As filed with the Securities and Exchange Commission on February 14, 1997.
Registration Nos. 33-37883
811-6231
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|
POST-EFFECTIVE AMENDMENT No. 9 |X|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
AMENDMENT No. 11 |X|
(Check appropriate box or boxes)
------------------------
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):
|_| immediately upon filing pursuant to paragraph (b) of Rule 485
|_| on May 1, 1996 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
|X| 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 __, 1997.
================================================================================
<PAGE>
BAILLIE GIFFORD INTERNATIONAL FUND
BAILLIE GIFFORD EMERGING MARKETS FUND
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>
<PAGE>
Prospectus May 1, 1997
BAILLIE GIFFORD INTERNATIONAL FUND
BAILLIE GIFFORD EMERGING MARKETS FUND
This Prospectus offers shares of the Baillie Gifford International Fund and
the Baillie Gifford Emerging Markets Fund (the "Funds"). The Funds are
diversified series fund portfolios of GBG Funds, Inc. (the "Company") which is a
diversified open-end management investment company.
Baillie Gifford International Fund (THE INTERNATIONAL FUND) invests
primarily in common stocks issued by companies domiciled outside the United
States and securities that are convertible into such common stocks.
Baillie Gifford Emerging Markets Fund (THE EMERGING MARKETS FUND) invests
primarily in common stocks issued by emerging market companies and securities
that are convertible into such common stocks.
Guardian Baillie Gifford Limited (the "Manager"), which serves as the
investment manager for the Funds, is a company formed through a joint venture
between the U.S. insurer, The Guardian Insurance & Annuity Company, Inc.
("GIAC"), and the Scottish investment management firm, Baillie Gifford Overseas
Limited.
Investment in the Funds is available only to purchasers or current owners
of certain variable annuity and variable life insurance contracts issued by
GIAC.
This Prospectus sets forth important information which a GIAC contractowner
should know about the investment policies and operations of the Funds before
investing and should be retained for future reference. Additional information
about the Funds is contained in a Statement of Additional Information, dated May
1, 1997, which has been filed with the U.S. Securities and Exchange Commission.
A copy of the Statement of Additional Information can be obtained, without
charge, by calling 1-800-221-3253 or by writing to the Company, c/o GIAC, 201
Park Avenue South, New York, New York 10003. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.
Contents
Section Page
- ------- ----
Summary of the Prospectus................................................ 2
Financial Highlights..................................................... 3
Investment Objective and Policies........................................ 4
Risk Considerations...................................................... 6
Special Investment Techniques............................................ 8
Structure and Management of the Funds.................................... 11
Performance Results...................................................... 12
Calculation of Net Asset Value........................................... 13
Purchase and Redemption of Shares........................................ 14
Dividends, Distributions and Taxes....................................... 14
Miscellaneous Information................................................ 15
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
BGIF-1
<PAGE>
SUMMARY OF PROSPECTUS
The following summary presents important information concerning the Funds
and is qualified in its entirety by the more detailed information contained
within this Prospectus.
Investment Objectives and Policies
Each Fund is managed separately, and the risks and opportunities of each
Fund should be examined separately.
THE INTERNATIONAL FUND -- The primary investment objective is to seek
long-term capital appreciation. Income is not a specific objective, although it
is anticipated that long-term capital appreciation will be accompanied by
dividend income. THE INTERNATIONAL FUND ordinarily invests at least 80% of its
net assets in a diversified portfolio of common stocks issued by companies
domiciled outside of the U.S. and in securities that are convertible into such
common stocks.
THE EMERGING MARKETS FUND -- The primary investment objective is to seek
long-term capital appreciation. THE EMERGING MARKETS FUND will, under normal
conditions, invest at least 65% of its total assets in a portfolio of common
stocks issued by emerging market companies and in securities that are
convertible into such common stocks. The Fund defines an emerging market company
as an entity (i) organized under the laws of, and with a principal office in, an
emerging market country (as defined in "Investment Objectives and Policies"
below); (ii) that derives 50% or more of its total revenues from either goods or
services produced or performed in, or from sales made in emerging market
countries (and which may be located in a "gateway" country, as defined herein);
or (iii) for which the principal securities market is located in an emerging
market country.
Risk Considerations
There are risks involved in all investments of securities. The value a
shareholder receives upon redemption of shares may be greater or less than the
value of such shares when acquired. Foreign investments by the Funds involve
additional special risks and opportunity considerations not typically associated
with investing in securities issued by United States companies, such as less
publicly available issuer information, less government regulation of issuers or
securities markets and increased risk of political unrest and governmental
restrictions of issuers. Changes in foreign currency exchange rates may affect
the U.S. Dollar value of securities in a Fund's portfolio, net asset value,
returns and gains and losses realized on sales of securities, even though the
value of the securities in local currency terms may not have changed. Given the
particular risks associated with investing in developing countries, an
investment in THE EMERGING MARKETS FUND should be considered speculative.
Management of the Funds
The Manager serves as investment adviser for each of the Funds and is
responsible for the Funds' overall investment management. For its services, the
Manager receives a fee 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. Baillie Gifford Overseas Limited ("BG Overseas") serves as the
sub-manager to each of the Funds and manages the day-to-day operations of the
Funds' portfolios. One-half of the fees paid by the Funds to the Manager is
payable to BG Overseas for its services as sub-manager.
Purchase and Redemption of Shares
Fund shares are continuously offered at the net asset value per share next
determined after a proper purchase request is received by GIAC. Shares of the
Funds are only offered to GIAC in connection with the variable annuities and
variable life insurance contracts issued through its separate accounts. Owners
of variable contracts receive beneficial interests in the Funds by having
allocated premium payments or contract values for investment in the Funds.
BGIF-2
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide selected data, total returns and ratios of the
Funds and have been audited by Ernst & Young LLP, independent auditors. This
information is supplemented by the Company's audited financial statements and
accompanying notes for the year ended December 31, 1996 which appear in the
Company's 1996 Annual Report to Shareholders. This Annual Report also includes
further information on the Funds' 1996 performance and the unqualified report of
Ernst & Young LLP on the Funds' 1996 Financial Statements. The Company's 1996
Annual Report is incorporated by reference into the Statement of Additional
Information. Free copies of the Company's Statement of Additional Information
and the Company's 1996 Annual Report are available by calling the telephone
number, or writing to the address, appearing on the cover page of this
Prospectus.
Selected data for a share of capital stock outstanding throughout the
periods indicated:
<TABLE>
<CAPTION>
THE EMERGING
MARKETS FUND
October 17,
Year Ended 1994** to
December 31, December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period .... $ 8.68 $ 9.87
---- ------- -------
Income from Investment
Operations
Net investment income .............. 0.07 0.01
Net realized and unrealized
gain/(loss) on investments and
foreign currency related
transactions ...................... (0.12) (1.17)
---- ------- -------
Net increase/(decrease) from
investment operations ............. (0.05) (1.18)
---- ------- -------
Distributions to Shareholders
Dividends from net
investment income ................. (0.07) (0.01)
Dividends in excess of
net investment income ............. (0.10) --
Distributions from net realized gain
on investments and foreign
currency related transactions ..... -- --
---- ------- -------
Total distributions ............. (0.17) (0.01)
---- ------- -------
Net asset value, end of period .......... $ 8.46 $ 8.68
==== ======= =======
Total return+ ........................... (0.60% (11.97%)
==== ======= =======
Ratios/supplemental data:
Net assets, end of period
(000's omitted) ................. $34,218 $ 24,069
Ratio of expenses to average
net assets ...................... 1.67% * 2.28%*
Ratio of net investment income
to average net assets ........... 0.89% * 0.94%*
Portfolio turnover rate ............ 51% --
<CAPTION>
THE INTERNATIONAL FUND
February 8,
1991** to
Year Ended December 31, December 31,
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 14.69 $ 14.69 $ 11.16 $ 12.37 $ 10.00
---- -------- -------- -------- ------- -------
Income from Investment
Operations
Net investment income .............. 0.16 0.15 0.23 0.09 0.04
Net realized and unrealized
gain/(loss) on investments and
foreign currency related
transactions ...................... 1.49 (0.02) 3.54 (1.20) 2.52
---- -------- -------- -------- ------- -------
Net increase/(decrease) from
investment operations ............. 1.65 0.13 3.77 (1.11) 2.56
---- -------- -------- -------- ------- -------
Distributions to Shareholders
Dividends from net
investment income ................. (0.15) (0.13) (0.24) (0.10)
Dividends in excess of
net investment income ............. (0.12) -- -- -- --
Distributions from net realized gain
on investments and foreign
currency related transactions ..... (0.70) -- -- -- (0.15)
---- -------- -------- -------- ------- -------
Total distributions ............. (0.97) (0.13) (0.24) (0.10) (0.19)
---- -------- -------- -------- ------- -------
Net asset value, end of period .......... $ 15.37 $ 14.69 $ 14.69 $ 11.16 $ 12.37
==== ======== ======== ======== ======= =======
Total return+ ........................... 11.23% 0.87% 34.04% (8.90%) 8.56%
==== ======== ======== ======== ======= =======
Ratios/supplemental data:
Net assets, end of period
(000's omitted) ................. $317,287 $303,050 $186,795 $55,175 $36,012
Ratio of expenses to average
net assets ...................... 0.99% 1.03% 1.11% 1.26% 1.67%
Ratio of net investment income
to average net assets ........... 0.97% 1.11% 1.75% 0.88% 0.61%
Portfolio turnover rate ............ 52% 27% 18% 44% 14%
</TABLE>
* Ratios are annualized.
** Commencement of public offering of the Fund's shares.
+ Total returns do not reflect the effects of charges deducted under the
terms of GIAC's variable contracts. Including such charges would reduce the
total returns for all periods shown. The total return shown for THE
EMERGING MARKETS FUND may not accord with the net increase in net assets
resulting from operations in the statement of operations due to the timing
in reinvestment price of dividends in 1995.
BGIF-3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective. The primary investment objective of each of the Funds
is long-term capital appreciation. Income is not a specific objective, although
it is anticipated that long-term capital appreciation will be accompanied by
dividend income, which may vary depending on the location of the investments. A
Fund's investment objective and certain investment restrictions are fundamental
policies which may not be changed without shareholder approval. Non-fundamental
investment techniques, policies and restrictions of a Fund may be changed by the
Company's Board of Directors (the "Board") without shareholder approval. There
is no assurance that the Funds will meet their respective investment objectives,
and the Funds cannot eliminate the risk of loss inherent in the ownership of
securities by following their investment objectives.
Each Fund's investment program is highlighted below, together with
information about special investment techniques which may be utilized to seek
each Fund's investment objective. Further details and information about each
Fund's investment restrictions are set forth in the Statement of Additional
Information.
Investment Policies of the Funds. THE INTERNATIONAL FUND -- This Fund will
ordinarily invest at least 80% of its net assets in a diversified portfolio of
common stocks issued by companies domiciled outside of the U.S. and in
securities convertible into, exchangeable for, or which carry the right to
acquire such common stocks. It is anticipated that the vast majority of the
Fund's investments will normally be divided among four main areas -- Continental
Europe, the United Kingdom, Japan and the markets of the Far East (including
Australia and New Zealand).
THE EMERGING MARKETS FUND -- This Fund will, under normal conditions,
invest at least 65% of its total assets in a portfolio of common stocks issued
by emerging market companies and in securities which are convertible into,
exchangeable for or which carry the right to purchase such common stocks. The
Fund defines an emerging market company as an entity (i) organized under the
laws of, and with a principal office in, an emerging market country (as defined
below); (ii) that derives 50% or more of its total revenue from either goods or
services produced or performed in, or from sales made in emerging market
countries (and which may be located in a "gateway" country, as described below);
or (iii) for which the principal securities market is located in an emerging
market country.
As defined by the Fund, an emerging market country includes any country
whose economy or markets are considered to be emerging or developing by the
International Finance Corporation and the World Bank, as well as countries which
are classified by the United Nations as developing. The Manager determines the
potential universe of emerging market countries for investment. The Fund
currently expects to invest in issuers located in some or all of the following
emerging market countries: Argentina, Brazil, Chile, China, Colombia, the Czech
Republic, Greece, Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico,
Pakistan, Peru, Philippines, Poland, Portugal, the Slovak Republic, South
Africa, South Korea, Sri Lanka, Taiwan, Thailand, Turkey, Venezuela, and
Zimbabwe. The list of countries in which the Fund will potentially invest will
vary from time to time, based upon the Manager's assessment of a particular
country's present suitability for investment. The Fund may also invest in
issuers located in countries which may be deemed by the Manager to be "gateways"
into emerging market countries, such as Hong Kong (which serves as a gateway to
China) and Austria (which serves as a gateway to Eastern European countries such
as Hungary and the Czech Republic).
In addition, THE EMERGING MARKETS FUND may ordinarily invest up to 35% of
its net assets in a combination of (i) debt securities of government or
corporate issuers in emerging market countries; (ii) debt and equity securities
of issuers in developed markets, and (iii) cash and money market instruments.
BGIF-4
<PAGE>
Emerging market debt securities are often rated below investment grade, or
may not be rated by rating agencies in the United States. Normally, THE EMERGING
MARKETS FUND will not invest more than 10% of its total assets in debt
securities that are not rated at least investment grade, or if unrated,
determined to be of comparable quality by the Manager. THE EMERGING MARKETS Fund
is not required to sell automatically when the ratings assigned to any of its
holdings are reduced below investment grade. Investment in non-investment grade
debt securities (commonly known as "junk bonds") are considered predominantly
speculative with regard to the payment of interest and principal and therefore
carry greater risk, including the possibility of issuer default or bankruptcy.
Certain emerging market countries prohibit direct foreign investment in
their capital markets and limit investors in those markets, such as the Emerging
Markets Fund, to government-authorized investment companies. In accordance with
the Investment Company Act of 1940 (the "1940 Act"), THE EMERGING MARKETS FUND
may invest up to 10% of its total assets in securities of other investment
companies. Shares of these investment companies may at times be acquired at
market prices representing a premium over the actual net asset value of their
portfolio securities. If shares of another investment company are acquired,
shareholders of THE EMERGING MARKETS FUND would bear both their proportionate
share of the expenses of the Fund, and indirectly, a proportionate share of the
expenses of the other investment company as well.
Policies Applicable to Both Funds
Subject to monitoring by the Board, each of the Funds will apportion their
investments among various securities markets in several countries and will not
normally concentrate investments in any particular industry or country. Under
normal circumstances, at least 65% of each Fund's total assets will be invested
in countries which are domiciled in at least three different countries outside
the United States. However, there are no other limitations on the percentage of
portfolio assets which may be invested in securities of issuers of any one
country at any given time. The diversification of a Fund's assets on an
international basis should, in theory, decrease the degree to which events in
any one country can affect the entire portfolio. For liquidity purposes, both
Funds may also hold cash in U.S. dollars and foreign currencies and invest in
short-term securities, including repurchase agreements and domestic and foreign
money market instruments. In addition, both Funds may enter into forward
currency transactions or other currency instruments to attempt to minimize the
effects of changes in foreign exchange rates, and may enter into options or
financial futures transactions to hedge against market or currency risks. (More
information concerning such transactions may be found in the section entitled
"Special Investment Techniques" below).
In pursuing their investment objectives, both Funds will vary both their
geographic scope and the types of securities in which they invest based on
continuous evaluations of economic, market and political trends worldwide. To
determine how portfolio assets should be allocated, the Manager will consider
the conditions and growth potential of various economies and securities markets,
currency exchange rates, technological developments in the various countries,
and other pertinent financial, social, national and political information. The
Manager seeks to identify those issuers whose companies are best situated to be
able to make use of these factors and conditions to their economic advantage.
THE INTERNATIONAL FUND will also attempt to apportion its holdings among
securities issued by companies at different stages of development, ranging from
large, well-established companies to smaller and newer companies. Securities
issued by smaller companies may be less liquid and subject to greater market
volatility and credit risk than those issued by larger companies.
The Funds may also invest in foreign issuers through sponsored American
Depository Receipts ("ADRs") and
BGIF-5
<PAGE>
European Depository Receipts ("EDRs") or similar investment vehicles. An ADR is
a dollar-denominated security issued by a U.S. bank or trust company which
represents, and may be converted into, a foreign security. An EDR is similar but
is issued by a European bank. ADRs and EDRs may be denominated in a currency
different from the underlying securities into which they may be converted.
Typically, ADRs, in registered form, are designed for issuance in U.S.
securities markets and EDRs, in bearer form, are designed for issuance in
European securities markets.
The Funds may significantly alter their portfolios as a temporary defensive
strategy if, in the judgment of the Manager, investments in international equity
securities are at risk because of current or anticipated political or economic
conditions. In such event, the Funds may, without any percentage limit, acquire
non-convertible preferred stock, debt obligations, securities issued by the U.S.
or foreign governments and domestic or foreign money market instruments. Any
such securities acquired by a Fund will be "investment grade" at the time of
acquisition.
THE EMERGING MARKETS FUND may also invest temporarily in cash (U.S.
dollars, foreign currency or multinational currency units) or, alternatively, in
money market instruments, pending investment of newly received proceeds from the
purchase of Fund shares or to meet ordinary daily cash needs.
If the U.S. government restricts any type of foreign investment which may
be made by or through the Funds, the Company's Board of Directors will promptly
take steps to determine whether significant changes in the Funds' portfolios are
appropriate.
RISK CONSIDERATIONS
Risk Considerations Concerning International Investing. Investments in
foreign equity securities present opportunities for both increased benefits and
risks as compared to investments in U.S. equity securities. In the past, the
securities markets in different countries have moved relatively independently
from each other due to differences in economic, financial, political and social
factors. The Funds invest in various companies and economies outside of the
U.S., thereby attempting to take advantage of these differences. This
diversification is intended to reduce the volatile effects that investment in
any one country or geographic area may have on the portfolio's performance.
However, investing in securities of foreign issuers involves certain risks and
considerations not typically associated with investing in securities of some
U.S. issuers. These risks may include less publicly available or less reliable
information and less governmental regulation and supervision of foreign stock
exchanges, brokers and issuers. Foreign issuers are not usually subject to
uniform accounting, auditing and financial reporting standards, practices and
requirements. Securities of foreign issuers are subject to the possibility of
expropriation, nationalization, confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability and
restrictions in the flow of international capital. Securities of some foreign
issuers are less liquid and their prices more volatile than the securities of
U.S. companies. In addition, the time period for settlement of transactions in
foreign securities may be longer than the corresponding period for settlement of
transactions in domestic securities. It may also be more difficult to obtain and
enforce judgments against foreign entities.
The Funds are expected to incur operating expenses which are higher than
those of mutual funds investing exclusively in U.S. equity securities since
expenses such as brokerage commissions and custodial fees related to foreign
investments are often higher than those associated with investments in U.S.
securities. In addition, dividends and interest from foreign securities may be
subject to foreign withholding taxes. (See "Dividends, Distributions and
Taxes".)
BGIF-6
<PAGE>
The securities held by the Funds will generally be denominated in
currencies other than the U.S. dollar. The U.S. dollar value of a security may
tend to decrease when the value of the U.S. dollar rises against the currency in
which that security is denominated and may tend to increase when the value of
the U.S. dollar falls against such currency. Accordingly, the U.S. dollar value
of securities held in a Fund's portfolio and the Fund's net asset value may
fluctuate in response to changes in currency exchange rates even though the
value of the securities in local currency terms may not have changed. Therefore,
changes in foreign exchange rates may affect the value of the securities held in
the Funds' portfolios either beneficially or adversely. Fluctuations in foreign
currency exchange rates may also affect the value of dividends and interest
earned, gains and losses realized on the sale of securities and net investment
income and gains, if any, distributed to shareholders.
If the U.S. government should impose any restrictions, through taxation or
other means, on any type of foreign investment which is made by the Funds, the
Board will promptly take steps to determine whether significant changes in the
Funds' portfolios are appropriate.
Particular Risk Considerations Concerning Emerging Markets. The following
risks are applicable to THE EMERGING MARKETS FUND and to THE INTERNATIONAL FUND
to the extent that it invests in emerging markets. Investing in emerging
markets, while offering the potential of more rapid share price appreciation and
long term growth than may be available from investments in more developed
markets, also present a corresponding higher degree of risk. Thus, an investment
in THE EMERGING MARKETS FUND should be considered speculative.
Emerging markets may be more likely to be subject to political unrest and
economic instability. The result could be nationalization, expropriation or
confiscation of assets, or repatriation of investment capital. In the event of
such governmental actions, the Funds could lose the entire value of a particular
investment or group of investments made in a particular market.
Certain emerging market countries have experienced substantial and, in some
cases, rapidly fluctuating rates of inflation for a number of years. Inflation
has, and may continue to have, a debilitating effect on the underlying economies
of these countries. Many emerging market countries are heavily dependent on
international trade and are particularly adversely affected by the imposition of
trade barriers and other protectionist measures, as well as the depreciation or
devaluation of their currencies, relative to the U.S. dollar. Certain currencies
are not free floating against the U.S. dollar, may not be internationally
traded, or may not be freely converted into other currencies. A devaluation or
restriction in the currencies in which a Fund's portfolio securities investments
are made could have an adverse impact on the Fund.
The securities markets in emerging countries may be less developed, and
offer less liquidity and more volatility than the markets of more developed
countries. Such markets have different clearance and settlement procedures and
there may be occasions where settlements are unable to keep pace with the volume
of securities transactions, making it difficult to complete such transactions.
The inability of a Fund to dispose of a particular portfolio security due to
settlement problems may result in the loss of other attractive investment
opportunities or, alternatively, in losses to the Fund due to subsequent
declines in the value of the portfolio security. If the Fund has entered into a
contract to sell the security, settlement problems could result in potential
Fund liability to the purchaser of that security.
The political or economic turmoil within a particular country or market
could also give rise to the possibility that trading of securities within a
particular market could be terminated or severely curtailed, thereby preventing
a Fund from either pricing or transacting in certain portfolio securities. The
1940 Act permits registered investment companies such as the Company, on behalf
of the Funds, to request that the U.S. Securities and Exchange Commission (the
"SEC") make the determination that an emergency exists, thereby permitting a
Fund to suspend
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redemptions of its shares during the emergency period. In the event that such
circumstances should arise, the Fund would consider applying to the SEC for a
determination that an emergency exists within the meaning of the 1940 Act. Prior
to the receipt of the SEC's determination, portfolio securities in the affected
markets would be priced at fair value as determined in good faith by or under
the direction of the Board.
Portfolio Turnover Rate. Each Fund's portfolio turnover rate may vary
significantly from year to year. Although neither Fund intends to trade
securities for short term profit, there is no limitation on the length of time
securities must be held by a Fund prior to being sold. The annual portfolio
turnover rate of the Funds is not usually expected to exceed 75%. (An annual
portfolio turnover rate of 100% would occur if all of the investments held in a
Fund's portfolio were replaced in a one-year period.)
SPECIAL INVESTMENT TECHNIQUES
This section describes the types of special investment techniques which
both Funds may utilize in an effort to achieve their investment objectives and
also describes the risks associated with such investment techniques. These
techniques and related risks are described in more detail in the Statement of
Additional Information.
Forward Foreign Currency Transactions. Forward foreign currency exchange
contracts are used to manage the risks associated with changes in exchange
rates. A forward foreign currency exchange contract is an agreement to exchange
a specified amount of U.S. dollars for foreign currencies at a specified future
date. The Manager generally uses currency exchange contracts to fix definite
prices for securities it has agreed to buy or sell. These contracts are also
used to hedge the Funds' investments against adverse exchange rate changes. The
profitable use of forward foreign currency transactions depends on the Manager's
ability to predict changes in exchange rates between the U.S. dollar and foreign
currencies. The Funds may incur either a gain or loss on these transactions,
which require skills that are different from those needed to select the Funds'
investments. While forward foreign currency transactions may help reduce losses
on securities denominated in foreign currencies, they may also reduce gains on
such securities depending on the actual changes in the subject currencies. The
Funds will not enter into forward foreign currency transactions for speculative
purposes.
Financial Futures Transactions. To attempt to hedge against fluctuations in
interest rates or securities prices, the Funds may purchase or sell interest
rate futures contracts and securities index futures contracts (collectively,
"financial futures contracts"). Interest rate futures contracts obligate the
long or short holder to take or make delivery of a specified quantity of a
financial instrument during a specified future period at a specified price.
Securities index futures contracts are similar in economic effect, but they are
based on a specific index of securities (rather than on specified securities)
and are settled in cash. The Funds may also purchase and write put and call
options on financial futures contracts as an attempt to hedge against market
risks.
There are special risks associated with entering into financial futures
contracts. There may be an imperfect correlation between the price movements of
financial futures contracts and the price movements of the securities in which a
Fund invests. There is also a risk that a Fund will be unable to close a futures
position when desired because there is no liquid secondary market for it.
The skills needed to use financial futures contracts effectively are
different from those needed to select a Fund's investments. If the Manager
misjudges the general direction of interest rates or markets, the Funds' overall
performance may be poorer than if no financial futures contracts had been
entered into. It is possible that a Fund could lose money on a financial futures
contract and also on the price of related securities, adversely affecting the
Fund's performance.
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The risk of loss in trading financial futures contracts can be substantial
due to the low margin deposits required and the extremely high degree of
leverage involved in futures pricing. A relatively small price movement in a
financial futures contract could have an immediate and substantial impact, which
may be favorable or unfavorable to a contractholder. It is possible for a
price-related loss to exceed the amount of a Fund's margin deposit.
Neither of the Funds will enter into financial futures contracts for
speculative purposes.
Options Transactions. The Funds may purchase or write (sell) options on
individual securities, securities indices and financial futures contracts to
attempt to: (1) reduce the overall risk of their investments; (2) manage foreign
currency exposure; (3) protect unrealized gains; or (4) facilitate the sale of
portfolio securities for investment purposes. The Funds use options as a
temporary substitute for purchasing or selling particular securities. The Funds
engage in options transactions as a hedging technique, and not for speculative
purposes. Using options as a successful hedge depends on the ability of the
Funds' Manager to predict pertinent market movements. Incorrect predictions may
make engaging in such transactions riskier to the Funds than trading in the
securities which each Fund is authorized to buy and sell.
Basically, there are two types of options: call options and put options.
The purchaser of a call option acquires the right to buy a security at a fixed
price during a specified period. The writer (seller) of such an option is then
obligated to sell the security if the option is exercised, and bears the risk
that the security's market price will increase over the purchase price set by
the option. The purchaser of a put option acquires the right to sell a security
at a fixed price during a specified period. The writer of such an option is then
obligated to buy the security if the option is exercised, and bears the risk
that the security's market price will decline from the purchase price set by the
option. Options are typically purchased subject to a premium which can reduce
the risks retained by the option writer.
As the writer of a covered call option or the purchaser of a secured put
option, a Fund must own securities that can be used to cover or secure any such
outstanding options. Also, when a Fund writes a put option, it must segregate
either cash or liquid, high-grade debt securities that are marked to market
daily with the Fund's custodian. The value of such segregated assets must at
least equal the exercise price of the put option. Segregating assets may limit a
Fund's ability to pursue other investment opportunities while options are
outstanding. The cover for a call option that is related to a foreign currency
can be short-term debt securities having a value equal to the option's face that
are denominated in the same currency as the call.
Options transactions can be voluntarily terminated before the exercise or
expiration of the options only by entering into closing transactions. The
ability to close out an option depends, in part, upon the liquidity of the
option market. If a Fund cannot close an option when it wants, it may miss
alternative investment opportunities.
Options trade on U.S. or foreign securities exchanges and in the
over-the-counter ("OTC") market. Exchange listed options are three-party
contracts issued by a clearing corporation. They generally have standardized
prices, expiration dates and performance mechanics. In contrast, all the terms
of an OTC option, including price and expiration date, are set by negotiation
between the buyer and seller (e.g., a Fund and a securities dealer or other
financial institution). A Fund could lose any premium it paid for an OTC option,
as well as any anticipated benefits of the transaction, if its counterparty
fails to perform under the option's terms. To minimize this risk, the Funds'
Manager will consider the creditworthiness of any counterparties with whom the
Funds may engage in OTC options transactions. However, there can be no assurance
that a counterparty will remain financially stable while an OTC option is
outstanding.
Generally, the staff of the SEC currently requires OTC options and any
assets used to cover such options to be
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treated as illiquid assets because OTC options may not be actively traded. Until
the SEC staff revises this position, neither Fund will engage in OTC option
transactions if, as a result, more than the permitted portion of its net assets
is invested in illiquid securities. (See the Statement of Additional
Information.)
Through the writing or purchase of securities index options, the Funds can
achieve many of same objectives as through the use of options on individual
securities. An option on a securities index is similar to an option on a
particular security except that, rather than the right to take or make delivery
of a particular security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the securities index upon which the option is based
is greater than (in the case of a call) or less than (in the case of a put) the
exercise price of the option. Price movements in securities which a Fund owns or
intends to purchase probably will not correlate perfectly with movements in the
level of a securities index and, therefore, that Fund bears the risk of a loss
on a securities index option which is not completely offset by movements in the
price of such securities. Because securities index options are settled in cash,
a call writer cannot determine the amount of its settlement obligations in
advance and, unlike call writing on a specific stock, cannot provide in advance
for, or cover, its potential settlement obligations by acquiring and holding
underlying securities. The Funds may, however, cover call options written on a
securities index by holding a mix of stocks which substantially replicates the
movement of the index or by holding a call option on the securities index with
an exercise price no higher than the call option sold.
The risks associated with purchasing and writing put and call options on
financial futures contracts can be influenced by the market for financial
futures contracts. An increase in the market value of a financial futures
contract on which a Fund has written an option may cause the option to be
exercised. In this situation, the benefit to the Fund would be limited to the
value of the exercise price of the option and, if the Fund closes out the
option, the cost of entering into the offsetting transaction could exceed the
premium the Fund initially received for writing the option. In addition, the
Fund's ability to enter into an offsetting transaction depends upon the market's
demand for such financial futures contracts. If an option purchased by a Fund
expires unexercised, that Fund would realize a loss in the amount of the premium
paid for the option.
The Funds may write covered call options on up to 25% of net assets, may
write secured put options on up to 25% of net assets and may purchase put and
call options provided that no more than 5% of total assets may be invested in
premiums on such options.
Repurchase Agreements. In a repurchase agreement transaction, a Fund
purchases a debt security and obtains a simultaneous commitment from the seller
(i.e., a bank or securities dealer) to repurchase the debt security at an agreed
time and price, reflecting a market rate of interest. Repurchase agreements are
fully collateralized (including the interest earned thereon) by U.S. government
securities, bank obligations, cash or cash equivalents, and are marked-to-market
daily during their respective terms. Costs, delays or losses could result if the
seller becomes bankrupt or is otherwise unable to repurchase a security that is
subject to a repurchase agreement. To attempt to minimize this risk, the
Company's Board of Directors periodically receives and reviews information about
the creditworthiness of securities dealers and banks which enter into repurchase
agreements with the Funds.
No more than 10% of the International Fund's net assets or 15% of THE
EMERGING MARKETS FUND'S net assets will be invested at any one time in
repurchase agreements of more than seven days' duration and in other investments
which are considered not readily marketable by the staff of the SEC or the
Board.
Privatizations. Certain foreign governments have begun programs intended to
privatize all or part of their interests in government owned or controlled
enterprises ("privatizations"). Investment in these enterprises may represent
significant opportunities for capital appreciation and, as such, may be
attractive investments under
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appropriate circumstances. Participation in privatizations by foreign investors
such as the Funds may be limited by local law or pursuant to terms which may be
less advantageous than those offered to local investors. There can be no
assurance that foreign governments will continue to sell enterprises currently
owned or controlled or that privatization programs will be successful.
STRUCTURE AND MANAGEMENT OF THE FUNDS
General Structure and Operations of the Company. The Company is a
diversified open-end management investment company which was incorporated in
Maryland in October 1990. The Company, which was known as "Baillie Gifford
International Fund, Inc.," prior to October 11, 1994, has been organized as a
"series" investment company which enables the Company, if it so chooses, to
create more than one distinct portfolio of investments. At present, the Company
consists of three portfolios of investments, two of which are described in this
Prospectus. The Board may establish additional portfolios with different
investment objectives in the future.
The business and affairs of the Funds are supervised by the Company's Board
which currently holds regular meetings on a quarterly basis. The Board currently
consists of nine directors, five of whom are not "interested persons" as defined
in the 1940 Act. The investments of the Funds are managed on a daily basis by
the Manager and the sub-investment manager, as described below. (See the
Statement of Additional Information for the identity and business experience of
the directors and officers of the Company.)
The Manager: Guardian Baillie Gifford Limited. The Manager is an investment
management company registered as a corporation under the laws of Scotland. It
was formed in November 1990 through a joint venture between GIAC, a wholly owned
U.S. subsidiary of The Guardian Life Insurance Company of America, a U.S.
insurance company, and Baillie Gifford Overseas Limited ("BG Overseas"), a
company wholly owned by the Scottish investment management partnership, Baillie
Gifford & Co. GIAC owns 51% of the voting shares of the Manager and may be
deemed to be in control of the Manager. BG Overseas owns the remaining 49% of
such shares. The Manager is registered with the SEC as an investment adviser
under the Investment Advisers Act of 1940.
BG Overseas, the minority shareholder of the Manager, is an investment
management company incorporated in Scotland and is registered with the SEC as an
investment adviser under the Investment Advisers Act of 1940. BG Overseas,
located in Edinburgh, Scotland, was formed several years ago by Baillie Gifford
& Co., its parent, specifically to manage funds for institutional clients
situated outside of the United Kingdom. Baillie Gifford & Co. is one of the
largest independently owned investment management firms in the United Kingdom.
Baillie Gifford & Co. has provided independent investment management services to
institutional clients primarily located in the United Kingdom since 1909.
Subject to the authority and supervision of the Board, the Manager is
responsible for the overall investment management of the Funds' portfolios and
furnishes the Board with reports and recommendations about the Funds' investment
programs and performance. In addition, the Manager maintains certain books and
records as required by the 1940 Act and by any other applicable laws and
regulations. The Manager has, in turn, entered into a sub-investment management
agreement with BG Overseas appointing the latter as sub-investment manager and
delegating to BG Overseas much of the day-to-day management responsibilities for
the portfolios of the Funds (see below).
The Sub-Manager: Baillie Gifford Overseas Limited. Pursuant to its
appointment as sub-investment manager, BG Overseas manages the investment and
reinvestment of the assets of the Funds. The Manager continuously monitors and
evaluates the performance of BG Overseas.
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Pursuant to the sub-investment management agreement between the Manager and
BG Overseas, BG Overseas selects, purchases and sells portfolio securities and
selects brokers for the execution of such transactions. (See the Statement of
Additional Information for additional information on the Manager and BG
Overseas.)
The Manager, BG Overseas and Baillie Gifford & Co. are located at 1 Rutland
Court, Edinburgh, EH3 8EY, Scotland. The Manager and BG Overseas provide
investment management and advisory services in the manner described to one other
Guardian-sponsored, U.S. registered mutual fund.
THE INTERNATIONAL FUND is managed by R. Robin Menzies, a Vice President of
the Company, and THE EMERGING MARKETS FUND is managed by Edward H. Hocknell, a
Vice President of the Company. Each is primarily responsible for allocation
decisions regarding geographical diversification of their respective Fund's
assets. The decisions to buy and sell securities for the Funds are made with the
help of several investment teams at BG Overseas which have expertise in specific
overseas securities markets. Mr. Menzies provides similar services to The
Guardian Baillie Gifford International Fund, a series of The Park Avenue
Portfolio, which is an open-end management investment company offered directly
to the public. He has served as a Director of BG Overseas and a partner of
Baillie Gifford & Co. for over thirteen years. Mr. Hocknell provides similar
services to the Guardian Baillie Gifford Emerging Markets Fund, a series of The
Park Avenue Portfolio. He has served as a Director of BG Overseas since October
1992. From September 1984 to September 1992 he was a portfolio manager of
Baillie Gifford & Co.
Management Fee. As compensation for its services to the Funds, the Manager
is entitled to a fee, payable monthly, at the 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. Although those management fees
are greater than that paid by most mutual funds, the Company's Board believes
these fees are justified by the international scope of the Funds' investment
activities. Additionally, the Fund believes these fees are appropriate in light
of the fees charged by other mutual funds which have investment objectives and
policies similar to those of the Funds. One-half of this fee is payable by the
Manager to BG Overseas as compensation for the services of BG Overseas as
sub-investment manager to the Funds. It is important to note that the
sub-investment management fees do not represent separate or additional charges
or assessments against the Company or the Funds.
Expenses of the Funds. The Funds assume all expenses of their operations
and business not specifically assumed or agreed to be paid by the Manager.
Expenses paid by the Funds will include, for example, costs relating to:
custody; the services of the Funds' transfer agent and dividend disbursing
agent; portfolio accounting services; shareholder communications; shareholder
meetings; calculation of net asset value; legal fees and expenses; accounting
and auditing fees and expenses; directors' fees and expenses; U.S. federal and
state registration fees; brokerage commissions; taxes; and bonding and
insurance.
PERFORMANCE RESULTS
The Funds may, from time to time, provide performance information in
advertisements, sales literature or other materials furnished to existing or
prospective owners of GIAC's variable contracts. When performance information is
provided in advertisements, it will include the effect of all charges deducted
under the terms of the specified contract, as well as all recurring and
non-recurring charges incurred by the Funds. All performance results are
historical and are not representative of future results.
Total return and average annual total return reflect the change in value of
an investment in the Fund over a specified period, assuming the reinvestment of
all capital gains distributions and income dividends. Average annual
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total returns show the average change in value for each annual period within a
specified period. Total returns, which are not annualized, show the total
percentage or dollar change in value over a specified period.
Each Fund may also compare its performance to other investment vehicles or
other mutual funds which have similar investment objectives or programs. Also,
the Funds may quote information from securities indices or 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 respective
portfolios; financial markets; or historical, current or prospective economic
trends. Topics of general interest, such as personal financial planning, may
also be discussed. More information about the Funds' performance is contained in
the Statement of Additional Information and Annual Report. Free copies may be
obtained by calling 1-800-221-3253 or by writing to Guardian Investor Services
Corporation.
The Funds' returns and net asset value will fluctuate. Shares are redeemed
in response to transfer instructions or surrender and withdrawal requests at the
then current net asset value per share which may be more or less than original
cost. Please refer to the Statement of Additional Information for more
information about the Funds' performance. Additional performance information
concerning the Funds appears in the Company's 1996 Annual Report to Shareholders
which is available at no charge by calling the telephone number, or writing to
the address appearing on the cover page of this Prospectus.
CALCULATION OF NET ASSET VALUE
The net asset value ("NAV") of each of the Funds is determined as of the
earlier of the close of trading on the New York Stock Exchange or 4:00 p.m.,
Eastern time, on each day on which the New York Stock Exchange is open for
business. Each Fund's NAV is calculated by subtracting the Fund's liabilities,
including expenses which are accrued daily, from its total assets and dividing
the result by the total number of shares outstanding.
Each Fund values its assets on their current market value when market
quotations are readily available. As of such time, quotations of foreign
securities in foreign currencies are converted into the U.S. dollar equivalents
at the prevailing market rates as computed by State Street Bank and Trust
Company, custodian of the Funds' assets. If a market value cannot be
established, assets are valued at fair value as determined in good faith by or
under the direction of the Company's Board of Directors. Short-term securities
which mature in 60 days or less are valued by using the amortized cost method,
unless the Board determines that this does not represent fair value. All
investments by the Funds are valued daily in U.S. dollars based on the then
prevailing exchange rate.
The value of a foreign security held by a Fund is determined based upon its
sale price on the foreign exchange or market on which it is traded and in the
currency of that market, as of the close of the appropriate exchange or, if
there have been no sales during the day, at the mean of the closing bid and
asked prices. Trading in securities on exchanges and over-the-counter markets in
Europe and the Far East is normally completed at various times prior to 4:00
p.m. Eastern time, the current time for the close of trading on the New York
Stock Exchange. Trading on foreign exchanges may not take place on every day the
New York Stock Exchange is open. Conversely, trading in various foreign markets
may take place on days when the New York Stock Exchange is not open and on other
days when the Funds' net asset values are not calculated. Consequently, the
calculation of the net asset value for a Fund may not occur contemporaneously
with the determination of the most current market prices of the securities
included in such calculation. In addition, the value of the net assets held by
either of the Funds may be significantly affected on days when shares are not
available for purchase or redemption.
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PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are continuously offered to GIAC's separate accounts at
the then current NAV. GIAC then offers to its contractowners units in its
separate accounts which directly correspond to shares in the Funds. GIAC submits
purchase and redemption orders to the Company based on allocation instructions
for premium payments, transfer instructions, or surrender and withdrawal
requests which are furnished to GIAC by such contractowners. Contractowners can
send such instructions and requests to GIAC at P.O. Box 26210, Lehigh Valley, PA
18002 by first class mail or 3900 Burgess Place, Bethlehem, PA 18017 by
overnight or express mail. Payment for redeemed shares will ordinarily be made
within three (3) business days after the Company receives a redemption order
from GIAC. The redemption price will be the NAV next determined after GIAC
receives the contractowner's instructions or request in proper form. The Company
may suspend the right of redemption or postpone the date of payment beyond three
(3) business days during any period when trading on the New York Stock Exchange
is restricted, or such Exchange is closed for other than weekends and holidays;
when an emergency makes it not reasonably practicable for the Funds to dispose
of their assets or calculate their respective NAV; or as permitted by the SEC.
The accompanying prospectus for a GIAC variable annuity or variable life
insurance policy describes the allocation, transfer and withdrawal provisions of
such annuity or policy.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Funds have qualified and intend to remain qualified as regulated
investment companies under the Internal Revenue Code of 1986, as amended
("Code"), so that neither Fund will be subject to federal income tax on net
investment income and net capital gains that are distributed to GIAC's separate
accounts. GIAC reinvests all such distributions in additional shares of the
Funds at NAV. The Funds typically distribute any net investment income twice
each year and any net capital gains once each year. The Company's Board of
Directors can change this policy. Contractowners who own units in a separate
account which correspond to shares in the Funds will be notified when
distributions are made.
The Code and its related Treasury Department regulations require mutual
funds that are offered through insurance company separate accounts to meet
certain diversification requirements to preserve the tax-deferral benefits
provided by the variable contracts which are offered in connection with such
separate accounts. The Manager intends to diversify the Funds' investments in
accordance with those requirements. The prospectuses for GIAC's variable
annuities and variable life insurance policies describe the federal income tax
treatment of distributions from such contracts.
Investment income received from sources within foreign countries may be
subject to foreign income taxes. In this regard, withholding tax rates in
countries with which the U.S. does not have a tax treaty are often as high as
30% or more. The U.S. has entered into tax treaties with many foreign countries
which entitle certain investors (such as the Funds) to a reduced rate of tax
(generally 10-15%) or to certain exemptions from tax. Each Fund will operate so
as to qualify for such reduced tax rates or tax exemptions whenever possible.
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 Fund.
The foregoing is only a summary of important federal tax law provisions
that can affect the Funds. Other federal, state, or local tax law provisions may
also affect each Fund and its operations. Anyone who is considering allocating,
transferring or withdrawing monies held under a GIAC variable contract to or
from this Fund should consult a qualified tax adviser.
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MISCELLANEOUS INFORMATION
Voting Rights. Through its separate accounts, GIAC is the sole shareholder
of record of the Funds, so, under the 1940 Act, GIAC is deemed to be in control
of the Funds. Nevertheless, when a Fund shareholders' meeting occurs, GIAC
solicits and accepts voting instructions from its contractowners who have
allocated or transferred monies for an investment in the Funds as of the record
date for the meeting. GIAC then votes the Funds' shares that are attributable to
its contractowners' interests in the Funds in accordance with their
instructions. GIAC will vote shares for which no instructions are received in
the same proportion as it votes shares for which it does receive instructions.
GIAC will vote any shares that it is entitled to vote directly due to amounts it
has contributed or accumulated in its separate accounts in the manner described
in the prospectuses for its variable annuities and variable life insurance
policies.
Each share of the Funds is entitled to one vote, and fractional shares are
entitled to fractional votes. Fund shares have non-cumulative voting rights, so
the vote of more than 50% of the shares can elect 100% of the directors.
The Company is not required to hold annual shareholder meetings, but
special meetings may be called to, among other things, elect or remove
directors, change fundamental policies or approve an investment advisory
agreement.
Availability of the Fund. The Funds are only available to owners of
variable annuities or variable life insurance policies issued by GIAC through
its separate accounts. The Company does not currently foresee any disadvantages
to the contractowners arising from offering shares of its Funds to variable
annuity and variable life insurance policy separate accounts simultaneously, and
its Board monitors events for the existence of any material irreconcilable
conflict between or among contractowners. If a material irreconcilable conflict
arises, one or more separate accounts may withdraw their investments in the
Funds. This could possibly force the Funds to sell portfolio securities at
disadvantageous prices. GIAC will bear the expenses of establishing separate
portfolios for variable annuity and variable life insurance separate accounts if
such action becomes necessary; however, ongoing expenses that are ultimately
borne by contractowners will likely increase due to the loss of the economies of
scale benefits that can be provided to mutual funds with substantial assets.
Custodian, Transfer Agent and Dividend Paying Agent. State Street Bank and
Trust Company, located at 1776 Heritage Drive, North Quincy, Massachusetts
02171, serves as the custodian of the assets of the Company. Foreign securities
acquired by the Company will be maintained in the sub-custody of either foreign
banks and trust companies that are members of State Street Bank's Global Custody
Network or foreign depositories used by such members. GIAC serves as the
Company's transfer agent and dividend paying agent.
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Prospectus May 1, 1997
THE GUARDIAN SMALL CAP STOCK FUND
This Prospectus offers shares of The Guardian Small Cap Stock Fund (the
"Fund") beginning June 1, 1997. The Fund is a diversified series fund portfolio
of GBG Funds, Inc. (the "Company") which is a diversified open-end management
investment company.
The Fund's primary investment objective is long-term growth of capital. The
Fund invests primarily in common stocks and convertible securities that are
issued by companies with small market capitalization. Current income is of
lesser importance; however it is expected that long-term growth of capital will
be accompanied by growth in income.
Guardian Investor Services Corporation ("GISC"), which serves as the
investment manager for the Fund, is a New York corporation and a wholly-owned
subsidiary of The Guardian Insurance & Annuity Company, Inc. ("GIAC").
Investment in the Funds is available only to purchasers or current owners
of certain variable annuity and variable life insurance contracts issued by
GIAC.
This Prospectus sets forth important information which a GIAC contractowner
should know about the investment policies and operations of the Fund before
investing and should be retained for future reference. Additional information
about the Fund is contained in a Statement of Additional Information, dated May
1, 1997, which has been filed with the Securities and Exchange Commission. A
copy of the Statement of Additional Information can be obtained, without charge,
by calling 1-800-221-3253 or by writing to the Company, c/o GIAC, 201 Park
Avenue South, New York, New York 10003. The Statement of Additional Information
is hereby incorporated by reference into this Prospectus.
Contents
Section Page
- ------- ----
Investment Objective and Policies........................................ 2
Risk Considerations...................................................... 4
Fund Management and the Investment Adviser............................... 4
Performance Results...................................................... 5
Calculation of Net Asset Value........................................... 6
Purchase and Redemption of Shares........................................ 6
Dividends, Distributions and Taxes....................................... 7
Miscellaneous Information................................................ 7
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
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<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective. The Fund's investment objective is long-term growth
of capital. Current income is not a specific objective, although it is
anticipated that long-term growth of capital will be accompanied by growth in
income. The Fund's investment objective and certain investment restrictions are
fundamental policies which may not be changed without shareholder approval.
Non-fundamental investment techniques, policies and restrictions of the Fund may
be changed by the Company's Board of Directors (the "Board") without shareholder
approval. There is no assurance that the Fund will meet its investment
objective, and the Fund cannot eliminate the risk of loss inherent in the
ownership of securities by following its investment objective.
Investment Policies. The Fund attempts to meet its objective by normally
investing at least 85% of the value of its assets in a diversified portfolio of
common stocks and convertible securities issued by smaller companies. Smaller
companies will be defined as companies whose total market capitalization places
them within the range of issuers included in the Russell 2000 Index. The Russell
Indexes are formulated to serve as a comprehensive representation of the
investible domestic equity market. These indexes, which are comprised solely of
common stocks issued by companies domiciled in the U.S. or its territories, are
value weighted. The Russell 2000 Index is a subset of the larger, Russell 3000
Index, which measures the performance of the 3,000 largest domestic companies,
based on total market capitalization. The Russell 2000 Index measures the
perfomance of the 2,000 smallest companies in the Russell 3000 Index. As of
December 31, 1996, the market capitalization of the companies included in the
Russell 2000 Index ranged between $20 million and $2.43 billion. Convertible
securities are bonds or preferred stock issues which may be converted at a
specified time and price into shares of common stock of the same or different
issuers. Convertible securities are typically senior to common stock in a
corporation's capital structure, so they may entail less risk than common
stocks. The Fund may acquire convertible securities without regard to their
ratings. See the Statement of Additional Information.
In selecting investments for the Fund, GISC, the Fund's investment adviser,
will consider the investment fundamentals and the risk/reward prospects for each
security. These evaluations are supplemented through the use of various
quantitative investment models, both proprietary and non-proprietary, to
identify those securities that represent good relative value in the marketplace
and have reasonable prospects for superior relative price performance. GISC
believes that this multi-faceted process will enhance investment performance and
will improve the consistency of portfolio results over time.
GISC can change the proportion of the Fund's assets which are invested in
particular companies and industries based on its evaluation of the outlook for
specific industries and companies and the economy.
The Fund typically invests its available cash in repurchase agreements. In
a repurchase agreement transaction, the Fund purchases a debt security and
obtains a simultaneous commitment from the seller (i.e., a bank or securities
dealer) to repurchase the debt security at an agreed time and price, reflecting
a market rate of interest. Repurchase agreements are fully collateralized
(including the interest earned thereon) by U.S. government securities, bank
obligations, cash or cash equivalents and are marked-to-market daily during
their respective terms. Costs, delays or losses could result if the seller
becomes bankrupt or is otherwise unable to repurchase a security that is subject
to a repurchase agreement. To attempt to minimize this risk, the Fund's Board of
Directors periodically receives and reviews information about the
creditworthiness of banks and securities dealers which enter into repurchase
agreements with the Fund. The Fund will not enter into a repurchase agreement
which matures in more than seven days if, as a result, more than 15% of its net
assets would be invested in illiquid securities.
From time to time, the Fund may invest up to 10% of its net assets in
securities of U.S. or foreign companies which are issued or settled overseas in
the form of American Depository Receipts ("ADRs"), European Depository
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Receipts ("EDRs") or other similar securities. An ADR is a
dollar-denominated security issued by a U.S. bank or trust company which
represents, and may be converted into, a foreign security. An EDR is similar but
is issued by a European bank. ADRs and EDRs may be denominated in a currency
different from the underlying securities into which they may be converted.
Typically, ADRs, in registered form, are designed for issuance in U.S.
securities markets and EDRs, in bearer form, are designed for issuance in
European securities markets. All such investments will be U.S. dollar
denominated. In addition, the Fund may invest up to 5% of its net assets in
foreign securities. See the Statement of Additional Information. If adverse
market conditions necessitate a defensive posture, the Fund may temporarily
invest some or all of its assets in debt obligations, including U.S. government
securities, investment grade corporate bonds, commercial paper, repurchase
agreements and cash equivalents.
RISK CONSIDERATIONS
Investment in Smaller Companies. Smallcap companies may present greater
opportunities for investment return, but may also involve greater risks. They
may have limited product lines, markets, or financial resources, or may depend
on a limited management group. The Fund may invest a substantial portion of its
assets in securities issued by small companies. Some of the small companies in
which the Fund may invest may be unseasoned. The Fund may invest up to 15% of
total assets in the securities of issuers which have less than three years of
continuous operations. While the markets in securities of small companies have
grown rapidly in recent years, such securities may trade less frequently and in
smaller volume than more widely-held securities. The values of these securities
may fluctuate more sharply than those of other securities, and the Fund may
experience some difficulty in establishing or closing out positions in these
securities at prevailing market prices. There may be less publicly-available
information about the issuers of these securities or less market interest in
such securities than in the case of larger companies, and it may take a longer
period of time for the prices of such securities to reflect the full value of
their issuers' underlying earnings potential or assets.
Foreign Securities. The Fund may invest in securities of foreign issuers.
Securities issued or settled overseas present additional and different risks to
the Fund. Foreign companies and foreign financial institutions may not be
subject to accounting standards or governmental supervision comparable to their
U.S. counterparts, and there may be less public information about their
operations. Foreign markets may be less liquid or more volatile than U.S.
markets and may offer less protection to investors. Foreign countries may impose
withholding taxes on interest income from investments in securities issued
there, or may enact confiscatory taxation provisions targeted to certain
investors. The time period for settling transactions in foreign securities may
be longer than the time period permitted for the settlement of domestic
securities transactions. In addition, as described in the Statement of
Additional Information, the market prices for foreign securities are not
determined at the same time of day as the net asset value for the Fund's shares.
It may be difficult to obtain and enforce judgments against foreign entities,
and the expenses of litigation are likely to exceed those which would be
incurred in the United States.
Portfolio Turnover Rate. The Fund's portfolio turnover rate may vary
significantly from year to year. Although the Fund does not intend to trade
securities for short term profit, there is no limitation on the length of time
securities must be held by the Fund prior to being sold. The annual portfolio
turnover rate of the Fund is anticipated to be between 50% and 75%. (An annual
portfolio turnover rate of 100% would occur if all of the investments held in a
Fund's portfolio were replaced in a one-year period.)
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<PAGE>
FUND MANAGEMENT AND THE INVESTMENT ADVISER
General Structure and Operations of the Company. The Company is a
diversified open-end management investment company which was incorporated in
Maryland in October 1990. The Company, which was known as "Baillie Gifford
International Fund, Inc." prior to October 11, 1994, has been organized as a
"series" investment company which enables the Company, if it so chooses, to
create more than one distinct portfolio of investments. At present, the Company
consists of three portfolios of investments, only one of which is described in
this Prospectus. The Board may establish additional portfolios with different
investment objectives in the future.
The management and affairs of the Fund are supervised by the Company's
Board of Directors. The Board meets regularly to review the Fund's investments,
performance, expenses, and other business affairs. The Board elects the Fund's
officers. The Board has nine members. Five Directors are not "interested
persons" of the Fund, as that term is defined in the Investment Company Act of
1940 ("the 1940 Act"). The names and business experience of the Directors and
officers of the Fund are set forth in the Statement of Additional Information.
GISC serves as investment adviser and provides certain administrative
services and facilities necessary to conduct the ongoing business of the Fund.
GISC selects, buys and sells securities for the Fund; chooses brokers and
dealers to effect the transactions; and negotiates any brokerage commissions.
The Fund pays GISC an investment management fee for these services at an annual
rate of 0.75% of its average daily net assets. Although this management fee is
greater than that paid by most mutual funds, the Company's Board believes that
the fee is reasonable in light of the services to be provided and the fees
charged by other mutual funds with similar objectives and policies. All payments
are due on a quarterly basis. The Fund also assumes all expenses of its
operations and business not specifically assumed or agreed to be paid by GISC.
Expenses paid by the Fund will include, for example, costs relating to: custody;
the services of the Fund's transfer agent and dividend disbursing agent;
portfolio accounting services; shareholder communications; shareholder meetings;
calculation of net asset value; legal fees and expenses; accounting and auditing
fees and expenses; directors' fees and expenses; U.S. federal and state
registration fees; brokerage commissions; taxes; and bonding and insurance.
GISC is located at 201 Park Avenue South, New York, New York 10003. GISC is
wholly owned by GIAC, which is, in turn, wholly owned by The Guardian Life
Insurance Company of America ("Guardian Life"), a mutual life insurance company
organized in the State of New York in 1860. GISC is the investment adviser to
six of the eight series funds comprising The Park Avenue Portfolio, which is an
open-end management investment company, and four other open-end management
investment companies. GISC is the manager of another open-end management
investment company and is the co-adviser of a separate account of GIAC. GISC is
also the principal underwriter and distributor of The Park Avenue Portfolio and
of variable annuities and variable life insurance policies issued by GIAC. See
the Statement of Additional Information.
Charles E. Albers, CFA and Larry Luxenberg, CFA share portfolio management
responsibility for the Fund. Mr. Albers and Mr. Luxenberg also share portfolio
management for a small cap fund series of The Park Avenue Portfolio (namely, The
Guardian Park Avenue Small Cap Fund) that commenced operations on May 1, 1997.
Mr. Albers also manages some or all of the assets of two series of The Park
Avenue Portfolio (namely, The Guardian Park Avenue Fund and The Guardian Asset
Allocation Fund), The Guardian Stock Fund and the equity assets of Guardian
Life. Mr. Albers is a Senior Vice President of Guardian Life. Mr. Luxenberg has
been a securities analyst for Guardian Life for the last 12 years. Mr.
Luxenberg, who is an Assistant Vice President, Equity Securities for Guardian
Life, has not previously managed an open-end management investment company.
BGSC-4
<PAGE>
PERFORMANCE RESULTS
The Fund may, from time to time, provide performance information in
advertisements, sales literature or other materials furnished to existing or
prospective owners of GIAC's variable contracts. When performance information is
provided in advertisements, it will include the effect of all charges deducted
under the terms of the specified contract, as well as all recurring and
non-recurring charges incurred by the Fund. All performance results are
historical and are not representative of future results.
Total return and average annual total return reflect the change in value of
an investment in the Fund over a specified period, assuming the reinvestment of
all capital gains distributions and income dividends. Average annual total
returns show the average change in value for each annual period within a
specified period. Total returns, which are not annualized, show the total
percentage or dollar change in value over a specified period.
The Fund may also compare its performance to other investment vehicles or
other mutual funds which have similar investment objectives or programs. Also,
the Fund may quote information from securities indices or financial and industry
or general interest publications in its promotional materials. Additionally, the
Fund's promotional materials may contain references to types and characteristics
of certain securities; features of their respective portfolios; financial
markets; or historical, current or prospective economic trends. Topics of
general interest, such as personal financial planning, may also be discussed.
More information about the Fund's performance is contained in the Statement of
Additional Information. Free copies may be obtained by calling 1 800-221-3253 or
by writing to GISC.
The Fund's returns and net asset value will fluctuate. Shares are redeemed
in response to transfer instructions or surrender and withdrawal requests at the
then current net asset value per share which may be more or less than original
cost. Please refer to the Statement of Additional Information for more
information about the Funds' performance.
CALCULATION OF NET ASSET VALUE
The net asset value ("NAV") of the Fund is determined as of the earlier of
the close of trading on the New York Stock Exchange or 4:00 p.m., Eastern time,
on each day on which the New York Stock Exchange is open for business. Each
Fund's NAV is calculated by subtracting the Fund's liabilities, including
expenses which are accrued daily, from its total assets and dividing the result
by the total number of shares outstanding.
The Fund values its assets on their current market value when market
quotations are readily available. As of such time, quotations of foreign
securities in foreign currencies are converted into the U.S. dollar equivalents
at the prevailing market rates as computed by State Street Bank and Trust
Company, custodian of the Fund's assets. If a market value cannot be
established, assets are valued at fair value as determined in good faith by or
under the direction of the Company's Board of Directors. Short-term securities
which mature in 60 days or less are valued by using the amortized cost method,
unless the Board determines that this does not represent fair value. All
investments by the Fund are valued daily in U.S. dollars based on the then
prevailing exchange rate.
The value of a foreign security held by the Fund is determined based upon
its sale price on the foreign exchange or market on which it is traded and in
the currency of that market, as of the close of the appropriate exchange or, if
there have been no sales during the day, at the mean of the closing bid and
asked prices. Trading in securities on exchanges and over-the-counter markets in
Europe and the Far East is normally completed at various times prior to 4:00
p.m. Eastern time, the current time for the close of trading on the New York
Stock Exchange.
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<PAGE>
Trading on foreign exchanges may not take place on every day the New York Stock
Exchange is open. Conversely, trading in various foreign markets may take place
on days when the New York Stock Exchange is not open and on other days when the
Fund's net asset value is not calculated. Consequently, the calculation of the
net asset value for the Fund may not occur contemporaneously with the
determination of the most current market prices of the securities included in
such calculation. In addition, the value of the net assets held by the Fund may
be significantly affected on days when shares are not available for purchase or
redemption.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are continuously offered to GIAC's separate accounts at
the then current NAV. GIAC then offers to its contractowners units in its
separate accounts which directly correspond to shares in the Fund. GIAC submits
purchase and redemption orders to the Company based on allocation instructions
for premium payments, transfer instructions, or surrender and withdrawal
requests which are furnished to GIAC by such contractowners. Contractowners can
send such instructions and requests to GIAC at P.O. Box 26210, Lehigh Valley, PA
18002 by first class mail or 3900 Burgess Place, Bethlehem, PA 18017 by
overnight or express mail. Payment for redeemed shares will ordinarily be made
within three (3) business days after the Company receives a redemption order
from GIAC. The redemption price will be the NAV next determined after GIAC
receives the contractowner's instructions or request in proper form. The Company
may suspend the right of redemption or postpone the date of payment beyond three
(3) business days during any period when trading on the New York Stock Exchange
is restricted, or such Exchange is closed for other than weekends and holidays;
when an emergency makes it not reasonably practicable for the Fund to dispose of
its assets or calculate its NAV; or as permitted by the SEC.
The accompanying prospectus for a GIAC variable annuity or variable life
insurance policy describes the allocation, transfer and withdrawal provisions of
such annuity or policy.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended ("Code"), so that the Fund will not be
subject to federal income tax on net investment income and net capital gains
that are distributed to GIAC's separate accounts. GIAC reinvests all such
distributions in additional shares of the Fund at NAV. The Fund typically
distributes any net investment income twice each year and any net capital gains
once each year. The Company's Board of Directors can change this policy.
Contractowners who own units in a separate account which correspond to shares in
the Fund will be notified when distributions are made.
The Code and its related Treasury Department regulations require mutual
funds that are offered through insurance company separate accounts to meet
certain diversification requirements to preserve the tax-deferral benefits
provided by the variable contracts which are offered in connection with such
separate accounts. GISC intends to diversify the Fund's investments in
accordance with those requirements. The prospectuses for GIAC's variable
annuities and variable life insurance policies describe the federal income tax
treatment of distributions from such contracts.
Investment income received from sources within foreign countries may be
subject to foreign income taxes. In this regard, withholding tax rates in
countries with which the U.S. does not have a tax treaty are often as high as
30% or more. The U.S. has entered into tax treaties with many foreign countries
which entitle certain investors (such as the Fund) to a reduced rate of tax
(generally 10-15%) or to certain exemptions from tax. The Fund will operate so
as to qualify for such reduced tax rates or tax exemptions whenever possible.
While contractowners will
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<PAGE>
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 Fund.
The foregoing is only a summary of important federal tax law provisions
that can affect the Fund. Other federal, state, or local tax law provisions may
also affect the Fund and its operations. Anyone who is considering allocating,
transferring or withdrawing monies held under a GIAC variable contract to or
from this Fund should consult a qualified tax adviser.
MISCELLANEOUS INFORMATION
Voting Rights. Through its separate accounts, GIAC is the sole shareholder
of record of the Fund, so, under the 1940 Act, GIAC is deemed to be in control
of the Fund. Nevertheless, when a Fund shareholders' meeting occurs, GIAC
solicits and accepts voting instructions from its contractowners who have
allocated or transferred monies for an investment in the Fund as of the record
date for the meeting. GIAC then votes the Fund's shares that are attributable to
its contractowners' interests in the Fund in accordance with their instructions.
GIAC will vote shares for which no instructions are received in the same
proportion as it votes shares for which it does receive instructions. GIAC will
vote any shares that it is entitled to vote directly due to amounts it has
contributed or accumulated in its separate accounts in the manner described in
the prospectuses for its variable annuities and variable life insurance
policies.
Each share of the Fund is entitled to one vote, and fractional shares are
entitled to fractional votes. Fund shares have non-cumulative voting rights, so
the vote of more than 50% of the shares can elect 100% of the directors.
The Company is not required to hold annual shareholder meetings, but
special meetings may be called to, among other things, elect or remove
directors, change fundamental policies or approve an investment advisory
agreement.
Availability of the Fund. The Fund is only available to owners of certain
variable annuities or variable life insurance policies issued by GIAC through
its separate accounts. The Company does not currently foresee any disadvantages
to the contractowners arising from offering shares of the Fund to variable
annuity and variable life insurance policy separate accounts simultaneously, and
its Board monitors events for the existence of any material irreconcilable
conflict between or among contractowners. If a material irreconcilable conflict
arises, one or more separate accounts may withdraw their investments in the
Fund. This could possibly force the Fund to sell portfolio securities at
disadvantageous prices. GIAC will bear the expenses of establishing separate
portfolios for variable annuity and variable life insurance separate accounts if
such action becomes necessary; however, ongoing expenses that are ultimately
borne by contractowners will likely increase due to the loss of the economies of
scale benefits that can be provided to mutual funds with substantial assets.
Custodian, Transfer Agent and Dividend Paying Agent. State Street Bank and
Trust Company, located at 1776 Heritage Drive, North Quincy, Massachusetts
02171, serves as the custodian of the assets of the Company. Foreign securities
acquired by the Company will be maintained in the sub-custody of either foreign
banks and trust companies that are members of State Street Bank's Global Custody
Network or foreign depositories used by such members. GIAC serves as the
Company's transfer agent and dividend paying agent.
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<PAGE>
BAILLIE GIFFORD INTERNATIONAL FUND
BAILLIE GIFFORD EMERGING MARKETS FUND
THE GUARDIAN SMALL CAP FUND
----------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 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 GBG 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-
Investment Objective and Policies......................... B-
Special Investment Techniques - International
Fund and Emerging Markets Fund.......................... B-
Special Investment Techniques - International Fund,
Emerging Markets Fund and Small Cap Stock Fund ......... B-
Portfolio Transactions and Brokerage...................... B-
Company Management........................................ B-
Investment Adviser, Sub-Investment Adviser and Distributor B-
GIAC and Other Fund Affiliates............................ B-
Taxes..................................................... B-
Performance Results....................................... B-
Fund Capitalization and Expenses.......................... B-
Purchase and Redemption of Shares......................... B-
Custodian and Transfer Agent.............................. B-
Legal Opinion............................................. B-
Independent Auditors and Financial Statements............. B-
<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).
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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. Write, purchase or sell puts, calls, or combinations thereof;
9. Purchase or sell commodities or commodity contracts;
10. 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:
11. 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;
12. 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;
13. 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;
14. Invest in securities of other registered investment companies;
15. 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;
16. 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);
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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
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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
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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.
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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.
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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
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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, Baillie Gifford Overseas Limited ("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
B-10
<PAGE>
brokerage commissions. GISC and BG 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 $ __________,
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
$__________, 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 ____%, respectively. For the Emerging
Markets Fund, the rates were 51% and ___%, 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 five mutual funds within
the Guardian Fund Complex.
John C. Angle* (73) Director Retired. Former Chairman of the
3800 South 42nd Street Board and Chief Executive
Lincoln, Nebraska 68506 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 five 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 five
mutual funds within the
Guardian Fund Complex.
Leo R. Futia* (77) Director Retired. Former Chairman of the
18 Interlaken Road Board and Chief Executive
Greenwich, Connecticut 06830 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 five mutual funds within
the Guardian Fund Complex.
Director (Trustee) of various
mutual funds sponsored by
Value Line, Inc.
- ----------
* "Interested person," as defined in the 1940 Act.
B-12
<PAGE>
Name, Address and Age Title Business History
- --------------------- ----- ----------------
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 five mutual funds
within the Guardian Fund
Complex and various mutual
funds sponsored by Mitchell
Hutchins Asset Management,
Inc. and PaineWebber Inc.
Sidney I. Lirtzman, Ph.D. (65) Director Professor of Management
38 West 26th Street 9/67-present and Acting Dean,
New York, New York 10010 School of Business
2/95-present, City University
of New York -- Baruch College.
President, Fairfield
Consulting Associates, Inc.
Director (Trustee) of five
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 five
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.
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 two 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 five mutual funds within
the Guardian Fund Complex.
B-13
<PAGE>
Name, Address and Age Title Business History
- --------------------- ----- ----------------
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 five 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 five 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 five 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
five mutual funds within the
Guardian Fund Complex.
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.
B-14
<PAGE>
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***
-------------- ------------------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Frank J. Fabozzi
Director $ N/A N/A $
William W. Hewitt, Jr.
Director N/A N/A
Sidney I. Lirtzman
Director N/A N/A
Carl W. Schafer**
Director N/A N/A
Robert G. Smith
Director N/A N/A
</TABLE>
* Directors who are "interested persons" of the Company are not compensated
by the Company.
** Mr. Schafer became a Director of the Company on March 20, 1996.
*** 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 February 1, 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-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
B-15
<PAGE>
$__________ 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 $__________, 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 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 $__________ 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 $__________, 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
B-16
<PAGE>
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.
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 February 1, 1997, GIAC was the record owner of 23,150,223 shares of
the International Fund and 4,855,778 shares of the Emerging Markets Fund. The
Guardian Life Insurance Company of America ("Guardian Life") owned beneficially
3,275,289 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, GIAC owns beneficially 960,695 (or 3.6%) of International
Fund shares and Guardian Life owns beneficially 3,275,289 shares (or 12.3%) of
the International Fund shares and 2,041,667 shares (or 30%) of the Emerging
Markets Fund shares.
B-17
<PAGE>
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. 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.
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.
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.
B-18
<PAGE>
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. When a Fund has been in
operation one, five and ten years, respectively, the average annual total return
figures for these periods will always be provided. 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.
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 .....................
Cumulative and Average Annual Total Returns
International Emerging
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 ....... --
- ----------
* 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.
B-19
<PAGE>
<TABLE>
<CAPTION>
Emerging
International Fund Markets Fund
------------------ ------------
% Change ERV % Change ERV
-------- --- -------- ---
<S> <C> <C> <C> <C>
For the year ended December 31, 1996 xx.xx% $x,xxx.xx (x.xx)% $xxx.xx
For the life of the Fund through December 31, 1996 x.xx% $x,xxx.xx (xx.xx)% $xxx.xx
</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.
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 ________, ____ purchased ______ shares of the Small Cap Fund at a price
of $10.00 per share for a total investment of $_______. Over the weeks following
this initial investment, _____ furnished an additional $________ in seed capital
to the Small Cap Fund, purchasing _______ shares. This investment was made to
enable the Small Cap Fund to commence operations and to acquire a diversified
portfolio of securities in accordance with its investment objective and
policies. The shares acquired by ____________ are being held for investment
purposes and ____________ 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.
B-20
<PAGE>
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.
The Small Cap Fund has incurred expenses in connection with its
organization in the amount of $______ which were advanced by ____. 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 Small Cap 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 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.
B-21
<PAGE>
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 is
incorporated by reference in this Statement of Additional Information.
B-22
<PAGE>
GBG 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
Report of Ernst & Young LLP, Independent Auditors
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
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 Guardian Small Cap Stock Fund
6 -- Not Applicable
7 -- Not Applicable
8 -- Form of Custodian Agreement between State Street
Bank and Trust Company and Registrant(6)
8(b) -- Addendum to Custodian Agreement between State
Street Bank and Trust Company and Registrant(5)
C-1
<PAGE>
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 (8)
11(a) -- Consent of Ernst & Young LLP (8)
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 Directors of the
Registrant(7)
27 -- Financial Data Schedules (9)
- ----------
(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) To be filed by amendment
(9) Not included in reliance on March 1996 Electronic Filing Regulatory Overview
question and answer
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 February 1,
1997:
Percentage of
Voting Securities
State of Incorporation Owned
Name of Entity or Organization By Guardian Life
-------------- --------------- ----------------
The Guardian Insurance & Delaware 100%
Annuity Company, Inc.
Guardian Reinsurance Services,Inc. Connecticut 100%
Managed Dental Care California 100%
Physicians Health Services, Inc. Delaware 14%
Private Healthcare Systems, Inc. Delaware 14%
Guardian Asset Management Delaware 100%
Corporation
The Guardian Tax-Exempt Fund Massachusetts 83%
The Guardian Baillie Gifford
International Fund Massachusetts 32%
The Guardian Investment Quality
Bond Fund Massachusetts 34%
Baillie Gifford International Fund Maryland 12%
Baillie Gifford Emerging
Markets Fund Maryland 30%
The Guardian Asset
Allocation Fund Massachusetts 18%
C-2
<PAGE>
The following list sets forth the persons directly controlled by affiliates
of Guardian Life and thereby indirectly controlled by Guardian Life as of
February 1, 1997:
Approximate
Percentage of Voting
Securities Owned
Place of Incorporation by Guardian Life
Name of Entity or Organization and its Affiliates
-------------- ---------------------- ------------------
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%
GBG Funds, Inc. Maryland 100%
Item 26. Number of Holders of Registrant's Securities
Number of Record Holders
Title of Class as of February 1, 1997
-------------- ------------------------
International Stock Class 11
Emerging Markets Stock Class 6
Small Cap Stock Class -
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-3
<PAGE>
Other Substantial Business,
Name Position(s) with GBG Profession, Vocation or Employment
---- -------------------- ----------------------------------
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"),*
Guardian Asset Management
Corporation* Gabelli Capital
Asset Fund, and five
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*
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
and Director: The Guardian
Insurance & Annuity Company,
Inc.* Director: Guardian Investor
Services Corporation and Guardian
Asset Management Corporation*
Director (Trustee) of five
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 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: GBG Funds, Inc.
- ----------
* 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-4
<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*
---- -------- ----------------------
James K. Anderson Director Partner: Baillie Gifford & Co.
Director: Baillie Gifford & Co. Limited
Gavin J. N. Gemmell** Chairman 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 Director 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.
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 Cash Management Fund, The Guardian Baillie Gifford International Fund,
The Guardian Investment Quality Bond Fund, The Guardian Tax-Exempt Fund, The
Guardian Asset Allocation Fund, and, effective May 1, 1997, The Guardian Baillie
Gifford Emerging Markets Fund and The Guardian Park Avenue Small Cap 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 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 GBG 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-5
<PAGE>
<TABLE>
<CAPTION>
Position(s) Position(s)
Name with GISC with Registrant
---- --------- ---------------
<S> <C> <C>
John M. Smith President & Director President
Philip H. Dutter Director None
Arthur V. Ferrara Director Director
Leo R. Futia Director Director
Peter L. Hutchings Director
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 None
Ryan W. Johnson Vice President & National None
Sales Director
Michele S. Babakian Vice President None
John M. Fagan Vice President None
Thomas R. Hickey, Jr. Vice President, Operations Vice President
Nikolaos D. Monoyios Vice President None
Frank L. Pepe Vice President & Controller Treasurer
Alexander M. Grant, Jr. Second Vice President None
Donald P. Sullivan, Jr. Vice President Second Vice President
Earl C. Harry Treasurer None
Richard T. Potter, Jr. Vice President and Counsel Counsel
Kevin S. Alter Vice President None
Peggy L. Coppola Assistant Vice President None
Joseph A. Caruso Secretary Secretary
Ann T. Kearney Second Vice President Controller
Karen Dickinson Assistant Secretary Assistant Secretary
</TABLE>
(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.
Registrant hereby undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six months from
the effective date of this registration statement with respect to the Small Cap
Fund.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, GBG Funds, Inc. (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 February, 1997.
GBG FUNDS, INC.
By s/THOMAS R. HICKEY, JR.
--------------------------------
Thomas R. Hickey, Jr.
Vice President
C-7
<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 February 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 February 13, 1997
-------------------------
Thomas R. Hickey, Jr.
Pursuant to a Power of Attorney
C-8
<PAGE>
GBG FUNDS, INC.
Exhibit Index
Number Description
1(c) Amendment to Registrant's Articles of Incorporation
5(e) Form of Investment Management Agreement
between Guardian Investor Services
Corporation and Registrant for the Guardian Small Cap
Stock Fund
10(b) Consent of Counsel (1)
11(a) Consent of Ernst & Young LLP (1)
27 Financial Data Schedules (2)
- -------------------
(1) To be filed by amendment
(2) Not included in reliance on March 1996 Electronic Filing Regulatory
Overview question and answer.
C-9
ARTICLES SUPPLEMENTARY
OF
GBG FUNDS, INC.
GBG Funds, Inc., a Maryland corporation having its principal office in
Maryland in Baltimore City (hereinafter called the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Board of Directors of the Corporation, at a meeting of the
Board of Directors held on December 19, 1996, adopted a resolution classifying
Two Hundred Million (200,000,000) shares of unclassified common stock as Small
Cap Stock Class common stock, in each case by setting or changing before the
issuance of such shares, the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption thereof as hereinafter set forth.
SECOND: The shares of Small Cap Stock Class common stock as so classified
by the Board of Directors of the Corporation shall have the preferences,
conversion and other rights, voting powers, restriction, limitations as to
dividends, qualifications and terms and conditions of redemption as set forth in
Article SEVENTH of the Articles of Incorporation of the Corporation and shall be
subject to all provisions of the Articles of Incorporation relating to stock of
the Corporation generally.
THIRD: The shares aforesaid have been duly reclassified by the Board of
Directors pursuant to authority and power contained in the Articles of
Incorporation of the Corporation.
<PAGE>
IN WITNESS WHEREOF, GBG Funds, Inc. has caused these Articles Supplementary
to be signed on this ___th day of February, 1997 in its name and on its behalf
by its duly authorized officers, who acknowledge that these Articles
Supplementary are the act of the Corporation and that to the best of their
knowledge, information and belief, all matters and facts set forth herein
relating to the authorization and approval of the Articles Supplementary are
true in all material respects and that this statement is made under penalties of
perjury.
GBG Funds, Inc.
By:__________________________
John M. Smith
President
ATTEST:
__________________________
Joseph A. Caruso
Secretary
Exhibit 99.5(e)
FORM OF
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, dated as of _________________, 199__, between GBG FUNDS,
INC., and GUARDIAN INVESTOR SERVICES CORPORATION, a New York corporation (the
"Adviser"), a wholly-owned subsidiary of The Guardian Insurance & Annuity
Company, Inc. ("GIAC"), which is, in turn, a wholly-owned subsidiary of The
Guardian Life Insurance Company of America ("Guardian Life").
WHEREAS, the Company is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Company is authorized to establish separate investment
portfolios, each of which offers a separate class of shares of common stock,
each with one or more investment objectives, policies and restrictions; and
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Company, on behalf of each Fund, desires to retain the Adviser
to furnish investment advisory services to certain existing investment
portfolios of the Company (each, a "Fund") and may retain the Adviser to serve
in such capacity with respect to certain additional investment portfolios of the
Company, all as now or hereafter identified on Schedule A hereto (such initial
investment portfolios and any such additional investment portfolios together
referred to herein as the "Funds") and the Adviser is willing to furnish such
services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound thereby, it is agreed
between the parties hereto as follows:
1. Appointment. (a) The Company hereby appoints the Adviser to act as
investment adviser to each Fund for the period and on the terms set forth in
this Agreement. The Adviser accepts such appointment and agrees to furnish the
services herein set forth for the compensation described in Section 7 of this
Agreement and as set forth in the appendix or appendices attached hereto and
made a part hereof (each, a "Fee Appendix").
(b) In the event that the Company establishes one or more portfolios other
than the Funds with respect to which it desires to retain the Adviser to act as
investment adviser hereunder, the Company shall notify the Adviser in writing.
If the Adviser is willing to render such services under this Agreement, it shall
notify the Company in writing whereupon, subject to such shareholder approval as
may be required pursuant to Section 11 hereof, such Fund shall be listed on
Schedule A as a covered Fund and shall
1
<PAGE>
be subject to the provisions of this Agreement, except to the extent that said
provisions are modified with respect to such Fund in writing by the Company and
the Adviser at that time.
2. Delivery of Documents. The Company has furnished the Adviser with copies,
properly certified or authenticated as appropriate in the circumstances, of each
of the following:
(a) Resolutions of the Company's Board of Directors authorizing the
appointment of the Adviser as the Funds' adviser and approving this Agreement;
(b) The Company's Articles of Incorporation, as amended to date;
(c) The Company's By-Laws;
(d) The Company's Notification of Registration on Form N-8A under the 1940
Act, as filed with the Securities and Exchange Commission (the "SEC");
(e) The Company's Registration Statement on Form N-1A under the Securities
Act of 1933 and the 1940 Act (the "Registration Statement"), as filed with the
SEC, and all amendments thereto; and
(f) The Company's most recent prospectuses for the Funds (such
prospectuses together with the related statements of additional information, as
currently in effect, and all amendments and supplements thereto, are herein
called "Prospectuses").
The Company will furnish the Adviser from time to time with copies, properly
certified or authenticated, as appropriate in the circumstances, of all
amendments or supplements to the foregoing, if any.
3. Services. The Adviser undertakes to provide the services hereinafter set
forth and assume the following obligations:
(a) Investment Management Services. Subject to the supervision of the
Company's Board of Directors (and any duly constituted committee thereof or any
officer of the Company acting pursuant to like authority), the Adviser shall:
(i) Obtain and evaluate pertinent economic, statistical and financial data
and other information relevant to the investment policies of each Fund,
including information about the economy generally and individual companies
or industries, as the Adviser deems necessary or useful to discharge its
duties hereunder;
(ii) Manage the assets of each Fund in a manner consistent with the
investment objectives, policies and restrictions of such Fund;
2
<PAGE>
(iii) Regularly furnish to the Board of Directors of the Company
recommendations with respect to an overall investment program for each Fund
which may be approved, modified or rejected by the Board; take such steps
as necessary to implement the investment programs approved by the Board;
and regularly report to the Board on the implementation of said investment
programs and the Adviser's activities in connection with the administration
of the Company and each Fund, including preparing statistical and other
reports as the Board may request from time to time;
(iv) Determine the securities to be purchased, sold or otherwise disposed
of by each Fund and the timing of such purchases, sales and dispositions;
and take such further action, including the placing of purchase and sale
orders on behalf of each Fund, as the Adviser shall deem necessary or
appropriate; and
(v) Maintain the records and books of account with respect to transactions
relating to the Company and each Fund (other than those maintained by the
Company's transfer agent, registrar, custodian or other agents); preserve
such records and books as required by the 1940 Act and the Advisers Act;
and supervise the furnishing of services to the Company and each Fund.
(b) Use of Sub-Advisers. In connection with the foregoing services, it is
understood that the Adviser may appoint one or more persons or entities ("Sub-
Advisers"), and each Sub-Adviser shall have full investment discretion and shall
make all determinations with respect to the investment of all or such portion of
the particular Fund's assets assigned to that Sub-Adviser and the purchase and
sale of portfolio securities with those assets, and take such steps as necessary
to implement such appointments.
The Adviser shall evaluate the Sub-Advisers and shall advise the Board of
Directors of the Company of the Sub-Advisers which the Adviser believes are best
suited to invest the assets of each Fund; shall monitor and evaluate the
investment performance of each Sub-Adviser employed by a Fund; shall allocate
the portion of each Fund's assets to be managed by each Sub-Adviser; shall
recommend changes of or additional Sub-Advisers when appropriate; and shall
coordinate the investment activities of the Sub-Advisers. The Adviser shall
render reports, at meetings of the Board of Directors, relating to, among other
things, its ongoing evaluation of the Sub-Advisers and any decisions or
recommendations it has made with respect to the allocation of assets among Sub-
Advisers.
4. Organizational Costs. The Adviser shall advance the costs of organizing
each Fund, and bear the costs of rendering the investment management and
supervisory services to be performed by it under this Agreement.
3
<PAGE>
5. Expenses. The Adviser shall, at its own expense, maintain such staff and
employ or retain such personnel and consult with such other persons as it shall
from time to time determine to be necessary or useful to the performance of its
obligations under this Agreement. The Adviser may delegate some or all of its
responsibilities hereunder to Sub-Advisers as permitted and in the manner
prescribed by the Company's Articles of Incorporation. The Adviser shall, at its
own expense, pay the fees and expenses, if any, of the Directors of the Company
who are deemed to be interested persons of the Company, but not those Directors
who are also officers or employees of Guardian Life or any of its subsidiaries
or affiliates.
6. Administrative Services. The Adviser shall furnish, at its own expense,
such office space, facilities and equipment and such clerical help,
administrative and bookkeeping services as the Company and each Fund shall
reasonably require in the conduct of its business. In addition, since shares of
the Funds are intended to be offered to separate accounts of GIAC to find
variable annuity and variable life insurance contracts, the Adviser will advise
the Funds as to (a) relevant insurance laws and regulations and other insurance-
related matters, such as possible material conflicts that might arise through
offering shares of the Funds through both variable annuity and variable life
contracts, and (b) requirements of the Internal Revenue Code of 1986, as amended
(and any successor thereto), and regulations thereunder, that must be met to
ensure that such contracts are treated as variable contracts for purposes of
such Code.
7. Compensation. For the services to be rendered hereunder, the facilities
furnished and the expenses assumed by the Adviser with respect to each Fund, the
Company shall pay to the Adviser from the assets of each such Fund a fee in the
amount set forth in the Fee Appendix which names such Fund. Each Fee Appendix is
hereby made a part of this Agreement.
Compensation under this Agreement, as stated in the Fee Appendices for all
Funds, shall be calculated and accrued daily and the amounts of the daily
accruals shall be paid quarterly, or at such other intervals as are mutually
agreed upon by the parties. If this Agreement becomes effective with respect to
a Fund subsequent to the first day of a quarter or shall terminate before the
last day of a quarter (or such other period as mutually agreed upon),
compensation for that part of such period during which this Agreement is in
effect shall be prorated in a manner consistent with the calculation of the fees
as set forth in the Fee Appendix for such Fund. Payment of the Adviser's
compensation for services to a Fund shall be made as promptly as possible after
completion of the computations contemplated by Section 9 hereof.
8. Fund Expenses. Each Fund shall pay all expenses not expressly assumed by
the Adviser which may be incurred in connection with such Fund's operations and
the offering of its shares. Such expenses shall include, but are not limited to,
the following (or each Fund's proportionate share of the following):
4
<PAGE>
(a) Charges and expenses of any custodian, sub-custodian, or depository
appointed by the Company for the safekeeping of the cash, portfolio
securities and other property of the Company and each Fund and for keeping
any books of account;
(b) Charges and expenses of any shareholder servicing agent, transfer or
dividend disbursing agent, any registrar or any agent appointed by the
Company for a Fund, and any outside service used for the pricing of any
assets held by any Fund or the calculation of net asset value of the shares
of any Fund;
(c) Brokerage commissions and dealer markups and other costs in connection
with the purchase or sale of securities for a Fund;
(d) Taxes, including securities issuance and transfer taxes, and any other
fees payable to federal, state or other governmental agencies;
(e) Insurance premiums attributable to a Fund on property and personnel
(including officers and Directors) of the Company which inure to its
benefit;
(f) Compensation and expenses of Directors or members of any advisory
board or committee of the Board of Directors who are not deemed to be
interested persons of the Company;
(g) Legal fees, disbursements and filing fees in connection with the
registration or qualification of the Company and of the shares of common
stock issued by the Company with respect to each Fund under federal and
state securities laws;
(h) All expenses associated with preparing registration statements and
preparing, printing and mailing prospectuses, shareholder reports, proxy
statements and other shareholder communications to current shareholders;
(i) All expenses of meetings of shareholders of the Company with respect
to such Fund called by the Board of Directors;
(j) All expenses of regular or special meetings of the Board of Directors
or of any advisory board or committee of the Board of Directors;
(k) Interest payable on borrowings by any Fund;
(l) All expenses incident to the payment of any dividend, distribution,
withdrawal or redemption in connection with the Company or any Fund;
(m) Fees and expenses of independent accountants to the Company;
5
<PAGE>
(n) Charges and expenses of legal counsel, including counsel if any to the
Directors of the Company who are not interested persons of the Company;
(o) All expenses attributable to underwriting and distributing shares of
common stock issued by the Company with respect to each Fund;
(p) Dues or other fees in connection with membership in the Investment
Company Institute or other similar organizations;
(q) Any extraordinary expenses (including, but not limited to, legal claims
and liabilities and litigation costs and any indemnification related
thereto); and
(r) All other charges and expenses relating to the operation of the
Company or any Fund unless otherwise explicitly provided herein.
9. Limitation of Expenses. In the event the operating expenses of the Company
or any Fund (including amounts payable to the Adviser pursuant to Section 7
hereof), for any fiscal year ending on a date on which this Agreement is in
effect, exceed the expense limitations imposed by state securities laws or
regulations thereunder, the Adviser shall reduce the management fee payable by
such Fund to the extent of such excess, and, if required pursuant to any such
laws or regulations, also reimburse such Fund or the Company for annual
operating expenses which are paid or payable and which exceed any expense
limitation that may be applicable. Excluded from such annual operating expenses
shall be the amount of any interest, taxes, brokerage commissions, distribution
fees, extraordinary expenses (including, but not limited to, legal claims and
liabilities and litigation costs and any indemnification related thereto) and
any other expenses which may be excluded under the applicable state securities
law. Such reduction, if any, shall be computed and accrued daily, shall be
settled on a quarterly basis, and shall be based upon the expense limitations
applicable as of the end of the last business day of the quarter. Should two or
more expense limitations be applicable as of the end of the last business day of
the quarter, the expense limitation which results in the largest reduction in
the Adviser's fee shall be considered operative for purposes of this Section.
10. Limitation of Liability. The Adviser will use its best efforts in the
supervision and management of the investment activities of each Fund, and shall
not be liable to the Company, any Fund, or any investor: for any error of
judgment or mistake of law; for any act or omission by the Adviser; or for any
losses sustained by the Company, any Fund or any investor, unless said error,
mistake, act or omission by the Adviser is the result of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations hereunder.
11. Effective Date; Continuance. This Agreement shall take effect on the date
first written above, provided that, with respect to any Fund, this Agreement
shall not take effect unless it has first been approved (a) by a vote of a
majority of the Board of Directors, including a majority of those Directors who
are not parties to this Agreement or
6
<PAGE>
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval, and (b) by vote of a majority of that Fund's
outstanding voting securities, or as is otherwise required by the 1940 Act.
Unless sooner terminated as provided herein, this Agreement shall continue in
effect with respect to a Fund 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 this Agreement, as set forth in Section 1(b) hereof. Thereafter, if not
terminated, this Agreement shall continue from year to year, provided that such
continuance is approved at least annually by a vote of a majority of the Board
of Directors, including a majority of those Directors who are not parties to
this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval, or, with respect to
any given Fund, by vote of a majority of the outstanding voting securities of
such Fund.
12. Termination. Termination of this Agreement, as detailed in this Section 12
with respect to any given Fund, shall in no way affect the continued validity of
this Agreement of the performance thereunder with respect to any other Fund.
(a) The Company, or any Fund, may, at any time and without the payment of
any penalty, terminate this Agreement with respect to such Fund upon at
least sixty (60) days' written notice to the Adviser, either by majority
vote of the Board of Directors of the Company or by the vote of a majority
of the outstanding voting securities of the affected Fund.
(b) The Adviser may terminate this Agreement with respect to the Company
or any Fund without payment of penalty upon at least sixty (60) days'
written notice to the Company or the affected Fund.
(c) This Agreement shall immediately terminate in the event of its
assignment unless such automatic termination shall be prevented by an
exemptive order or rule of the SEC.
13. Amendment. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver or discharge is
sought, or by notice of termination as provided in Section 12 above. Any
amendment of this Agreement shall be subject to the 1940 Act.
14. Services Not Exclusive. Nothing contained in this Agreement shall prevent
the Adviser or any affiliated person of the Adviser from rendering investment
advisory or corporate administrative services to other investment companies, or
from acting as investment adviser or manager to other persons, firms or
corporations, or from engaging in other business activities.
7
<PAGE>
15. Use of Name. The Adviser and the Company each agree that the words "The
Guardian," which may comprise a component of a Fund's name, is a property right
of Guardian Life. In this regard, the Company on behalf of itself and each Fund
agrees and consents to the following: (a) the words "The Guardian" will only be
used as a component of a name and for no other purpose; (b) the Company will not
purport to grant to any third party the right to use the words "The Guardian"
for any purpose; (c) Guardian Life, the Adviser or any other duly authorized
affiliate of Guardian Life may use or grant to others the right to use the words
"The Guardian," or any combination or abbreviation thereof, as all or a portion
of a corporate or business name or for any commercial purpose, including a grant
of such right to any other investment company; and (d) upon the termination of
any investment advisory agreement into which the Adviser and the Company may
enter, or upon the termination of any such investment advisory agreement with
respect to a Fund of the Company, or upon termination of the affiliation of the
Adviser with Guardian Life, the Company and any affected Fund of the Company
shall, upon request by the Adviser or Guardian Life, cease to use the words "The
Guardian" as a name component, and shall not use such words or any combination
thereof, as part of a name or for any other commercial purpose, and shall take
any and all actions which the Adviser or Guardian Life may request to effect the
foregoing and to reconvey to the Adviser or Guardian Life any and all rights to
the words "The Guardian."
16. Governing Law. This Agreement shall be construed in accordance with the
laws of the State of New York and the applicable provisions of the 1940 Act. To
the extent that the applicable law of the State of New York, or any provisions
contained herein, conflicts with the provisions of the 1940 Act, the latter
shall control.
17. Notices. Any notice under this Agreement shall be given in writing,
addressed and delivered, telecopied with acknowledgment of receipt, or mailed
postage prepaid, to the other party. As of the date of this Agreement, the
address of both parties is 201 Park Avenue South, New York, New York 10003.
18. Miscellaneous. If any provisions of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors. As used in this Agreement, the terms "majority of the outstanding
voting securities," "interested person," "assignment," "broker," "dealer,"
"investment adviser," "net assets," "prospectus," "sale," "sell" and "security"
shall have the meanings assigned to them in the 1940 Act, subject to such
exemptions as may be granted by the SEC by any rule, regulation or order. Where
the effect of a requirement of the 1940 Act is relaxed by a rule, regulation or
order of the SEC, such provision shall be deemed to incorporate the effect of
such rule, regulation or order. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
8
<PAGE>
19. Counterparts This Agreement may be executed in counterparts by the parties
hereto, each of which shall constitute an original and together shall constitute
one Agreement.
IN WITNESS WHEREOF, the Company and the Adviser have caused this Agreement
to be executed on their behalf by and through their duly authorized officers in
the City and State of New York as of the date first written above.
GBG FUNDS, INC.
Attest:
_______________________ By:_______________________
Name:
Title:
GUARDIAN INVESTOR SERVICES
CORPORATION
Attest:
_______________________ By:_______________________
Name:
Title:
9
<PAGE>
SCHEDULE A
to Investment Advisory Agreement
between
GBG Funds, Inc. and Guardian Investor Services Corporation
The Guardian Small Cap Stock Fund
Dated: _________________________
10
<PAGE>
FEE APPENDIX
to Investment Advisory Agreement
between
GBG FUNDS, INC. (the "Company")
and
GUARDIAN INVESTOR SERVICES CORPORATION (the "Adviser")
dated ___________________ 199__
1. For the services provided and the expenses assumed pursuant to the
captioned Investment Advisory Agreement, The Guardian Small Cap Stock Fund (the
"Fund") will pay to the Adviser a fee, computed daily and paid quarterly (or at
such other intervals as the parties may from time to time agree), at the annual
rate of 0.75% of the Fund's average daily net assets. For this purpose, the
value of the Fund's average daily net assets shall be computed in the manner
specified in the Company's Articles of Incorporation, as in effect from time to
time.
2. The captioned Investment Advisory Agreement, as supplemented by this
Fee Appendix, shall not take effect with respect to the Fund unless it has first
been approved (i) by a vote of the Directors of the Company, including a
majority of those Directors who are not parties to the Investment Advisory
Agreement or interested persons of any such persons, cast in person at a meeting
called for the purpose of such approval and (ii) by vote of a majority of the
Fund's outstanding voting securities.
3. This Fee Appendix shall be attached to and made a part of the
captioned Investment Advisory Agreement and is subject to all of its terms and
conditions.
IN WITNESS WHEREOF, the parties hereto have caused this Fee Appendix to be
executed by their designated officers as of ________________, 199__.
GBG FUNDS, INC.
on behalf of THE GUARDIAN SMALL
CAP STOCK FUND
By:_____________________________
Name:
Title:
GUARDIAN INVESTOR SERVICES
CORPORATION
By:_____________________________
Name:
Title:
