As filed with the Securities and Exchange Commission on November 13, 1997.
Registration Nos. 33-37883
811-6231
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|
POST-EFFECTIVE AMENDMENT No. 11 |X|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
AMENDMENT No. 13 |X|
(Check appropriate box or boxes)
------------------------
GIAC FUNDS, INC.
Formerly
GBG FUNDS, INC.
formerly
BAILLIE GIFFORD INTERNATIONAL FUND, INC
(Exact Name of Registrant as Specified in Charter)
C/O THE GUARDIAN INSURANCE & ANNUITY COMPANY, INC.
201 PARK AVENUE SOUTH, NEW YORK, NEW YORK 10003
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (212) 598-8259
------------------------
Copy to:
Richard T. Potter, Jr., Esq. Cathy G. O'Kelly, Esq.
c/o The Guardian Insurance Vedder, Price, Kaufman & Kammholz
& Annuity Company, Inc 222 North LaSalle Street
201 Park Avenue South Chicago, Illinois 60601
New York, New York 10003
(Name and Address of Agent for Service)
------------------------
It is proposed that this filing will become effective (check appropriate
box):
|X| immediately upon filing pursuant to paragraph (b) of Rule 485
|_| on (date) pursuant to paragraph (b) of Rule 485
|_| 60 days after filing pursuant to paragraph (a)(1) of Rule 485
|_| on (date) pursuant to paragraph (a)(1) of Rule 485
|_| 75 days after filing pursuant to paragraph (a)(2) of Rule 485
|_| on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
|_| This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
------------------------
The Registrant has registered an indefinite number of its securities under
the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. The notice required by such rule for the Registrant's most recent
fiscal year was filed on February 26, 1997.
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<PAGE>
BAILLIE GIFFORD INTERNATIONAL FUND
BAILLIE GIFFORD EMERGING MARKETS FUND
THE GUARDIAN SMALL CAP STOCK FUND
Cross Reference Sheet
(as required by Rule 495 under the Securities Act of 1933)
<TABLE>
<CAPTION>
Form N-1A Item No. Location in the Baillie Gifford International Fund
and Baillie Gifford Emerging Markets Fund Prospectus
<S> <C> <C>
Part A
Item 1. Cover Page.................................................... Cover Page
Item 2. Synopsis...................................................... Summary of the Prospectus
Item 3. Condensed Financial Information............................... Financial Highlights
Item 4. General Description of Registrant............................. Investment Objective and Policies; Risk
Considerations; Special Investment
Techniques; Miscellaneous Information
Item 5. Management of the Fund........................................ Structure and Management of the Fund
Item 5A. Management's Discussion of Fund Performance................... Performance Results
Item 6. Capital Stock and Other Securities............................ Dividends, Distributions and Taxes;
Miscellaneous Information
Item 7. Purchase of Securities Being Offered.......................... Purchase and Redemption of Shares;
Calculation of Net Asset Value
Item 8. Redemption or Repurchase...................................... Purchase and Redemption of Shares
Item 9. Pending Legal Proceedings..................................... Not Applicable
<CAPTION>
Location in the Guardian Small Cap Stock Fund
Prospectus
<S> <C>
Part A
Item 1. Cover Page.................................................... Cover Page
Item 2. Synopsis...................................................... Summary of the Prospectus
Item 3. Condensed Financial Information............................... N/A
Item 4. General Description of Registrant............................. Investment Objective and Policies; Risk Considerations;
Miscellaneous Information
Item 5. Management of the Fund........................................ Fund Management and the Investment Adviser
Item 5A. Management's Discussion of Fund Performance................... Performance Results
Item 6. Capital Stock and Other Securities............................ Dividends, Distributions and Taxes; Miscellaneous
Information
Item 7. Purchase of Securities Being Offered.......................... Purchase and Redemption of Shares; Calculation of Net
Asset Value
Item 8. Redemption or Repurchase...................................... Purchase and Redemption of Shares
Item 9. Pending Legal Proceedings..................................... Not Applicable
Part B
<CAPTION>
<S> <C> <C>
Item 10. Cover Page.................................................... Cover Page
Item 11. Table of Contents............................................. Table of Contents
Item 12. General Information and History............................... Not Applicable
Item 13. Investment Objectives and Policies............................ Investment Restrictions; Special
Investment Techniques - International Fund and
Emerging Markets Fund; Special Investment Techniques-
International Fund, Emerging Markets Fund and
Small Cap Stock Fund
Item 14. Management of the Registrant.................................. Fund Management
Item 15. Control Persons and Principal Holders of Securities........... GIAC and Other Fund Affiliates
Item 16. Investment Advisory and Other Services........................ Investment Manager, Sub-Investment
Manager and Distributor; Custodian
and Transfer Agent; Independent
Auditors and Financial Statements
Item 17. Brokerage Allocation and Other Practices...................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities............................ Fund Capitalization and Expenses
Item 19. Purchase, Redemption and Pricing of Securities Being Offered.. Not Applicable
Item 20. Tax Status.................................................... Taxes
Item 21. Underwriters.................................................. Investment Manager, Sub-Investment
Manager and Distributor
Item 22. Calculation of Performance Data............................... Performance Results
Item 23. Financial Statements.......................................... Independent Auditors and Financial
Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration Statement.
<PAGE>
The Guardian Small Cap Stock Fund
Supplement dated November 13, 1997
to Prospectus dated May 1, 1997
Financial Highlights
The following table provides information about the financial history of The
Guardian Small Cap Stock Fund (the "Small Cap Fund"). It is based on a single
share of the Small Cap Fund outstanding for the period ended September 30, 1997.
The table is part of the Small Cap Fund's financial statements for the period
ended September 30, 1997, included in the Statement of Additional Information.
The Statement of Additional Information is incorporated by reference in the
Prospectus. The information in the table is unaudited.
================================================================================
Period from
April 2,
1997+ to
September 30, 1997
- --------------------------------------------------------------------------------
Net asset value, beginning of period $ 10.00
- --------------------------------------------------------------------------------
Income from investment operations
Net investment income/(loss) 0.02
Net realized and unrealized gain/(loss)
on investments 4.21
- --------------------------------------------------------------------------------
Net increase/(decrease)
from investment operations 4.23
- --------------------------------------------------------------------------------
Distributions to shareholders
Dividends from net investment income --
Distributions in excess of net investment income --
Distributions from net realized gain on investments --
- --------------------------------------------------------------------------------
Net asset value, end of period $ 14.23
- --------------------------------------------------------------------------------
Total return* 17.60%
================================================================================
Ratios/supplemental data:
Net assets, end of period (000's omitted) $ 62,122
Ratio of expenses to average net assets 0.98%(a)
Ratio of net investment income to average
net assets 0.54%(a)
Portfolio turnover 11%
Average rate of commissions paid $ 0.039
================================================================================
- ----------
+ Commencement of operations.
* Total returns do not reflect the effects of charges deducted pursuant to
the terms of variable contracts issued by The Guardian Insurance & Annuity
Company, Inc. Inclusion of such charges would reduce the total return for
the period shown.
(a) Annualized.
<PAGE>
The following documents are hereby incorporated by reference into this
Post-Effective Amendment to the Registration Statement of GIAC Funds, Inc.:
1. The current prospectus, dated May 1, 1997, of each of Baillie Gifford
International Fund and Baillie Gifford Emerging Markets Fund; and
2. The current prospectus, dated May 1, 1997, of The Guardian Small Cap
Stock Fund.
<PAGE>
BAILLIE GIFFORD INTERNATIONAL FUND
BAILLIE GIFFORD EMERGING MARKETS FUND
THE GUARDIAN SMALL CAP STOCK FUND
------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
as supplemented to November 13, 1997
------------
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus of Baillie Gifford International Fund
and Baillie Gifford Emerging Markets Fund and the Prospectus of The Guardian
Small Cap Stock Fund dated May 1, 1997. The Funds are diversified series funds
of GIAC Funds, Inc. (the "Company"). The series funds are referred to in this
Statement of Additional Information as the "Funds" and each separately as a
"Fund". A free copy of the Prospectus may be obtained by writing to the Fund,
c/o The Guardian Insurance & Annuity Company, Inc., 201 Park Avenue South, New
York, New York 10003 or by telephoning 1-800-221-3253. Please retain this
document for future reference.
TABLE OF CONTENTS
Page
----
Investment Restrictions............................................ B-2
Investment Objective and Policies.................................. B-5
Special Investment Techniques - International Fund
and Emerging Markets Fund........................................ B-5
Special Investment Techniques - International Fund,
Emerging Markets Fund and Small Cap Stock Fund................... B-10
Portfolio Transactions and Brokerage............................... B-10
Company Management................................................. B-12
Investment Advisers, Sub-Investment Adviser and Distributor........ B-15
GIAC and Other Fund Affiliates..................................... B-18
Taxes.............................................................. B-18
Performance Results................................................ B-19
Fund Capitalization and Expenses................................... B-21
Purchase and Redemption of Shares.................................. B-21
Custodian and Transfer Agent....................................... B-22
Legal Opinion...................................................... B-22
Independent Auditors and Financial Statements...................... B-22
<PAGE>
INVESTMENT RESTRICTIONS
The International Fund has adopted the following investment restrictions
which cannot be changed without the approval of the holders of a majority of the
outstanding shares of the Fund. As defined in 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 (a) 67% or more of
the shares of the Fund present at a meeting where more than 50% of the
outstanding voting shares are present in person or by proxy, or (b) more than
50% of the outstanding voting shares of the Fund. The investment restrictions of
the International Fund listed below have also been adopted by the Emerging
Markets Fund. Under the 1940 Act, certain investment restrictions for the
Emerging Markets Fund can only be changed with the approval of the holders of a
majority of the outstanding shares of the Fund. These restrictions are
designated by an asterisk. The other investment restrictions of the Emerging
Markets Fund are non-fundamental policies which can be changed with respect to
the Fund with the approval of a majority of the Board of Directors and without
shareholder approval. The Small Cap Stock Fund has also adopted certain
investment restrictions some of which can only be changed with the approval of
the holders of a majority of the outstanding shares of the Fund as indicated
below, and the remainder of which are non-fundamental. All percentage
restrictions on investments apply at the time of the making of the investment
and shall not be considered to violate the limitations unless, immediately after
or as a result of the investment, an excess or deficiency of the restrictions
occurs. A later increase or decrease beyond a specified limit that results from
a change in value or net assets shall not constitute a violation of the
applicable restriction.
The International Fund and the Emerging Markets Fund
The following investment restrictions provide that the International Fund
and the Emerging Markets 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 a 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 the Fund's
total assets, and then only to secure borrowings effected within the above
restriction. Neither the deposit in escrow of underlying securities in
connection with the writing of call options, nor the deposit in escrow of U.S.
Treasury bills in connection with the writing of put options, nor the deposit of
cash and cash equivalents in a segregated account with the Fund's custodian or
in a margin account with a broker in connection with futures transactions,
options transactions, nor the writing of call and put options in spread
transactions, is deemed to be a pledge.
*3. Make loans of money or portfolio securities, except through the
purchase of debt obligations and 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 a Fund's total assets would be invested in the securities of
issuers in the same industry. There is no limitation as to the Fund's
investments in obligations issued by U.S. branches of domestic banks or in
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities. 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 Funds
invest are not subject to these limitations.
B-2
<PAGE>
7. Invest more than 10% of the value of the net assets of the International
Fund or 15% of the net assets of the Emerging Markets Fund in securities that
are not readily marketable or which are restricted as to disposition under the
U.S. securities laws or otherwise. This restriction shall not apply to
securities purchased or sold pursuant to Rule 144A under the Securities Act of
1933. This restriction will apply to repurchase agreements maturing in more than
seven days. This restriction will also apply to securities received as a result
of a corporate reorganization or similar transaction affecting readily
marketable securities already held in a Fund's portfolio. To the extent that
securities received under these circumstances, together with other securities
considered illiquid by the staff of the Securities and Exchange Commission
("SEC") or by the Company's Board, exceed the applicable percentage of the value
of the Fund's total assets, the Fund will attempt to dispose of them in an
orderly fashion in order to reduce its holdings in such securities to less than
the applicable threshold.
*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.
9. Purchase securities of other U.S. or foreign investment companies,
except that the Fund may make such a purchase (a) in the open market 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) as part of an offer of exchange,
reorganization 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 Funds 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 Funds 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, or to increase the current return of its portfolio by writing covered
call or covered put options, as each is described under the "Special Investment
Techniques" sections of the Company's Prospectus and Statement of Additional
Information.
*12. Purchase or sell commodities or commodity contracts, except that the
Funds may enter into financial futures contracts, options contracts, options on
futures contracts and forward foreign currency exchange contracts as described
in the "Special Investment Techniques" sections of the Company's 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 Funds 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 Company, the officers, directors and employees of the Company or of the
Company's investment manager or sub-investment manager 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 described in the Prospectus or Statement of Additional Information,
and except for borrowing subject to the restrictions set forth under Investment
Restriction 1, above).
B-3
<PAGE>
The Small Cap Stock Fund
The Fund has adopted the following investment restrictions which cannot be
changed without the approval of the holders of a majority of the outstanding
shares of the Fund. The following investment restrictions provide that the Small
Cap Stock Fund may not:
1. As to 75% of the Fund's total assets, purchase any security (other than
obligations of the U.S. Government, its agencies or instrumentalities and
investment companies) if as a result, more than 5% of the Fund's total assets
(taken at current value) would then be invested in the securities of a single
issuer.
2. Purchase more than 10% of any class of securities of any issuer. All
debt securities and all preferred stocks are each considered as one class.
3. Borrow money, except that the Fund may (i) borrow up to 5% of the value
of its total assets (not including the amount borrowed) for temporary or
emergency needs; and (ii) engage in reverse repurchase agreements or other
transactions which may involve a borrowing from banks or other persons, provided
that the aggregate amount involved in all such transactions shall not exceed 33%
of the value of the Fund's total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage permitted by law;
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;
5. Make loans to other persons except for loans of portfolio securities and
except through the purchase of debt obligations and repurchase agreements in
which the Fund may invest, consistent with its investment objectives and
policies, provided that repurchase agreements maturing in more than seven days,
when taken together and at current value, may not exceed 15% of the Fund's net
assets;
6. Purchase any securities other than the obligations 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 (there is no
limitation as to investments in obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities);
7. 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 connection with the sale of portfolio securities;
8. Purchase or sell real estate (although it may purchase securities of
issuers that engage in real estate operations as well as readily marketable
interests such as real estate investment trusts and readily marketable
securities of companies which invest in real estate);
9. Write, purchase or sell puts, calls, or combinations thereof;
10. Purchase or sell commodities or commodity contracts;
11. Issue any senior securities except as permitted under the Investment
Company Act of 1940.
The Fund has adopted the following non-fundamental restrictions, which may
be changed by the Board of Directors without shareholder approval. The Fund may
not:
12. 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 are
not subject to these limitations;
13. Purchase securities restricted as to resale if, as a result, (i) more
than 10% of the Fund's total assets would be invested in such securities, or
(ii) more than 5% of the Fund's total assets (excluding any securities eligible
for resale under Rule 144A under the Securities Act of 1933) would be invested
in such securities;
14. Invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities restricted as to resale, and (c) repurchase
agreements maturing in more than seven days, if, as a result, more than 15% of
the Fund's net assets (taken at current value) would then be invested in the
aggregate in securities described in (a), (b), and (c) above;
15. Invest in securities of other registered investment companies;
16. 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;
B-4
<PAGE>
17. 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;
18. Purchase or retain the securities of any issuer, if, to the knowledge
of the Fund, the officers, directors and employees of the Fund or of the Adviser
who individually own more than 1/2 of 1% of the outstanding securities of such
issuer together own more than 5% of the securities of such issuer; and
19. Purchase securities for the purpose of exercising control over another
company.
INVESTMENT OBJECTIVE AND POLICIES
As described in the Prospectus, each Fund is permitted to invest in
convertible securities. Convertible securities are bonds or preferred stock
issues, 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 convertible securities
is generally less than would be the case if the securities were not convertible.
In evaluating a convertible security for a Fund, Guardian Baillie Gifford
Limited, the investment adviser of the International Fund and the Emerging
Markets Fund, or BG Overseas Limited, the sub-investment adviser of the
International Fund and the Emerging Markets Fund ("BG Overseas"), or Guardian
Investor Services Corporation, the investment adviser of the Small Cap Stock
Fund, looks primarily at the attractiveness of the underlying common stock and
at the fundamental business strengths of the issuer. Other factors considered
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.
SPECIAL INVESTMENT TECHNIQUES - INTERNATIONAL FUND AND
EMERGING MARKETS FUND
The Prospectus for the International Fund and the Emerging Markets Fund
describes the investment objective of each of the Funds, as well as certain
investment policies and investment techniques which the Funds may employ in an
effort to achieve their respective investment objectives. The following
discussion supplements the section entitled "Special Investment Techniques"
contained in the International Fund and Emerging Markets Fund Prospectus. There
can be no assurance that these techniques will enable the Funds to achieve their
investment objectives.
Forward Foreign Currency Transactions. The foreign securities held by the
Funds will usually be denominated in foreign currencies and the Funds may
temporarily hold foreign currency in connection with such investments. As a
result, the value of the assets held by a Fund may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange control
regulations. The Funds 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 Funds 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 a Fund holds or intends
to purchase. Thus, the Funds will not enter into a forward currency contract if
such contract would obligate that 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.
A 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
a Fund enters into a contract to purchase or sell securities denominated in a
particular foreign currency, a 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 Funds can protect the value of
securities in the underlying transaction
B-5
<PAGE>
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 Funds may also use forward currency contracts to hedge the value, in
U.S. dollars, of securities it currently owns. For example, if a Fund held
securities denominated in a foreign currency and anticipated a substantial
decline (or increase) in the value of that currency against the U.S. dollar,
that 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, a 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 gains or losses as a result of entering into such an offsetting
contract to the extent the exchange rate between the currencies involved changed
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 the decline in the value of a currency does not eliminate fluctuations
in the underlying prices of the securities a 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 Funds will
depend on the ability of the Funds' investment manager to accurately predict
future currency exchange rates.
Options on Securities. A Fund may write (sell) covered call options so long
as it owns securities which are acceptable for the purpose of covering the
outstanding options in the transaction, and may write secured put options, which
means that so long as the Funds are obligated as writers of a put option, they
will invest an amount not less than the exercise price of the put option in
eligible securities (i.e., cash or cash equivalents). These obligations reduce
the Funds' flexibility to pursue other investment opportunities while options
are outstanding. The Funds may also purchase put and call options. A call option
gives the purchaser the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price during the option period. A put option
gives the purchaser the right to sell, and the writer the obligation to buy, the
underlying security at the exercise price during or, in some cases at the end
of, the option period. The premium received for writing an option will reflect,
among other things, the current market price of the underlying security, the
relationship of the exercise price to such market price, the price volatility of
the underlying security, the option period, supply and demand and interest
rates.
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 security 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 the
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 Funds may 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
B-6
<PAGE>
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.
The Funds may also purchase options in combination with each other. For
example, a Fund may purchase a put option and a call option, each with the same
expiration date, on the same underlying security. A Fund will profit from the
combination position if an increase or decrease in the value of the underlying
security is sufficient for a 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.
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
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 it
owns, without being required to actually sell that security. At times the Funds
may seek to establish a position in securities upon which call options are
available. By purchasing a call option the Funds are 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.
Stock Index Options. As part of its options transactions, the Funds may
also use options on stock indices. Through the writing and purchase of stock
index options, the Funds can achieve many of the same objectives as through the
use of options on individual securities. Stock index options are similar to
options on a particular stock except that, rather than the right to take or make
delivery of a security at a specified price, an option on a stock index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the stock 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 (the "exercise settlement
amount") is equal to the 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 stock
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.
When a Fund writes an option on a stock 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 stock 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 stock indices involve risks similar to those risks relating to
transactions in financial futures contracts described below. Also, an option
purchased by a Fund may expire worthless, in which case that Fund would lose the
premium paid therefor.
Financial Futures Contracts. The Funds may enter into interest rate or
stock 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 adversely
affect the value of securities which a Fund holds or intends to purchase. 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 stock 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.
B-7
<PAGE>
If a Fund owned long-term bonds and expected interest rates to rise, it
could sell interest rate futures contracts. If interest rates did increase, the
value of the bond in that Fund 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
financial 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 financial futures contracts and short-term debt
securities could then be liquidated and the cash proceeds used to buy long-term
bonds.
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 the price movements of the financial futures
contracts and price movements of the securities which a Fund owns or intends to
purchase. 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.
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. The Funds will incur brokerage fees when it purchases or sells financial
futures contracts, and will be required to maintain margin deposits.
Options on Financial Futures Contracts. The Funds may purchase and write
put and call 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. The Funds would be required to deposit with the Company's custodian
initial margin and variation margin with respect to put and call options on
financial futures contracts it has written.
Foreign Currency Futures and Options on Foreign Currency Futures. The Funds
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
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 either or both of the Funds, anticipated to be purchased by a Fund, or
sold by a 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 futures 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 options on foreign currency futures contracts
is subject to the continuing availability of a liquid secondary market. In order
to reduce this risk, the Funds will not purchase or sell options on foreign
currency options unless, in the opinion of the Funds' investment manager, 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 Funds 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 a 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 a 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.
B-8
<PAGE>
The Funds will purchase options on foreign currencies in an attempt to
hedge against fluctuations in exchange rates. However, should exchange rates
move adversely to the Funds' position, the Funds may forfeit both the entire
price of the option plus the related transaction costs.
Special Considerations Relating to Futures Transactions. Financial futures
contracts entail certain risks. If the Manager's judgment about the general
direction of interest rates or markets is wrong, the Funds' overall performance
may be poorer than if no such contracts had been entered into.
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 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 futures markets could result. Price distortions could also result
if investors in 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 speculators in the futures market could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities and movements in the prices of futures contracts, a correct
forecast of market trends by the Funds' investment manager 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.
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 Funds) 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.
Applicable U.S. Regulatory Restrictions. To the extent required to comply
with the 1940 Act and the rules and interpretations thereunder, whenever one of
the Funds purchases a financial futures contract, writes a put option or enters
into a delayed-delivery purchase, that Fund will maintain in a segregated
account either cash or liquid high-grade securities equal to the value of the
contracts. This segregation of assets places a practical limit on the extent to
which the Funds may engage in financial futures contracts, write put options,
and enter into delayed-delivery transactions.
To the extent required to comply with CFTC Regulation 4.5 and thereby avoid
"commodity pool operator" status, the Funds will not enter into a financial
futures contract or purchase an option thereon if immediately thereafter the
aggregate initial margin deposits for financial futures contracts held by a Fund
plus premiums paid by it for open options on futures would exceed 5% of the
liquidation value of the Fund's total assets, taking into account unrealized
profits and losses on such contracts. The Funds will not engage in transactions
in financial futures contracts or options thereon for speculation, but only in
an attempt to hedge against changes in interest rates or market conditions
affecting the value of securities which a Fund holds or intends to purchase.
When financial futures contracts or options thereon are purchased to protect
against a price increase on securities intended to be purchased later, it is
anticipated that at least 75% of such intended purchases will be completed.
Whenever financial futures contracts or options thereon are purchased, the
underlying value of such contracts will at all times not
B-9
<PAGE>
exceed the sum of: (1) accrued profit on such contract held by the broker; (2)
cash or high quality money market instruments set aside in an identifiable
manner plus funds deposited on margin on the contract; and (3) cash proceeds
from existing investments due in 30 days.
Miscellaneous. Several foreign governments permit investments by
non-residents only through participation in certain investment companies
specifically organized to participate in such markets. Subject to the provisions
of the 1940 Act, the Funds may invest in the shares of other investment
companies.
Pursuant to exemptive relief granted to the Funds under the 1940 Act, a
portion of the equity and convertible securities which may be acquired by a 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 a
broker, a dealer, an underwriter or an investment adviser.
The International Fund may also invest a portion of its assets in unit
trusts organized in the United Kingdom (which are analogous to U.S. mutual
funds) and which invest in smaller foreign markets than those which the
International Fund would ordinarily invest in directly. The International Fund
believes investments in such unit trusts will enhance the geographical
diversification of the International Fund's assets while reducing the risks
associated with investing in certain smaller foreign markets. Investments by the
International Fund in such unit trusts will 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.
SPECIAL INVESTMENT TECHNIQUES - INTERNATIONAL FUND,
EMERGING MARKETS FUND AND SMALL CAP STOCK FUND
When-Issued or Delayed-Delivery Securities. The Funds may purchase or sell
the securities held in their portfolios on a when-issued or delayed-delivery
basis. When-issued or delayed-delivery transactions involve a commitment by a
Fund to purchase or sell particular securities, with payment and delivery to
take place at a future date, in order to secure what is considered to be an
advantageous price or yield to a Fund at the time of entering into the
transaction. When a Fund enters into a delayed-delivery transaction, it becomes
obligated to purchase securities and it has all of the rights and risks
attendant to ownership of a security, although delivery and payment occur at a
later date. The value of fixed income securities to be delivered in the future
will fluctuate as interest rates vary. The Funds generally have the ability to
close out a purchase obligation on or before the settlement date rather than
purchase the security.
To engage in such transactions, the Funds must set aside, in a segregated
account, cash or liquid high-grade securities at least equal in value to their
commitments to purchase when-issued or delayed-delivery securities. In the case
of a sale of securities on a delayed-delivery basis, a Fund must hold the
subject portfolio securities in a segregated account while the commitment is
outstanding. These obligations to segregate cash or securities will limit a
Fund's ability to pursue other investment opportunities.
To the extent a Fund engages in when-issued or delayed-delivery
transactions, it will do so for the purpose of acquiring portfolio securities in
a manner which is consistent with its investment objective and policies and not
for the purpose of either investment leverage or interest rate change
speculation. The Funds will only make commitments to purchase securities on a
when-issued or delayed-delivery basis with the intention of actually acquiring
the securities, but the Funds reserve the right to sell these securities before
the settlement date if deemed advisable. It is not expected that the Small Cap
Stock Fund will make extensive use of these techniques.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Guardian Baillie Gifford Limited ("GBG") serves as investment adviser of
the International Fund and Emerging Markets Fund in accordance with agreements
between the Company and GBG. Pursuant to sub-investment management agreements
with GBG, BG Overseas serves as the sub-investment adviser to the International
and Emerging Markets Funds. Guardian Investor Services Corporation ("GISC")
serves as investment adviser of the Small Cap Stock Fund. (GBG, BG Overseas and
GISC are collectively referred to as the "Advisers"). GISC and, subject to the
monitoring of GBG, BG Overseas, are responsible for decisions relating to the
purchase and sale of securities for the Funds, the timing of such purchases and
sales, the selection of brokers and dealers to effect transactions and the
negotiation of any brokerage commissions. GISC and BG
B-10
<PAGE>
Overseas intend to effect portfolio transactions for the Funds through dealers,
underwriters, or brokers through whom they believe they will obtain the best
price and execution available. In connection with over-the-counter transactions,
GISC and BG Overseas will attempt to deal with a primary market maker except
where they believe better prices and execution are available elsewhere.
In allocating portfolio transactions to different brokers, consideration is
given to brokers which GISC and BG Overseas believe can obtain the best price
and execution of orders, and to brokers who furnish statistical data, research
and other factual information. GISC and BG Overseas are authorized to pay a
commission in excess of that which another broker may charge for effecting the
same transaction if they consider that the commissions paid for brokerage,
research services and other statistical data are appropriate and reasonable for
the services rendered. Research services provided by brokers through whom the
Funds effect securities transactions may be used by GISC or BG Overseas in
servicing all of its accounts, and not all such services may be used by GISC or
BG Overseas in connection with the Funds.
For the years ended December 31, 1994, 1995 and 1996, the International
Fund paid brokerage commissions of $754,782, $692,400 and $704,982,
respectively. For the period October 17, 1994 (commencement of Fund operations)
through December 31, 1994 and the years ended December 31, 1995 and 1996, the
Emerging Markets Fund paid brokerage commissions of $98,384, $139,527 and
$209,894, respectively. Neither GBG, BG Overseas nor GISC will participate in
commissions paid by the Funds to other brokers or dealers and neither party will
knowingly accept any reciprocal business directly or indirectly as a result of
paying commissions to other brokers or dealers.
Portfolio turnover rates for the International Fund for the years ended
December 31, 1995 and 1996 were 52% and 38%, respectively. For the Emerging
Markets Fund, the rates were 52% and 46%, respectively. The Portfolio turnover
rate for the Small Cap Stock Fund is anticipated to be between 50% and 75%.
B-11
<PAGE>
COMPANY MANAGEMENT
The directors and officers of the Company are listed below, together with
information about their principal occupations during the past five years and
certain other current affiliations. The business address of each director and
officer is 201 Park Avenue South, New York, New York 10003 unless otherwise
noted below. The Guardian Fund Complex is comprised of (1) the Company, (2) The
Guardian Stock Fund, Inc., (3) The Guardian Bond Fund, Inc., (4) The Guardian
Cash Fund, Inc. and (5) The Park Avenue Portfolio (a series trust that issues
its shares in eight series).
Name, Address and Age Title Business History
- --------------------- ----- ----------------
Joseph D. Sargent* (59) Chairman of Chief Executive Officer, The
the Board Guardian Life Insurance
Company of America,
1/96-present. President and
Director 1/93-present.
Executive Vice President
prior thereto. Director
(Trustee) of The Guardian
Insurance & Annuity Company,
Inc., Guardian Investor
Services Corporation,
Guardian Asset Management
Corporation, Guardian
Baillie Gifford, Ltd. and
various mutual funds within
the Guardian Fund Complex.
John C. Angle* (73) Director Retired. Former Chairman of
3800 South 42nd Street the Board and Chief
Lincoln, Nebraska 68506 Executive Officer, The
Guardian Life Insurance
Company of America; Director
1/78-present. Director
(Trustee) of Guardian
Investor Services
Corporation from 2/82-2/96
and The Guardian Insurance &
Annuity Company, Inc.
Director (Trustee) of
various mutual funds within
the Guardian Fund Complex.
Frank J. Fabozzi, Ph.D. (48) Director Adjunct Professor of Finance,
858 Tower View Circle School of Management -- Yale
New Hope, Pennsylvania 18938 University 2/94-present;
Visiting Professor of
Finance and Accounting,
Sloan School of Management
-- Massachusetts 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* (66) Director Retired. Chairman of the Board
of Directors and Chief
Executive Officer, The
Guardian Life Insurance
Company of America
1/93-12/95; President and
Chief Executive Officer
1/89-12/92; President prior
thereto; Director
1/81-present. Director
(Trustee) of Guardian
Investor Services
Corporation, Guardian Asset
Management Corporation, The
Guardian Insurance & Annuity
Company, Inc., Gabelli
Capital Asset Fund and
various mutual funds within
the Guardian Fund Complex.
Leo R. Futia* (77) Director Retired. Former Chairman of
18 Interlaken Road the Board and Chief
Greenwich, Connecticut 06830 Executive Officer, The
Guardian Life Insurance
Company of America; Director
5/70-present. Director
(Trustee) of The Guardian
Insurance & Annuity Company,
Inc., Guardian Investor
Services Corporation, and
various mutual funds within
the Guardian Fund Complex.
Director (Trustee) of
various mutual funds
sponsored by Value Line,
Inc.
William W. Hewitt, Jr. (68) Director Retired. Former Executive Vice
P.O. Box 2359 President, Shearson Lehman
Princeton, New Jersey 08543 Brothers, Inc. Director
(Trustee) of various mutual
funds within the Guardian
Fund Complex and various
mutual funds sponsored by
Mitchell Hutchins Asset
Management, Inc. and
PaineWebber Inc.
*"Interested person," as defined in the 1940 Act.
B-12
<PAGE>
Name, Address and Age Title Business History
- --------------------- ----- ----------------
Sidney I. Lirtzman, Ph.D. (65) Director Professor of Management
38 West 26th Street 9/67-present and Acting
New York, New York 10010 Dean, School of Business
2/95-present, City
University of New York --
Baruch College. President,
Fairfield Consulting
Associates, Inc. Director
(Trustee) of various mutual
funds within the Guardian
Fund Complex.
Carl W. Schafer (61) Director President, Atlantic Foundation
P.O. Box 1164 (charitable foundation
Princeton, New Jersey 08542 supporting mainly
oceanographic exploration
and research). 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
Nutraceutrix 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 PaineWebber, Inc.
Robert G. Smith, Ph.D. (64) Director President, Smith Affiliated
132 East 72nd Street Capital Corporation and
New York, New York 10021 Director (Trustee) of
various mutual funds within
the Guardian Fund Complex.
John M. Smith (60) President Executive Vice President,
Equity Products 1/95 to
present, The Guardian Life
Insurance Company of
America; Senior Vice
President prior thereto.
Director, Guardian Baillie
Gifford Limited
11/90-present. Executive
Vice President and Director,
The Guardian Insurance &
Annuity Company, Inc.
President and Director,
Guardian Investor Services
Corporation. Director of
Guardian Asset Management
Corporation. President, GBG
Funds, Inc. Officer of one
mutual fund within the
Guardian Fund Complex.
Charles E. Albers Senior Vice Senior Vice President, The
President Guardian Life Insurance
Company of America
1/91-present. Executive Vice
President of Guardian
Investor Services
Corporation and Guardian
Asset Management
Corporation. Vice President,
Equity Securities, The
Guardian Insurance and
Annuity Company, Inc.
Officer of various mutual
funds within the Guardian
Fund Complex.
Frank J. Jones Executive Vice Executive Vice President and
President Chief Investment Officer,
The Guardian Life Insurance
Company of America
1/94-present; Senior Vice
President and Chief
Investment Officer
8/91-12/93. Director,
Guardian Investor Services
Corporation and Guardian
Baillie Gifford Limited.
Executive Vice President,
Chief Investment Officer and
Director, The Guardian
Insurance and Annuity
Company, Inc. Director and
President, Guardian Asset
Management Corporation.
Officer of various mutual
funds within the Guardian
Fund complex.
B-13
<PAGE>
Name, Address and Age Title Business History
- --------------------- ----- ----------------
R. Robin Menzies (43) Vice President Partner, Baillie Gifford & Co.
c/o Baillie Gifford Overseas 4/81-present. Director,
Limited Baillie Gifford Overseas
1 Rutland Court Limited 11/90-present.
Edinburgh, EH3 8EY, Director, Guardian Baillie
Scotland Gifford Limited
11/90-present. Officer of
various mutual funds within
the Guardian Fund Complex.
Thomas R. Hickey, Jr. (44) 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
various mutual funds within
the Guardian Fund Complex.
Edward H. Hocknell (36) Vice President Director, Baillie Gifford
Overseas Limited
10/92-present. Director,
Guardian Baillie Gifford
Limited 9/95-present.
Officer of one mutual fund
within the Guardian Fund
Complex.
Frank L. Pepe (54) Treasurer Vice President and Equity
Controller, The Guardian
Life Insurance Company of
America 1/96-present; Second
Vice President and Equity
Controller prior thereto.
Vice President and
Controller, The Guardian
Insurance & Annuity Company,
Inc. and Guardian Investor
Services Corporation.
Officer of various mutual
funds within the Guardian
Fund Complex.
Joseph A. Caruso (45) Secretary Vice President and Corporate
Secretary, The Guardian Life
Insurance Company of America
1/96-present; Second Vice
President and Corporate
Secretary, 1/95-1/96;
Corporate Secretary
10/92-12/94. Secretary, The
Guardian Insurance & Annuity
Company, Inc., Guardian
Investor Services
Corporation, Guardian Asset
Management Corporation and
various mutual funds within
the Guardian Fund Complex.
Richard T. Potter, Jr. (42) 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
and Counsel, The Guardian
Insurance & Annuity Company,
Inc. and Guardian Investor
Services Corporation.
Counsel, Guardian Asset
Management Corporation and
various mutual funds within
the Guardian Fund Complex.
Ann T. Kearney (45) 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 various mutual
funds within the Guardian
Fund Complex.
B-14
<PAGE>
The Company pays directors who are not "interested persons" of the Company
(as defined in the 1940 Act) directors' fees of $700 per meeting and an annual
retainer of $500. Directors who are "interested persons," except Mr. Sargent,
receive the same fees, but they are paid by GISC. Mr. Sargent receives no
compensation for his service as a Director of the Company. All officers for the
Company are employees of The Guardian Life Insurance Company of America
("Guardian Life") or Directors of BG Overseas; they receive no compensation from
the Company.
Each Company Director is also a director of The Guardian Stock Fund, Inc.,
The Guardian Bond Fund, Inc. and The Guardian Cash Fund, Inc., and a trustee of
The Park Avenue Portfolio, a series trust consisting of The Guardian Park Avenue
Fund, The Guardian Cash Management Fund, The Guardian Investment Quality Bond
Fund, The Guardian Tax-Exempt Fund, The Guardian Baillie Gifford International
Fund, The Guardian Baillie Gifford Emerging Markets Fund, The Guardian Park
Avenue Small Cap Fund and The Guardian Asset Allocation Fund. The Company 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 Company and the Fund Complex to the Company's Directors
for the year ended December 31, 1996.
Compensation Table*
<TABLE>
<CAPTION>
Total Compensation
From The Company
Aggregate Accrued Pension or Estimated Annual And Other Members
Compensation Retirement Benefits Benefits Of The
Name and Title From the Company*** Paid by the Company Upon Retirement Fund Complex**
- -------------- ------------------- ------------------- --------------- --------------
Frank J. Fabozzi
<S> <C> <C> <C> <C>
Director $12,000 N/A N/A $28,600
William W. Hewitt, Jr.
Director 5,000 N/A N/A 35,300
Sidney I. Lirtzman
Director 5,000 N/A N/A 35,300
Carl W. Schafer
Director 15,000 N/A N/A 35,300
Robert G. Smith
Director 15,000 N/A N/A 35,300
</TABLE>
* Directors who are "interested persons" of the Company are not compensated
by the Company.
** Includes compensation paid to attend meetings of the Board's Audit
Committee.
All issued and outstanding shares of the Funds are legally owned by The
Guardian Insurance & Annuity Company, Inc. ("GIAC"), a wholly owned subsidiary
of Guardian Life, and are held either directly or for the benefit of
contractowners of the variable annuity and variable life insurance contracts
issued by GIAC.
The Company's officers and directors had an aggregate interest of less than
1% in the Funds' outstanding shares as of March 31, 1997.
INVESTMENT ADVISERS, SUB-INVESTMENT ADVISER AND DISTRIBUTOR
The Adviser - International Fund and Emerging Markets Fund: Guardian
Baillie Gifford Limited. The Adviser, an investment management company
registered as a corporation under the laws of Scotland, was formed in November
1990 through a joint venture between GIAC and BG Overseas, a company wholly
owned by Baillie Gifford & Co. GIAC owns 51% of the voting shares of the Adviser
and may be deemed to be in control of the Adviser. BG Overseas owns the
remaining 49% of such shares. The Adviser is registered in the United States
with the SEC as an investment adviser under the Investment Advisers Act of 1940
and in the United Kingdom is regulated by the Investment Management Regulatory
Organization ("IMRO"). BG Overseas also serves as sub-investment adviser to the
Funds (see below).
Pursuant to Investment Management Agreements ("Management Agreements")
between the Adviser and the Company, and subject to the continuous monitoring
and supervision of the Company's Board of Directors, the Adviser is responsible
for the overall investment management of the Funds' portfolios. Under the terms
of the Management Agreements, the Adviser is responsible for all decisions to
buy and sell securities for the Funds, furnishes the Board with recommendations
with respect to the Funds' 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. The Adviser has, in turn, entered into
sub-investment management agreements with BG Overseas appointing the latter as
sub-
B-15
<PAGE>
investment adviser and delegating to BG Overseas much of the day-to-day
management responsibilities for the portfolios of the Funds (see "The
Sub-Adviser: Baillie Gifford Overseas Limited" below).
The Management Agreements were approved by the Company's Board of Directors
(including a majority of the directors who are not parties to the Management
Agreements or "interested persons" of the Company or of the Adviser) and will
continue in full force and effect from year to year, provided their continuance
is specifically approved at least annually by vote of the Company's Board of
Directors, including a majority of the directors who are not parties to the
Management Agreements or "interested persons" of the Company or of the Adviser,
cast in person at a meeting called for the purpose of voting on such
continuance.
The Management Agreements provide that the Funds shall pay the Adviser a
monthly fee at an annual rate of 0.80% of the average daily net assets of the
International Fund and 1.00% of the average daily net assets of the Emerging
Markets Fund for the services rendered, the facilities furnished and the
expenses assumed by the Adviser. A portion of this fee is payable by the Adviser
to BG Overseas as compensation for the services of BG Overseas as sub-investment
adviser to the Funds as more fully described below. For the years ended December
31, 1994, 1995 and 1996, the International Fund paid the Manager a total of
$2,081,994, $2,430,879 and $3,048,628 in fees, respectively. For the period
between October 21, 1994 (commencement of public offering of fund shares) to
December 31, 1994 and the years ended December 31, 1995 and 1996 the Emerging
Markets Fund paid the Adviser a total of $44,703, $296,572, and $513,410,
respectively, in fees.
The Management Agreements provide that neither the Adviser, 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 Funds in connection with the
matters to which the Management Agreements relate, 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 Funds or
from reckless disregard by the Adviser or any such person of the duties of the
Adviser under the Management Agreements.
The Management Agreements may be terminated, without penalty, at any time
by either party upon 60 days' written notice and will terminate automatically
upon their assignment. In addition, either party may terminate the Management
Agreements 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 Management Agreements are terminated and unless they
are replaced by other agreements between GIAC and BG Overseas or their
affiliates, the continued use of the names "Baillie Gifford International Fund,"
or "Baillie Gifford Emerging Markets Fund" by the Company is subject to the
approval of both GIAC and BG Overseas.
The Sub-Investment Adviser - International Fund and Emerging Markets Fund:
Baillie Gifford Overseas Limited. BG Overseas acts as the sub-investment adviser
to the Company pursuant to sub-investment management agreements ("Sub-Management
Agreement") with the Adviser. BG Overseas is registered in the United States
with the SEC as an investment adviser under the Investment Advisers Act of 1940
and in the United Kingdom is regulated by IMRO. Pursuant to the Sub-Management
Agreements, BG Overseas manages the day-to-day operations of the Funds'
portfolios. 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
the Adviser. The Adviser continually monitors and evaluates the performance of
BG Overseas.
The Sub-Management Agreements were approved by the Company's Board of
Directors (including a majority of directors who are not parties to the
Sub-Management Agreements or "interested persons" of the Company or the Adviser)
and will continue in full force and effect from year to year, provided their
continuance is specifically approved at least annually (1) by the Board of
Directors of the Adviser and (2) by the Board of Directors of the Company,
including approval by a vote of the majority of the directors who are not
parties to the Sub-Management Agreements or "interested persons" of the Company
or of the Adviser, cast in person at a meeting called for the purpose of voting
on such continuance.
The Sub-Management Agreements provide that the Adviser shall pay BG
Overseas a monthly fee at an annual rate of 0.40% of the average daily net
assets of the International Fund and 0.50% of the average daily net assets of
the Emerging Markets Fund for the services rendered, the facilities furnished
and the expenses assumed
B-16
<PAGE>
by BG Overseas. This sub-investment management fee is paid to BG Overseas out of
the management fee paid by the Funds to the Adviser. For the years ended
December 31, 1994, 1995 and 1996, the Adviser paid BG Overseas a total of
$1,040,972, $1,215,440 and $1,524,314 in fees, respectively, for services
provided for the International Fund. For the period between October 21, 1994
(commencement of public offering of fund shares) and December 31, 1994 and the
years ended December 31, 1995 and 1996, the Adviser paid BG Overseas $22,352,
$148,289 and $256,705, respectively, in fees for services provided to the
Emerging Markets Fund.
The Sub-Management Agreements provide 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 the Adviser or the Company in
connection with the matters to which the Sub-Management Agreements relate,
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 Adviser or the Company or from reckless disregard by BG
Overseas or any such person of the duties of BG Overseas under the
Sub-Management Agreements.
The Sub-Management Agreements may be terminated, without penalty, at any
time by either party upon 60 days' written notice and will terminate
automatically upon their assignment. In addition, either party may terminate the
Sub-Management Agreements immediately in any of the following situations: (1)
the other party commits any material breach of its obligations under the
Agreements 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.
The Adviser - Small Cap Stock Fund: Guardian Investor Services Corporation
("GISC"). GISC is the investment adviser for the Small Cap Stock Fund. GISC is
registered as an investment adviser under the Investment Advisers Act of 1940.
Under the investment advisory agreement between the Fund and GISC, GISC
furnishes investment advice and 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.
The investment advisory agreement between the Fund and GISC will continue
in full force and effect for two years following the date of its execution, or
the date of execution of any written modification of this agreement in
connection with any other Funds established by the Company that are made subject
to the agreement and thereafter, if not terminated, from year to year so long as
its continuance is specifically approved at least annually by vote of a majority
of the Fund's outstanding voting shares, or by vote of the Fund's Board of
Directors, including a majority of the Fund's outstanding voting shares, or by
vote of the Fund's Board of Directors, including a majority of Directors who are
not parties to the agreement or "interested persons" of the Fund 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 without
penalty at any time by either party upon 60 days' written notice.
If the investment advisory agreement is terminated and it is not replaced
by an agreement with another affiliate of Guardian Life, the Fund's continued
use of the name "The Guardian Small Cap Stock Fund" is subject to the approval
of Guardian Life, because Guardian Life maintains the exclusive ownership
interest of the service mark "The Guardian Small Cap Stock Fund".
A service agreement between GISC and Guardian Life provides that Guardian
Life will furnish the office space, clerical staff, services and facilities
which GISC needs to perform under the investment advisory agreement. GISC's
officers are salaried employees of Guardian Life; they receive no compensation
from GISC. GISC reimburses Guardian Life for its expenses under the service
agreement.
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 Fund 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 Fund or from
reckless disregard by GISC or any such person of the duties of GISC under the
investment advisory agreement.
B-17
<PAGE>
The Distributor: Guardian Investor Services Corporation. Guardian Investor
Services Corporation(R) ("GISC") serves as the distributor of shares of the
Funds. These shares are continuously offered at net asset value without any
sales charge. GISC is registered with the SEC as a broker-dealer under the
Securities Exchange Act of 1934 and acts as distributor of the variable annuity
and variable life insurance contracts issued by GIAC. GISC receives no
compensation from the Company or from purchasers of shares of the Funds for
acting as distributor.
GIAC AND OTHER FUND AFFILIATES
As of March 31, 1997, GIAC was the record owner of 22,825,890 shares of the
International Fund and 5,761,743 shares of the Emerging Markets Fund. The
Guardian Life Insurance Company of America ("Guardian Life") owned beneficially
3,530,786 shares of the International Fund and 2,041,667 shares of the Emerging
Markets Fund. Together, the aforementioned shares represent 100% of the
outstanding shares of each Fund. As described more fully in "Fund Capitalization
and Expenses" below, GIACowns beneficially 960,695 (or 3.6%) of International
Fund shares and Guardian Life owns beneficially 3,530,786 shares (or 13.3%) of
the International Fund shares and 2,041,667 shares (or 26.16%) of the Emerging
Markets Fund shares. The balance of the Fund shares is owned on behalf of the
owners of variable annuity and variable life insurance contracts issued by GIAC.
Such shares have been allocated to one or more separate accounts of GIAC which
fund such contracts. As of April 2, 1997, GIAC was the record and beneficial
owner of 2,000,000 shares of the Small Cap Stock Fund representing 100% of the
outstanding shares of the Fund. GIAC is a wholly owned subsidiary of Guardian
Life and has executive offices located at 201 Park Avenue South, New York, New
York 10003. In addition, GIAC owns 51% of the voting shares of GBG, adviser to
the International and Emerging Markets Funds (see above) and may be deemed to be
in control of GBG, and Guardian Life owns 100% of the voting shares of GISC.
As of March 31, 1997, 6.9% and 5.3% of the International Fund's shares were
attributable to variable annuity policies owned, respectively, by the Trustees
of The Guardian Employee Incentive Savings Plan Trust and The Guardian Pension
Trust both of 201 Park Avenue South, New York, New York.
TAXES
The International Fund and the Emerging Markets Fund qualify and intend to
remain qualified, and the Small Cap Fund intends to qualify and to remain
qualified, to be taxed as regulated investment companies under certain
provisions of the U.S. Internal Revenue Code of 1986, as amended (the "Code").
So long as the Funds qualify as regulated investment companies and comply 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 Funds will not incur a tax
liability on that portion of their net ordinary income and net realized capital
gains which have been distributed to its shareholders. Accordingly, the Funds
intend to distribute all or substantially all of their net investment income and
net capital gains.
To qualify for treatment as a regulated investment company, a Fund must,
among other things, derive in each taxable year at least 90% of its gross income
from (1) dividends, (2) interest, (3) payments with respect to securities loans,
(4) gains from the sale or other disposition of stock or securities or foreign
currencies (subject to the authority of the Secretary of the U.S. Treasury to
exclude foreign currency gains which are not ancillary to a Fund's performance
of its authorized investment activities); or (5) other income (including but not
limited to gains from options, futures, or forward contracts) derived in
connection with the pursuit of its investment objectives. In addition, 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, the Fund may be required to
defer disposing of certain securities beyond the time when it might otherwise be
advantageous to do so.
Options, forward contracts, futures contracts and foreign currency
transactions entered into by the Funds will be subject to special tax rules.
These rules may accelerate income to the Funds, 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.
For U.S. federal income tax purposes, if the Company establishes additional
portfolios, each portfolio will be treated as a separate entity.
B-18
<PAGE>
Income received by the Funds 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% and, 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 the
Funds' return on its investments. While contractowners will bear the cost of any
foreign tax withholding, they will not be able to claim a foreign tax credit or
deduction for taxes paid by the Funds.
The U.S. federal tax laws impose a four percent nondeductible excise tax on
each regulated investment company with respect to an amount, if any, by which
such company does not meet distribution requirements specified in such tax laws.
The Funds intend to comply with such distribution requirements and thus do not
expect to incur the four percent nondeductible excise tax.
Since the sole shareholder of the Funds will be GIAC, no discussion is set
forth herein as to the U.S. federal income tax consequences at the shareholder
level. For information concerning the U.S. federal income tax consequences to
purchasers of the GIAC contracts, see the Prospectus for such contract.
The discussion of "Taxes" in the Prospectuses, in conjunction with the
foregoing, is a general and abbreviated summary of the applicable provisions of
the Code and U.S. Treasury Regulations currently in effect as interpreted by
U.S. Courts and the Internal Revenue Service. These interpretations can change
at any time. The above discussion covers only U.S. federal income tax
considerations with respect to the Funds. No attempt has been made to describe
any U.S. state and local tax consequences.
PERFORMANCE RESULTS
As described in the Prospectus, the Funds' performance results may be
disclosed in the form of "average annual total return" and "cumulative total
return" figures.
The Funds use the following formula prescribed by the SEC to compute their
average annual total returns.
P(1+T)^n = ERV
Where: P = a hypothetical initial payment of $1,000 from which no sales
load is deducted
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000 payment at
the end of the period represented by "n."
The average annual total return and cumulative total return for a Fund for
a specific period is calculated by first taking a hypothetical investment amount
($1,000 for the average annual total return calculation) ("initial investment")
in the Fund's shares on the first day of the period and computing the
"redeemable value" of that investment at the end of the period. The average
annual total return is determined by dividing the redeemable value by the
initial investment and this quotient is taken to the "nth" root ("n"
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. Promotional materials relating
to the Funds' performance will always at least provide average annual total
returns for each of a short (one to four years), medium (five to ten years), and
long (ten years or more) period of time. The cumulative total return percentage
is determined by subtracting the initial investment from the redeemable value
and dividing the remainder by the initial investment and expressing the result
as a percentage. All average annual total return and cumulative total return
calculations will indicate the length of and the last day of the period used in
computing the return figures.
B-19
<PAGE>
The tables below show each Fund's returns for the periods noted. These
figures reflect the reinvestment of all capital gains distributions and income
dividends paid by each Fund, and the deduction of all Fund expenses. The actual
returns for owners of GIAC's variable contracts will be lower to reflect the
effects of charges deducted under the terms of the specific contracts. The Small
Cap Stock Fund is not included because it did not commence operations until
1997.
International Fund Emerging Markets Fund
Year Ended December 31, Total Return Total Return
----------------------- ------------ ------------
1991* ......................... 8.56% --
1992 .......................... (8.90)% --
1993 .......................... 34.04% --
1994** ........................ 0.87% (11.97)%
1995 .......................... 11.23% (0.60)%
1996 .......................... 15.41% 24.59%
<TABLE>
<CAPTION>
Cumulative and Average Annual Total Returns
International Emerging
------------- --------
<S> <C> <C>
Period Ended December 31, 1996 ............ Fund* Markets Fund**
Lifetime Total Return ..................... 48.67% (12.50)%
Average Annual Lifetime Total Return .... 8.45% (10.53)%
One-Year Total Return ..................... 11.23% (0.60)%
Five-Year Total Return .................... -- --
Five Year Cumulative Total Return ......... -- --
</TABLE>
- ----------
* Beginning February 8, 1991 (commencement of International Fund's investment
operations).
** Beginning October 17, 1994 (commencement of Emerging Markets Fund's
investment operations).
The following example shows the average annual total return performance of
each Fund for the periods indicated by showing the average annual percentage
change for each period and the ending redeemable value of a $1,000 investment.
The example takes into account all Fund expenses and assumes reinvestment of all
capital gains distributions and income dividends, but does not take into account
charges deducted under the terms of GIAC's variable contracts or federal income
taxes and tax penalties that may be incurred when distributions are made from
such variable contracts.
<TABLE>
<CAPTION>
Emerging
International Fund Markets Fund
------------------ ------------
% Change ERV %Change ERV
-------- --- ------- ---
<S> <C> <C> <C> <C>
For the year ended December 31, 1996 ................. 15.41% $11,541.49 24.59% $12,458.63
For the life of the Fund through December 31, 1996 ... 9.60% $17,165.25 3.99% $10,901.30
</TABLE>
All figures quoted take into account all nonrecurring charges incurred by
the Funds and assume reinvestment of all capital gains distributions or
dividends paid by the Funds, but do not take into account income taxes due on
Fund distributions or dividends or the effect of any charges deducted from the
variable contracts or at the separate account level. Including the effects of
such charges would reduce the performance figures.
The Funds intend to use non-standardized cumulative total return figures
and will indicate the length of and the last day of the period used in computing
such figures as well as a description of the method by which such performance
figures were calculated. However, non-standardized cumulative total return
figures will be accompanied by the SEC mandated total return figures.
The Funds may also compare their performance to that of other mutual funds
with similar investment objectives or programs and may quote information from
financial and industry or general interest publications in its promotional
materials. Additionally, the Funds' promotional materials may contain references
to types and characteristics of certain securities; features of their
portfolios; financial markets; or historical, current or prospective economic
trends. Topics of general interest, such as personal financial planning, may
also be discussed.
Performance calculations contained in reports by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc., Morningstar, The WM Company,
Variable Annuity & Research Data Service 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 net asset value with all
dividends reinvested and may not reflect the imposition of charges deducted
under the terms of GIAC's variable contracts.
B-20
<PAGE>
The Funds' performance figures are based upon historical results and do not
project future performance. Factors affecting the Funds' performance include
general market conditions, rates of exchange, operating expenses, and investment
management fees. Shares of the Funds are redeemable at net asset value which may
be more or less than original cost.
FUND CAPITALIZATION AND EXPENSES
On January 22, 1991, GIAC purchased 10,000 shares of the International Fund
at a price of $10.00 per share for a total investment of $100,000. Over the
weeks following this initial investment, GIAC furnished an additional $9,900,000
in seed capital to the International Fund, purchasing 824,320 shares. On
September 13, 1994 Guardian Life purchased 2,000,000 shares of the Emerging
Markets Fund at a price of $10.00 per share for a total investment of
$20,000,000. Each of these investments were made to enable the Funds to commence
operations and to acquire a diversified portfolio of securities in accordance
with their respective investment objective and policies. The shares acquired by
GIAC and Guardian Life are being held for investment purposes and GIAC and
Guardian Life have no present intention of redeeming or selling such shares.
On April 2, 1997, GIAC purchased 2,000,000 shares of the Small Cap Fund at
a price of $10.00 per share for a total investment of $20,000,000. This
investment was made to enable the Small Cap Stock Fund to commence operations
and to acquire a diversified portfolio of securities in accordance with its
investment objective and policies. The shares acquired by GIAC are being held
for investment purposes and GIAC has no present intention of redeeming or
selling such shares.
The authorized stock of the Company consists of one billion (1,000,000,000)
shares having a par value of $0.10 each. Two hundred million (200,000,000) of
such shares have been designated as shares of the class which are attributable
to each of the Funds. To date a total of 600,000,000 shares have been so
designated. The Board may designate additional classes of Company shares, and
increase or decrease the number of shares in a class, provided that the Board
does not decrease the number of shares outstanding.
Each issued and outstanding share is entitled to participate equally in
dividends and distributions declared by the respective class of stock and, upon
liquidation or dissolution, in the net assets of such class remaining after
satisfaction of outstanding liabilities.
The International Fund has incurred expenses in connection with its
organization in the amount of $39,110 which were advanced by GIAC and reimbursed
as of March 31, 1992. In connection with its organization and registration, the
Emerging Markets Fund incurred expenses in the amount of $2,536, which were
advanced by GIAC and which were repaid upon completion by the Fund of one year
of operations. These expenses included legal and auditing fees, registration
fees and preparation and printing costs of the registration statement and other
documents. These expenses are being amortized by the International Fund on a
straight-line basis over a five-year period which began in February 1991 for the
International Fund and in September 1994 for the Emerging Markets Fund, when
each of the Funds first became available to owners and prospective owners of
contracts issued by GIAC.
As of April 2, 1997, the Small Cap Stock Fund has incurred expenses in
connection with its organization in the approximate amount of $1,500 which were
advanced by GISC. These organization expenses include, and/or are expected to
include, legal and auditing fees, registration fees and preparation and printing
costs of the registration statement and other documents. These expenses will be
amortized by the Small Cap Stock Fund on a straight-line basis over a five-year
period which will begin in June 1997, when the Fund first becomes available to
owners and prospective owners of contracts issued by GIAC.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are continuously offered at the net asset value per
share next determined after a proper purchase request is deemed received by
GIAC. Shares of the Funds are only offered to GIAC in connection with the
variable annuity and variable life insurance contracts issued through its
separate accounts. GIAC submits purchase and redemption orders on behalf of its
contractowners to the Funds based on premium payments or transfer instructions
furnished to GIAC by such contractowners. Payment for shares redeemed will be
made within seven (7) days after the order for redemption is received by the
Funds from GIAC. The redemption price will be the net asset value per share next
determined following the time a proper request for redemption is deemed to have
been received. The right to redeem a Fund's shares may be suspended or the date
of payment postponed beyond seven (7) days during any period when (1) trading on
the New York Stock Exchange is restricted, as determined by
B-21
<PAGE>
the SEC, or the New York Stock Exchange is closed for other than weekends and
holidays; (2) an emergency exists, as determined by the SEC, 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; or (3) the SEC by order so permits for the
protection of contractowners.
See the accompanying Prospectus for the applicable GIAC contract for a
description of the procedures concerning allocations or transfers among
investment options of the separate account which supports the contract.
CUSTODIAN AND TRANSFER AGENT
The custodian for all securities and assets of the Company is State Street
Bank and Trust Company ("State Street Bank"), 1776 Heritage Drive, North Quincy,
Massachusetts 02171. Portfolio securities purchased for the Funds outside of the
U.S. are maintained in the custody of foreign banks and trust companies which
are members of State Street Bank's Global Custody Network and foreign
depositories (foreign sub-custodians). State Street Bank and each of the foreign
custodial institutions holding portfolio securities of the Funds has been
approved by the Board in accordance with regulations under the 1940 Act.
To the extent required by the 1940 Act and the regulations thereunder, 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 foreign custodial
institution used by a Fund. However, 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
sub-custodians, difficulties and costs of obtaining jurisdiction over, or
enforcing judgments against, the foreign sub-custodians, or application of
foreign law to a Fund's foreign subcustodial 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.
GIAC serves as the Company's transfer and dividend paying agent. In its
capacity as transfer agent and dividend paying agent, GIAC issues and redeems
shares of the Funds and distributes dividends to the GIAC separate accounts
which invest in the Funds' shares.
State Street Bank does not play a part in formulating the investment
policies of the Funds or in determining which portfolio securities are to be
purchased or sold by the Funds.
LEGAL OPINION
The legality of the shares described in the Prospectus has been passed upon
by Richard T. Potter, Jr., Vice President and Counsel of GIAC and Counsel to the
Company.
INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
The independent auditors of the Company are Ernst & Young LLP, 787 Seventh
Avenue, New York, New York 10019. Ernst & Young LLP audits and reports on the
financial statements of the Company which appear in the Company's Annual Report
to Shareholders for the year ended December 31, 1996. That Annual Report,
together with the Semi-Annual Report to Shareholders for the six months ended
June 30, 1997 (unaudited), are incorporated by reference in this Statement of
Additional Information.
Unaudited financial statements for The Guardian Small Cap Stock Fund for
the period ended September 30, 1997 are set forth below.
B-22
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments
- --------------------------------------------------------------------------------
September 30, 1997 (Unaudited)
The Guardian Small Cap Stock Fund
- --------------------------------------------------------------------------------
Common Stock - 94.4%
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
Appliance and Furniture - 2.8%
35,800 Ethan Allen Interiors, Inc. $ 1,109,800
32,000 Furniture Brands Int'l., Inc. 604,000
-------------
1,713,800
- --------------------------------------------------------------------------------
Biotechnology - 0.3%
15,000 Depotech Corp. 202,500
- --------------------------------------------------------------------------------
Building Materials and Homebuilders - 4.8%
11,000 Centex Construction Products, Inc. 325,875
10,000 Crossmann Communities, Inc. 226,250
42,000 FM Pptys., Inc. 207,375
55,000 Griffon Corp. 893,750
11,000 Lone Star Industries, Inc. 594,000
5,000 Medusa Corp. 238,125
8,900 Southdown, Inc. 486,163
-------------
2,971,538
- --------------------------------------------------------------------------------
Capital Goods-Miscellaneous Technology - 4.1%
36,800 AFC Cable Systems, Inc. 1,306,400
4,900 Alliant Techsystems, Inc. 315,744
9,600 Computer Learning Centers, Inc. 374,400
8,700 Esterline Technologies Corp. 339,300
6,100 National Computer Systems, Inc. 215,788
-------------
2,551,632
- --------------------------------------------------------------------------------
Chemicals - 1.9%
9,100 AptarGroup, Inc. 509,031
8,000 Fuller HB Co. 433,500
10,000 McWhorter Technologies, Inc. 251,250
-------------
1,193,781
- --------------------------------------------------------------------------------
Coal - 0.8%
20,000 Zeigler Coal Hldg. Co. 467,500
- --------------------------------------------------------------------------------
Computer Software - 1.3%
4,500 National Instruments Corp. 208,687
8,400 Pegasystems, Inc. 255,150
6,800 Pervasive Software, Inc. 78,200
6,000 Visio Corp. 250,500
-------------
792,537
- --------------------------------------------------------------------------------
Computer Systems - 0.5%
6,900 Stratus Computer, Inc. 333,787
- --------------------------------------------------------------------------------
Cosmetics & Toiletries - 0.5%
13,000 Herbalife Int'l., Inc. 339,625
- --------------------------------------------------------------------------------
Drugs and Hospitals - 3.6%
4,400 Boron Lepore & Associates, Inc. 101,750
9,000 Integrated Health Svcs. 300,937
15,500 Life Technologies, Inc. 468,875
20,000 Respironics, Inc. 550,000
5,700 Total Renal Care Hldgs., Inc. 285,000
12,000 Universal Health Svcs., Inc. 519,000
-------------
2,225,562
- --------------------------------------------------------------------------------
Electrical Equipment - 2.2%
2,300 Hadco Corp. 124,559
10,000 Jabil Circuit, Inc. 655,000
4,100 Sanmina Corp. 354,906
3,000 Uniphase Corp. 238,500
-------------
1,372,965
- --------------------------------------------------------------------------------
Electronics and Instruments - 6.1%
3,200 ANADIGICS, Inc. 157,800
12,800 Dallas Semiconductor Corp. 572,800
15,000 FARO Technologies, Inc. 245,625
9,000 Fluke Corp. 486,000
17,500 Micrel, Inc. 740,469
9,500 Smart Modular Technologies, Inc. 788,500
10,000 Unitrode Corp. 741,250
1,000 Vitesse Semiconductor Corp. 49,563
--------------
3,782,007
- --------------------------------------------------------------------------------
Electronics - Semiconductor - 2.0%
14,500 ADE Corp. 581,812
10,400 Daisytek Int'l. Corp. 455,000
3,100 Lattice Semiconductor Corp. 201,887
2,500 RF Micro Devices, Inc. 46,562
--------------
1,285,261
- --------------------------------------------------------------------------------
Financial-Banks - 5.0%
22,000 CFX Corp. 471,625
33,500 North Fork Bancorp, Inc. 971,500
3,500 Prime Bancshares, Inc. 66,500
6,800 Silicon Valley Bancshares 397,800
10,900 U.S. Bancorp, Inc. 703,050
5,500 Westamerica Bancorp. 479,875
--------------
3,090,350
- --------------------------------------------------------------------------------
Financial-Thrift - 2.6%
5,500 Astoria Financial Corp. 276,719
12,000 CitFed Bancorp, Inc. 607,500
10,800 Coast Savings Financial, Inc. 566,325
3,000 Commercial Federal Corp. 141,375
--------------
1,591,919
- --------------------------------------------------------------------------------
Food, Beverage and Tobacco - 2.6%
19,800 Earthgrains Co. 851,400
11,000 Smithfield Foods, Inc. 330,000
9,200 Tootsie Roll Industries, Inc. 466,900
--------------
1,648,300
- --------------------------------------------------------------------------------
Household Products - 0.5%
9,200 Oneida Ltd. 326,600
- --------------------------------------------------------------------------------
Insurance - 10.3%
9,300 American Heritage Life Inv. 372,000
12,750 W.R. Berkley Corp. 549,048
10,100 CMAC Investment Corp. 541,612
15,000 Enhance Financial Svcs. Group, Inc. 821,250
9,000 Executive Risk, Inc. 615,375
12,000 Financial Sec. Assur. Hldgs. Ltd. 558,000
18,000 Frontier Insurance Group, Inc. 684,000
17,000 HCC Insurance Hldgs., Inc. 451,562
3,800 Markel Corp. 598,500
17,000 Penn America Group, Inc. 344,250
23,000 State Auto Financial Corp. 520,375
5,600 Vesta Insurance Group, Inc. 319,200
--------------
6,375,172
- --------------------------------------------------------------------------------
Lodging - 2.1%
15,000 Bristol Hotel Co. 419,063
17,000 Signature Resorts, Inc. 807,500
2,100 Fairfield Communities, Inc. 78,881
--------------
1,305,444
- --------------------------------------------------------------------------------
Machinery and Equipment - 4.2%
4,100 AAR Corp. 136,839
7,500 Applied Power, Inc. 472,031
2,500 Flowserve Corp. 74,688
7,300 Kennametal, Inc. 354,050
13,800 Manitowoc Co. 492,488
27,800 Robbins & Myers, Inc. 1,070,300
--------------
2,600,396
- --------------------------------------------------------------------------------
B-23
<PAGE>
The Guardian Small Cap Stock Fund
Schedule of Investments (Continued)
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
Merchandising-Department Stores - 2.0%
13,000 Carson Pirie Scott & Co. $ 512,688
13,000 Stein Mart, Inc. 425,750
6,600 Varlen Corp. 260,700
--------------
1,199,138
- --------------------------------------------------------------------------------
Merchandising - Mass - 1.0%
Shopko Stores, Inc. 639,600
- --------------------------------------------------------------------------------
Merchandising-Special - 5.0%
13,000 Best Buy Co., Inc. 320,937
21,200 Big Dog Hldgs., Inc. 296,800
21,000 Claire's Stores, Inc. 469,875
26,000 The Dress Barn 624,000
10,000 Lands End, Inc. 308,125
15,000 MacFrugals Bargain Closeouts 457,500
24,000 Sotheby's Hldgs., Inc. 487,500
3,700 St. John Knits, Inc. 166,269
--------------
3,131,006
- --------------------------------------------------------------------------------
Metals - Steel - 0.6%
3,300 AK Steel Hldg. Corp. 140,663
7,000 Titanium Metals Corp. 260,750
--------------
401,413
- --------------------------------------------------------------------------------
Miscellaneous - Consumer Growth Staples - 1.9%
9,500 New England Business Svcs., Inc. 304,000
12,300 StaffMark, Inc. 468,937
12,000 Valassis Communications, Inc. 382,500
--------------
1,155,437
- --------------------------------------------------------------------------------
Oil and Gas Producing - 5.0%
30,000 Basin Exploration, Inc. 502,500
22,000 Bellwether Exploration Co. 308,000
96,000 Canadian 88 Energy Corp. 442,820
21,000 Chieftain Int'l., Inc. 546,000
50,000 Petromet Resources Ltd. 160,156
16,000 Rigel Energy Corp. 172,000
7,000 St. Mary Land & Exploration Co. 317,625
95,000 Wainoco Oil Corp. 635,312
--------------
3,084,413
- --------------------------------------------------------------------------------
Oil and Gas Services - 3.7%
7,800 Dreco Energy Services Ltd. 445,359
1,500 Freide Goldman Int'l., Inc. 90,000
23,000 Halter Marine Group, Inc. 1,112,625
13,100 Varco Int'l., Inc. 635,350
--------------
2,283,334
- --------------------------------------------------------------------------------
Paper and Forest Products - 0.5%
6,500 Deltic Timber Corp. 212,469
3,150 Mosinee Paper Corp. 106,706
--------------
319,175
- --------------------------------------------------------------------------------
Publishing-News - 2.9%
15,000 Bowne & Co., Inc. 526,875
2,500 CMP Media, Inc. 62,500
15,000 Harte-Hanks Communications 494,063
10,100 McClatchy Newspapers, Inc. 347,187
6,200 Pulitzer Publishing Co. 350,300
--------------
1,780,925
- --------------------------------------------------------------------------------
Real Estate Investment Trust - 4.6%
7,500 Ambassador Apartments, Inc. 178,594
16,000 American Gen. Hospitality Corp. 466,000
8,000 Arden Realty, Inc. 251,000
12,000 Brandywine Realty Trust 287,250
7,500 Camden Ppty. Trust 229,688
13,500 Commercial Net Lease Realty, Inc. 215,156
30,000 Innkeepers USA Trust 515,625
7,500 JDN Realty Corp. 250,313
7,000 National Golf Ppty., Inc. 229,250
7,500 Charles E. Smith Residential Realty 255,000
--------------
2,877,876
- --------------------------------------------------------------------------------
Textile-Apparel and Production - 1.0%
7,600 Nautica Enterprises, Inc. 213,750
20,625 Paxar Corp. 406,055
--------------
619,805
- --------------------------------------------------------------------------------
Transportation-Miscellaneous - 4.0%
13,400 Airborne Freight Corp. 811,537
11,200 Air Express Int'l. Corp. 408,800
12,900 Expeditors Int'l. 540,187
7,000 Hub Group, Inc. 259,875
28,800 Maritrans, Inc. 277,200
12,000 Rollins Truck Leasing Corp. 204,750
--------------
2,502,349
- --------------------------------------------------------------------------------
Truckers - 3.3%
20,200 Arnold Industries, Inc. 472,175
6,800 Swift Transportation, Inc. 215,050
13,900 U.S. Freightways Corp. 467,387
19,800 Werner Enterprises, Inc. 480,150
13,000 Yellow Corp. 423,312
--------------
2,058,074
- --------------------------------------------------------------------------------
Utilities - Electric - 0.4%
14,000 Southern Electronics Corp. 273,000
- --------------------------------------------------------------------------------
Utilities-Gas and Pipeline - 0.3%
14,000 Aquila Gas Pipeline Corp. 180,250
- --------------------------------------------------------------------------------
Total Common Stocks
(Cost $47,690,726) 58,676,471
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Repurchase Agreement - 7.1%
- --------------------------------------------------------------------------------
Principal Maturity
Amount Date Value
- --------------------------------------------------------------------------------
$4,388,000 State Street Bank & Trust
repurchase agreement,
dated 9/30/97, maturity
value $4,388,707 at 5.80%
due 10/1/97 (collateralized by
$4,480,000 U.S. Treasury
Notes, 6.00% due 5/31/98) 10/1/97 $ 4,388,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $4,388,000) 4,388,000
- --------------------------------------------------------------------------------
Total Investments - 101.5%
(Cost $52,078,726) 63,064,471
Payables in Excess of Cash, Receivables
and Other Assets - (1.5%) (942,921)
- --------------------------------------------------------------------------------
Net Assets - 100.0% $62,121,550
- --------------------------------------------------------------------------------
B-24
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997 (Unaudited)
ASSETS:
Inestments, at identified cost $ 52,078,726
==============
Investments, at market 63,064,471
--------------
Cash 726
Receivable for securities sold 221,805
Dividends and interest receivable 36,821
Other assets 1,277
--------------
TOTAL ASSETS 63,325,100
--------------
LIABILITIES:
Payable for securities purchased 1,092,245
Accrued expenses 22,006
Due to affiliates 89,299
--------------
TOTAL LIABILITIES 1,203,550
--------------
NET ASSETS $ 62,121,550
==============
COMPONENTS OF NET ASSETS:
Capital stock, at par $436,605
Additional paid-in capital 50,141,607
Undistributed net investment income 108,438
Accumulated net realized gain on investments 449,155
Net unrealized appreciation of investments 10,985,745
--------------
NET ASSETS $ 62,121,550
--------------
Shares Outstanding - $0.10 par value 4,366,049
--------------
NET ASSET VALUE PER SHARE $ 14.23
==============
B-25
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Period from April 2, 1997* to September 30, 1997 (Unaudited)
Investment Income:
Income:
Dividends $ 143,437
Interest 122,838
--------------
Total Income 266,275
--------------
Expenses:
Investment advisory fees 112,168
Custodian fees 21,068
Registration fees 606
Audit fees 11,667
Directors' fees 7,222
Printing expense 3,667
Transfer agent fees 825
Other 614
--------------
Total Expenses 157,837
--------------
Net Investment Income 108,438
--------------
Realized and Unrealized Gain/(Loss)
on Investments
Net realized gain on investments 449,155
Net change in unrealized appreciation
of investments 10,985,745
--------------
Net Realized and Unrealized Gain
on Investments 11,434,900
--------------
Net Increase in Net Assets
from Operations $ 11,543,338
==============
* Commencement of operations.
B-26
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
Period from
April 2, 1997** to
September 30, 1997
(UNAUDITED)
-------------------
INCREASE IN NET ASSETS
From Operations:
Net investment income $ 108,438
Net realized gain on investments 449,155
Net change in unrealized appreciation of investments 10,985,745
--------------
Net Increase in Net Assets from Operations 11,543,338
--------------
Dividends and Distribution to Shareholders from:
Net investment income -
Net realized gain on investments -
--------------
Total Dividends and Dstribution to Shareholders -
--------------
From Capital Share Transactions:
Net increase in net assets from capital share transactions 50,578,212
--------------
Net Increase in Net Assets 62,121,550
Net Assets:
Beginning of period -
--------------
End of period* $ 62,121,550
==============
* Incudes undistributed net investment income of: $ 108,438
** Commencement of operations.
B-27
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the period
indicated:
Period from
April 2, 1997* to
September 30, 1997
(UNAUDITED)
-------------------
Net asset value, beginning of period $ 10.00
-------------------
Income from investment operations
Net investment income 0.02
Net realized and unrealized gain/(loss) on investments 4.21
-------------------
Net increase/(decrease) from investment operations 4.23
-------------------
Dividends and Distributions to Shareholders from:
Net investment income -
Net realized gain -
-------------------
Total dividends and distributions -
-------------------
Net asset value, end of period $ 14.23
===================
Total return** 42.30%
====================
Ratios/supplemental data:
Net assets, end of period (000's omitted) $ 62,122
Ratio of expenses to average net assets 0.98%(a)
Ratio of net investment income to average net assets 0.54%(a)
Portfolio turnover rate 11%
Average rate of commissions paid (b) 0.039(b)
* Commencement of operations.
** Total returns do not reflect the effects of charges deducted pursuant to the
terms of GIAC's variable contracts. Inclusion of such charges would reduce
the total return for the period shown.
(a) Annualized.
(b) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on wich
commissions are charged.
B-28
<PAGE>
- --------------------------------------------------------------------------------
GIAC Funds, Inc., - The Guardian Small Cap Stock Fund
- -------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
September 30, 1997 (Unaudited)
- ------------------------------------------------
Note A -- Organization and Accounting Policies
- ------------------------------------------------
GIAC Funds, Inc. (the Company) is a diversified open-end management
investment company registered under the Investment Company Act of 1940, as
amended (1940 Act), which was incorporated in Maryland on October 29, 1990. The
Company was known as Baillie Gifford International Fund, Inc. prior to October
11, 1994 and GBG Funds, Inc. prior to March 27, 1997. Shares of the Company are
offered in three series, Baillie Gifford International Fund (BGIF), Baillie
Gifford Emerging Markets Fund (BGEMF) and The Guardian Small Cap Stock Fund
(GSCSF). The series are collectively referred to herein as the "Funds." Shares
of the Funds are only sold to certain separate accounts of The Guardian
Insurance & Annuity Company, Inc. (GIAC). GIAC is a wholly owned subsidiary of
The Guardian Life Insurance Company of America. The Funds are available for
investment only through the allocation of contract values under certain variable
annuity and variable life insurance contracts issued by GIAC. Upon commencing
its operations on April 2, 1997, GSCSF sold 2,000,000 shares of its capital
stock to The Guardian Life Insurance Company of America for $20,000,000 to
facilitate the commencement of operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Investments in foreign securities are vulnerable to the effects of
changes in the relative values of the local currency and the U.S. dollar and to
the effects of changes in each country's legal, political and economic
environment.
Valuation of Investments
Equity and debt securities listed on domestic or foreign securities
exchanges are valued at the last sales price of such exchanges, or if no sale
occurred, at the mean of the bid and asked prices. Securities traded in the
over-the-counter market are valued using the last sales price, when available.
Otherwise, over-the-counter securities are valued at the mean between the bid
and asked prices or yield equivalents as obtained from one or more dealers that
make a market in the securities.
Certain debt securities may be valued each business day by an independent
pricing service (Service) approved by the Board of Directors of the Company.
Debt securities for which quoted bid prices, in the judgment of the Service, are
readily available and representative of the bid side of the market, are valued
at the mean between the quoted bid prices (as obtained by the Service from
dealers in such securities) and asked prices (as calculated by the Service based
upon its evaluation of the market for such securities). Other debt securities
that are valued by the Service are carried at fair value as determined by the
Service, based on methods which include consideration of: yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Securities for which market
quotations are not readily available, including restricted securities and
illiquid assets, are valued at fair value as determined in good faith by or
under the direction of the Company's Board of Directors.
Repurchase agreements are carried at cost which approximates market value
(See Note E).
- --------------------------------------------------------------------------------
B-29
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
September 30, 1997 (Unaudited)
Securities Transactions and Investment Income
Securities transactions are recorded on the trade date. Net realized gains
or losses on sales of investments are determined on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on an accrual basis.
Taxes
The Fund intends to continue to qualify to be taxed as a "regulated
investment company" under the provisions of the U.S. Internal Revenue Code of
1986, as amended (Code), and as such will not be subject to federal income tax
on income (including any realized capital gains) which is distributed in
accordance with the provisions of the Code to its shareholders. Therefore, no
federal income tax provision is required. Losses on security transactions
arising after October 31 are treated as arising on the first day of the Fund's
next fiscal year.
Investment income received from investments in foreign currencies may be
subject to foreign withholding tax. Whenever possible, the Fund will attempt to
operate so as to qualify for reduced tax rates or tax exemptions in those
countries with which the United States has a tax treaty.
Dividends and Distributions to Shareholders
The Fund intends to distribute each year, as dividends, substantially all
net investment income and net capital gains realized. All such dividends or
distributions are credited in the form of additional shares of the Fund's at net
asset value on the ex-dividend date. Such distributions are determined in
conformity with federal income tax regulations. Differences between the
recognition of income on an income tax basis and recognition of income based on
generally accepted accounting principles may cause
- --------------------------------------------------------------------------------
B-30
<PAGE>
- --------------------------------------------------------------------------------
GIAC Funds, Inc., - The Guardian Small Cap Stock Fund
- -------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
September 30, 1997 (Unaudited)
temporary overdistributions of net realized gains and net investment income.
Currently, the Fund's policy is to distribute net investment income
approximately every six months and net capital gains once a year. This policy
is, however, subject to change at any time by the Company's Board of Directors.
Reclassifications of Capital Accounts
The treatment for financial statement purposes of distributions made during
the year from net investment income and net realized gains may differ from their
ultimate treatment for federal income tax purposes. These differences primarily
are caused by differences in the timing of the recognition of certain components
of income or capital gain; and the recharacterization of foreign exchange gains
or losses to either ordinary income or realized capital gains for federal income
tax purposes. Where such differences are permanent in nature, they are
reclassified in the components of net assets based on their ultimate
characterization for federal income tax purposes. Any such reclassifications
will have no effect on net assets, results of operations, or net asset value per
share of the Fund.
- --------------------------------------------
Note B -- Investment Management Agreements
and Payments to Related Parties
- --------------------------------------------
The Fund has an investment advisory agreement with Guardian Investors
Services Corporation (GISC), a wholly owned subsidiary of GIAC. GISC receives a
management fee from GSCSF at an annual rate of .75% of its average daily net
assets.
No compensation is paid by the Company to a director who is deemed to be
an "interested person" (as defined in the 1940 Act) of the Company. Each
director not deemed an "interested person" is paid an annual fee of $500 and
$350 for attendance at each meeting of the Company. The aggregate remunerations
paid by GSCSF to the Company's disinterested directors amounted to $7,222 for
the six months ended September 30, 1997.
- ---------------------------------------------
Note C -- Deferred Organization and Initial
Offering Expenses
- ---------------------------------------------
GSCSF incurred expenses of $1,500 in connection with its organization and
registration. These expenses were advanced by GIAC and will be repaid by GSCSF
upon completion of its first year of operations or when its net assets reach $50
million. These expenses have been deferred and are being amortized on a
straight-line basis over a five year period, beginning with the commencement of
GSCSF's operations in April, 1997.
- -----------------------------------
Note D -- Investment Transactions
- -----------------------------------
Purchases and proceeds from sales of securities (excluding short-term
securities) were as follows:
- --------------------------------------------------------------------------------
B-31
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
September 30, 1997 (Unaudited)
From April 2 to September 30, 1997
(Unaudited)
----------------------------------
GSCSF
-----
Purchases
Stocks and debt obligations ............ $ 49,463,528
Proceeds
Stocks and debt obligations ............ $ 2,072,147
The cost of investments owned at September 30, 1997 for federal income tax
purposes for GSCSF is the same as for financial reporting purposes. The gross
unrealized appreciation and (depreciation) of investments at September 30, 1997
were as follows:
GSCSF
-----
Gross Appreciation ........................... $ 11,363,649
Gross Depreciation ........................... $ (377,904)
------------
Net Unrealized Appreciation ............ $ 10,985,745
============
Forward foreign currency contracts represent commitments to purchase or sell
- --------------------------------
Note E -- Repurchase Agreements
- --------------------------------
Collateral underlying repurchase agreements takes the form of either cash or
fully negotiable U.S. government securities. Repurchase agreements are fully
collateralized (including the interest earned thereon) and such collateral is
marked-to-market daily while the agreements remain in force. If the value of the
underlying securities falls below the value of the repurchase price plus accrued
interest, the Funds will require the seller to deposit additional collateral by
the next business day. If the request for additional collateral is not met, or
the seller defaults, the Funds maintain the right to sell the collateral and may
claim any resulting loss against the seller. The Company's Board of Directors
has established standards to evaluate the creditworthiness of broker-dealers and
banks which engage in repurchase agreements with the Funds. Repurchase
agreements of more than seven days' duration (or investments in any other
securities which are deemed to be not readily marketable by the staff of the
Securities and Exchange Commission) are not permitted if more than 10% of the
applicable Fund's net assets would be so invested.
- --------------------------------------------------------------------------------
B-32
<PAGE>
- --------------------------------------------------------------------------------
GIAC Funds, Inc. - The Guardian Small Cap Stock Fund
- -------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
September 30, 1997 (Unaudited)
- ----------------------------------------
Note F -- Transactions in Capital Stock
- ----------------------------------------
There are 1,000,000,000 shares of $0.10 par value capital stock authorized.
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
April 2 April 2
to to
September 30, 1997 September 30, 1997
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------
Shares Amount
- -------------------------------------------------------------------------------------
<S> <C> <C>
o Guardian Small Cap Stock Fund:
Shares sold 4,392,128 $50,927,444
Shares issued in reinvestments of dividends
and distributions -- --
Shares repurchased 26,079 (349,232)
- -------------------------------------------------------------------------------------
Net increase 4,366,049 $50,578,212
- -------------------------------------------------------------------------------------
</TABLE>
- --------------------------
Note G -- Line of Credit
- --------------------------
A $20,000,000 line of credit available to GSCSF and the other Guardian
related Funds has been established with Morgan Guaranty Trust Company. The rate
of interest charged on any borrowings is based upon the prevailing Federal Funds
rate at the time of the loan plus .25% calculated on a 360-day basis per annum.
For the six months ended September 30, 1997 the fund did not borrow against
this line of credit.
- --------------------------------------------------------------------------------
B-33
<PAGE>
GIAC FUNDS, INC.
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
a) Financial Statements of each Fund - Incorporated by reference in Part B:
Schedule of Investments as of December 31, 1996 (Audited)
Statement of Assets and Liabilities as of December 31, 1996 (Audited)
Statement of Operations for the Year ended December 31, 1996 (Audited)
Statement of Changes in Net Assets for the Years ended December 31, 1996
and 1995 (Audited)
Financial Highlights for the years noted therein
Notes to Financial Statements
Reports of Ernst & Young LLP, Independent Auditors
Schedule of Investments for Baillie Gifford International Fund ("BGIF") as
of June 30, 1997 (unaudited)
Statement of Assets and Liabilities for BGIF as of June 30, 1997
(unaudited)
Statement of Operations for BGIF the six months ended June 30, 1997
(unaudited)
Statement of Changes in Net Assets for BGIF for the six months ended June
30, 1997 (unaudited)
Schedule of Investments for Baillie Gifford Emerging Markets Fund ("BGEMF")
as of June 30, 1997 (unaudited)
Statement of Assets and Liabilities for BGEMF as of June 30, 1997
(unaudited)
Statement of Operations for BGEMF for the six months ended June 30, 1997
(unaudited)
Statement of Changes in Net Assets for BGEMF for the six months ended June
30, 1997 (unaudited)
Notes to Financial Statements (unaudited)
Financial Highlights for the periods noted therein (unaudited)
Schedule of Investments for The Guardian Small Cap Stock Fund ("Small Cap
Fund") as of September 30, 1997 (unaudited)
Statement of Assets and Liabilities for the Small Cap Fund as of September
30, 1997 (unaudited)
Statement of Operations for the Small Cap Fund for the period ended
September 30, 1997 (unaudited)
Statement of Changes in Net Assets for the Small Cap Fund for the period
ended September 30, 1997 (unaudited)
Notes to Financial Statements (unaudited)
Financial Highlights for the Small Cap Fund for the period ended September
30, 1997
C-1
<PAGE>
b) Exhibits
Number Description
------ -----------
1(a) -- Registrant's Articles of Incorporation(1)
1(b) -- Amendment to Registrant's Articles of
Incorporation(6)
1(c) -- Amendment to Registrant's Articles of Incorporation (8)
1(d) -- Amendment to Registrant's Articles of Incorporation
(change of name) (9)
2 -- Registrant's By-Laws(1)
3 -- Not Applicable
4 -- Not Applicable
5(a) -- Form of Investment Management Agreement between
Guardian Baillie Gifford Limited and Registrant for
Baillie Gifford International Fund(2)
5(b) -- Form of Investment Management Agreement between
Guardian Baillie Gifford Limited and Registrant for
Baillie Gifford Emerging Markets Fund(6)
5(c)(i) -- Form of Sub-Investment Management Agreement between
Guardian Baillie Gifford Limited and Baillie Gifford
International Fund(2)
(ii) -- Form of Supplemental Sub-Investment Management
Agreement between Guardian Baillie Gifford Limited and
Baillie Gifford Overseas Limited for Baillie Gifford
International Fund(4)
5(d) -- Form of Sub-Investment Management Agreement between
Guardian Baillie Gifford Limited and Baillie Gifford
Overseas Limited for Baillie Gifford Emerging Markets
Fund(6)
5(e) -- Form of Investment Management Agreement between
Guardian Investor Services Corporation and Registrant
for The Guardian Small Cap Stock Fund (8)
6 -- Not Applicable
7 -- Not Applicable
8 -- Form of Custodian Agreement between State Street Bank
and Trust Company and Registrant(6)
C-2
<PAGE>
8(b) -- Addendum to Custodian Agreement between State Street
Bank and Trust Company and Registrant(5)
9 -- Form of Transfer Agency Agreement between State
Street Bank and Trust Company and Registrant(6)
10(a) -- Opinion and Consent of Counsel(4)
10(b) -- Consent of Counsel
11(a) -- Consent of Ernst & Young LLP
12 -- Not Applicable
13 -- Letter from The Guardian Insurance & Annuity Company,
Inc. with respect to providing the initial capital for
the Registrant(3)
14 -- Not Applicable
15 -- Not Applicable
16 -- Schedule for Computation of Performance Quotations(4)
17(a) -- Powers of Attorney executed by the Board of Directors
and certain principal officers of the Registrant(2)
17(b) -- Powers of Attorney executed by Messrs. Angle,
Fabozzi, and Futia (7) Directors of the Registrant
27 -- Financial Data Schedules
----------
(1) Incorporated by reference to the Registration Statement for the Registrant
on Form N-1A (Reg. No. 33-37883) as filed on November 19, 1990.
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement for the Registrant on Form N-1A as filed on January 8,
1991.
(3) Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registration Statement for the Registrant on Form N-1A as filed on January 28,
1991.
(4) Incorporated by reference to Post-Effective Amendment No. 2 to the
Registration Statement for the Registrant on Form N-1A as filed on April 20,
1992.
(5) Incorporated by reference to Post-Effective Amendment No. 4 to the
Registration Statement for the Registrant on Form N-1A as filed on April 28,
1994.
(6) Incorporated by reference to Post-Effective Amendment No. 6 to the
Registration Statement for the Registrant on Form N-1A as filed on October 12,
1994.
(7) Incorporated by reference to Post-Effective Amendment No. 8 to the
Registration Statement for the Registrant on Form N-1A as filed on April 19,
1996.
(8) Incorporated by reference to Post-Effective Amendment No. 9 to the
Registration Statement for the Registrant on Form N-1A as filed on February 14,
1997.
(9) Incorporated by reference to Post-Effective Amendment No. 10 to the
Registration Statement for the Registrant on Form N-1A as filed on April 23,
1997.
Item 25. Persons Controlled by or under Common Control with Registrant
The following list sets forth the persons directly controlled by The
Guardian Life Insurance Company of America ("Guardian Life") as of September 30,
1997:
State of Percent of
Incorporation Voting Securities
Name of Entity or Organization Owned
------------- ------------- --------------
The Guardian Insurance & Delaware 100%
Annuity Company, Inc.
Guardian Asset Management Delaware 100%
Corporation
Park Avenue Life Insurance Delaware 100%
Company
Guardian Reinsurance Services, Inc. Connecticut 100%
Physicians Health Services, Inc. Delaware 14%
Private Healthcare Systems, Inc. Delaware 14%
Managed Dental Care, Inc. California 100%
The Guardian Baillie Gifford Massachusetts 30%
International Fund
The Guardian Investment Quality Massachusetts 51%
Bond Fund
Baillie Gifford International Fund Maryland 16%
Baillie Gifford Emerging Markets Fund Maryland 23%
The Guardian Tax-Exempt Fund Massachusetts 87%
The Guardian Asset Allocation Fund Massachusetts 14%
The Guardian Park Avenue Small Cap Fund Massachusetts 35%
The Guardian Baillie Gifford Emerging
Markets Fund Massachusetts 75%
The Guardian Small Cap Stock Fund Maryland 46%
C-3
<PAGE>
The following list sets forth the persons directly controlled by affiliates
of Guardian Life and thereby indirectly controlled by Guardian Life as of
September 30, 1997:
<TABLE>
<CAPTION>
Approximate
Percentage of Voting
Securities Owned
Place of Incorporation by Guardian Life
Name of Entity or Organization and its Affiliates
-------------- --------------- ------------------
<S> <C> <C>
Guardian Investor Services New York 100%
Corporation
Guardian Baillie Gifford Limited Scotland 51%
The Guardian Cash Fund, Inc. Maryland 100%
The Guardian Bond Fund, Inc. Maryland 100%
The Guardian Stock Fund, Inc. Maryland 100%
GIAC Funds, Inc. (fka GBG Funds, Inc.) Maryland 100%
</TABLE>
Item 26. Number of Holders of Registrant's Securities
Number of Record Holders
Title of Class as of September 30, 1997
-------------- ------------------------
International Stock Class 12
Emerging Markets Stock Class 7
Small Cap Stock Class 6
Item 27. Indemnification
Reference is made to Article EIGHTH, Section 2 of Registrant's By-Laws,
filed as Exhibit 2 to the Registration Statement on Form N-1A on November 19,
1990 and incorporated herein by reference.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business and Other Connections of Registrant's Investment Adviser and
Sub-Investment Adviser
At present, Guardian Baillie Gifford Limited ("GBG"), the Registrant's
investment manager, is exclusively engaged in the business of acting as the
investment manager to the Registrant and one other series fund of The Park
Avenue Portfolio, a registered investment company underwritten and distributed
by Guardian Investor Services Corporation. GBG's principal business address is 1
Rutland Court, Edinburgh EH3 8EY, Scotland. A list of GBG's executive officers
and directors is set forth below, indicating the business, profession, vocation
or employment of a substantial nature in which each person has been engaged
during the past two fiscal years for his or her own account or in the capacity
of director, officer, partner, or trustee, aside from any affiliation with the
Registrant.
C-4
<PAGE>
Other Substantial Business,
Name Position(s) with GBG Profession, Vocation or Employment
---- -------------------- ----------------------------------
CHARLES EDGAR ALBERS Director Senior Vice President, Equity
Securities: The Guardian Life
Insurance Company of America.*
Vice President, Equity
Securities: The Guardian
Insurance & Annuity Company,
Inc.* Executive Vice President,
Guardian Investor Services
Corporation:* Vice President
Guardian Asset Management
Corporation.* Officer of various
Guardian-sponsored mutual
funds.*
ARTHUR VINCENT FERRARA Director Retired. Chairman of the Board
and Chief Executive Officer: The
Guardian Life Insurance Company
of America until December 1995.
Director (Trustee) of The
Guardian Insurance & Annuity
Company, Inc.,* Guardian Investor
Services Corporation ("GISC"),*
Gabelli Capital Asset Fund and
various Guardian-sponsored mutual
funds
GAVIN JOHN NORMAN GEMMELL Director Senior Partner: Baillie Gifford &
Co.** Chairman: Baillie Gifford
Overseas Limited** and Baillie
Gifford & Co. Limited** Director:
Toyo Trust Baillie Gifford**
EDWARD H. HOCKNELL Director Director: Baillie Gifford
Overseas Limited** Officer of:
The Park Avenue Portfolio*
FRANK J. JONES Director Executive Vice President and
Chief Investment Officer: The
Guardian Life Insurance Company
of America.* Executive Vice
President, Chief Investment
Officer and Director: The
Guardian Insurance & Annuity
Company, Inc.;* Park Avenue Life
Insurance Company.* President
and Director: Guardian Asset
Management Corporation.*
Director: Guardian Investor
Services Corporation.* Officer
of various Guardian-sponsored
mutual funds.*
ROWAN ROBIN MENZIES Director Partner: Baillie Gifford & Co.**
Director: Baillie Gifford
Overseas Limited** Officer of:
The Park Avenue Portfolio*
JOSEPH DUDLEY SARGENT Director President and Chief Executive
Officer: The Guardian Life
Insurance Company of America
since January 1996; President
and Director prior thereto*
President, Chief Executive
Officer and Director: The
Guardian Insurance & Annuity
Company, Inc.* and Park Avenue
Life Insurance Company.*
Director: Guardian Investor
Services Corporation and
Guardian Asset Management
Corporation* Director (Trustee)
of various Guardian-sponsored
mutual funds.*
JOHN MATTHEW SMITH Director Executive Vice President, Equity
Products: The Guardian Life
Insurance Company of America
since January 1995; Senior Vice
President, Equity Products,
prior thereto.* Executive Vice
President and Director: The
Guardian Insurance & Annuity
Company, Inc.* President and
Director: Guardian Investor
Services Corporation.* Director:
Guardian Asset Management
Corporation* President: GIAC
Funds, Inc.
MAXWELL C. B. WARD Director Chairman: Baillie Gifford
Overseas Limited**; Director
Baillie Gifford Overseas Limited,
prior thereto.
- ----------
* Principal business address is 201 Park Avenue South, New York, New York
10003.
** Principal business address is 1 Rutland Court, Edinburgh, EH3 8EY,
Scotland.
C-5
<PAGE>
Baillie Gifford Overseas Limited ("BGO") acts as the sub-investment manager
for the Registrant and one other Guardian-sponsored mutual fund and provides
investment management services to institutional clients outside of the United
Kingdom. BGO is wholly owned by Baillie Gifford & Co. which is an investment
management firm providing independent investment management services to
investment trusts, unit trusts, pension funds, charitable funds and other
institutional clients primarily located in the United Kingdom.
A list of BGO's directors is set forth below, indicating the business,
profession, vocation or employment of a substantial nature in which each person
has been engaged during the past two fiscal years for his or her own account or
in the capacity of director, officer, partner, or trustee, aside from any
affiliation with the Registrant. Except where otherwise noted, the principal
business address of each individual in his capacity as director of BGO is 1
Rutland Court, Edinburgh, EH3 8EY, Scotland.
Position Other Substantial
Name with BGO Business Affiliations*
---- -------- ----------------------
Sarah J. Athley Director Director: Baillie Gifford & Co.
Gavin J. N. Gemmell** Director Senior Partner: Baillie Gifford & Co.
Edward H. Hocknell** Director None
Gareth A. Howlett Director Director: Toyo Trust Baillie Gifford
Limited
J. Ross Lidstone Director Partner: Baillie Gifford & Co.
Gill E. Meekison Director Director: Baillie Gifford Savings
Management Limited
R. Robin Menzies** Director Partner: Baillie Gifford & Co.
Maxwell C. B. Ward** Chairman Partner: Baillie Gifford & Co.
- ----------
* Principal business address of each entity is 1 Rutland Court, Edinburgh,
EH3 8EY, Scotland.
** Director of GBG, the Registrant's investment manager.
Guardian Investor Services Corporation
Guardian Investor Services Corporation ("GISC") acts as the sole investment
adviser for The Guardian Small Cap Stock Fund. It also serves as adviser to The
Guardian Stock Fund, Inc., The Guardian Cash Fund, Inc., The Guardian Bond Fund,
Inc., and six of the eight series funds which comprise The Park Avenue
Portfolio, namely: The Guardian Park Avenue Fund, The Guardian Park Avenue Small
Cap Fund, The Guardian Investment Quality Bond Fund, The Guardian Tax-Exempt
Fund, The Guardian Cash Management Fund, and The Guardian Asset Allocation Fund.
GISC serves as the manager of The Gabelli Capital Asset Fund. GISC is also the
co-investment adviser for The Guardian Real Estate Account. GISC's principal
business address is 201 Park Avenue South, New York, New York 10003. In
addition, GISC is the distributor of variable annuities and variable life
insurance policies offered by The Guardian Insurance & Annuity Company, Inc.
("GIAC") through its separate accounts. These separate accounts, The
Guardian/Value Line Separate Account, The Guardian Separate Account A, The
Guardian Separate Account B, The Guardian Separate Account C, The Guardian
Separate Account D, The Guardian Separate Account E and The Guardian Separate
Account K, are all unit investment trusts registered under the Investment
Company Act of 1940, as amended.
A list of GISC's officers and directors is set forth below, indicating the
business, profession, vocation or employment of a substantial nature in which
each person has been engaged during the past two fiscal years for his or her own
account or in the capacity of director, officer, partner, or trustee, aside from
any affiliation with the Registrant. Except where otherwise noted, the principal
business address of each company is 201 Park Avenue South, New York, New York
10003.
C-6
<PAGE>
Other Substantial Business,
Name Position(s) with GISC Profession, Vocation or Employment
---- --------------------- ----------------------------------
Charles E. Albers Executive Vice Senior Vice President, Equity
President Securities: The Guardian Life
Insurance Company of America. Vice
President, Equity Securities: The
Guardian Insurance & Annuity
Company, Inc. Executive Vice
President: Guardian Asset
Management Corporation. Officer of
various Guardian-sponsored mutual
funds. Director: Guardian Baillie
Gifford Limited.*
Kevin S. Alter Second Vice Director, Broker-Dealer Operations:
President The Guardian Life Insurance Company
of America.
Joseph A. Caruso Secretary Vice President and Secretary,
The Guardian Life Insurance
Company of America 1/96 to
present; Second Vice President
and Secretary, 1/95 to 1/96;
Secretary prior thereto.
Secretary: The Guardian
Insurance & Annuity Company,
Inc., Guardian Investor Services
Corporation, Guardian Asset
Management Corporation, various
Guardian-sponsored mutual funds.
- ----------
* Principal business address: 1 Rutland Court, Edinburgh EH3 8EY, Scotland.
C-7
<PAGE>
Other Substantial Business,
Name Position(s) with GISC Profession, Vocation or Employment
---- --------------------- ----------------------------------
Philip H. Dutter Director Independent Consultant (self-
employed). Director: The Guardian
Life Insurance Company of America.
Director: The Guardian Insurance &
Annuity Company, Inc.
John M. Fagan Vice President Vice President, Life Policy
Operations: The Guardian Life
Insurance Company of America. Vice
President: The Guardian Insurance &
Annuity Company, Inc.
Arthur V. Ferrara Director Retired. Chairman of the Board &
Chief Executive Officer: The
Guardian Life Insurance Company of
America 1/93 - 12/95; President,
Chief Executive Officer & Director
prior thereto. Director (Trustee)
of The Guardian Insurance & Annuity
Company, Inc., and various
Guardian-sponsored mutual funds.
Leo R. Futia Director Director: The Guardian Life
Insurance Company of America.
Director: The Guardian Insurance &
Annuity Company, Inc.
Director/Trustee of various
Guardian-sponsored mutual funds and
mutual funds sponsored by Value
Line, Inc.*
Alexander M. Grant, Jr. Second Vice Second Vice President, The Guardian
President Life Insurance Company of America,
1/97 to present; Assistant Vice
President, Investments 9/93 to
12/96; Investment Officer, Fixed
Income Securities prior thereto.
Officer of various
Guardian-sponsored mutual funds.
Second Vice President: Park Avenue
Life Insurance Company and The
Guardian Insurance & Annuity
Company, Inc.
Earl C. Harry Treasurer Treasurer: The Guardian Life
Insurance Company of America
7/96 - present; Assistant
Treasurer prior thereto.
Treasurer: The Guardian Insurance
& Annuity Company, Inc.,
Guardian Asset Management
Corporation, Park Avenue Life
Insurance Company, and Managed
Dental Care, Inc.
- ----------
* Principal business address: 711 Third Avenue, New York, New York 10017.
C-8
<PAGE>
Other Substantial Business,
Name Position(s) with GISC Profession, Vocation or Employment
---- --------------------- ----------------------------------
Thomas R. Hickey, Jr. Vice President, Vice President, Equity Operations:
Operations The Guardian Life Insurance Company
of America. Vice President,
Operations: The Guardian
Insurance & Annuity Company, Inc.
Officer of various Guardian-
sponsored mutual funds.
Peter L. Hutchings Director Executive Vice President and
Chief Financial Officer: The
Guardian Life Insurance Company
of America. Director, President
and Chief Executive Officer,
Park Avenue Life Insurance
Company. Director: Guardian
Asset Management Corporation.
Director: The Guardian Insurance
& Annuity Company, Inc.
Ryan W. Johnson Vice President, Second Vice President, Equity
Equity Sales Sales: The Guardian Life Insurance
Company of America since 3/95;
Regional Sales Director, Western
Division, for Equity Products prior
thereto. Vice President, Equity
Sales, The Guardian Insurance &
Annuity Company, Inc.
Frank J. Jones Director Executive Vice President and
Chief Investment Officer: The
Guardian Life Insurance Company
of America. Director, Executive
Vice President and Chief
Investment Officer: The Guardian
Insurance & Annuity Company,
Inc. President and Director:
Guardian Asset Management
Corporation and Guardian Baillie
Gifford Limited*. Executive Vice
President, Park Avenue Life
Insurance Company. Officer of
various Guardian-sponsored
mutual funds.
- ----------
*Principal business address: 1 Rutland Court, Edinburgh EH3 8EY, Scotland.
C-9
<PAGE>
Other Substantial Business,
Name Position(s) with GISC Profession, Vocation or Employment
---- --------------------- ----------------------------------
Ann T. Kearney Second Vice Second Vice President, Group
President Pensions Financial Management, The
Guardian Life Insurance Company of
America, 1/95 to present; Assistant
Vice President & Equity Controller
6/94 to 12/94; Assistant Controller
prior thereto. Second Vice
President: The Guardian Insurance &
Annuity Company, Inc. Controller of
various Guardian-sponsored mutual
funds.
Nikolaos D. Monoyios Vice President Vice President, Equity Securities:
The Guardian Life Insurance Company
of America. Vice President:
Guardian Asset Management
Corporation. Officer of various
Guardian-sponsored mutual funds.
Frank L. Pepe Vice President & Vice President, Equity Management
Controller and Control, The Guardian Life
Insurance Company of America
since 1/96. Second Vice
President, Equity Management and
Control, prior thereto. Vice
President and Controller: The
Guardian Insurance & Annuity
Company, Inc. Officer of various
Guardian-sponsored mutual
funds.
C-10
<PAGE>
Other Substantial Business,
Name Position(s) with GISC Profession, Vocation or Employment
---- --------------------- ----------------------------------
Richard T. Potter, Jr. Vice President Vice President and Equity Counsel:
and Counsel The Guardian Life Insurance Company
of America since 1/96; Second Vice
President and Equity Counsel prior
thereto. Counsel: The Guardian
Insurance & Annuity Company, Inc.
and Guardian Asset Management
Corporation; Counsel of various
Guardian-sponsored mutual funds.
Joseph D. Sargent Director President, Chief Executive
Officer and Director: The
Guardian Life Insurance Company
of America since 1/96; President
and Director prior thereto.
Director, President and Chief
Executive Officer: The Guardian
Insurance & Annuity Company,
Inc. Director (Trustee) Guardian
Asset Management Corporation,
Guardian Baillie Gifford, Ltd.*,
Park Avenue Life Insurance
Company, and various Guardian-
sponsored mutual funds.
John M. Smith President & Executive Vice President: The
Director Guardian Life Insurance Company of
America 1/95 to present; Senior
Vice President, Equity Products,
prior thereto. Executive Vice
President and Director: The
Guardian Insurance & Annuity
Company, Inc. Director: Guardian
Baillie Gifford Limited*
President and Director: Guardian
Asset Management Corporation.
President: GIAC Funds, Inc.
Donald P. Sullivan, Jr. Vice President Second Vice President, Equity
Administration, The Guardian Life
Insurance Company of America 11/94
to present; Assistant Vice
President, Equity Administration
prior thereto. Vice President:
Guardian Insurance & Annuity
Company, Inc.; Second Vice
President: various mutual
Guardian-sponsored mutual funds.
William C. Warren Director Retired.
Director: The Guardian Life
Insurance Company of America.
Director: The Guardian Insurance &
Annuity Company, Inc.
- ----------
*Principal business address: 1 Rutland Court, Edinburgh EH3 8EY, Scotland.
C-11
<PAGE>
Item 29. Principal Underwriters
(a) Guardian Investor Services Corporation ("GISC") is the principal underwriter
and distributor of the Registrant's shares and is also the principal underwriter
and distributor of The Guardian Stock Fund, Inc., The Guardian Bond Fund, Inc.,
The Guardian Cash Fund, Inc., and The Park Avenue Portfolio, a series fund
consisting of the following portfolios: The Guardian Park Avenue Fund, The
Guardian Park Avenue Small Cap Fund, The Guardian Cash Management Fund, The
Guardian Baillie Gifford International Fund, The Guardian Baillie Gifford
Emerging Markets Fund, The Guardian Investment Quality Bond Fund, The Guardian
Tax-Exempt Fund, and The Guardian Asset Allocation Fund. In addition, GISC is
the distributor of variable contracts offered by The Guardian Insurance &
Annuity Company, Inc. ("GIAC") through GIAC's separate accounts: The Guardian
Real Estate Account, which is not a registered investment company, and The
Guardian/Value Line Separate Account, The Guardian Separate Account A, The
Guardian Separate Account B, The Guardian Separate Account C, The Guardian
Separate Account D, The Guardian Separate Account E and The Guardian Separate
Account K, which are all registered as unit investment trusts under the
Investment Company Act of 1940, as amended. These latter separate accounts buy
and sell shares of The Guardian Stock Fund, Inc., The Guardian Bond Fund, Inc.,
The Guardian Cash Fund, Inc. and GIAC Funds, Inc. on behalf of GIAC's variable
contractowners.
(b) The following is a list of the directors and officers of GISC and their
respective positions with the Registrant, if any. The principal business address
of each individual listed below is 201 Park Avenue South, New York, New York
10003.
C-12
<PAGE>
Position(s) Position(s)
Name with GISC with Registrant
---- --------- ---------------
John M. Smith President & Director President
Philip H. Dutter Director None
John M. Fagan Vice President None
Arthur V. Ferrara Director Director
Leo R. Futia Director Director
Peter L. Hutchings Director None
Frank J. Jones Director None
Edward K. Kane Senior Vice President, None
General Counsel & Director
Joseph D. Sargent Director Chairman of the
Board of Directors
William C. Warren Director None
Charles E. Albers Executive Vice President Vice President
Ryan W. Johnson Vice President & National None
Sales Director
Thomas R. Hickey, Jr. Vice President, Operations Vice President
Nikolaos D. Monoyios Vice President None
Frank L. Pepe Vice President & Controller Treasurer
Donald P. Sullivan, Jr. Vice President Second Vice
President
Earl C. Harry Treasurer None
Richard T. Potter, Jr. Vice President and Counsel Counsel
Joseph A. Caruso Secretary Secretary
Alexander M. Grant, Jr. Second Vice President None
Ann T. Kearney Second Vice President Controller
(c) Not Applicable.
Item 30. Location of Accounts and Records
Most of the accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained on behalf of the Registrant by the custodian and
transfer agent, State Street Bank and Trust Company, 1776 Heritage Drive, North
Quincy, Massachusetts 02171. Documents constituting the Registrant's corporate
records are maintained on behalf of the Registrant by The Guardian Insurance &
Annuity Company, Inc. at 201 Park Avenue South, New York, New York 10003.
Item 31. Management Services
Pursuant to an administrative and secretarial agreement between GBG and
Baillie Gifford & Co., the latter will furnish office space, clerical staff,
services and facilities required by GBG in connection with its obligations under
the Investment Management Agreement between GBG and the Registrant for an annual
fee of 10,000 (British Pounds) (approximately $20,000).
Item 32. Undertakings
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that Section.
Registrant hereby undertakes to furnish, upon request and without charge, a
copy of the Registrant's latest Annual Report to Shareholders to each person to
whom a copy of the Registrant's prospectus is delivered.
C-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, GIAC Funds, Inc. (formerly GBG
Funds, Inc. and formerly Baillie Gifford International Fund, Inc.) certifies
that it meets all of the requirements for effectiveness of this Post-Effective
Amendment to the Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-Effective Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York and the State of New York on the 13th
day of November, 1997.
GBG FUNDS, INC.
By s/THOMAS R. HICKEY, JR.
--------------------------------
Thomas R. Hickey, Jr.
Vice President
C-14
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates reflected below.
s/JOHN M. SMITH* President November 13, 1997
- ------------------------- (Principal Executive
John M. Smith Officer)
s/FRANK L. PEPE* Treasurer
- ------------------------- (Principal Financial
Frank L. Pepe and Accounting Officer)
- ------------------------- Chairman of the Board of
Joseph D. Sargent Directors
s/JOHN C. ANGLE* Director
- -------------------------
John C. Angle
s/FRANK J. FABOZZI* Director
- -------------------------
Frank J. Fabozzi
s/ARTHUR V. FERRARA* Director
- -------------------------
Arthur V. Ferrara
s/LEO R. FUTIA* Director
- -------------------------
Leo R. Futia
s/WILLIAM W. HEWITT, JR.* Director
- -------------------------
William W. Hewitt, Jr.
s/SIDNEY I. LIRTZMAN* Director
- -------------------------
Sidney I. Lirtzman
- ------------------------- Director
Carl W. Schafer
s/ROBERT G. SMITH* Director
- -------------------------
Robert G. Smith
*By s/THOMAS R. HICKEY, JR. Vice President November 13, 1997
-------------------------
Thomas R. Hickey, Jr.
Pursuant to a Power of Attorney
C-15
<PAGE>
GIAC FUNDS, INC.
Exhibit Index
Number Description
------ -----------
10(b) Consent of Counsel
11(a) Consent of Ernst & Young LLP
27 Financial Data Schedules for The Guardian Small Cap
Stock Fund
C-16
EX-99.10(b)
CONSENT OF COUNSEL
I hereby consent to the reference to my name under the caption "Legal
Opinion" included in the Statement of Additional Information constituting part
of this Post-Effective Amendment to the Registration Statement on Form N-1A for
GIAC Funds, Inc. and to the filing of this consent as an exhibit to said
Amendment.
By /s/ Richard T. Potter, Jr.
---------------------------------
Richard T. Potter, Jr.
Counsel
New York, New York
November 12, 1997
EX-99.11(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors and Financial
Statements" in the Statement of Additional Information in this Registration
Statement (Form N-1A No. 33-37883) of GIAC Funds, Inc., and to the inclusion
herein of our reports dated February 9, 1997 on the financial statements and
financial highlights of the Baillie Gifford International Fund and the Baillie
Gifford Emerging Markets Fund.
By /s/ Ernst & Young LLP
------------------------------
Ernst & Young LLP
New York, New York
November 7, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE GUARDIAN SMALL CAP STOCK FUND
This schedule contains financial information extracted from the interim
"Financial Statements" included in the Statement of Additional
Information dated May 1, 1997, as supplemented to November , 1997, and is
qualified in its entirety to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 52,079
<INVESTMENTS-AT-VALUE> 63,064
<RECEIVABLES> 261
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 63,325
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 1,203
<SENIOR-EQUITY> 437
<PAID-IN-CAPITAL-COMMON> 50,142
<SHARES-COMMON-STOCK> 4,366
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 108
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 499
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,986
<NET-ASSETS> 62,122
<DIVIDEND-INCOME> 143
<INTEREST-INCOME> 123
<OTHER-INCOME> 0
<EXPENSES-NET> 158
<NET-INVESTMENT-INCOME> 108
<REALIZED-GAINS-CURRENT> 449
<APPREC-INCREASE-CURRENT> 10,986
<NET-CHANGE-FROM-OPS> 11,543
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 50,229
<NUMBER-OF-SHARES-REDEEMED> 349
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 62,122
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 112
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 46
<AVERAGE-NET-ASSETS> 29,994
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> 4.21
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.23
<EXPENSE-RATIO> 0.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
