Purchase or sell real estate; however, the Fund may purchase
marketable securities issued by the companies which invest in real
estate or interests therein.
7. Purchase securities on margin or sell short.
8. Purchase or sell commodities or commodity futures contracts, or oil,
gas or mineral exploration or development programs.
9. Underwrite securities of other issuers.
10. Purchase warrants, or write, purchase or sell puts, calls, straddles,
spreads or combinations thereof.
11. Participate on a joint or joint-and-several basis in any securities
trading account.
12. Purchase the securities of any other investment company.
13. Purchase securities of any issuer for the purpose of exercising
control or management.
14. Borrow money, except from banks for temporary or emergency purposes or
to meet redemption requests which might otherwise require the untimely
disposition of securities (not for leveraging), provided that
borrowing in the aggregate may not exceed 10% of the value of the
Fund's total assets, including the amount borrowed, at the time of
such borrowing.
15. Mortgage, pledge or hypothecate any assets except in connection with
any borrowing and in amounts not in excess of 10% of the value of the
Fund's total assets at the time of such borrowing or make additional
investments during any period that borrowings exceed 5% of the value
of the Fund's total assets.
16. Issue any senior securities (except for borrowing subject to the
restrictions set forth in the Prospectus).
17. Invest more than 10% of the value of its net assets in securities
which are not readily marketable or which are restricted as to resale
under federal securities laws, excluding any such securities that have
been determined by the trustees (or the person(s) designated by them
to make such determinations) to be readily marketable.
18. Underwrite securities of other issuers, except to the extent that the
Fund or its investment adviser may be deemed to be an underwriter
under the Securities Act of 1933 in selling portfolio securities.
The Asset Allocation Fund
The following investment restrictions provide that the Asset Allocation
Fund may not:
1. Purchase or sell put options, call options, or combinations thereof,
except that the Fund may (i) write covered call and secured put
options and enter into closing purchase transactions with respect to
such options, (ii) purchase put and call options, provided that the
premiums on all outstanding options do not exceed 5% of its total
assets, and enter into closing sale transactions with respect to such
options; and (iii) engage in financial futures contracts and related
options transactions to seek to hedge against either a decline in the
value of securities included in the Fund's portfolio or an increase in
the price of securities which the Fund plans to purchase in the
future.
2. Borrow money, except that the Fund may borrow up to 10% of the value
of its total assets as a temporary measure for extraordinary or
emergency needs, such as enabling the Fund to meet redemption requests
which might otherwise require the sale of portfolio securities at a
time when it is not in the Fund's best interests. The Fund may not,
however, borrow money for investment purposes.
3. Mortgage, pledge or hypothecate more than 5% of the value of its total
assets, and then only to secure borrowings effected within the above
restriction. For purposes of this restriction, collateral arrangements
with respect to options, financial futures contracts, options on
futures contracts, when-issued or delayed delivery securities, forward
contracts, or similar collateral arrangements which may be required in
connection with securities transactions by the 1940 Act are not
considered a pledge of assets.
B-8
<PAGE>
4. Engage in the underwriting of securities, except to the extent that
the Fund may be deemed an underwriter under the Securities Act of 1933
in selling portfolio securities.
5. Invest in real estate, real estate limited partnership interests,
securities that are secured by interests in real estate, or securities
that represent interests in real estate, including real estate
investment trusts, although the Fund may purchase securities of
issuers which engage in real estate operations.
6. Invest in commodities or commodity contracts, except that it may
invest in financial futures contracts, options and options on
financial futures contracts as described in the Prospectus or
Statement of Additional Information.
7. Make loans to others, except through the purchase of debt obligations
or repurchase agreements, or by lending the Fund's portfolio
securities consistent with its investment objectives, policies and
techniques as set forth in the Prospectus or Statement of Additional
Information.
8. Invest more than 5% of the value of its total assets in the securities
of any one issuer or purchase more than 10% of the outstanding voting
securities, or any other class of securities, of any one issuer. For
purposes of this 10% restriction, all outstanding debt securities of
an issuer are considered as one class, and all preferred stock of an
issuer is considered as one class. This restriction does not apply to
obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities.
9. Invest 25% or more of its assets in securities of issuers in any one
industry. For the purpose of this restriction, gas, electric, water
and telephone utilities will each be treated as a separate industry.
10. Invest more than 5% of the value of its total assets in securities of
issuers having a record, together with predecessors, of less than
three years of continuous operation. The restriction does not apply to
any obligation issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
11. Purchase or retain the securities of any issuer if, to the knowledge
of the Fund, those officers and trustees of the Fund or of the Fund's
investment adviser who individually own more than one-half of 1% of
the outstanding securities of such issuer together own more than 5% of
such securities.
12. Issue any "senior securities" as defined in the 1940 Act, except for
engaging in futures and options transactions as well as any other
investment techniques set forth in the Prospectus or Statement of
Additional Information, and except for borrowing subject to the
restrictions set forth under Investment Restriction 2, above.
13. Purchase securities for the purpose of exercising control over another
company.
14. Purchase securities on margin or sell securities short or participate
on a joint or a joint and several basis in any trading account in
securities, except that the Fund may (i) obtain such short-term
credits as may be necessary for the clearance of purchases and sales
of securities, (ii) purchase or sell futures contracts; and (iii)
deposit or pay initial or variation margin in connection with
financial futures contracts or related options transactions.
15. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may
invest in the securities of companies which invest in or sponsor such
programs.
16. Invest in securities of other investment companies, except that: (a)
the Fund may purchase such securities in the open market, without
regard to section (b), below, provided that immediately thereafter (i)
not more than 10% of the Fund's total assets would be invested in such
securities, (ii) not more than 5% of the Fund's total assets would be
invested in securities of any one investment company, and (iii) not
more than 3% of the total outstanding voting stock of any one
investment company would be owned by the Fund; or (b) the Fund may
acquire such securities as part of a merger, consolidation,
reorganization, acquisition of assets, offer of exchange or as a
dividend.
17. Invest more than 10% of the value of its total assets in warrants or
more than 2% of such value in warrants which are not listed on the New
York or American Stock Exchanges, except that warrants attached to
other securities in which the Fund invests are not subject to these
limitations.
18. Invest more than 15% of the value of its net assets in
securities which are not readily marketable or which
are restricted as to resale under federal securities laws,
excluding any such securities that have been
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<PAGE>
determined by the Trustees (or the person(s) designated by them to
make such determinations) to be readily marketable.
Additional Investment Restrictions
The Funds named below will adhere to the following additional
non-fundamental investment restrictions so long as required by certain state
regulations:
(1) For the International Fund and the Asset Allocation Fund, investments
in warrants may not exceed 5% of the value of either Fund's net
assets; included within such amount, but not to exceed 2% of the value
of either Fund's net assets, may be warrants which are not listed on
the New York or American Stock Exchanges.
(2) No Fund shall purchase securities of issuers which such Fund is
restricted from selling to the public without registration under the
Securities Act of 1933 if by any reason thereof the value of the
aggregate investment in such securities will exceed 10% of the Fund's
assets.
(3) No Fund shall purchase securities of unseasoned issuers, including
their predecessors, which have been in operation for less than three
years, and equity securities of issuers which are not readily
marketable if by reason thereof the value of the Fund's investments in
such classes of securities will exceed 5% of such Fund's total assets.
The Park Avenue Fund will not issue any "senior securities" as defined in
the 1940 Act, except for any investment technique set forth in the Prospectus or
Statement of Additional Information which may be treated as a senior security,
or except for borrowing subject to the Fund's Investment Restriction Number 3.
Notwithstanding the reservation of right provided by its Investment
Restriction No. 6, the Bond Fund will not purchase any securities of U.S.
branches of domestic banks if, immediately after such purchase, more than 25% of
the Fund's total assets would be invested in such securities.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the information contained in the
Prospectus section entitled "Investment Objectives and Policies."
The International Fund
Several foreign governments permit investments by non-residents only
through participation in certain specifically organized investment companies.
Subject to the provisions of the 1940 Act, the International Fund may invest in
the shares of other investment companies. In addition, pursuant to exemptive
relief granted to the International Fund under the 1940 Act, a portion of the
equity and convertible securities which may be acquired by the International
Fund may be issued by foreign companies that, in each of their most recent
fiscal years, derived more than 15% of their gross revenues from their
activities as brokers, dealers, underwriters or investment advisers.
The International Fund may also invest a portion of its assets in unit
trusts organized in the United Kingdom (which are analogous to United States
mutual funds) and which invest in smaller foreign markets than those in which
the International Fund would ordinarily invest directly. GBG and BG Overseas,
the International Fund's investment advisers, believe that investments in such
unit trusts will enhance the geographical diversification of the Fund's assets
while reducing the risks associated with investing in certain smaller foreign
markets. Investments by the International Fund in such unit trusts are likely to
provide increased liquidity and lower transaction costs than are normally
associated with direct investments in such markets. At the present time, the
International Fund intends to limit its investments in unit trusts, together
with its investments in other investment companies, to no more than 5% of its
total assets.
The Park Avenue Fund, The Bond Fund, The Tax-Exempt Fund
and The Asset Allocation Fund
Convertible securities purchased by the Park Avenue Fund and the Asset
Allocation Fund, and debt securities purchased by the Bond Fund and the
Tax-Exempt Fund will primarily be "investment grade," i.e., rated
in one of the top four rating categories established by
nationally recognized statistical rating organizations like Moody's
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<PAGE>
Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group
("Standard & Poor's"). Under normal conditions, less than 5% of the Park Avenue
Fund's and the Asset Allocation Fund's assets, and less than 10% of the other
named Funds' assets will consist of securities rated lower than "investment
grade." Such holdings will typically result from reductions in the ratings of
securities after such securities were acquired by the Funds as "investment
grade" securities, though the Park Avenue Fund and the Asset Allocation Fund may
acquire convertible securities without regard to their ratings.
Lower rated securities may be subject to certain risks not typically
associated with "investment grade" securities, such as the following: (1) the
market for lower rated securities, which expanded rapidly during a period of
economic expansion, has only been tested during one period of economic downturn;
(2) reliable and objective information about the value of lower rated
obligations may be difficult to obtain because the market for such securities
may be thinner and less active than that for investment grade obligations; (3)
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower than investment grade
obligations, and, in turn, adversely affect their market; (4) companies that
issue lower rated obligations may be in the growth stage of their development,
or may be financially troubled or highly leveraged, so they may not have more
traditional methods of financing available to them; (5) when other institutional
investors dispose of their holdings of lower rated debt securities, the general
market and the prices for such securities could be adversely affected; and (6)
the market for lower rated securities could be impaired if legislative proposals
to limit their use in connection with corporate reorganizations or to limit
their tax and other advantages are enacted.
The Bond Fund and The Asset Allocation Fund
The Bond Fund and the Asset Allocation Fund may purchase mortgage-backed
securities, such as collateralized mortgage obligations ("CMOs") and mortgage
pass-throughs.
Payments of principal and interest on the mortgage obligations underlying
CMOs are not passed through directly to the holders. Rather, they are made to an
independent trustee created specifically for the allocation of such interest and
principal payments because CMOs are frequently issued in a variety of classes or
series which are designed to be retired sequentially as the underlying mortgages
are repaid. In the event of prepayment on such mortgages, the class of
obligations next scheduled to mature generally will be paid down first. Thus,
even if the issuer does not supply additional collateral, there will be
sufficient collateral to secure the obligations which remain outstanding. A
mortgage pass-through, on the other hand, is secured by a pool of mortgages with
common characteristics, so it will not have the class structure associated with
CMOs. For this reason, payments of principal and interest on the underlying
mortgages can be passed-through to all holders of the mortgage pass-through.
And, all such holders will share the same pre-payment risk.
Many factors affect the frequency of unscheduled prepayments or
refinancings of the underlying mortgages, including interest rate changes,
economic conditions, the ages of the mortgages and locations of the mortgaged
properties. Prepayments on mortgage obligations tend to occur more frequently
after interest rates generally have declined. The return provided to the Funds
will be lower if the proceeds of prepaid mortgage-backed securities are
reinvested in securities that provide lower coupons. In addition, the Funds may
suffer losses on prepaid obligations which were acquired at a premium.
When interest rates are rising, mortgage-backed securities may suffer price
declines, particularly if their durations extend because mortgage prepayments or
refinancings slow down. Securities that have lost value will have an adverse
impact on a Fund's total return.
Stripped mortgage securities are another type of mortgage-backed security.
Stripped mortgage securities are created by separating the interest and
principal payments generated by a pool of mortgage-backed bonds to create two
classes of securities. Generally, one class receives only interest payments
(IOs) and one principal payments (POs). IOs and POs are acutely sensitive to
interest rate changes and to the rate of principal prepayments. They are very
volatile in price and may have lower liquidity than most mortgage-backed
securities. Certain CMOs may also exhibit these qualities, especially those
which pay variable rates of interest which adjust inversely with and more
rapidly than short-term interest rates. The Portfolio's Board of Trustees has
adopted procedures for use by GISC, the investment adviser to these Funds, to
ascertain the liquidity and fair value of their investments, including their
mortgage-backed securities holdings. There is no guarantee that the Funds'
investments in CMOs, IOs or POs will be successful, and the Funds' total return
could be adversely affected as a result.
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The Park Avenue Fund, The International Fund and The Asset Allocation Fund
As described in the Prospectus, the Park Avenue Fund, the International
Fund and the Asset Allocation Fund are permitted to invest in convertible
securities. Convertible securities are fixed-income securities, such as bonds or
preferred stock, which may be converted at a stated price within a specified
period of time into a specific number of shares of common stock of the same or a
different issuer. Convertible securities also have characteristics similar to
non-convertible debt securities in that they ordinarily provide income with
generally higher yields than those of common stock of the same or a similar
issuer. However, convertible securities are usually subordinated to
non-convertible debt securities. Convertible securities carry the potential for
capital appreciation should the value of the underlying common stock increase,
but they are subject to a lesser risk of a decline in value, relative to the
underlying common stock, due to their fixed-income nature. Due to the conversion
feature, however, the interest rate or dividend rate on a convertible security
is generally less than would be the case if the securities were not convertible.
In evaluating a convertible security the investment advisers look primarily
at the attractiveness of the underlying common stock and at the fundamental
business strengths of the issuer. Other factors considered by the investment
advisers include the yield of the convertible security in relation to the yield
of the underlying common stock, the premium over investment value and the degree
of call protection.
The Tax-Exempt Fund
Diversification. For the purpose of diversification under the 1940 Act, the
identification of the issuer of Municipal Obligations depends on the terms and
conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed only
by the assets and revenues of the subdivision, such subdivision would be deemed
to be the sole issuer. Similarly, in the case of an industrial development bond,
if that bond is backed only by the assets and revenues of the non-governmental
issuer, then such non-governmental issuer would be deemed to be the sole issuer.
If, however, in either case, the creating government or some other entity
guarantees a security, such a guaranty would be considered a separate security
and will be treated as an issue of such government or other entity.
Municipal Lease/Purchase Agreements. The Tax-Exempt Fund may invest in
Municipal Lease/Purchase Agreements which are similar to installment purchase
contracts for property or equipment. These obligations typically are not fully
backed by the issuing municipality's credit and their interest may become
taxable if the lease is assigned. If the governmental issuer does not
appropriate sufficient funds for the following year's lease payments, the lease
will terminate, with the possibility of default on the lease obligation, which
may result in loss to the Fund.
Stand-by Commitments. The Tax-Exempt Fund may acquire stand-by commitments
from brokers, dealers or banks to facilitate its portfolio liquidity. Under a
stand-by commitment, the obligor must repurchase, at the Fund's option,
specified securities held in the Fund's portfolio at a specified price. Thus,
stand-by commitments are comparable to put options. The exercise of a stand-by
commitment is subject to the ability of the seller to make payment on demand.
The Tax-Exempt Fund does not intend to exercise its rights under stand-by
commitments for trading purposes. The Tax-Exempt Fund may pay for stand-by
commitments if such action is deemed necessary, thus increasing to a degree the
cost of the underlying Municipal Obligation and similarly decreasing such
security's yield. Gains realized in connection with stand-by commitments will be
taxable.
Tender Option Bonds. The Tax-Exempt Fund may invest in tender option bonds,
which generally are long- term Municipal Obligations which are coupled with
options to tender the underlying Municipal Obligations to third-party financial
institutions at periodic intervals. Holders of tender option bonds pay periodic
fees to the financial institution(s) that provide(s) the option(s). Such fees
are typically equal to the difference between the Municipal Obligation's fixed
coupon rate and the rate at or near the commencement of the option period
thatwould cause the securities, coupled with the tender option, to trade at par
on the date that a remarketing or similar agent would make the relevant rate
determinations. Thus, the holder effectively holds a demand obligation that
bears interest at the prevailing short-term tax-exempt rate. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
Municipal Obligation and for other reasons. Accordingly, GISC will consider, on
an ongoing basis, the creditworthiness of: (1) the issuers of Municipal
Obligations which are coupled with tender options; (2) any custodian; and (3)
the provider of the tender option.
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<PAGE>
The Fund will purchase tender option bonds only when it is satisfied that
any custodial arrangements and the tender option arrangements, including the fee
payment arrangements, will not adversely affect the tax-exempt status of the
underlying Municipal Obligations and that payment of any tender fees will not
have the effect of creating taxable income for the Fund. Based on the tender
option bond agreement, the Fund expects to be able to value the tender option
bond at par; however, the value of the instrument will be monitored to assure
that it is valued at fair value.
Other. The Tax-Exempt Fund may also invest in Municipal Obligations with
embedded derivatives. Such securities increase their interest rate payments to
the holder if rates go up and prices correspondingly decline. As the price of a
security goes down, the income goes up, offsetting the price decline.
Ratings of Municipal Obligations. Subsequent to its purchase by the Fund,
an issue of rated Municipal Obligations may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require the sale of such Municipal Obligations by the Fund, but GISC will
consider such event in determining whether the Fund should continue to hold the
Municipal Obligations. To the extent that the ratings given by Moody's or
Standard & Poor's for Municipal Obligations may change as a result of changes in
such organizations or their rating systems, the Fund will attempt to use
comparable ratings as standards for its investments in accordance with the
investment policies contained in the Prospectus and this Statement of Additional
Information. See the Appendix to this Statement of Additional Information for a
more detailed discussion of securities ratings.
SPECIAL INVESTMENT TECHNIQUES
Each Fund has an investment objective which it pursues through its stated
investment policies and special investment techniques. There can be no assurance
that the objective of a Fund will be achieved. The following is a description of
certain of the special investment techniques which may be used by the investment
advisers on behalf of the Funds to the extent permitted by the Funds' investment
restrictions. This section supplements the description of "Special Investment
Techniques" contained in the Prospectus.
Options on Securities.
General. Each of the International Fund, the Bond Fund, the Tax-Exempt Fund
and the Asset Allocation Fund may purchase put and call options and write (sell)
covered call options and secured put options. As a covered call option writer, a
Fund must own securities which are acceptable for the purpose of covering any
outstanding options. So long as the Fund is obligated as a writer of a put
option, it will invest an amount not less than the exercise price of the put
option in eligible securities (i.e., cash or cash equivalents). These duties
reduce a Fund's flexibility to pursue other investment opportunities while
options are outstanding.
During the option period, the covered call writer gives up the potential
for capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the writer
having to deliver the underlying security to the holder of the option at the
exercise price, which will likely be lower than the security's value. For the
secured put writer, substantial depreciation in the value of the underlying
security would result in the exercise of the option by the holder, thereby
obligating the writer to purchase the underlying securities at the exercise
price, which will likely exceed the security's value. If a covered call option
expires unexercised, the writer realizes a gain and the buyer a loss in the
amount of the premium. If the covered call option writer has to sell the
underlying security because of the exercise of the call option, the writer
realizes a gain or loss from the sale of the underlying security, with the
proceeds being increased by the amount of the premium. If a secured put option
expires unexercised, the writer realizes a gain and the buyer a loss in the
amount of the premium. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized loss to the extent that the current market value of the
underlying security is less than the exercise price of the put option. However,
this would be offset in whole or in part by gain from the premium received and
any interest income earned on the investment of the premium.
The exercise price of an option may be below, equal to or above the current
market value of the underlying security at the time the option is written. The
buyer of a put who also owns the related security is protected by
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ownership of a put option against any decline in that security's price below the
exercise price less the amount paid for the option. The ability to purchase put
options allows a Fund to protect capital gains in an appreciated security which
is already owned, without being required to actually sell that security. At
times a Fund may seek to establish a position in securities upon which call
options are available. By purchasing a call option a Fund is able to fix the
cost of acquiring the security, this being the cost of the call plus the
exercise price of the option. This procedure also provides some protection from
an unexpected downturn in the market, because a Fund is only at risk for the
amount of the premium paid for the call option which it can, if it chooses,
permit to expire.
The Funds named above may also write or purchase spread options, which are
options for which the exercise price may be a fixed monetary spread or yield
spread between the security underlying the option and another security that is
used as a benchmark. Spread options involve the same risks as are associated
with purchasing and selling options on securities generally, as described above.
The writer (seller) of a spread option which expires unexercised realizes a gain
in the amount of the premium and any interest earned on the investment of the
premium. However, if the spread option is exercised, the writer will forego the
potential for capital appreciation or incur an unrealized loss to the extent the
market value of the underlying security exceeds or is less than the exercise
price of such spread option. The purchaser of a spread option incurs costs equal
to the amount of the premium paid for such option if the spread option expires
unexercised, or the associated transaction costs if the purchaser closes out the
spread option position.
A Fund which is authorized to buy and sell options may purchase a put
option and a call option, each with the same expiration date, on the same
underlying security. The Fund will profit from the combination position if an
increase or decrease in the value of the underlying security is sufficient for
the Fund to profit from exercise of either the call option or the put option.
Combined option positions involve higher transaction costs (because of the
multiple positions taken) and may be more difficult to open and close out than
other option positions.
Options on Securities Indices. The Funds named above may write or purchase
options on securities indices, subject to their general investment restrictions
regarding options transactions. Index options offer the Funds the opportunity to
achieve many of the same objectives sought through the use of options on
individual securities. Options on securities indices are similar to options on a
security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to such difference between the
closing price of the index and the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends on price movements in the market generally (or in a particular
industry or segment of the market) rather than price movements in individual
securities.
Price movements in securities which the Funds own or intend to purchase
probably will not correlate perfectly with movements in the level of a
securities index and, therefore, the Funds bear the risk of a loss on a
securities index option which is not completely offset by movements in the price
of such securities. Because securities index options are settled in cash, a call
writer cannot determine the amount of its settlement obligations in advance and,
unlike call writing on a specific security, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding underlying
securities. The Funds may, however, cover call options written on a securities
index by holding a mix of securities which substantially replicate the movement
of the index or by holding a call option on the securities index with an
exercise price no higher than the call option sold.
When a Fund writes an option on a securities index, it will be required to
cover the option or to segregate assets equal in value to 100% of the exercise
price in the case of a put, or the contract value in the case of a call. In
addition, where a Fund writes a call option on a securities index at a time when
the exercise price exceeds the contract value, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess.
Options on securities indices involve risks similar to those risks relating to
transactions in financial futures contracts described below. Also, a purchased
option may expire worthless, in which case the premium which was paid for it is
lost.
Financial Futures Transactions.
General. The International Fund, the Bond Fund, the Tax-Exempt Fund and the
Asset Allocation Fund may enter into interest rate futures contracts and
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securities index futures contracts (collectively referred to as "financial
futures contracts") primarily to hedge (protect) against anticipated future
changes in interest rates or equity market conditions which otherwise might
affect adversely the value of securities which these Funds hold or intend to
purchase. In addition, the Asset Allocation Fund may also enter into financial
futures to reallocate assets among the Fund's equity, fixed-income and money
market asset categories while minimizing transaction costs or generally as a
hedge against changes in market conditions. A "sale" of a financial futures
contract means the undertaking of a contractual obligation to deliver the
securities or the cash value called for by the contract at a specified price
during a specified delivery period. A "purchase" of a financial futures contract
means the undertaking of a contractual obligation to acquire the securities at a
specified price during a specified delivery period.
When a Fund enters into a financial futures contract, it is required to
deposit with its custodian, on behalf of the broker, a specified amount of cash
or eligible securities called "initial margin." The initial margin required for
a financial futures contract is set by the exchange on which the contract is
traded. Subsequent payments, called "variation margin," to and from the broker
are made on a daily basis as the market price of the financial futures contract
fluctuates. At the time of delivery, pursuant to the contract, adjustments are
made to recognize differences in value arising from the delivery of securities
with a different interest rate than that specified in the contract. With respect
to securities index futures contracts, settlement is made by means of a cash
payment based on any fluctuation in the contract value since the last adjustment
in the variation margin was made.
If a Fund owned long-term bonds and interest rates were expected to rise,
it could sell interest rate futures contracts. If interest rates did increase,
the value of the bonds in such Fund's portfolio would decline, but this decline
should be offset in whole or in part by an increase in the value of the Fund's
interest rate futures contracts. If, on the other hand, long-term interest rates
were expected to decline, a Fund could hold short-term debt securities and
benefit from the income earned by holding such securities, while at the same
time purchasing interest rate futures contracts on long-term bonds. Thus, a Fund
could take advantage of the anticipated rise in the value of long-term bonds
without actually buying them. The interest rate futures contracts and short-term
debt securities could then be liquidated and the cash proceeds used to buy
long-term bonds.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery of the security. The offsetting of a
contractual obligation is accomplished by purchasing (or selling as the case may
be) on a commodities or futures exchange an identical financial futures contract
calling for delivery in the same month. Such a transaction, if effected through
a member of an exchange, cancels the obligation to make or take delivery of the
securities. All transactions in the futures market are made, offset or fulfilled
through a clearing house associated with the exchange on which the contracts are
traded. A Fund will incur brokerage fees when it purchases or sells financial
futures contracts, and will be required to maintain margin deposits. If a liquid
secondary market does not exist when a Fund wishes to close out a financial
futures contract, it will not be able to do so and will continue to be required
to make daily cash payments of variation margin in the event of adverse price
movements.
Special Considerations Relating to Financial Futures Contracts. Financial
futures contracts entail risks. If the investment adviser's judgment about the
general direction of interest rates or markets is wrong, the overall performance
may be poorer than if no financial futures contracts had been entered into. For
example, in some cases, securities called for by a financial futures contract
may not have been issued at the time the contract was written. There may also be
an imperfect correlation between movements in prices of financial futures
contracts and portfolio securities being hedged. The degree of difference in
price movement between financial futures contracts and the securities being
hedged depends upon such things as differences between the securities being
hedged and the securities underlying the financial futures contracts, and
variations in speculative market demand for financial futures contracts and
securities. In addition, the market prices of financial futures contracts may be
affected by certain factors. If participants in the futures market elect to
close out their contracts through offsetting transactions rather than meet
margin requirements, distortions in the normal relationship between the
securities and financial futures markets could result. Price distortions could
also result if investors in financial futures contracts decide to make or take
delivery of underlying securities rather than engage in closing transactions,
which would reduce the liquidity of the futures market. In addition, because the
margin requirements in the futures markets are less onerous than margin
requirements in the cash market, increased participation by the speculators in
the futures market could cause temporary price distortions. Due to the
possibility of price distortions in the futures market and because there may be
an imperfect correlation between movements in the prices of securities
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and movements in the prices of financial futures contracts, a correct forecast
of market trends by the investment adviser may still not result in a successful
hedging transaction. If this should occur, the Funds could lose money on the
financial futures contracts and also on the value of their portfolio securities.
Options on Financial Futures Contracts.
The International Fund, the Bond Fund, the Tax-Exempt Fund and the Asset
Allocation Fund may purchase and write call and put options on financial futures
contracts. An option on a financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a financial
futures contract at a specified exercise price at any time during the period of
the option. Upon exercise, the writer of the option delivers the financial
futures contract to the holder at the exercise price. A Fund would be required
to deposit with its custodian initial margin and variation margin with respect
to put and call options on a financial futures contract as written by it.
When-Issued or Delayed-Delivery Transactions.
The International Fund, the Bond Fund, the Tax-Exempt Fund and the Asset
Allocation Fund may enter into when-issued or delayed delivery transactions.
Prior to settlement of these transactions, the value of the subject securities
will fluctuate, reflecting interest rate changes. Accordingly, when a Fund
commits to buy particular securities and make payment in the future, it must set
aside, in a segregated account with the custodian, cash or liquid high grade
securities at least equal in value to its commitments. In the case of a sale of
securities on a delayed-delivery basis, a Fund will instruct the custodian to
hold the subject portfolio securities in a segregated account while the
commitment is outstanding. These obligations to segregate cash or securities
will limit the investment advisers' ability to manage each Fund's investments.
Lending of Portfolio Securities.
The Bond Fund, the Tax-Exempt Fund and the Asset Allocation Fund may, to a
limited extent, lend their portfolio securities to broker-dealers, banks and
other institutional investors.
These Funds will typically receive commitment fees from the borrowers which
are normally payable upon the expiration of the loan transactions. However, if a
Fund calls the loaned securities prior to the expiration date of a loan, the
Fund may not be entitled to receive the entire commitment fee. The Funds do not
expect to call loaned securities prior to the applicable loan expiration date
unless the current market value of the loaned securities exceeds the expected
return of the loan, including commitment fee income, on the expiration date.
These loan transactions may be structured to permit similar, but not necessarily
identical, securities to be returned to the Funds upon the expiration of a loan.
Since there are risks of delays in recovery or even loss of rights in the
collateral related to all types of secured credit, the loans will be made only
to borrowers deemed by GISC to be creditworthy and will not be made unless, in
GISC's judgment, the income which can be earned justifies the risk. Any such
loans entered into by the Funds will create leverage for the Funds, as lender.
This leverage results from the expectation that the income and gains on the
securities acquired by the Funds with the loan collateral provided by the
borrower will exceed the cost of the loan transaction. Accordingly, each Fund
will only enter into a loan transaction if its earnings or net asset value are
expected to increase faster than otherwise would be the case. However, should
the income and gains earned on the securities acquired with the loan collateral
fail to exceed the cost of the loan, the Fund's earnings or net asset value will
decline faster than otherwise would be the case.
In the event the borrower is unable to complete a loan transaction, or in
the event of any default or insolvency of the borrower, each Fund will retain
the collateral it received in connection with the loan transaction. If this
collateral is insufficient to fully satisfy its rights under the loan agreement,
the affected Fund will take whatever steps it deems advisable to satisfy its
claim.
The Funds may pay reasonable custodian and administrative fees in
connection with the loans.
Foreign Currency Futures and Options on Foreign Currency Futures.
The International Fund may purchase and sell futures contracts on foreign
currencies, related options thereon and options on foreign currencies as a hedge
against possible variation in foreign exchange rates. A futures contract on a
foreign currency is an agreement between two parties to buy and sell a specified
amount of a particular
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currency for a particular price on a future date. An option on a foreign
currency futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a foreign currency futures contract at a
specified price at any time during the period of the option. An option
transaction on a foreign currency provides the holder with ability to buy or
sell a particular currency at a fixed price on a future date, and is used to
hedge the currency exchange rate risk on non-U.S. dollar-denominated securities
owned by the Fund, anticipated to be purchased by the Fund, or sold by the Fund
but not yet delivered. Options on foreign currencies may be traded on U.S. and
foreign exchanges or in the over-the-counter market.
Foreign currency futures contracts and options on foreign currency futures
contracts are traded on boards of trade and futures exchanges. Buyers and
sellers of foreign currency futures contracts are subject to the same risks
which apply to the use of future contracts generally. In addition, there are
risks associated with foreign currency futures contracts similar to those
associated with options on foreign currencies, described above. Moreover, the
ability to close out positions in such options is subject to the maintenance of
a liquid secondary market. In order to reduce this risk, the Fund will not
purchase or sell options on foreign currency options unless, in the opinion of
the Fund's investment adviser, a sufficiently liquid secondary market exists so
that the risks connected to such options transactions are not greater than the
risks associated with the underlying foreign currency futures contract.
The Fund will only write covered options on foreign currency or foreign
currency futures contracts. A put on a foreign currency or foreign currency
futures contract written by the Fund will be considered covered if the Fund
segregates cash, U.S. government securities or other liquid high-grade debt
securities, equal to the average exercise price of the put. A call on a foreign
currency or on a foreign currency futures contract written by the Fund will be
considered covered if the Fund owns short-term debt securities with a value
equal to the face amount of the option contract denominated in the currency upon
which the call is written.
The Fund will purchase an option on foreign currency as a hedge against
fluctuations in exchange rates. However, should exchange rates move adversely to
the Fund's position, the Fund may forfeit both the entire price of the option
plus the related transaction costs.
Engaging in foreign futures and foreign options transactions involves the
execution and clearing of trades on or subject to the rules of a foreign board
of trade. Neither the National Futures Association ("NFA") nor any domestic
(U.S.) exchange regulates activities of any foreign boards of trade, including
the execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the exchange may be liquidated by a transaction on
the appropriate domestic market. Moreover, applicable laws or regulations will
vary depending on the foreign country in which the foreign futures or foreign
options transaction occurs. Therefore, entities (such as the International Fund)
which trade foreign futures or foreign options contracts may not be afforded
certain of the protective measures provided by the Commodity Exchange Act,
Commodity Futures Trading Commission ("CFTC") regulations, the rules of the NFA
or those of a domestic (U.S.) exchange. In particular, monies received from
customers for foreign futures or foreign options transactions may not be
provided the same protections as monies received in connection with transactions
on U.S. futures exchanges. In addition, the price of any foreign futures or
foreign options contract and, therefore, the potential profit and loss thereon,
may be affected by any variance in the foreign exchange rate between the time
the order for the futures contract or option is placed and the time it is
liquidated, offset or exercised.
Forward Foreign Currency Transactions.
The foreign securities held by the International Fund will usually be
denominated in foreign currencies and the Fund may temporarily hold foreign
currency in connection with such investments. As a result, the value of the
assets held by the Fund may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations. The Fund may
enter into forward foreign currency exchange contracts ("forward currency
contracts") in an effort to control some of the uncertainties of foreign
currency exchange rate fluctuations. A forward currency contract is an agreement
to purchase or sell a specific currency at a specified future date and price
agreed to by the parties at the time of entering into the contract. The Fund
will not engage in forward currency contracts for speculation, but only as an
attempt to hedge against changes in currency exchange rates affecting the values
of securities which the Fund holds or intends to purchase. Thus, the Fund will
not enter into a forward 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.
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The Fund will normally be expected to use forward currency contracts to fix
the value of certain securities it has agreed to buy or sell. For example, when
the Fund enters into a contract to purchase or sell securities denominated in a
particular foreign currency, the Fund could effectively fix the maximum cost of
those securities by purchasing or selling a foreign currency contract, for a
fixed value of another currency, in the amount of foreign currency involved in
the underlying transaction. In this way, the Fund can protect the value of
securities in the underlying transaction from an adverse change in the exchange
rate between the currency of the underlying securities in the transaction and
the currency denominated in the foreign currency contract, during the period
between the date the security is purchased or sold and the date on which payment
is made or received.
The Fund may also use forward currency contracts to hedge the value, in
U.S. dollars, of securities it currently owns. For example, if the Fund holds
securities denominated in a foreign currency and anticipates a substantial
decline (or increase) in the value of that currency against the U.S. dollar, the
Fund may enter into a foreign currency contract to sell (or purchase), for a
fixed amount of U.S. dollars, the amount of foreign currency approximating the
value of all or a portion of the securities held which are denominated in such
foreign currency.
Upon the maturity of a forward currency transaction, the Fund may either
accept or make delivery of the currency specified in the contract or, at any
time prior to maturity, enter into a closing transaction which involves the
purchase or sale of an offsetting contract. An offsetting contract terminates
the Fund's contractual obligation to deliver the foreign currency pursuant to
the terms of the forward currency contract by obligating the Fund to purchase
the same amount of the foreign currency, on the same maturity date and with the
same currency trader, as specified in the forward currency contract. The Fund
realizes a gain or loss as a result of entering into such an offsetting contract
to the extent the exchange rate between the currencies involved moved between
the time of the execution of the original forward currency contract and the
offsetting contract.
The use of forward currency contracts to protect the value of securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities the Fund owns or intends to acquire, but
it does fix a future rate of exchange. Although such contracts minimize the risk
of loss resulting from a decline in the value of the hedged currency, they also
limit the potential for gain resulting from an increase in the value of the
hedged currency. The benefits of forward currency contracts to the Fund will
depend on the ability of the Fund's investment adviser to accurately predict
future currency exchange rates.
Regulatory Restrictions.
To the extent required to comply with the 1940 Act and rules and
interpretations thereunder, a Fund may not maintain open short positions in
financial futures contracts, call options written on financial futures contracts
or call options written on indexes if, in the aggregate, the market value of all
such open positions exceeds the current value of the securities in its
portfolio, plus or minus unrealized gains and losses on the open positions,
adjusted for the historical relative volatility of the relationship between the
portfolio and the positions. When purchasing a financial futures contract or
writing a put option on a financial futures contract, the Fund must segregate
cash, cash-equivalents (including any margin) or liquid high-grade debt
obligations equal to the market value of such contract. These cover and
segregation requirements may limit the Fund's ability to pursue other investment
opportunities.
In order to comply with the Commodity Futures Trading CommissionRegulation
4.5 and thereby avoid being deemed a "commodity pool operator," a Fund will use
commodity futures or commodity options contracts solely for bona fide hedging
purposes within the meaning and intent of Regulation 1.3(z), or, with respect to
positions in commodity futures and commodity options contracts that do not come
with the meaning and intent of Regulation 1.3(z), the aggregate initial margin
and premiums required to establish such positions will not exceed 5% of the fair
market value of the assets of the Fund, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered into. In the
case of an option that is in-the-money at the time of purchase, the in-the-money
amount (as defined in Section 190.01(x) of the CFTC Regulations) may be excluded
in computing such 5%.
INVESTMENT ADVISERS AND DISTRIBUTOR
Guardian Investor Services Corporation ("GISC"). GISC is the investment
adviser for each of the Funds (except the International Fund). GISC and the
Portfolio have entered into a written investment advisory agreement which
provides that GISC shall act as the applicable Funds' investment adviser, manage
their
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investments and provide them with various services and facilities. The
investment advisory agreement will continue in full force and effect from year
to year with respect to each Fund so long as its continuance is approved at
least annually by vote of a majority of the outstanding voting securities of
that Fund, or by vote of the Board of Trustees of the Portfolio, including a
majority of the Trustees who are not parties to the agreement or "interested
persons" of the Portfolio or of GISC, cast in person at a meeting called for
that purpose. The agreement will terminate automatically upon its assignment and
may be terminated with respect to any Fund without penalty at any time by either
party upon 60 days written notice. Termination of the investment advisory
agreement with respect to one Fund will not affect its validity with respect to
any other Fund.
Under the terms of the investment advisory agreement, GISC provides or pays
for certain of the Fund's administrative costs. Among the services and
facilities provided or paid for by GISC are: office space; clerical staff and
recordkeeping; and the services of all Fund personnel, including any fees and
expenses of the Trustees who are affiliated with The Guardian Life Insurance
Company of America ("Guardian Life"). All other costs and expenses are to be
paid by the Funds which GISC advises. However, GISC has agreed to reduce its
advisory fee and, if necessary, reimburse any of the Funds which it advises if a
Fund's operating expenses exceed the expense limitations imposed by state law.
Excluded from such operating expenses are: interest; taxes; brokerage
commissions; distribution fees and extraordinary expenses. Currently, the most
restrictive state law limitation is imposed by the State of California, which
requires reimbursement when covered operating expenses exceed 21/2% of the first
$30,000,000 of average net assets, 2% of the next $70,000,000 of such assets and
11/2% of such net assets in excess thereof.
The investment advisory agreement provides that neither GISC, nor any of
its personnel shall be liable for any error of judgment or mistake of law or for
any loss suffered by GISC or the Funds in connection with the matters to which
the investment advisory agreement relates, except for loss resulting from
willful misfeasance or misconduct, willful default, bad faith, or gross
negligence in the performance of its or his/her duties on behalf of GISC or the
Funds or from reckless disregard by GISC or any such person of the duties of
GISC under the investment advisory agreement.
Guardian Life has registered and maintains the exclusive ownership interest
of the following trademarks or service marks, as the case may be: "The Guardian
Park Avenue Fund," "The Guardian Investment Quality Bond Fund," "The Guardian
Tax-Exempt Fund," "The Guardian Cash Management Fund," "The Guardian Asset
Allocation Fund" and "The Guardian Baillie Gifford International Fund." If the
investment advisory agreement is terminated with respect to any or all of the
Funds and it is not replaced by an agreement with another affiliate of Guardian
Life, any affected Fund's continued use of its name is subject to the approval
of Guardian Life.
The investment advisory agreement includes a provision that if any 1940 Act
requirement is relaxed by rule, regulation or order of the SEC, then any
provision of the agreement which reflects such 1940 Act requirement shall be
deemed to incorporate the effect of such rule, regulation or order.
A service agreement between GISC and Guardian Life provides that the latter
will furnish the office space, clerical staff, services and facilities which
GISC needs to perform its duties under the investment advisory agreement. GISC's
officers and other personnel are salaried employees of Guardian Life; they
receive no compensation from GISC. GISC reimburses Guardian Life for its
expenses under the separate agreement.
The following chart details the investment management fees paid to GISC by
the Funds named during the periods noted.
- --------------------------------------------------------------------------------
Fund Name Year Ended 2/15/93 to Year ended Year ended
12/31/93 12/31/93 12/31/94 12/31/95
- --------------------------------------------------------------------------------
Park Avenue $2,297,194 N/A $3,046,391 $4,093,163
Cash $ 181,160 N/A $ 229,729 $ 332,665
Bond N/A $ 89,811 $ 126,947 $ 255,331
Tax-Exempt N/A $ 96,947 $ 90,421 $ 83,564
Asset Allocation N/A $ 228,583 $ 357,563 $ 404,836
- --------------------------------------------------------------------------------
Guardian Baillie Gifford Limited ("GBG"). GBG is the investment adviser to
the International Fund pursuant to an investment advisory agreement between GBG
and the Portfolio. GBG was formed in November 1990
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<PAGE>
through a joint venture between GIAC, a wholly owned subsidiary of Guardian Life
and Baillie Gifford Overseas Limited ("BG Overseas"), which is wholly owned by
Baillie Gifford & Co.
The agreement provides that GBG is responsible for the overall investment
management of the International Fund's portfolio. Under the terms of the
agreement, GBG is responsible for all decisions to buy and sell securities for
the Fund, furnishes the Board with recommendations with respect to the Fund's
investment policies, provides the Board with regular reports pertaining to the
implementation and performance of such policies, and maintains certain books and
records as required by the 1940 Act and by any other applicable laws and
regulations. GBG has, in turn, entered into a sub-investment advisory agreement
with BG Overseas appointing the latter as sub-investment adviser and delegating
to BG Overseas much of the day-to-day management responsibilities for the Fund's
portfolio (see "Baillie Gifford Overseas Limited" below).
The agreement between GBG and the Portfolio will continue in full force and
effect from year to year, provided its continuance is specifically approved at
least annually by vote of a majority of the outstanding securities of the Fund,
or by vote of the Board of Trustees of the Portfolio, including a majority of
the Trustees who are not parties to the agreement or "interested persons" of the
Portfolio or of GBG, cast in person at a meeting called for the purpose of
voting on such continuance.
The agreement provides that neither GBG, nor any of its officers,
directors, or employees shall be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the matters to which
the agreement relates, except for loss resulting from willful misfeasance or
misconduct, willful default, bad faith, or gross negligence in the performance
of its or his/her duties on behalf of the Fund or from reckless disregard by GBG
or any such person of the duties of GBG under the agreement.
The agreement includes a provision that if any 1940 Act requirement is
relaxed by rule, regulation or order of the SEC, then any provision of the
agreement which reflects such 1940 Act requirement shall be deemed to
incorporate the effect of such rule, regulation or order.
The agreement may be terminated, without penalty, at any time by either
party upon 60 days' written notice and will terminate automatically upon its
assignment. In addition, either party may terminate the agreement immediately in
any of the following situations: (1) the other party commits any material breach
of its obligations under the agreement which, if curable, is not remedied within
30 days; (2) the dissolution of the other party; or (3) the termination or
expiration of the joint venture agreement between GIAC and BG Overseas.
In the event that the agreement is terminated and unless it is replaced by
another agreement between GIAC and BG Overseas or their affiliates, the Fund's
continued use of the name "The Guardian Baillie Gifford International Fund" is
subject to the approval of both GIAC and BG Overseas.
The management fees paid by the International Fund to GBG for the years
ended December 31, 1995, December 31, 1994 and for the period February 15, 1993
through December 31, 1993 were $331,752, $253,292 and $87,854 respectively.
Baillie Gifford Overseas Limited. BG Overseas is the International Fund's
sub-investment adviser pursuant to a sub-investment advisory agreement with GBG.
Pursuant to this sub-investment advisory agreement, BG Overseas manages the
day-to-day operations of the Fund's portfolio. In so doing, BG Overseas has full
discretion to purchase and sell portfolio securities, to select brokers for the
execution of such purchases, sales, and to negotiate brokerage commissions, if
any, subject to monitoring by GBG. GBG continually monitors and evaluates the
performance of BG Overseas.
The sub-investment advisory agreement will continue in full force and
effect from year to year, provided its continuance is specifically approved at
least annually (1) by the Board of Directors of GBG and (2) by either (a) a
majority of the outstanding securities of the Fund or (b) the Board of Trustees
of the Portfolio, including approval by a vote of the majority of the Trustees
who are not parties to the sub-investment advisory agreement or "interested
persons" of the Portfolio or of GBG, cast in person at a meeting called for the
purpose of voting on such continuance.
The sub-investment advisory agreement provides that neither BG Overseas,
nor any of its officers, directors or employees shall be liable for any error of
judgment or mistake of law or for any loss suffered by GBG or the Fund in
connection with the matters to which the sub-investment advisory agreement
relates, except for any loss resulting from willful misfeasance or misconduct,
willful default, bad faith, or gross negligence in the performance
B-20
<PAGE>
of its or his/her duties on behalf of GBG or the Fund or from reckless disregard
by BG Overseas or any such person of the duties of BG Overseas under the
sub-investment advisory agreement.
The sub-investment advisory agreement includes a provision that if any 1940
Act requirement is relaxed by rule, regulation or order of the SEC, then any
provision of the sub-investment advisory agreement which reflects such 1940 Act
requirement shall be deemed to incorporate the effect of such rule, regulation
or order.
The sub-investment advisory agreement may be terminated, without penalty,
at any time by either party upon 60 days' written notice and will terminate
automatically upon its assignment. In addition, either party may terminate the
sub-investment advisory agreement immediately in any of the following
situations: (1) the other party commits any material breach of its obligations
under the agreement which, if curable, is not remedied within 30 days; (2) the
dissolution of the other party; or (3) the termination or expiration of the
joint venture agreement between GIAC and BG Overseas.
GBG pays one-half of the management fees that it receives under its
investment advisory agreement with the International Fund to BG Overseas as
compensation for BG Overseas' services as the Fund's sub-investment adviser. For
the years ended December 31, 1995, December 31, 1994 and for the period February
15, 1993 through December 31, 1993, BG Overseas received $165,876, $126,646 and
$43,927, respectively, from GBG.
(See the Prospectus section entitled "Management" for more information
about the Portfolio's investment advisory agreements.)
The Administrative Services Agreement. GISC and the Portfolio have also
entered into an Administrative Services Agreement on behalf of both classes of
shares pursuant to which GISC will provide information and administrative
services for the benefit of the Portfolio and its shareholders. These services
include providing office space, equipment and personnel, maintenance of
shareholder account records, responding to routine shareholder inquiries
regarding the Portfolio and assisting in the processing of shareholder
transactions and any other services which the Portfolio may reasonably request.
GISC may also enter into related agreements with other broker-dealers or other
financial services firms that provide such services and facilities for their
customers who are shareholders of the Portfolio. The Administrative Services
Agreement may be terminated at any time by either party upon 60 days' written
notice. The Agreement may not be assigned without the consent of the Portfolio.
Any material amendments to the Agreement, including an increase in the amount of
fees, must be approved by the Board of Trustees of the Portfolio. For the year
ended December 31, 1995, no fees were received by GISC pursuant to this
Agreement.
Underwriting Agreement. The Portfolio has also entered into an underwriting
agreement with GISC which, together with a distribution plan and agreement
pursuant to Rule 12b-1 under the 1940 Act (see below), governs the sale and
distribution of Fund shares and payment of commissions to GISC. Shares are
offered continuously; however, the Portfolio reserves the right to cease the
offer of any Fund's shares at any time, subject to applicable laws, rules and
regulations. The underwriting agreement shall remain in full force and effect
from year to year so long as its continuance is approved at least annually by
the Board of Trustees of the Portfolio, including a majority of Trustees who are
not parties to the agreement or interested persons of any such party. It will
terminate upon assignment and may be terminated with respect to any or all of
the Funds at any time by either party on not less than 30 nor more than 60 days'
written notice. Termination of the underwriting agreement with respect to one
Fund will not affect its validity with respect to any other Fund. The agreement
also provides that the Portfolio shall indemnify GISC and persons in control of
GISC with respect to certain liabilities, including liabilities arising under
the Securities Act of 1933. Shares of each Fund may be purchased through
Guardian Life agents who are registered representatives and licensed by GISC to
sell Fund shares, and through registered representatives of selected
broker-dealers which are members of the National Association of Securities
Dealers, Inc. and which have entered into selling agreements with GISC. GISC may
reallow up to 100% of any sales charge on shares sold by dealers with whom it
has sales agreements.
Distribution Plan Pursuant to Rule 12b-1 and Distribution Agreement. Under
a Distribution Plan adopted by the Portfolio pursuant to Rule 12b-1 under the
1940 Act (the "12b-1 Plan"), each Portfolio Fund which issues Class B shares
(the "Multiple Class Funds") is authorized to pay a monthly 12b-1 fee at an
annual rate of up to 0.75% 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 those Funds.
B-21
<PAGE>
The 12b-1 fees may be paid by the Portfolio Funds to third parties,
including GISC, which enter into Distribution Agreements with the Portfolio.
Under the 12b-1 Plan, distribution fees may be used to compensate brokers and
dealers who engage in or support the distribution of the Class B shares of the
Multiple Class Funds. The 12b-1 fees may also be used to pay other
distribution-related expenses incurred, such as communications equipment
charges, printing prospectuses, statements of additional information and reports
for prospective investors, the costs of printing sales literature and
advertising materials, training and educating sales personnel and other
overhead. The 12b-1 Plan, in conjunction with the contingent deferred sales load
("CDSL"), permits an investor to purchase Class B shares through a distributor
without the imposition of an initial sales load.
In order to effect the 12b-1 Plan, the Portfolio, on behalf of the Multiple
Class Funds, has entered into a Distribution Agreement with GISC. GISC is
compensated by the fees it receives under the 12b-1 Plan and is not paid any
additional amounts under the Distribution Agreement. GISC intends to use these
fees to pay for distribution-related expenses for Class B shareholders and
payments to registered representatives for the sale of Class B shares. GISC also
intends to use the 12b-1 fees to advance payments of up to 3.0% of the proceeds
of sales of Class B shares to its registered representatives and other
authorized broker-dealers.
GISC absorbs its distribution and service expenses which exceed the amount
of 12b-1 fees collected. No Fund is obligated to reimburse GISC for such excess
expenses, and GISC will not carry one year's deficiency to a subsequent year in
order to recover such deficiency from the subsequent year's fee. Similarly, if
the 12b-1 Plan or Underwriting Agreement, as either pertains to a Fund, is
terminated or not renewed, any expenses incurred by GISC on behalf of such Fund
which are in excess of fees which GISC has received or accrued shall be absorbed
by GISC. Conversely, if GISC's expenditures for a Fund under the 12b-1 Plan are
less than the amount collected, GISC is entitled to retain the excess. However,
the Trustees are authorized to negotiate changes to the 12b-1 Plan, such as a
fee reduction or increased services, if the fee paid by a Fund in a particular
year exceeds the covered expenses. Alternatively, the Trustees may find such
excess justifiable under the circumstances.
The 12b-1 Plan specifically provides that while it is in effect, the
selection and nomination of the Trustees who are not "interested persons" of the
Portfolio, as that term is defined in the 1940 Act, shall be made solely at the
discretion of the Trustees who are not interested persons of the Portfolio.
The fees to be paid by a Fund under the 12b-1 Plan may not be amended in a
material way without approval by vote of: (1) a majority of the Trustees; (2) a
majority of the Trustees who are not "interested persons" of the Portfolio and
have no direct or indirect financial interest in the operation of the 12b-1 Plan
or related agreements ("Independent Trustees"); and (3) a majority of such
Fund's outstanding voting securities, as defined by the 1940 Act.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
12b-1 Plan
Fees Paid by the Funds
and Expenditures by GISC
for the Year Ended December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
GISC's Expenditures to Print
Fund -- Name and 12b-1 GISC's Marketing and and Mail Prospectuses Distribution Trail Amounts Retained
Fees Paid to GISC Advertising Expenditures for Prospective Investors Expenses Commissions by GISC
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Park Avenue Fund
$1,227,949 $149,727 $10,035 $165,956 $877,285 $24,946
- --------------------------------------------------------------------------------------------------------------------------------
Asset Allocation
Fund
$155,706 $69,426 $10,035 $11,993 $137,046 ($72,793)
- --------------------------------------------------------------------------------------------------------------------------------
International Fund
$103,673 $67,222 $10,035 $7,700 $93,761 ($75,044)
- --------------------------------------------------------------------------------------------------------------------------------
Bond Fund
$127,666 $68,199 $10,035 $9,481 $98,655 ($58,703)
- --------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund
$41,783 $64,732 $10,035 $2,973 $17,957 ($53,914)
- --------------------------------------------------------------------------------------------------------------------------------
Cash Management
Fund
$166,333 $69,410 $10,035 $11,936 $110,224 ($35,272)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
B-22
<PAGE>
The 12b-1 Plan will continue from year-to-year for each Fund if such
continuance is specifically approved by vote of the Board, and by vote of the
Independent Trustees, cast in person at a meeting called for the purpose of
voting on the 12b-1 Plan.
The 12b-1 Plan may be terminated with respect to the Portfolio or a Fund
(1) at any time by vote of a majority of the Trustees, a majority of the
Independent Trustees, or a majority of that Fund's outstanding voting
securities, or (2) by GISC on 60 days' notice in writing to the Portfolio.
The Portfolio has also entered into a Distribution Plan with GISC on behalf of
the Class A shares. This Plan was made dormant by the Board as of May 1, 1996
and no 12b-1 fees are currently authorized to be paid in connection with sales
of Class A shares. The following chart details the amount that the Class A
shares of each Fund paid GISC under this 12b-1 Plan and how GISC used that money
to promote sales and provide customer service during 1995, when this Plan was
operational.
PORTFOLIO TRANSACTIONS AND BROKERAGE
GISC currently serves as investment adviser to several Guardian-sponsored
mutual funds, serves as manager of one other mutual fund and is the co-adviser
of a separate account established by its corporate parent, GIAC. GBG and BG
Overseas currently serve as investment adviser and sub-investment adviser,
respectively, to two series of one other Guardian-sponsored mutual fund. In the
future, each of GISC, GBG or BG Overseas (collectively, the "Advisers") may act
as investment advisers to other Guardian-sponsored mutual funds or GIAC separate
accounts. At times, investment decisions may be made to purchase or sell the
same investment security for one or more of the other clients advised by the
Advisers. It is each Adviser's practice to allocate purchase and sale
transactions among the Funds and other clients whose assets they manage in such
manner as is deemed equitable, which may or may not be beneficial to the Funds.
The Advisers have no formula for the distribution of brokerage business
when placing orders for the purchase and sale of portfolio securities. For
over-the-counter transactions, the Advisers attempt to deal with a primary
market maker unless they believe better prices and execution are available
elsewhere. In allocating portfolio transactions among brokers, the Advisers give
consideration to brokers whom they believe can obtain the best price and
execution of orders and to brokers who furnish statistical data, research and
other factual information. The Advisers are authorized to pay a commission in
excess of that which another broker may charge for effecting the same
transaction if they consider that such commissions they pay for brokerage,
research services and other statistical data are appropriate and reasonable for
the services rendered. The research services and statistical data which the
Advisers receive in connection with the Funds' portfolio transactions may be
used by the Advisers to benefit other clients and will not necessarily be used
in connection with the Funds. The Advisers do not participate in commissions
paid by the Funds to other brokers or dealers and do not knowingly receive any
reciprocal business directly or indirectly as a result of such commissions.
While the Advisers will be primarily responsible for the placement of each
Fund's business, the policies and practices will be subject to review by the
Board of Trustees. The following chart details brokerage commissions paid by the
Funds during the years ended December 31, 1993, 1994 and 1995, or any shorter
period from the commencement of their operations.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Brokerage Commissions
Paid by the Funds Comprising
The Park Avenue Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
Commissions Paid During
Commissions Paid the Period February 15, Commissions Paid Commissions Paid
During the Year Ended 1993 (Inception) to During the Year Ended During the Year Ended
Fund December 31, 1993 December 31, 1993 December 31, 1994 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Park Avenue Fund $716,741 N/A $1,070,414 $1,477,817
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund N/A $82,168 $129,259 $126,876
- ------------------------------------------------------------------------------------------------------------------------------------
International Fund N/A $67,539 $128,338 $114,727
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Cash Fund, Bond Fund and Tax-Exempt Fund primarily purchase securities in
principal transactions at net prices. None of these Funds paid separate
brokerage commissions during the time periods covered by the foregoing chart.
- --------------------------------------------------------------------------------
B-23
<PAGE>
In any particular year, market conditions could necessitate portfolio
activity which results in high or low turnover rates. Portfolio turnover is
calculated by dividing the lesser of purchases or sales of a Fund's securities
during a fiscal year by the average monthly value of the Fund's securities
during such fiscal year. In determining the portfolio turnover rate, all
securities whose maturities or expiration dates at the time of acquisition were
one year or less are excluded. Turnover rates may be affected by factors such as
purchase and redemption requirements and market volatility, and may vary greatly
from time to time. The portfolio turnover rate of a Fund may be higher during
its early history. Increased portfolio turnover will not necessarily indicate a
variation from a Fund's stated investment policies, but may result in greater
brokerage commissions and, consequently, higher expenses. The following chart
shows each Fund's portfolio turnover rate during the time periods noted.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio
Turnover Rates
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate
Portfolio Turnover Rate for the Period February 15, Portfolio Turnover Rate Portfolio Turnover Rate
for the Year Ended 1993 (Inception) to for the Year Ended for the Year Ended
Fund* December 31, 1993 December 31, 1993 December 31, 1994 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Park Avenue Fund 46% N/A 54% 78%
- ------------------------------------------------------------------------------------------------------------------------------------
International Fund N/A 9% 33% 51%
- ------------------------------------------------------------------------------------------------------------------------------------
Bond Fund N/A 167% 186% 401%
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Fund N/A 108% 107% 194%
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund N/A 165% 216% 219%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Cash Fund's Portfolio turnover rate is not meaningful since, by its
nature, a money market mutual fund that invests in short-term instruments
will turn its portfolio over several times during the course of a year.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
National Financial Data Services, the Portfolio's shareholder servicing
agent, will typically pay redemption proceeds within three business days after
it receives a proper redemption request. Redemptions will generally be made in
cash but may be made wholly or partly in readily marketable securities or other
non-cash assets if the Board of Trustees should determine that orderly
liquidation of a Fund's securities is impracticable or that payment wholly in
cash would have a material adverse effect on the remaining shareholders. The
redemption will be made at the NAV next determined after the redemption request
is received in proper form. Shares that are purchased by check cannot be
redeemed until the check has cleared. This may take up to 15 calendar days.
Shareholders are not permitted to elect whether the redemption will be made in
cash or securities. The Portfolio has elected to be governed by Rule 18f-1 under
the 1940 Act, so it is committed to pay cash redemptions to each shareholder
during any 90-day period up to the lesser of $250,000 or 1% of the net asset
value of a Fund at the beginning of such period. Any portfolio securities paid
or distributed in kind will be valued as described under "Net Asset Value"
below. A subsequent sale of such securities would ordinarily require payment of
brokerage commissions by the redeeming shareholders.
The right to redeem a Fund's shares may be suspended, or the payment date
postponed, for any period during which: (1) the New York Stock Exchange ("NYSE")
is closed (other than customary weekend and holiday closings); (2) trading on
the NYSE is restricted for any reason; (3) an emergency exists, as a result of
which disposal by a Fund of securities owned by it is not reasonably
practicable, or it is not reasonably practicable for a Fund fairly to determine
the value of its net assets, as determined by the SEC under its rules and
regulations; or (4) the SEC, by order, so permits suspension for the protection
of shareholders of a Fund.
B-24
<PAGE>
PERFORMANCE RESULTS
As described in the Prospectus, a Fund may state its yield, average annual
total return and total return in advertisements, sales materials and investor
communications. These various measures of performance are described and
illustrated below.
Performance figures are based upon historic results and do not represent
future performance. With the exception of the Cash Fund, Class A shares are sold
at NAV plus a maximum sales load of 4.50% of the NAV. Class B shares of the
Multiple Class Funds are sold at NAV, subject to a maximum contingent deferred
sales load of 4.0%. Returns will fluctuate and may be different for Class A and
Class B shares of the same Portfolio Fund, since Class B shares bear higher
overall expenses than Class A shares. Factors affecting Fund performance include
general market conditions, the level of overall operating expenses, investment
management fees, and, with respect to the International Fund, exchange rates.
Any additional fees charged by a broker, dealer or other financial services firm
will further reduce the returns described in this section. Class A shares of the
Funds are redeemable at NAV. Class B shares of the Funds are redeemable subject
to a CDSL. Redemption proceeds may be more or less than the original cost.
NOTE: Performance illustrations provided for the Class A Park Avenue Fund
and the Class A Cash Fund for periods ending prior to January 1, 1993 do not
reflect the imposition of charges under the Portfolio's Class A 12b-1 Plan which
went into effect on January 1, 1993. No 12b-1 fees are currently being imposed
on the Class A shares of any Fund. Restating these Funds' performance results to
include the effect of such charges would reduce the performance results.
Yield is a measure of the net investment income per share earned over a
specific time period (one month or 30 days in the case of the Bond Fund and the
Tax-Exempt Fund, and seven days in the case of the Cash Fund) expressed as a
percentage of the maximum offering price of the Fund's shares.
Yield is computed in accordance with the following SEC standardized method.
YIELD = 2[((a-b)/cd)+1)^6-1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period
d = the maximum offering price per share on the last day of the
period
This standardized methodology is not necessarily consistent with generally
accepted accounting principle
The Bond Fund's yield for the 30-day period ended December 31, 1995 was
5.40%, and the Tax-Exempt Fund's yield was 4.02% for the same period. The
Tax-Exempt Fund's tax equivalent yield is computed by dividing that portion of
the yield (as calculated above) which is tax-exempt by one minus the maximum
federal income tax rate and adding the product to that portion, if any, of the
Fund's yield that is not tax-exempt. Using this formula, the tax equivalent
yield of the Tax-Exempt Fund for the 30-day period ended December 31, 1995 was
6.28%. Amendments to the Internal Revenue Code enacted by the U.S. Congress
during 1993 increased the federal income tax rates for some taxpayers.
Correspondingly, the tax equivalent yield calculated for the Tax-Exempt Fund
under the foregoing method has also increased.
The Cash Fund provides current yield and effective yield quotations, which
are calculated in accordance with SEC standards and are based upon changes in
account value during a recent seven-day base period. Current yield quotations
are computed by annualizing (on a 365-day basis) the "base period return." The
"base period return" is computed by determining the net change, exclusive of
capital changes, in the value of one Cash Fund share and dividing that amount by
the value of one Fund share at the beginning of the base period. Effective yield
is computed by compounding the "base period return." The Cash Fund's current
yield for the seven days ended December 31, 1995 was 5.04%. Its effective yield
for the same period was 5.17%.
Yields are affected by market conditions, portfolio quality, portfolio
maturity,type of instruments held and operating expenses.
B-25
<PAGE>
A Fund's average annual total return is computed in accordance with the
following SEC standardized method.
P(1 + T) = ERV
Where: P = a hypothetical initial purchase order of $1,000 from which
the maximum sales load is deducted
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000 purchase at
the end of the period
Total return is calculated in a similar manner, except that the results are
not annualized. Each calculation assumes that all dividends and distribution are
reinvested at NAV on the reinvestment dates during the period, but do not take
into account income taxes due on Fund distributions. Any statements of total
return or other performance data of a Fund will be accompanied by the Fund's
average annual total returns for the one-year, five-year and ten-year periods as
of the end of the most recent calendar quarter, if applicable. A Fund may also
advertise total return and average annual total return information for different
periods of time.
Recent returns for all of the Funds except the Cash Fund are presented
below.
<TABLE>
<CAPTION>
Asset
Park Avenue International Bond Tax-Exempt Allocation
Average Annual Total Return Fund Fund Fund Fund Fund
--------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1 year ended December 31, 1995 28.24% 6.14% 11.39% 9.43% 18.91%
5 years ended December 31, 1995 19.88 N/A N/A N/A N/A
10 years (or life of Fund if less) ended
December 31, 1995 14.74 11.46 4.06 2.26 9.72
</TABLE>
The table below shows the Park Avenue Fund's total cumulative return and
average annual total return for the one-year, five-year and ten-year periods, as
well as the life of the Fund through December 31, 1995.
================================================================================
Period Ended The Guardian The Guardian
December 31, 1995 Park Avenue Fund* Park Avenue Fund++
- --------------------------------------------------------------------------------
Lifetime Cumulative Total Return+ 3,064.77% 2,922.00%
- --------------------------------------------------------------------------------
Lifetime Average Annual Total Return+ 15.78% 15.55%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ten Year Cumulative Total Return 314.27% 295.63%
- --------------------------------------------------------------------------------
Ten Year Average Annual Total Return 15.27% 14.74%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Five Year Cumulative Total Return 159.22% 147.56%
- --------------------------------------------------------------------------------
Five Year Average Annual Total Return 20.99% 19.88%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
One Year Average Annual Total Return 34.28% 28.24%
================================================================================
- --------------------------------------------------------------------------------
* Shows performance without deduction of sales load.
+ Period beginning June 1, 1972.
++ Reflects deduction of current maximum sales load of 4.5% at beginning of
period. Prior to August 25, 1988, shares of the Park Avenue Fund were
offered with a higher sales load, so actual returns would have been
somewhat lower.
================================================================================
As noted in the Prospectus, each Fund may compare its performance to
certain indices, similar mutual funds and other investment vehicles.
Additionally, a Fund may quote information from industry and financial
publications in its promotional materials. In particular:
(1) the Park Avenue Fund may compare its performance to that of the S&P
500, Dow Jones Industrials, Russell 3000, or the New York Stock Exchange
Composite Index;
(2) the International Fund may compare its performance to the Morgan
Stanley Capital International's Europe, Australia and the Far East ("EAFE")
Index;
(3) the Bond Fund may compare its performance to the Salomon Brothers
Government and High Grade Bond Indices, the Shearson-Lehman Government Bond or
Government/Corporate Bond Indices, the Merrill
B-26
<PAGE>
Lynch Government Master or Government/Corporate Master Indices, and the Lehman
Mortgage-Backed Securities or the Lehman Aggregate Bond Indices;
(4) The Tax-Exempt Fund may compare its performance to the Lehman Brothers
Municipal Bond Index;
(5) The Cash Fund may compare its performance to the Consumer Price Index
or the Bank Rate Monitor; and
(6) The Asset Allocation Fund may compare its performance to the S&P 500
and the Lehman Aggregate Bond Index.
Performance calculations contained in reports by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc., Morningstar, the WM Company
or industry or financial publications of general interest such as Business Week,
Financial World, Forbes, Financial Times, The Wall Street Journal, The New York
Times, Barron's and Money which may be quoted by the Funds are often based upon
changes in NAV with all dividends reinvested and may not reflect the imposition
of any sales loads.
NET ASSET VALUE
Each Fund's NAV is determined as of the earlier of 4:00 p.m. Eastern time
or the close of trading on the NYSE on each day on which the NYSE is open for
business. The NAV is calculated by adding the value of all securities, cash or
other assets, subtracting liabilities, dividing the remainder by the number of
shares outstanding and adjusting the results to the nearest full cent per share.
The Cash Fund. Securities held by the Cash Fund are valued at their
amortized cost. Amortized cost is acquisition cost as adjusted for amortization
of any discount or premium at a constant daily rate to maturity. This method
provides certainty in valuation, but may result in valuations that are higher or
lower than the price which would be received if an instrument was sold prior to
its maturity because neither unrealized gains nor unrealized losses are
accounted for.
The Cash Fund's use of amortized cost and the maintenance of the Cash
Fund's net asset value at $1.00 per share is based on its election to value its
portfolio in accordance with the provisions of Rule 2a-7 under the 1940 Act. As
a condition of operating under that rule, the Cash Fund must: maintain a
dollar-weighted average portfolio maturity of 90 days or less; purchase U.S.
dollar-denominated instruments having remaining maturities of thirteen months or
less; and invest only in securities that are determined to present minimal
credit risks and that are eligible for investment under the rule. Eligible
securities are securities rated within the two highest rating categories
assigned by the requisite number of nationally recognized statistical rating
organizations ("NRSROs") or, if unrated, deemed to be of comparable quality by
GISC, the Cash Fund's investment adviser in accordance with guidelines adopted
by the Board of Trustees.
The aforementioned guidelines were adopted by the Board of Trustees and are
designed to stabilize the Cash Fund's NAV at $1.00, taking into account current
market conditions and the Fund's investment objective. These guidelines mandate
periodic review, as the Board deems appropriate and at such intervals as are
reasonable in light of current market conditions, of the relationship between
the amortized cost value per share and a NAV based upon available indications of
market value. In such review, investments for which market quotations are
readily available are valued at the most recent bid price or quoted yield
equivalent for such securities or for securities of comparable maturity, quality
and type as obtained from one or more of the major market makers for the
securities to be valued. Other investments and assets are valued at fair value,
as determined in good faith by or under the direction of the Portfolio's Board
of Trustees.
In the event of a deviation of over 1/2 of 1% between the Cash Fund's NAV
based upon available market quotations or market equivalents and $1.00 per share
based on amortized cost, the Board will promptly consider what action, if any,
should be taken. Action will also be taken to reduce, to the extent reasonably
practicable, any material dilution or other unfair results which might arise
from differences between the Cash Fund's NAV based upon market values and
amortized cost. Such action may include redemption in kind, selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
the average portfolio maturity, withholding or paying dividends or
distributions, or using a market value NAV.
B-27
<PAGE>
The Board will also take such action as it deems appropriate if securities
held by the Cash Fund are downgraded, go into default, become ineligible for
investment under Rule 2a-7, or come to present greater than minimal credit
risks. In the event that securities accounting for 1/2 of 1% or more of the Cash
Fund's total assets default in a material way that is related to the issuer's
financial condition, the SEC will be notified and advised of the actions to be
taken in response to the situation.
Since dividends from net investment income and from net realized and
unrealized gains will be accrued daily and paid monthly, the net asset value per
share will ordinarily remain at $1.00, but the Cash Fund's daily dividends will
vary in amount, and there may be days when there will be no dividend. If net
realized or unrealized losses on any day exceeds interest income, less expenses,
the net asset value per share on that day might decline.
The International Fund. The calculation of the International Fund's NAV may
not occur contemporaneously with the determination of the value of the Fund's
portfolio because trading on foreign exchanges may not take place every day the
NYSE is open and the NYSE may be closed when foreign exchanges are open for
business. Hence, it is possible that the value of the International Fund's
assets may change significantly on days when the Fund's shares are not valued.
The foregoing also applies to any holdings of foreign securities by the other
Funds which are authorized to make such investments.
Securities Valuations. Securities that are listed or traded on any U.S. or
foreign securities exchange or on the NASDAQ National Market System 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. Investments in U.S. government
securities (other than short-term securities) are valued at the average of the
quoted bid and asked price in the over-the-counter market. Certain debt
securities may be valued each business day by an independent pricing service
("Service"). The use of a Service to ascertain values has been approved by the
Portfolio's Board of Trustees. Debt securities for which quoted bid prices, in
the judgment of a Service, are readily available and are 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 from dealers in such securities). Other debt
securities that are valued by the Service are carried at estimated market value
as determined by the Service, based on methods which include consideration of:
yields or prices of government 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 illiquid securities and certain
other debt securities, are valued at fair value as determined in good faith by
or under the direction of the Portfolio's Board of Trustees. Repurchase
agreements are carried at cost which approximates market value. Options are
valued at the last sale price unless the bid price is higher or the asked price
is lower, in which event such bid or asked price is used. Financial futures
contracts are valued at the settlement prices established each day by the boards
of trade or exchanges on which they are traded. Foreign securities are valued in
the currencies of the markets where they trade. Conversions to U.S. dollar
values occur in connection with each calculation of the International Fund's net
asset value per share.
PORTFOLIO MANAGEMENT
The trustees and officers of the Portfolio are named below. Information
about their principal occupations and certain other affiliations during the past
five years is also provided. The business address of each trustee and officer is
201 Park Avenue South, New York, New York 10003 unless otherwise noted. The
"Guardian Fund Complex" referred to in this biographical information is
comprised of (1) the Portfolio, (2) The Guardian Cash Fund, (3) The Guardian
Stock Fund, (4) The Guardian Bond Fund and (5) GBG Funds, Inc. (a series fund
that issues its shares in two series).
B-28
<PAGE>
<TABLE>
<CAPTION>
Name and Address Title Business History
---------------- ----- ----------------
<S> <C> <C>
CHARLES E. ALBERS (55) Executive Vice Senior Vice President, The Guardian Life Insurance Company of
President America 1/91 to present; Vice President, Equity Securities, The
Guardian Insurance & Annuity Company, Inc. Executive Vice
President, Guardian Asset Management Corporation and Guardian
Investor Services Corporation. Officer of four mutual funds
within the Guardian Fund Complex.
JOHN C. ANGLE (72)* Trustee Retired. Former Chairman of the Board and Chief Executive
3800 South 42nd Street Officer, The Guardian Life Insurance Company of America;
Lincoln, Nebraska Director 1/78-present. Director (Trustee) of The Guardian
Insurance &Annuity Company, Inc., Guardian Investor Services
Corporation 6/82-2/96. Director (Trustee) of five mutual funds
within the Guardian Fund Complex.
MICHELE S. BABAKIAN (40) Vice President Vice President, The Guardian Life Insurance Company of America
1/95-present; Second Vice President, Fixed-Income Securities
prior thereto. Assistant Vice President, The Guardian Insurance
& Annuity Company, Inc. Vice President, Guardian Investor
Services Corporation and Guardian Asset Management Corporation,
and three mutual funds within the Guardian Fund Complex.
JOSEPH A. CARUSO (44) Secretary Second Vice President and Corporate Secretary, The Guardian
Life Insurance Company of America, 1/95-present; Corporate
Secretary,10/92-12/94;Assistant Secretary, 1/91-10/92;Manager,
Board Relations, prior thereto. Secretary, The Guardian
Insurance & Annuity Company, Inc., Guardian Investor Services
Corporation, Guardian Asset Management Corporation, Guardian
Baillie Gifford Limited, and five mutual funds within the
Guardian Fund Complex.
FRANK J. FABOZZI (47) Trustee Adjunct Professor of Finance, School of Management--Yale
858 Tower View Circle University, 2/94-present; Visiting Professor of Finance and
New Hope, Pennsylvania Accounting, Sloan School of Management--Massachusetts
18938 Institute of Technology prior thereto. Editor, Journal
of Portfolio Management. Director (Trustee) of five mutual
funds within the Guardian Fund Complex. Director (Trustee) of
various closed-end investment companies sponsored by
Blackstone Financial Management.
ARTHUR V. FERRARA (65)* Trustee Retired. Chairman of the Board and Chief Executive Officer, The
70 Baldwin Farms South Guardian Life Insurance Company of America 1/93-12/95;
Greenwich, Connecticut President, Director and Chief Executive Officer prior thereto.
06831 Director (Trustee)of The Guardian Insurance & Annuity Company,
Inc., Guardian Investor Services Corporation, and five
mutual funds within the Guardian Fund Complex.
LEO R. FUTIA (76)* Trustee Retired. Former Chairman of The Board and Chief Executive
18 Interlaken Road Officer, The Guardian Life Insurance Company of America;
Greenwich, Connecticut 06830 Director 5/70-present. Director (Trustee) of The Guardian
Insurance & Annuity Company, Inc., Guardian Investor Services
Corporation and five mutual funds within the Guardian Fund
Complex. Director (Trustee) of various mutual funds sponsored
by Value Line, Inc.
</TABLE>
- -------------
* Trustee who is an " interested person " under the 1940 Act.
B-29
<PAGE>
<TABLE>
<CAPTION>
Name and Address Title Business History
---------------- ----- ----------------
<S> <C> <C>
ALEXANDER M. GRANT, JR. (46) Second Vice Assistant Vice President, Investments, The Guardian Life
President Insurance Company of America, 9/93 to present; Investment
Officer prior thereto. Officer of three mutual funds within the
Guardian Fund Complex.
WILLIAM W. HEWITT, JR. (67) Trustee Retired. Former Executive Vice President, Shearson Lehman
P.O. Box 2359 Brothers, Inc. Director (Trustee) of five mutual funds within
Princeton, New Jersey 08543 the Guardian Fund Complex. Director (Trustee) of various mutual
funds sponsored by Mitchell Hutchins Asset Management, Inc. and
Paine Webber, Inc.
THOMAS R. HICKEY, JR. (43) Vice President Vice President, Equity Operations, The Guardian Life Insurance
Company of America 3/92-present; Second Vice President and
Equity Counsel prior thereto. Vice President, Administration,
The Guardian Insurance & Annuity Company, Inc. Vice President,
Guardian Investor Services Corporation, and five mutual funds
within the Guardian Fund Complex.
JONATHAN C. JANKUS (49) Vice President Second Vice President, Investments, The Guardian Life Insurance
Company of America 3/95-present; Chief Investment
Strategist-Global Bonds, Barclays Investments 1/94-3/95; Senior
Vice President, Kidder Peabody & Co. 5/80-1/94. Vice President,
Guardian Asset Management Corporation.
FRANK J. JONES (57) President Executive Vice President and Chief Investment Officer, The
Guardian Life Insurance Company of America 1/94-present; Senior
Vice President and Chief Investment Officer 8/91-12/93. First
Vice President, Director of Global Fixed Income Research and
Economics, Merrill Lynch & Co. prior thereto. Senior Vice
President and Chief Investment Officer and Director, The
Guardian Insurance & Annuity Company, Inc. Director, Guardian
Investor Services Corporation and Guardian Baillie Gifford
Limited. Officer of three mutual funds within the Guardian Fund
Complex.
ANN T. KEARNEY (44) Controller Second Vice President, Group Pensions, The Guardian Life
Insurance Company of America 1/95-present; Assistant Vice
President and Equity Controller 6/94-12/94; Assistant
Controller prior thereto. Second Vice President of The Guardian
Insurance & Annuity Company. Inc. and Guardian Investor
Services Corporation. Controller of five mutual funds within
the Guardian Fund Complex.
SIDNEY I. LIRTZMAN (64) Director Professor of Management 9/67-present and Acting Dean of the
38 West 26th Street School of Business Management 2/95-present, City University of
New York, New York 10010 New York-Baruch College. President, Fairfield Consulting
Associates, Inc. Director (Trustee) of five mutual funds within
the Guardian Fund Complex.
R. ROBIN MENZIES (43) Vice President Partner, Baillie Gifford & Co. 4/81-present. Director, Baillie
c/o Baillie Gifford Overseas Gifford Overseas Limited 11/90-present. Director, Guardian
Limited Baillie Gifford Limited 11/90-present.
1 Rutland Court
Edingburgh, EH3 8EY,
Scotland
</TABLE>
B-30
<PAGE>
<TABLE>
<CAPTION>
Name and Address Title Business History
---------------- ----- ----------------
<S> <C> <C>
NIKOLAOS S. MONOYIOS (46) Vice President Vice President, Equity Securities, The Guardian Life Insurance
Company of America. Vice President, Guardian Asset Management
Corporation, Guardian Investor Services Corporation. Officer of
two mutual funds within the Guardian Fund Complex.
JOHN B. MURPHY (51) Second Vice Second Vice President, Equity Securities, The Guardian Life
President Insurance Company of America. Officer of two mutual funds
within the Guardian Fund Complex.
FRANK L. PEPE (53) Treasurer Vice President and Equity Controller, The Guardian Life
Insurance Company of America since 1/96; Second Vice President
and Equity Controller prior thereto. Vice President and
Controller, The Guardian Insurance & Annuity Company, Inc. and
Guardian Investor Services Corporation. Controller, Guardian
Asset Management Corporation Officer of five mutual funds
within the Guardian Fund Complex.
RICHARD T. POTTER, JR. (41) Counsel Vice President and Equity Counsel, The Guardian Life Insurance
Company of America 1/96-present; Second Vice President and
Equity Counsel 1/93-12/95; Counsel 1/92 - 12/92. Vice
President-Counsel, Home Life Insurance Company prior thereto.
Counsel, The Guardian Insurance & Annuity Company, Inc.,
Guardian Investor Services Corporation, Guardian Asset
Management Corporation and five mutual funds within the
Guardian Fund Complex.
JOSEPH D. SARGENT* (58) Trustee President, Chief Executive Officer and Director, The Guardian
Life Insurance Company of America, since 1/96; President and
Director 1/93 to 12/95; Executivc Vice President prior thereto.
Director (Trustee) of The Guardian Insurance & Annuity Company,
Inc., Guardian Investor Services Corporation and five mutual
funds within the Guardian Fund Complex.
CARL W. SCHAFER (60) Trustee President, Atlantic Foundation (charitable foundation
P.O. Box 1164 supporting mainly oceanographic exploration and research).
Princeton, New Jersey 08542 Director of Roadway Express (trucking), Evans Systems, Inc. (a
motor fuels, convenience store and diversified company), Hidden
Lake Gold Mines Ltd. (gold mining), Electronic Clearing House,
Inc. (financial transactions processing), Wainoco Oil
Corporation and NutraGeutrics Inc. (biotechnology). Chairman of
the Investment Advisory Committee of the Howard Hughes Medical
Institute 1985-1992. Director (Trustee) of five mutual funds
within the Guardian Fund Complex. Director (Trustee) of various
mutual funds sponsored by Mitchell Hutchins Asset Management,
Inc. and Paine Webber, Inc.
ROBERT G. SMITH (63) Trustee President, Smith Affiliated Capital Corp. 4/82-present.
132 East 72nd Street Director (Trustee) of five mutual funds within the Guardian
New York, New York 10021 Fund Complex.
</TABLE>
B-31
<PAGE>
The Portfolio pays the Trustees who are not "interested persons" of the
Portfolio an annual retainer fee of $7,000 and a per meeting fee of $3,500.
Trustees who are "interested persons" of the Portfolio, except Mr. Sargent,
receive the same fees, but they are paid by GISC. Mr. Sargent receives no
compensation for his trusteeship. The officers of the Portfolio are employees of
Guardian Life; they receive no compensation from the Portfolio.
Each Trustee is also a director of The Guardian Stock Fund, Inc., The
Guardian Bond Fund, Inc., The Guardian Cash Fund Inc. and GBG Funds Inc., a
series fund consisting of Baillie Gifford International Fund and Baillie Gifford
Emerging Markets Fund. The Portfolio and the other funds named in this paragraph
are a "Fund Complex" for purposes of the federal securities laws. The following
table provides information about the compensation paid by the Portfolio and the
Fund Complex to the Portfolio's Trustees during the year ended December 31,
1995.
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
Compensation Table*
- -----------------------------------------------------------------------------------------------------------------------
Aggregate Accrued Pension or Estimated Annual Total Compensation from the
Compensation Retirement Benefits Benefits Upon Portfolio and Other Members
Name and Title from the Portfolio** Paid by the Portfolio Retirement of the Fund Complex**
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Frank J. Fabozzi, $22,800 N/A N/A $32,000
Trustee
- -----------------------------------------------------------------------------------------------------------------------
William W. Hewitt, Jr. $22,800 N/A N/A $35,300
Trustee
- -----------------------------------------------------------------------------------------------------------------------
Sidney I. Lirtzman $22,800 N/A N/A $35,300
Trustee
- -----------------------------------------------------------------------------------------------------------------------
Carl W. Schafer+ $ 3,000 N/A N/A $ 3,000
Trustee
- -----------------------------------------------------------------------------------------------------------------------
Robert G. Smith $22,800 N/A N/A $35,300
Trustee
- -----------------------------------------------------------------------------------------------------------------------
* Trustees who are "interested persons" of the Portfolio are not compensated
by the Portfolio, so information about their compensation is not included
in this table.
** Includes compensation paid to attend meetings of the Board's Audit
Committee.
+ Mr. Schafer became a Trustee of the Portfolio on December 14, 1995.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
As of February 29, 1996, the number of shares of each Fund owned by all
officers and trustees of the Portfolio in the aggregate totalled less than 1% of
the outstanding shares of each Fund.
B-32
<PAGE>
PORTFOLIO AFFILIATES AND PRINCIPAL HOLDERS OF FUND SHARES
Guardian Entities. Guardian Life, 201 Park Avenue South, New York, New York
10003, is the parent company and sole stockholder of GIAC. GIAC, also located at
201 Park Avenue South, New York, New York 10003, is the parent and sole
stockholder of GISC.
The Park Avenue Fund. As of February 1, 1996, separate accounts established
by GIAC held the following positions in the Park Avenue Fund's shares:
Number Percentage
of of Total Shares
Owner of Record Shares Outstanding
--------------- ------ -----------
The Guardian/Value Line Separate Account 4,691,034 16.11%
The Guardian Variable Account 1 1,250,894 4.30%
The Guardian Variable Account 2 364,000 1.25%
Owners of variable annuity contracts issued by GIAC have the beneficial
interest in these Park Avenue Fund shares. At any shareholders meetings where
shareholders of the Park Avenue Fund are entitled to vote, GIAC, as the owner of
record, votes the Park Avenue Fund shares which are attributable to variable
annuity contracts in accordance with voting instructions received from
contractowners.
The Cash Fund. As of February 1, 1996, GIAC and GISC each owned shares of
the Cash Fund for their own accounts as follows: GIAC -- 2,644,849 shares
(3.9%); GISC -- 4,808,387 shares (7.11%). At any shareholders meeting(s), GIAC
and GISC are expected to vote their respective shares of the Portfolio Funds FOR
proposals presented by Management.
The International, Bond, Tax-Exempt and Asset Allocation Funds. As of February
29, 1996, Guardian Life was in control of the Bond Fund and the Tax-Exempt Fund,
and owned more than 5% of the outstanding shares issued by the International
Fund and the Asset Allocation Fund. Guardian Life invested in these Funds in
1993 to provide them with sufficient capital to commence their operations and
acquire securities. Guardian Life's positions in these Funds as of February 1,
1996 were:
Number Percentage
of of Total Shares
Fund Shares Outstanding
---- ------ -----------
International Fund 1,016,101 30.81%
Bond Fund 1,831,911 32.94%
Tax-Exempt Fund 1,161,265 64.20%
Asset Allocation Fund 1,123,055 19.32%
At any shareholders meeting where shareholders of these Funds are entitled to
vote, Guardian Life will vote its shares FOR proposals presented by Management.
Except as disclosed above, Management of the Portfolio does not know of any
other person who owned beneficially 5% or more of the shares of any of the
Portfolio Funds as of February 29, 1996.
The International Fund, Bond Fund, Tax-Exempt Fund and Asset Allocation
Fund incurred expenses in connection with their organization in the amounts of
$15,218, $16,418, $16,418 and $16,418, respectively. GISC advanced these
expenses to the Funds; they included legal and auditing fees, registration fees
and preparation and printing costs for the registration statement and other
documents. Each of these Portfolio Funds has reimbursed GISC for its
organizational expenses, which are being amortized on a straight-line basis over
a five-year period.
TAXES
For federal income tax purposes, each Fund is treated as a separate entity.
Each Fund intends to continue to qualify to be taxed as a regulated investment
company under the U.S. Internal Revenue Code of 1986, as amended (the "Code").
B-33
<PAGE>
To qualify as a regulated investment company, a Fund must derive less than 30%
of its gross income in each taxable year from gains (without deduction for
losses) arising from the sale or other disposition of securities held for less
than three months. In order to meet this 30% requirement, a Fund may be required
to defer disposing of certain securities beyond the time when it might otherwise
be advantageous to do so and may be restricted in its options, futures and
foreign currency transactions. So long as a Fund qualifies as a regulated
investment company and complies with the provisions of the Code pertaining to
regulated investment companies which distribute substantially all of their net
income (both net ordinary income and net capital gains) to their shareholders,
the Fund will not incur a tax liability on that portion of its net ordinary
income and net realized capital gains which have been distributed to its
shareholders. The Code imposes a 4% nondeductible excise tax on each regulated
investment company with regard to the amount, if any, by which such investment
company does not meet the distribution requirements specified in the Code.
Accordingly, each Fund intends to distribute all or substantially all of its net
investment income and net capital gains.
Options, forward contracts, financial futures contracts and foreign
currency transactions entered into by a Fund are subject to special tax rules.
These rules may accelerate income to the Fund, defer Fund losses, cause
adjustments in the holding periods of Fund securities, convert capital gain into
ordinary income and convert short-term capital losses into long-term capital
losses. As a result, these rules could affect the amount, timing and character
of Fund distributions.
Income received by a Fund from sources within various foreign countries
will generally be subject to foreign income taxes withheld at the source. If the
United States has entered into a tax treaty with the country in which the payor
is a resident, foreign tax withholding from dividends and interest is typically
set at a rate between 10% and 15%. If the United States has not entered into a
tax treaty with the country in which the payor is a resident, such withholding
may be as high as 30% to 35%. Taxes paid to foreign governments will reduce a
Fund's return on its investments. A shareholder's pro rata share of foreign
income taxes paid by the Fund is treated as taxable income to that shareholder.
Accordingly, the Portfolio, on behalf of the International Fund, has made an
election under Section 853 of the Code so that the International Fund's
shareholders can claim a credit or deduction on their income tax returns for
their pro rata portions of the International Fund's foreign income taxes.
Shareholders who claim a credit are required to treat their pro rata portions of
such income taxes as amounts distributed to them. Under the Code, no deduction
for foreign taxes may be claimed by individual shareholders who do not elect to
itemize deductions on their federal income tax returns.
Shareholders of a Fund may exchange their shares for shares of another Fund
within the Portfolio (the "reinvested shares"). If a shareholder (other than a
tax-exempt entity) makes such exchanges, the shareholder will recognize a
capital gain or loss for federal income tax purposes measured by the difference
between the value of the reinvested shares and the basis of the exchanged
shares. Upon the exchange of shares which were purchased subject to a sales
charge and held less than 91 days, the lesser of (1) the sales charge incurred
on the exchanged shares or (2) the sales charge waived on the reinvested shares
is included in the basis of the reinvested shares and is not included in the
basis of the exchanged shares. If a shareholder realizes a loss on the
redemption of Fund shares and reinvests in shares of the same Fund within the
period beginning 30 days before and ending 30 days after the redemption, the
transactions may be subject to the wash sale rules resulting in a disallowance
of such loss for federal income tax purposes. Any loss recognized on the
disposition of Fund shares held for six months or less will be treated as
long-term capital loss to the extent that the shareholder has received any
long-term capital gain distributions on such shares. In addition, if a
shareholder sells shares that have been held for six months or less at a loss,
the loss will be disallowed to the extent of any exempt-interest dividends
received by the shareholder on such shares.
Interest on indebtedness that is incurred to purchase or carry shares of a
mutual fund which distributes exempt-interest dividends during the year is not
deductible for federal income tax purposes. Further, the Tax-Exempt Fund may not
be an appropriate investment for persons who are "substantial users" of
facilities financed by industrial development bonds held by the Fund or who are
"related persons" to such users; such persons should consult their tax advisers
before investing in the Tax-Exempt Fund.
The "Superfund Act of 1986" (the "Superfund Act"), imposes a separate tax
on corporations at a rate of 0.12% of the excess of such corporation's "modified
alternative minimum taxable income" over $2,000,000. A portion of tax-exempt
interest, including exempt interest from the Tax-Exempt Fund, may be includible
in modified alternative minimum taxable income. Corporate shareholders are
advised to consult their tax advisers with respect to the consequences of the
Superfund Act.
B-34
<PAGE>
If the Portfolio establishes additional series funds, each such series will
be treated as a separate entity for federal income tax purposes.
The discussions of "Taxes" in the Prospectus and this Statement of
Additional Information are general and abbreviated. Interpretations of the
Code's provisions and U.S. Treasury regulations can change at any time.
Additionally, no attempt has been made to describe any state, local or foreign
tax consequences of purchasing, owning and redeeming shares of the Portfolio
Funds.
SHAREHOLDER VOTING RIGHTS
The Portfolio generally is not required to hold shareholder meetings. Under
the Portfolio's Amended and Restated Declaration of Trust, however, shareholder
meetings will be held for all shareholders or just the shareholders of affected
Funds, as the case may be, in connection with the following matters: (1) the
election or removal of trustees if a meeting is called for such purpose; (2) the
adoption of any contract for which shareholder approval is required by the 1940
Act; (3) termination of the Portfolio or any Fund to the extent and as provided
in the Amended and Restated Declaration of Trust; (4) the amendment of the
Amended and Restated Declaration of Trust to the extent and as provided in the
Amended and Restated Declaration of Trust; (5) to determine whether a court
action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Portfolio or any Fund or the
shareholders, to the same extent as the shareholders of a Massachusetts business
corporation; and (6) such additional matters as may be required by law, the
Amended and Restated Declaration of Trust, the By-Laws of the Portfolio, any
registration of the Portfolio with the SEC or any state, or as the trustees may
consider necessary or desirable. Shareholders also would be entitled to vote
upon changes in fundamental investment objectives, policies or restrictions
which pertain to any Fund(s) in which they have a voting interest.
Each trustee serves until the earlier of: (1) the next meeting of
shareholders, if any, called for the purpose of electing trustees and until the
election and qualification of his or her successor; or (2) such trustee's death,
resignation, retirement or removal by a two-thirds vote of the trustees or by a
majority vote of the outstanding shares of the Portfolio. In accordance with the
1940 Act: (1) the Portfolio will hold a shareholders meeting for the election of
trustees at such time as less than a majority of the trustees have been elected
by shareholders; and (2) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the trustees have been elected by shareholders. In that
event, the vacancy will be filled only by a vote of shareholders.
A special meeting of the shareholders shall be called by the trustees for
the purpose of removing a trustee upon the written request of shareholders
owning at least 10% of the outstanding shares entitled to vote at the meeting.
Whenever ten or more persons who have been shareholders of record for at least
six months preceding the date of application, and who hold in the aggregate
either shares having a net asset value of at least $25,000 or at least one
percent of the outstanding shares, whichever is less, wish to communicate with
other shareholders for the purpose of obtaining signatures to request a meeting,
the trustees shall either afford the applicants access to a list of the names
and addresses of all shareholders of record or mail the communication to the
Portfolio shareholders at the applicants' cost.
TRUSTEE LIABILITY
The Amended and Restated Declaration of Trust provides that the trustees
will not be liable for errors of judgment or mistakes of fact or law. However,
nothing in the Amended and Restated Declaration of Trust protects a trustee
against any liability to which the trustee would otherwise be subject by reason
of willful malfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his or her office. The By-laws of the
Portfolio provide for indemnification by the Portfolio of the trustees and the
officers of the Portfolio except with respect to any matter as to which any such
person did not act in good faith in the belief that his or her action was in, or
not opposed to, the best interests of the Portfolio. Such person may not be
indemnified against any liability to the Portfolio or the Portfolio's
shareholders to which he or she would otherwise be subject by reason of willful
malfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
B-35
<PAGE>
CUSTODIAN
State Street Bank and Trust Company ("State Street Bank"), Custody
Division, 1776 Heritage Drive, North Quincy, Massachusetts 02171, is the
custodian of the Portfolio's assets.
Portfolio securities purchased for a Fund outside of the U.S. are cleared
through foreign depositories and are maintained in the custody of foreign banks
and trust companies which are members of State Street Bank's Global Custody
Network. State Street Bank and each of the foreign custodial institutions
holding portfolio securities of a Fund have been approved by the Board in
accordance with regulations under the 1940 Act.
The Board reviews, at least annually, whether it is in the best interest of
a Fund and its shareholders to maintain Fund assets in each custodial
institution. However, with respect to foreign custodians, there can be no
assurance that a Fund, and the value of its shares, will not be adversely
affected by acts of foreign governments, financial or operational difficulties
of the foreign custodians, difficulties and costs of obtaining jurisdiction
over, or enforcing judgment against, the foreign custodians, or application of
foreign law to a Fund's foreign custodial arrangements. Accordingly, an investor
should recognize that the noninvestment risks associated with holding assets
abroad may be greater than those associated with investing in the U.S.
State Street Bank plays no part in formulating the investment policies of
the Funds or in determining which portfolio securities are to be purchased or
sold by the Funds.
TRANSFER AGENT
National Financial Data Services ("NFDS"), P.O. Box 419611, Kansas City,
Missouri 64141-6611, is the Portfolio's transfer agent and dividend paying
agent. NFDS issues and redeems shares of each Fund and distributes dividends to
each Fund's shareholder accounts.
NFDS plays no part in formulating the investment policies of the Funds or
in determining which portfolio securities are to be purchased or sold by the
Funds.
FINANCIAL STATEMENTS
The Portfolio's financial statements appear in the 1995 Annual Report to
Park Avenue Portfolio shareholders. The report of Ernst & Young LLP, independent
auditors of the Portfolio, on such financial statements also appears in the 1995
Annual Report. The Report to Park Avenue Portfolio Shareholders is incorporated
by reference into this Statement of Additional Information. A free copy of the
Report accompanies this Statement of Additional Information.
LEGAL OPINIONS
The legality of the shares described in the Prospectus has been passed upon
by Richard T. Potter, Jr., Counsel of the Portfolio. Federal securities law
matters relating to the Portfolio have been passed upon by the law firm of
Vedder, Price, Kaufman & Kammholz of Chicago, Illinois.
INDEPENDENT AUDITORS
The Portfolio's independent auditors are Ernst & Young LLP, 787 Seventh
Avenue, New York, New York 10019. Ernst & Young LLP audits and reports on the
annual financial statements of the Portfolio which appear in the Annual Report
to Shareholders for the year ended December 31, 1995. That Annual Report is
incorporated by reference into this Statement of Additional Information.
B-36
<PAGE>
APPENDIX
DESCRIPTIONS OF TYPES OF DEBT OBLIGATIONS
U.S. Government Agency and Instrumentality Securities: U.S. government
agency securities are debt obligations issued by agencies or authorities
controlled by and acting as instrumentalities of the U.S. government established
under authority granted by Congress. U.S. government agency obligations include,
but are not limited to, those issued by the Bank for Co-operatives, Federal Home
Loan Banks, Federal Intermediate Credit Banks, and the Federal National Mortgage
Association. U.S. government instrumentality obligations include, but are not
limited to, those issued by the Export-Import Bank and Farmers Home
Administration. Some obligations issued or guaranteed by U.S. government
agencies and instrumentalities are supported by the full faith and credit of the
U.S. Treasury; others, by the right of the issuer to borrow from the Treasury;
others by discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and others only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
government will provide financial support to such U.S. government sponsored
agencies or instrumentalities in the future, since it is not obligated to do so
by law.
U.S. Treasury Securities: U.S. Treasury securities consist of Treasury
Bills, Treasury Notes and Treasury Bonds. These securities are each backed by
the full faith and credit of the U.S. government and differ in their interest
rates, maturities, and dates of issuance. U.S. Treasury Bills are issued with
maturities of up to one year. U.S. Treasury Notes may be issued with an original
maturity of not less than one year and not more than 10 years. U.S. Treasury
Bonds may be issued with any maturity, but generally have original maturities of
over 10 years.
Certificates of Deposit: Certificates of deposit are negotiable receipts
issued by a bank or savings and loan association in exchange for the deposit of
funds. A certificate of deposit earns a specified rate of return over a definite
period of time. Normally a certificate can be traded in a secondary market prior
to maturity. Eurodollar certificates of deposit are U.S. dollar-denominated
deposits in banks outside the U.S. The bank may be a foreign branch of a U.S.
bank. Eurodollar deposits in foreign branches of U.S. banks are the legal
equivalent of domestic deposits, but are not covered by FDIC insurance. Yankee
certificates of deposit are U.S. dollar-denominated deposits issued and payable
by U.S. branches of foreign banks.
Commercial Paper: Commercial paper is generally defined as unsecured
short-term notes issued in bearer form by large, well-known corporations and
finance companies. Maturities on commercial paper range from a few days to nine
months. Commercial paper is also sold on a discount basis.
Bankers Acceptances: Bankers acceptances generally arise from short-term
credit arrangements designed to enable businesses to obtain funds in order to
finance commercial transactions. Generally, an acceptance is a time draft drawn
on a bank by an exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then "accepted" by a bank that, in
effect, unconditionally guarantees to pay the face value of the instrument on
its maturity date.
Repurchase Agreements: Repurchase agreements are instruments by which a
Fund purchases a security and obtains a simultaneous commitment from the seller
(a domestic bank or broker-dealer) to repurchase the security at an agreed upon
price and date. The resale price is in excess of the purchase price and reflects
an agreed upon market rate unrelated to the coupon rate on the purchased
security. Such transactions afford an opportunity for a Fund to invest
temporarily available cash and earn a return that is insulated from
market fluctuations during the term of the agreement. The risk to a Fund is
limited to the risk that the seller will be unable to pay the agreed upon sum
upon the delivery date. Repurchase agreements are collateralized by cash or the
securities purchased in connection with the agreement. In the event a selling
party to an agreement is unable to repurchase the securities pursuant to that
agreement, a Fund will liquidate the collateral held and thus recover the
proceeds loaned under the agreement. The loss to a Fund will be the difference
between the proceeds from the sale and the repurchase price. Investments in
repurchase agreements will be limited to transactions with financial
institutions believed by the Board of Trustees of the Portfolio to present
minimal credit risks.
Corporate Obligations: Such instruments include bonds and notes issued by
U.S. and foreign corporations in order to finance longer term credit needs.
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DESCRIPTION OF LONG TERM DEBT RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Aaa. Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present which make the long-term risk appear somewhat greater than the "Aaa"
securities.
A. Bonds which are rated "A" possess many favorable investment attributes
and are considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated "Baa" are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from "Aa" through "B" in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
STANDARD & POOR'S RATINGS GROUP ("STANDARD & POOR'S")
AAA. Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated "AA" has a very strong capacity to pay interest and repay
principal, and differs from the highest rated issues only in small degree.
A. Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
With respect to Municipal Obligations, debt rated "A" differs from the two
higher ratings because:
General Obligation Bonds -- There is some weakness in the local economic
base, debt burden, balance between revenues and expenditures, or quality of
management. Under certain adverse circumstances, any one such weakness might
impair the ability of the issuer to meet debt obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
B-38
<PAGE>
General Obligation Bonds -- Under certain adverse conditions, weakness in
the local economic base, debt burden, balance between revenues and expenditures,
or quality of management could contribute to a lesser capacity for payment of
debt service. The difference between "A" and "BBB" rating is that the latter
shows more than one fundamental weakness, or one very substantial fundamental
weakness, whereas the former shows only one deficiency among the factors
considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow possibly being
subject to erosion over time. Basic security provisions are no more than
adequate. Management performance could be stronger.
BB and B. Debt rated "BB" or "B" is regarded, on balance, as predominantly
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates a lower degree of
speculation than "B." While such debt will likely have some quality and
protective characteristics, those characteristics can be outweighed by large
uncertainties or major exposures to adverse conditions.
Note: Standard & Poor's ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within the major categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S
P-1 (Prime-1). Issuers (or supporting institutions) rated P-1 have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity.
P-2 (Prime-2). Issuers (or supporting institutions) rated P-2 have a strong
ability for repayment of senior short-term obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S
A-1. Issues in the A-1 category, which is the highest category, have a very
strong degree of safety regarding timely payment. Those issues determined to
possess extremely strong safety characteristics are denoted with a plus (+) sign
designation.
A-2. Capacity for timely payment on issues rated A-2 is strong. However,
the relative degree of safety is not as high as for issues designated `A-1'.
DUFF & PHELPS, INC.
Duff 1+ Issues rated Duff 1+ have the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or ready access
to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
Duff 1 Issues rated Duff 1 have very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1- Issues rated Duff 1- have high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
Duff 2 Issues rated Duff 2 have good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
B-39
<PAGE>
FITCH INVESTORS SERVICES, INC.
F-1+ Issues rated F-1+ have exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
F-1 Issues rated F-1 have very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated `F-1+'.
F-2 Issues rated F-2 have good credit quality. Issues carrying this rating
have a satisfactory degree of assurance for timely payments, but the margin of
safety is not as great as the `F-1+' and `F-1' ratings.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends forexample, may be less important over the short run. A
short-term rating may also be assigned on an issue having a demand feature. Such
ratings will be designated as VMIG or, if the demand feature is not rated, as
NR. Short-term ratings on issues with demand features are differentiated by the
use of the VMIG symbol to reflect such characteristics as payment upon periodic
demand, rather than fixed maturity dates, and payment relying on external
liquidity. Additionally, investors should be alert to the fact that the source
of payment may be limited to the external liquidity with no or limited legal
recourse to the issuer in the event the demand is not met. MIG and VMIG ratings
indicate that the rated securities are investment grade.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades.Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
STANDARD & POOR'S
SP-1. The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
SP-2. The issuers of these municipal notes exhibit satisfactory capacity to
pay principal and interest.
USING THE RATINGS
Ratings represent each rating organization's opinion as to the quality of
the securities that they undertake to rate. It should be emphasized that ratings
are relative and subjective, and are not absolute standards of quality.
Consequently, securities with the same maturity, interest rate and rating may
have different market prices or yields. Subsequent to its purchase by a Fund, an
issue of securities may cease to be rated or its rating may be reduced. The
investment adviser will consider such an event in determining whether a Fund
should continue to hold the security. Although ratings may be an initial
criterion for selection of portfolio investments, the investment adviser also
performs its own credit analysis with respect to the securities it purchases and
holds for a Fund.
B-40
