GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
201 Park Avenue South
New York, New York 10003
VIA EDGAR
March 1, 1999
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Re: 1998 Annual Report to Contractowners of:
The Guardian Separate Account A
(File No. 811-3323)
Dear Sir or Madam:
7On behalf of the above-referenced registrant, transmitted herewith please find
an electronic copy of the Annual Report to Contractowners for the year ended
December 31, 1998, which is being filed pursuant to Sections 24(b) and 30(b) of
the Investment Company Act of 1940 ("Act") and the rules thereunder promulgated.
Pursuant to Section 30(d) of the Act, this report commenced mailing to all
existing contractowners on or before March 1, 1999.
Please direct any questions concerning this filing to me at 212-598-7168.
Very truly yours,
/s/ Kristin N. Cuscela
Kristin N. Cuscela
Equity Administrative Support
[TYPE] N-30D
[DESCRIPTION] Annual Report
[TEXT]
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DECEMBER 31, 1998 Value
[LOGO] Guard II
Annual Report to Contractowners
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The Guardian Separate Account A
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The Guardian Stock Fund, Inc.
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The Guardian Bond Fund, Inc.
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The Guardian Cash Fund, Inc.
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Gabelli Capital Asset Fund
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Baillie Gifford International Fund
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Baillie Gifford Emerging Markets Fund
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The Guardian Small Cap Stock Fund
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Value Line Centurion Fund, Inc.
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Value Line Strategic Asset Management Trust
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MFS Growth with Income Series
The Guardian Insurance &
Annuity Company, Inc.
A wholly owned subsidiary of
The Guardian Life Insurance Company of America
Executive Offices
201 Park Avenue South
New York, New York 10003
Customer Service Office
P.O. Box 26210
Lehigh Valley, Pennsylvania 18002-6210
1-800-221-3253
Distributed By:
Guardian Investor Services Corporation(R)
[LOGO]
Guardian(SM)
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<PAGE>
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Performance Summary
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[GRAPHIC OMITTED]
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Investment Option Total Return*
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The Guardian Stock Fund ...................................... 18.69%
Baillie Gifford International Fund ........................... 19.99%
Baillie Gifford Emerging Markets Fund ........................ -27.49%
Value Line Centurion Fund .................................... 26.22%
Value Line Strategic Asset Mgt. Trust ........................ 26.21%
Gabelli Capital Asset Fund ................................... 10.61%
The Guardian Bond Fund ....................................... 7.04%
The Guardian Cash Fund ....................................... 4.08%
The Guardian Small Cap Stock Fund ............................ -6.68%
MFS Growth with Income Series ................................ 21.12%
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Fixed-Rate Option
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The annual rate of interest declared for amounts deposited or renewed (on a
contract anniversary) in the Fixed-Rate Option from January 1, 1998 to August
31, 1998 was 5.50%, and from September 1, 1998 to December 31, 1998 was 5.25%.
This rate is subject to change at any time, and may be higher or lower for new
deposits or renewals on a contract anniversary, but is guaranteed until the
following contract anniversary.
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* The chart above shows the total returns for each investment option under
Value Guard II based on the percentage change in unit values during the
period January 1, 1998 through December 31, 1998. In contrast to the
returns presented in the portfolio managers' interviews, changes in unit
values reflect the effects of mortality and expense risk charges as well
as each option's expenses to give you a better picture of an investment
option's performance under the contract. Total return performance figures
stated above do not, however, reflect the annual contract administration
charge or possible withdrawal charges. Deduction of these amounts would
reduce the stated total returns. Past performance is not a guarantee of
future results. Investment returns and principal value will vary with
market conditions.
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<PAGE>
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Dear Contractowner:
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[Photo of Joseph D. Sargent, CLU President & CEO]
As President and Chief Executive Officer of The Guardian Insurance &
Annuity Company, Inc. (GIAC), and its parent, The Guardian Life Insurance
Company of America, I am proud to introduce this Annual Report on the
performance of your contract's separate account and its underlying investment
options during 1998. I hope you will enjoy learning more about your investments
as well as the economic outlook for the coming year.
Once again, we are proud to report that as of December 31, 1998, GIAC
continues to enjoy exemplary ratings from four of the nation's leading insurance
company evaluators: Moody's, Standard & Poor's, A.M. Best and Duff & Phelps.
GIAC's solid ratings reflect its ability to meet its guarantee of your
contract's Fixed-Rate Option and pre-retirement death benefit. However, these
ratings do not apply to the investment options available under The Guardian
Investor, which are subject to the risks of investing in securities. We are very
proud of our ratings because they reflect the strength of GIAC, which stands
behind the contract's guarantees.
We at GIAC have a strong commitment to our contractowners. We strive to
keep you informed about your investments and the current economic environment,
in order to help you make the best possible decisions for your future.
To this end, we have included a letter from Frank J. Jones, Ph.D., Chief
Investment Officer of GIAC, and interviews with the managers of your contract's
underlying investment options. I invite you to read these materials to learn
more about the strategies used to manage your investment options during the past
year.
Thank you for continuing to invest for your future through GIAC.
Sincerely,
/s/ Joseph D. Sargent
Joseph D. Sargent, CLU
President and Chief Executive Officer
The Guardian Insurance & Annuity Company, Inc.
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<PAGE>
VALUE GUARD II
Table of Contents
Portfolio Schedule
Manager of
Interview Investments
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Economic Report 5
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The Guardian Stock Fund 8 40
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Objective: Long-term growth of capital
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Portfolio: At least 80% common stocks
and securities convertible
into common stocks
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Inception: April 13, 1983
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Net Assets at December 31, 1998: $3,665,195,881
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"We believe that the best way to achieve
consistently outstanding returns is to
combine tried and tested quantitative tools
with good investment judgments."
- -- Larry Luxenberg, C.F.A. -- John B. Murphy, C.F.A.
Co-Portfolio Manager Co-Portfolio Manager
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The Guardian Bond Fund 12 50
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Objective: Maximum current income without
undue risk of principal.
Capital appreciation is a
secondary objective
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Portfolio: At least 80% investment-grade
debt securities and U.S.
government securities
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Inception: May 1, 1983
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Net Assets at December 31, 1998: $381,387,095
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"In 1998, clearly what distinguished one
fund's performance from another was owning a
well-diversified fixed income portfolio that
focused on relative valuations and asset
allocation."
- -- Howard W. Chin -- Thomas G. Sorell, C.F.A.
Co-Portfolio Manager Co-Portfolio Manager
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The Guardian Cash Fund 28 58
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Objective: As high a level of current
income as is consistent
with preservation of capital
and liquidity
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Portfolio: Short-term money market
instruments
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Inception: November 1, 1981
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Net Assets at December 31, 1998: $419,482,654
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"The Guardian Cash Fund is a place for
investors to put their money while they
decide their preferred long-term investment
vehicle, be it stocks or bonds."
- -- Alexander M. Grant, Jr.
Portfolio Manager
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Gabelli Capital Asset Fund 14 70
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Objective: Growth of capital. Current
income is a secondary
objective
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Portfolio: Primarily common and
preferred stocks and other
securities representing the
right to acquire common stocks
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Inception: May 1, 1995
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Net Assets at December 31, 1998: $155,360,967
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"While we will always have a "wall of worry,"
we believe the economy and the capital market
landscape for 1999 will provide . . . us the
opportunity to unearth well-managed companies
. . . that should benefit from sustainable
long-term economic dynamics."
- -- Mario J. Gabelli, C.F.A.
Portfolio Manager
<PAGE>
Portfolio Schedule
Manager of
Interview Investments
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Baillie Gifford International Fund 16 80
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Objective: Long-term capital
appreciation
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Portfolio: At least 80% in a diversified
portfolio common stocks of
companies domiciled outside
of the United States
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Inception: February 8, 1991
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Net Assets at December 31, 1998: $680,290,062
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"We . . . focus our efforts on finding the
best business to invest in for your Fund, and
let the availability of those attractive
businesses be the main guide to the countries
in which we should and should not place your
money."
- -- R. Robin Menzies
Portfolio Manager
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Baillie Gifford Emerging Markets Fund 18 86
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Objective: Long-term capital appreciation
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Portfolio: At least 65% in a portfolio
of common stocks issued by
emerging market companies
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Inception: October 17, 1994
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Net Assets at December 31, 1998: $50,663,561
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"The crucial element these markets need is
confidence. We are encouraged that the
performance of these markets has begun to
improve, but we feel a clear resolution of
Brazil's problems is necessary before we can
become more bullish about emerging markets as
a whole."
- -- Edward H. Hocknell
Portfolio Manager
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The Guardian Small Cap Stock Fund 20 94
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Objective: Long-term growth of capital
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Portfolio: At least 85% in a diversified
portfolio of common stocks and
convertible securities issued
by companies with small market capitalization
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Inception: July 16, 1997
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Net Assets at December 31, 1998: $193,592,901
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"Fundamental knowledge of the companies is
critical, particularly when dealing with
small companies, many of which have shorter
operating histories, more variable operations
and less research coverage."
- -- Larry Luxenberg, C.F.A.
Portfolio Manager
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Value Line Centurion Fund 22 108
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Objective: Long-term growth of capital
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Portfolio: At least 90% common stocks
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Inception: November 15, 1983
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Net Assets at December 31, 1998: $815,207,150
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"Our strategy has been consistently focused
on our forecasts for decelerating growth,
benign inflation, lower interest rates, and a
modest increase in corporate profits."
-- Value Line, Inc.
Investment Adviser
<PAGE>
Portfolio Schedule
Manager of
Interview Investments
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Value Line Strategic Asset Management Trust 24 118
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Objective: High total return consistent
with reasonable risk
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Portfolio: Stocks, bonds and money
market instruments
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Inception: October 1, 1987
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Net Assets at December 31, 1998: $1,414,283,697
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"For stock selection, we rely on the Value
Line Timeliness Ranking System. This
proprietary tool favors stocks with strong
earnings momentum. To reduce risk, we
maintain a diversified portfolio that doesn't
stray too far from the industry weightings of
the S&P500."
- -- Value Line, Inc.
Investment Adviser
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MFS Growth with Income Series 26 132
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Objective: Reasonable current income
and long-term growth of
capital and income
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Portfolio: At least 65% of its assets
in equity securities that are
believed to have long-term
prospects for growth and income
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Inception: October 9, 1995
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Net Assets at December 31, 1998: $244,310,267
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"We believe that our research-focused
investment discipline has helped us discern
which companies' earnings are growing
consistently."
- -- John D. Laupheimer, Jr.
Portfolio Manager
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The Guardian Separate Account A 30
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Investments offered through The Guardian Insurance & Annuity Company, Inc. are
not deposits or obligations of, or guaranteed by, any bank or depository
institution, nor are they federally insured by the Federal Deposit Insurance
Corporation, The Federal Reserve Board, or any other agency. They involve
investment risk, including possible loss of principal amount invested.
<PAGE>
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Economic Report
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[Photo of Frank J. Jones, Ph. D. Chief Investment Officer]
The Bad, The Ugly, and The Surprisingly Good
In retrospect, 1998 turned out to provide surprisingly strong investment
returns given the modest expectations going into the year and the various
negative events that occurred during the year. Prior to 1998, the U.S. economy
had expanded (i.e. had no recession) since April 1991, the third longest
post-WWII expansion. Preceding 1998, there were three consecutive years of
exceptional stock market performance, with returns on the S&P 500 Index(1) of
37.38%, 23.83%, and 33.28% during 1995, 1996 and 1997, respectively, continuing
the bull market which began in September 1990. The 30-year Treasury bond yield
declined to 5.93% at the end of 1997.
Given this preceding strength, few analysts would have been surprised if
1998 experienced the end of the economic expansion, the end of the stock bull
market, and a retraction in the bond market. And the expectations for the
economy, the stock market and the bond market for 1998 would have been even more
negative if it had been known that during 1998 there would be an impeachment,
the first since 1868; a one-month 14% decline in the S&P 500, the largest
monthly decline since October 1987; a devaluation and a default by Russia; a
failure and near bankruptcy by the high-profile U.S. hedge fund, Long-Term
Capital Management (LTCM); extreme concern about events in Asia and Latin
America, particularly Brazil; and uncertainty about the introduction of the
Euro.
Nevertheless, 1998 proved to be another strong year for the economy, the
stock market, and the bond market. Specifically, real Gross Domestic Product
(GDP) grew by 3.9% during 1998 and continued the period of economic growth,
making this the longest post-WWII peacetime expansion. The S&P 500 increased by
28.58%, resulting in the fourth year in a row with a return over 20%. Finally,
the 30-year Treasury bond yield declined to 5.10% at the end of 1998, providing
a return of 16.55% on the 30-year Treasury bond and 8.69% on the Lehman
Aggregate Bond Index(2) during 1998.
But observing these economic, stock and bond market averages and
concluding that 1998 was simply another uniformly strong year would be akin to
concluding that it would be impossible for a man to drown in a lake that
averaged only two feet deep. In fact, 1998 was a tumultuous year, marked by
extreme volatility and deviations from market averages in individual stock and
bond market sectors.
With respect to the economy, early in the year the Fed was concerned about
the strong economy, tight job markets, and the threat of inflation. Late in the
year, however, the Fed was concerned about a weak economy, a credit crunch, and
deflation. The transition occurred after mid-year when the Fed made a change
from a tightening bias at its June 10 Federal Reserve Open Market Committee
(FOMC) meeting to a neutral position at its August 18 meeting and then actually
eased rates three times, first at the September 29 meeting and then again on
October 15, between FOMC meetings, and finally at the November 17 meeting. Most
of the rest of the western countries followed these Fed easings with easings of
their own. This shift in Fed policy has been credited with changing
economic/financial expectations and averting a more serious outcome for the
U.S., western developed countries, and Asia and Latin America.
Fiscal policy was also constructive during 1998, with a fiscal year 1998
budget surplus of $69 billion, the first federal budget surplus since 1969.
While the stock and bond markets performed quite well during 1998, there
is a question as to whether the "average" stock or bond actually existed. There
is a traditional question in the stock market: "Is it a stock market or a market
of stocks?" During 1998, it was certainly a market of stocks rather than a stock
market. For example, within the Dow Jones Industrial Average (DJIA),(3) Walmart
Stores returned 107.9% during 1998, while Boeing Co. returned -34.5%.
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(1) The Standard &Poor (S&P 500) Index is an unmanaged index of 500 large-cap
U.S. stocks that is generally considered to be representative of U.S.
stock market activity.
(2) The Lehman Aggregate Bond Index is an unmanaged index that is generally
considered to be representative of U.S. bond market activity.
(3) The Dow Jones Industrial Average (DJIA) is an unmanaged average of 30
industrial stocks listed on the New York Stock Exchange that is generally
considered to be representative of U.S. stock market performance.
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5
<PAGE>
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Data on various sectors of the stock market are in the table below.(4)
With respect to size, while the S&P 500 returned 28.58%, the S&P 100 (the
largest 100 stocks in the S&P 500) returned 33.22% and the S&P Small Cap 600
returned -1.33%. In addition, growth stocks outperformed value stocks by
remarkable margins. The stunning NASDAQ return was driven by the performance of
technology stocks. While technology stocks (particularly their internet
subsector) and industrial stocks did quite well, financial and, even more so,
transportation stocks performed badly. As a result, small changes in the
composition of a mutual fund portfolio could cause significant differences in
performance.
With respect to bonds, it was an "ugly year" for most bond sectors except
Treasuries. During October, all "spread products," that is, corporates,
mortgage-backed and asset-backed securities and municipals, weakened
significantly relative to Treasuries, as investors became extremely averse to
credit risk and illiquidity. Investment grade corporates underperformed
Treasuries of equivalent maturities by 2.66% during October alone, an event
which, before the fact, would have been regarded as virtually impossible. Such
spread widening was closely related to the problems experienced by LTCM
mentioned above. For 1998 as a whole, Treasuries, which comprise approximately
37% of the Lehman Aggregate Bond Index, were the strongest sector of the bond
market, as shown in the table below.
In general, large cap stocks and risk-free Treasuries were the strong
performers of 1998, making it difficult for managed portfolios to keep up with
the market averages.
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(4) This table provides information from several sources. The unmanaged S&P
100, S&P 500 and Mid Cap 400 indices are compiled by Standard & Poor's
Corporation and are generally considered to be representative of the
returns of large cap and mid cap companies. The unmanaged S&P Industrial,
S&P Transportation, S&P Utilities and S&P Financial indices are generally
considered to represent the returns of companies within those sectors of
the equity markets. The NASDAQ Composite Index is a broad-based
capitalization-weighted index of all Nasdaq National Market & small cap
stocks. The Russell indexes are compiled by Frank Russell & Co. and are
generally considered to represent small-capitalization issues in the U.S.
stock market. The sub-indexes showing Growth and Value returns indicate
different styles of investment in the equity markets. "Growth investing"
emphasizes companies whose earnings are expected to grow substantially,
while "value investing" emphasizes companies whose stocks are believed to
be undervalued relative to their current market prices.
Equities
S&P Indexes 1998 Return (%)
S&P 100 33.22
S&P 500 28.58
S&P Mid Cap 400 19.09
S&P Small Cap 600 -1.33
S&P Industrial 33.68
S&P Transportation -1.96
S&P Utilities 14.57
S&P Financial 10.97
Other Indexes
Dow Jones Industrial Average 18.13
NASDAQ Composite 40.20
Russell Indexes
Overall Growth Value
Russell 3000 23.95 35.02 13.50
Russell Top 200 33.98 45.09 21.24
Russell 1000 26.77 38.71 15.63
Russell 2000 -2.24 1.23 -6.45
Fixed Income
1998 Curve
Adjusted Return
1998 Relative to
Return Treasuries
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Lehman Aggregate Bond Index 8.69% -0.75%
Treasury Bond Index 10.03% --
Investment Grade Corporate Bond
Index 8.57% -2.20%
Mortgage-Backed Securities Index 6.96% -0.86%
Asset-Backed Securities Index 7.76% -0.83%
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Source: Lehman Bros.
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6
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Lesson Learned
The market turbulence led mutual fund investors to withdraw $11.7 billion
from stock funds during August, in retrospect withdrawing near the stock market
lows. This withdrawal was contrary to the recent "buy on dips" strategy employed
by individual investors during market corrections. This conservatism with
respect to stock mutual funds continued during September and October ($6.3
billion and $2.5 billion inflows, respectively). However, the S&P 500 increased
by 21.30% during October, November and December, the strongest quarter for the
S&P 500 since the first quarter of 1987. It is entirely possible that these
outflows and modest inflows were simply a rebalancing of mutual fund portfolios
toward bonds and away from stocks due to the strong stock market of the last few
years. It is more likely, however, that these withdrawals reflected, for the
first time in more than a decade, fear among mutual fund investors of a
continuing decline in the stock market. If so, this attempt at market timing,
once again, was costly to mutual fund investors.
In particular, this conservatism controverted two axioms of investing.
First, with respect to the stock markets, "You have to stay in to win." Second,
with respect to the markets in general, "Don't fight the Fed." With respect to
the market timing issue, if the Fed had such poor forecasting that it changed
from a tightening bias to an actual easing in two months, how successful are the
rest of us likely to be at forecasting?
These facts beg the question of how we should position our portfolios and
also our psyches for 1999.
First, be prepared for another volatile year. The volatility will be due
first to the economy. Most observers expect a weaker economy, although not a
recession, during the first half of 1999 and a strengthening economy, although
not at an inflationary level, in the last part of 1999. But the strength of late
1998 could continue into 1999. Corporate profits will continue to weaken from
1998 to 1999 as they did from 1997 to 1998, but are expected to be moderate.
Volatility will also continue in some specific sectors, mainly the technology
sector, due to their high valuations and the increasing number of investors
trading this sector online.
In the bond market, the spreads on corporates, mortgage-backed securities
and municipals, while somewhat tighter than their October highs, are still quite
wide, and seem to have achieved some stability. These spreads will most likely
tighten somewhat during 1999, thus providing additional returns to bond
investors, but will remain volatile and may at times widen.
Now for two investment principles, one for your portfolio and one for your
psyche. With respect to your portfolio, maintain diversification. The value of
diversification was illustrated by the LTCM episode. LTCM executed trades which
were highly likely to become profitable and in fact became profitable. However,
they were so non-diversified and leveraged that they were forced to sell when
the markets moved against them. A practical result of diversification is that
you are not forced to sell, that is, you do not have to sell unless you choose
to.
With respect to your psyche, avoid market timing, and particularly avoid
making short-term decisions based on fear when you have a long-term investment
horizon. I would submit that if Greenspan cannot time the economy and the
markets, then neither can we.
Thus, diversification protects you from being forced to sell when you do
not want to. And an aversion to market timing assures that you will not choose
to sell when it is not appropriate to do so. In combination, these two
principles will ensure that you will maintain your long-term investment
approach. Changes should, of course, be made due to changing personal
circumstances and changing asset class valuations. The overall approach is,
however, long-term and stable. For most investors, this was an effective
strategy during 1998 and we expect that it will continue to be so during 1999.
Regards,
/s/ Frank J. Jones
Frank J. Jones, Ph.D.
Chief Investment Officer
The Guardian Insurance & Annuity Company, Inc.
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7
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The Guardian Stock Fund
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[Photo of Larry Luxenberg, C.F.A. Co-Portfolio Manager]
[Photo of John B. Murphy, C.F.A. Co-Portfolio Manager]
Q. How did the Fund perform in 1998?
A. The Guardian Stock Fund earned a total return of 19.86%,(1) as compared with
a total return of 28.58% for the Standard & Poor's 500 Index.(2) 1998 was a year
of political and economic turbulence, and investors were filled with optimism in
the beginning and at the end of the year. In between, there was also extreme
volatility and highly divergent returns among different types of stocks. In the
space of three months, most major market indices dropped close to 20% and then
rallied 20%. Those two moves were the quickest of that size in modern market
history.
The gains in the market occurred in an extremely narrow range of stocks.
According to a Salomon Smith Barney report,(3) only 12 stocks accounted for half
the gain in the S&P 500 Index, which is weighted by the market capitalization of
the companies included in the index. Similarly, while the S&P 500 returned
28.58%, the average stock in the index was up only 10.95%, according to a
Merrill Lynch research report.(4) Even more startling in a year in which the
major averages set all time record highs, more than half of the New York Stock
Exchange and NASDAQ stocks ended the year down.
Q. What factors affected Fund performance in 1998?
A. The Fund generated a good absolute return and also did well compared to other
funds in its peer group. According to Lipper Analytical Services,5 the
performance for the average U.S. equity mutual fund was 14.52%. However, the
Fund did underperform the S&P 500 by eight percentage points. We attribute the
slippage largely to the extreme concentration of strong returns among a handful
of stocks in the S&P 500. Over the sixteen-year history of the Fund, we have
always attempted to produce consistent as well as outstanding returns. To do
that, we run a diversified Fund.
Helping performance during the year was our quantitative work on specific
stocks as well as our internal assessment that 1998 would be another good year
for large-cap stocks, generally. At year-end 1998, the Fund's overall
investments reflected a weighted market capitalization two-thirds as large as
that of the S&P 500. We gradually increased the weighting all year, reaching
near parity with the S&P 500 by the end of September and keeping at that level
through year-end.
Finally, we also remained committed to growth stocks all year and
continually pared our holdings in sectors exposed to commodity prices (such as
energy and metals), many of which plunged to quarter cen-
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(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect to reflect separate account and contract/policy
charges. Past performance is not a guarantee of future results. Investment
return and principal value will fluctuate so that the value of your
investment, when redeemed, may be worth more or less than the original
cost.
(2) The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect the fees and expenses that have been deducted from
the Fund. Likewise, return figures for the S&P 500 Index do not reflect
any sales charges that an investor may have to pay when purchasing or
redeeming shares of the Fund.
(3) "Equity Strategy," John L. Manley, December 23, 1998.
(4) "Performance Monitor," Richard Bernstein, January 1999.
(5) Lipper Analytical Services, Inc., is an independent mutual fund monitoring
and rating service and its database of performance information is based on
historical total returns, which assume the reinvestment of dividends and
distributions, and the deduction of all Fund expenses. Lipper returns do
not reflect the deduction of sales charges, and performance would be
different if sales charges were deducted.
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8
<PAGE>
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tury lows.
Q. What strategies do you use to manage the Fund?
A. There was no change in our strategic approach during the year. We rely on a
combination of quantitative techniques and our own fundamental judgments. We
believe that the best way to achieve consistently outstanding returns is to
combine tried and tested quantitative tools with good investment judgments.
Our quantitative work combines a cluster of approaches. We look at the
portfolio from a top-down view as well as from the bottom up. Finally, we are
continually refining our tools to deal with the increasing risk and volatility
in the capital markets. Our top-down approach involves a number of different
predictive models that we use to identify which portfolio styles are most likely
to do well. The bottom-up approach uses a multi-factor stock scoring system to
identify specific attractive stocks within our 2200-stock research universe.
Q. What do you envision for the stock market in 1999?
A. As the year begins, we see continued conflicting forces. The valuation of the
market is high, by many measures the highest in modern stock market history.
Inflation remains low with even modest doses of deflation possible. The U.S.
economy remains strong, although corporate profits are weakening. But around the
world, many economies are still under great stress. In combination, we expect
these forces to produce continued high volatility for the market but we plan to
stick to the approach and methodologies that have served the Fund well in the
past. We believe these methodologies will help us to achieve superior
performance.
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9
<PAGE>
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The Guardian Stock Fund Profile
as of December 31, 1998
- ------------------------------------
Sector Weightings of Common Stocks
Held by the Fund on December 31, 1998
[The following table was depicted as a pie chart in the printed material.]
Energy 3.6%
Basic Industry 0.6%
Financial 10.6%
Transportation 2.5%
Capital Goods/Technology 23.7%
Utilities 13.7%
Capital Goods 5.3%
Conglomerates 0.7%
Credit Cyclicals 1.1%
Consumer Services 6.5%
Consumer Staples 19.5%
Consumer Cyclicals 12.2%
- --------------------------------------------------------------------------------
The Guardian Stock Fund
Top 10 Holdings as of 12/31/98
1. General Electric Co. 4.3%
- --------------------------------------------------------------------------------
2. Microsoft Corp. 4.2%
- --------------------------------------------------------------------------------
3. International Business Machines 3.3%
- --------------------------------------------------------------------------------
4. Pfizer, Inc. 3.1%
- --------------------------------------------------------------------------------
5. Bristol Myers Squibb Corp. 2.4%
- --------------------------------------------------------------------------------
6. BellSouth Corp. 2.3%
- --------------------------------------------------------------------------------
7. Wal-Mart Stores, Inc. 2.3%
- --------------------------------------------------------------------------------
8. Ford Motor Co. 2.0%
- --------------------------------------------------------------------------------
9. MCI WorldCom, Inc. 2.0%
- --------------------------------------------------------------------------------
10. Merck & Co., Inc. 1.9%
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Returns for Periods Ended 12/31/98(1)
Life of Fund
1 Year 5 Years 10 Years (since 4/13/83)
- --------------------------------------------------------------------------------
The Guardian Stock Fund 19.86% 22.35% 19.32% 17.99%
- --------------------------------------------------------------------------------
S&P 500 Index(2) 28.58% 23.96% 19.10% 17.51%
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect expenses, which have been deducted from the Fund's
return.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table was depicted as a line chart in the printed material.]
GSF S&P CPI
--- --- ---
4/13/83 10000 10000 10000
10891 10844 10333
83 11028 10867 10336
10684 10328 10571
84 12218 11529 10754
14360 13501 10958
85 16130 15169 11162
20326 18307 11152
86 18889 17985 11295
22920 22898 11580
87 19241 18903 11794
23115 21283 12029
88 23160 21989 12314
26541 25595 12650
89 28613 28887 12885
28334 29749 13252
90 25224 27959 13680
29788 31938 13874
91 34293 36439 14088
34598 36196 14302
92 41178 39207 14516
46490 41100 14720
93 49396 43130 14913
47471 41667 15097
94 48767 43679 15311
58848 52468 15545
95 65667 59992 15668
72792 66015 15973
96 83330 73770 16176
110475 91429 16627
97 112983 94035 16627
128110 110637 17090
12/31/98 135440 120810 17287
A hypothetical $10,000 investment made at the inception of The Guardian Stock
Fund on April 13, 1983 would have grown to $135,440 on December 31, 1998. We
compare our performance to that of the S&P 500 Index, which is an unmanaged
index that is generally considered the performance benchmark of the U.S. stock
market. While you cannot invest directly in the S&P 500 Index, a similar
hypothetical investment would now be worth $120,810. The Cost of Living, as
measured by the Consumer Price Index, which is generally representative of the
level of U.S. inflation, is also provided to lend a more complete understanding
of the investment's real worth.
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Bond Fund
- -----------------------------------
[Photo of Thomas G. Sorell, C.F.A.]
[Photo of Howard W. Chin Co-Portfolio Manager]
Q. How did The Guardian Bond Fund perform during 1998?
A. The Fund had a total return of 8.10%(1) for the year ended December 31, 1998,
outperforming the average fund in our Lipper Intermediate Investment Grade peer
group(2) by 0.41%. The average fund in the Lipper group returned 7.69% for the
year. The group consists of other mutual funds that invest primarily in
investment grade debt with average maturities of 5-10 years. Another commonly
used benchmark, the Lehman Aggregate Bond Index,(3) returned 8.69% in 1998.
Q. What factors affected the Fund's performance?
A. The year 1998 will long be remembered by fixed income investors as one of
incredible turbulence and excesses that eventually led to a significant and
costly re-pricing of risk in the market. Until August, interest rates had
remained fairly stable, declining approximately 0.30%, to what were then
historically low yields for 30-year Treasury bonds.
1998's financial crisis began in earnest in late August when Russia
effectively defaulted on its ruble-denominated debt. Immediately, rumors of
significant losses at a number of U.S. financial institutions led to fears that
several might actually need assistance or collapse. The result was a curtailment
of credit and the need for many financial institutions to reduce leverage. The
near failure of several prominent hedge funds and effective closure of the
credit markets led to a decision by the Fed to reduce the Fed Funds rate 75
basis points to 4.75% in a series of three quick 25 basis point cuts that
effectively restored investor confidence and market stability.
As a result of the many unprecedented events in 1998, the investment
environment favored the fixed income sector as the credit crisis led to a
significant flight to quality and the safe haven of U.S. Treasuries. However,
all other spread assets (corporate bonds, mortgage and asset-backed securities
and agency debt) significantly underperformed Treasuries. Such a uniform
underperformance has never been observed in the 1990's. Prior to 1998,
underperforming spread sectors were often offset by another sector that
outperformed. However, the financial crisis in 1998 was so extreme that
investors would not tolerate risk of any sort, and Treasuries became the
investment of choice. Spread sector underperformance in 1998 is most clearly
seen on a duration-adjusted basis4 relative to equivalent duration Treasuries,
with corporates, mortgage- and asset-backed securities underperforming by 2.2%,
0.86% and 0.83%, respectively.
Q: What was your investment strategy during the year?
A. The Fund was overweighted in U.S. Treasuries in
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment for the Fund
will be lower to reflect separate account and contract policy changes.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) Lipper Analytical Services, Inc. is an independent mutual fund monitoring
and rating service. Its database of performance information is based on
historical total returns, which assume the reinvestment of dividends and
distributions, and the deduction of all fund expenses. Lipper returns do
not reflect the deduction of sales charges, and performance would be
different if sales charges were deducted.
(3) The Lehman Aggregate Bond Index is an unmanaged index that is generally
considered to be representative of U.S. bond market activity. The Lehman
Aggregate Bond Index is not available for direct investment and the
returns do not reflect the fees and expenses that have been deducted from
the Fund. Likewise, return figures for the Lehman Aggregate Bond Index do
not reflect any sales charges that an investor may have to pay when
purchasing shares of the Fund. 3 Duration-adjusted, expressed in
percentage terms, represents the excess return over the weighted average
return of a group of similar duration Treasuries.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
the early part of the year, which served the Fund well as Treasuries
outperformed most spread products. As the year progressed, the Fund began to
increase its exposure to corporate bonds and mortgage-backed securities as
valuations indicated that these sectors were fundamentally undervalued.
This strategy was well-reasoned, but did not insulate us from the
volatility which occurred in August and September. Poor market liquidity and
spread product underperformance became the overwhelming characteristic for both
September and October. During this period, the Fund did reduce its exposure to
mortgage-backed securities and avoided a significant portion of the subsequent
spread widening. As a result, the Fund was then better positioned during the
flight to quality, but as with any portfolio that retained some exposure to the
spread sectors, it was still subject to underperformance as the market retained
its preference for Treasuries.
In November, the Fund increased its allocation to spread assets when
valuations hit an extreme level of attractiveness. This decision was well timed
as corporate and mortgage securities recovered significantly in November,
regaining approximately half of the widening experienced.
In 1998, what distinguished one fund's performance from another was owning
a well-diversified fixed income portfolio that focused on relative valuations
and asset allocation. Historically, many funds have outperformed by
overweighting spread assets at the expense of Treasuries. This strategy was
unsuccessful in 1998 while our strategy of selectively underweighting spread
sectors when valuations were unattractive enhanced our performance. 1998
reinforced the fundamental need for a flexible investment strategy that responds
nimbly to the market's opportunities.
Q: What is your outlook for 1999?
A. The Fund's overall strategy is to maximize the total return of a diversified
fixed income portfolio of investment-grade corporate, mortgage-backed,
asset-backed, and U.S. Government securities. Our strategy in 1999 will continue
to focus on monitoring and balancing our asset allocations to reflect changes in
sector valuations and continuing to identify attractive investment opportunities
within these sectors.
- --------------------------------------------------------------------------------
The Guardian Bond Fund Profile
as of December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Returns
for Periods Ended 12/31/98
================================================================================
1 Year ........................................... 8.10%
5 Years .......................................... 6.59%
10 Years ......................................... 8.77%
Since Inception (5/1/83) ......................... 9.29%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table was depicted as a line graph in the printed material.]
GBF Lehman
--- ------
4/29/83 10000 10000
83 9925 10204
84 11219 11750
85 13728 14347
86 15766 16537
87 15816 16992
88 17351 18332
89 19758 20996
90 21254 22877
91 24695 26538
92 26597 28502
93 29218 31281
94 28209 30369
95 33170 35979
96 34124 37286
97 37191 40885
12/31/98 40181 44432
To give you a comparison, the chart above shows the performance of a $10,000
investment made in The Guardian Bond Fund and in the Lehman Aggregate Bond
Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- -----------------------------------
[Photo of Mario J. Gabelli, C.F.A. Portfolio Manager]
Q. How did the Fund perform for the year ended December 31, 1998?
A. For the year ended December 31, 1998, The Gabelli Capital Asset Fund's total
return was 11.67%.(1) The Standard & Poor's 500 Index(2) (the "S&P 500") had a
return of 28.58%, while the Russell 2000 Index(3) declined 2.24% over the same
twelve month period. Since inception on May 1, 1995 through December 31, 1998,
the Fund had a cumulative total return of 91.61%, which equates to an average
annual return of 19.40%.
Q. What factors affected the Fund's performance in 1998? A. In the first half of
1998, the economy behaved much as we anticipated. Then, in the third quarter,
more than a few things happened. Southeast Asian economic problems proved far
more serious than initially expected. Japan went into recession, and the Russian
ruble collapsed, threatening the country's embryonic free market economy. Latin
American currencies came under pressure and stock markets worldwide experienced
a sharp correction. Then three Federal Reserve interest rate cuts made investors
forget all about the world's economic problems. By the fourth quarter, the
market indices returned to record territory.
Media stocks, most notably cable television ("CATV"), cable television
networks and entertainment software companies, dominated our "Top Twenty"
performance list in 1998. This group was deep in Wall Street's doghouse when we
began aggressively buying in 1995 and 1996. At the time, we believed the
competitive threat from direct broadcast satellite services was overblown and
that the telecommunications capabilities of all those coaxial connections to
American homes would drive values higher. The AT&T/Tele-Communications Inc.
merger validated our investment thesis, and portfolio holdings like Cablevision
Systems, Time Warner and Comcast soared.
Although the performance of our telecommunications holdings were mixed,
Century Telephone Enterprises, Sprint, BellSouth and Telefonica de Espana made
our Top Twenty List, and the group as a whole contributed to the Fund's returns.
Q. In what sectors do you see value?
A. Despite strong gains this year, we believe the media and telecommunications
industries' exceptional global growth potential is still not adequately
reflected in stock prices. We bought our media and telecommunications holdings
at opportunistic prices. We will continue to hold them as long as they remain
undervalued.
This year's investment laggards include energy and energy services
holdings that sank along with oil prices. We question the current consensus
viewpoint that oil should remain near $10 per barrel or lower forever. If OPEC
can enforce some production discipline among its members, and as Asian economies
recover, oil prices should rebound. In the interim, there will continue to be
consolidation in the group. We have already seen two big deals, British
Petroleum/Amoco and Exxon/Mobil. In the year ahead, we expect to see more deals,
particularly in the oil services industry, as energy companies cut costs in
response to lower oil prices.
Industrial cyclicals like Boeing, Deere and a host of smaller portfolio
companies closed the year with losses as Asian economic weakness materially
reduced
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deductions of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal will fluctuate so that the value of your investment, when
redeemed, may be worth more or less then the original cost.
(2) The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect expenses, which have been deducted from the Fund's
return.
(3) The Russell 2000 Index is an unmanaged index of 2,000 small cap U.S.
stocks that is generally considered to be representative of
small-capitalization issues in the U.S. stock market. The Russell 2000
Index is not available for direct investment and its returns do not
reflect the fees and expenses that have been deducted from the Fund.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
demand and restrained earnings. These remain high quality, dominant market share
companies that we are confident will reward us over the long term.
Q. What is your outlook for 1999?
A. On interest rates, we think there is plenty of margin of flexibility on the
short end. Real rates are much too high and should migrate down. From the
market's point of view, we still think we are in a world in which corporate
profits can rise and we see a 6% - 8% secular growth rate over the next five
years in corporate profits. With much more volatility in the market, there is no
margin of safety in stocks.
Despite ongoing global uncertainty, the popular market indices are once again in
record territory. While we will always have a "wall of worry," we believe the
economy and the capital market landscape for 1999 will provide stock pickers
like us the opportunity to unearth well-managed companies, trading at
significant discounts to their private market value, that should benefit from
sustainable long-term economic dynamics.
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund Profile
as of December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Returns
for Periods Ended 12/31/98
================================================================================
1 Year .......................................... 11.67%
3 Years ......................................... 20.91%
Since Inception (5/1/95) ........................ 19.40%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table was depicted as a line graph in the printed material.]
S&P Cap
--- ---
5/1/95 10000 10000
12/95 12178 10840
12/96 14974 12034
12/97 19969 17159
12/31/98 25708 19168
To give you a comparison, the chart above shows the performance of a $10,000
investment made in the Gabelli Capital Asset Fund and in the S&P 500 Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top Ten Holdings
1. Cablevision Systems Corp. Cl. A
- --------------------------------------------------------------------------------
2. Telephone & Data Systems Inc.
- --------------------------------------------------------------------------------
3. Tele-Communications Inc./Liberty Media
Group Cl. A
- --------------------------------------------------------------------------------
4. Viacom Inc. Cl. A
- --------------------------------------------------------------------------------
5. Rollins Inc.
- --------------------------------------------------------------------------------
6. Media General Inc. Cl. A
- --------------------------------------------------------------------------------
7. MediaOne Group Inc.
- --------------------------------------------------------------------------------
8. Gaylord Entertainment Co. Cl. A
- --------------------------------------------------------------------------------
9. American Bankers Insurance Group Inc.
- --------------------------------------------------------------------------------
10. Aeroquip Vickers Inc.
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Baillie Gifford International Fund
- --------------------------------------------------
[Photo of R. Robin Menzies, Portfolio Manager]
Q. How did the Fund perform during 1998?
A. 1998 was an excellent year for the Fund. The total return for the Fund was
21.17%(1), compared with a total return of 20.33% for the Morgan Stanley Capital
International (MSCI) Europe, Australia and Far East (EAFE) Index.(2)
Q. What factors affected the Fund's performance?
A. A number of factors affected the Fund's performance. First, the U.S. dollar
was weak against most foreign currencies during the period, which made foreign
currency returns larger when translated into dollars. While the MSCI EAFE Index
had a total return of 20.33% when measured in dollars, in local currency terms
the total return was only 12.60%. The core Continental European currencies were
particularly strong in the run up to the start of the Euro on January 1, 1999.
For example, while the MSCI France Index(3) had a total return for the period of
31.91% when measured in French Francs, the weakness of the dollar made that
total return 42.06% when translated into dollars.
Second, European markets were buoyant. The MSCI Europe ex-UK(4) Index had
a total return of 33.95% in dollar terms during the period. This was
attributable in part to an acceleration in economic activity in the first half
of the year, leading to increased investor optimism over corporate profits
growth. There was also a climate of falling interest rates, both long and short
term, as the interest rates of the currencies of all 11 putative members of the
Euro converged on the rates prevailing in Germany which happened to be among the
lowest in Europe. Finally, as long term interest rates (i.e. bond yields) fell,
savers chose to invest more of their money in mutual funds and common stocks at
the expense of bank deposits and bonds.
Third, and a negative factor, markets in Asia were weak during the period.
In yen terms, the MSCI Japan Index(5) showed a total return of -8.70%, which
became +5.25% when expressed in dollars, while the MSCI Pacific ex-Japan(6)
index had total returns of -1.91% and -6.22% expressed in local currency and
dollar terms, respectively. The weakness of these markets was attributable to
financial turmoil in the region, with Japan troubled by bad loans in its banking
system, and many other Asian countries finding it hard to repay debts in foreign
currencies following the devaluations of their own currencies.
Q. What was your investment strategy during the year?
A. We continued to apply our long term, fundamental investment approach of
seeking to identify and invest in well-run businesses with sound prospects and
good management. The application of this strategy led us to invest more in
Europe and less in Asia, because the business prospects of many Asian companies,
however good their management, were clouded by the
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total return for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Post performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than the original cost.
(2) The Morgan Stanley Capital International (MSCI) Europe, Australia and Far
East (EAFE) index is an unmanaged index that is generally considered to be
representative of international stock market activity. The MSCI EAFE Index
is not available for direct investment and the returns do not reflect the
fees and expenses that have been deducted from the Fund's return.
(3) The MSCI France Index is an unmanaged index generally considered to be
representative of French stock market activity. The returns for the Index
do not reflect expenses that are deducted from the Fund's return.
(4) The MSCI Europe Ex-UK Index is an unmanaged index generally considered to
be representative of European stock market activity, excluding the United
Kingdom. The returns for the index do not reflect expenses that are
deducted from the Fund's return.
(5) The MSCI Japan Index is an unmanaged index generally considered to be
representative of Japanese stock market activity. The returns for the
index do not reflect expenses that are deducted from the Fund's return.
(6) The MSCI Pacific Ex-Japan Index is an unmanaged index generally considered
to be representative of the stock market activity of Australia, Singapore,
Hong Kong and New Zealand. The returns for the index do not reflect
expenses that are deducted from the Fund's return.
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
appalling economic conditions there. Within Europe, we focused on industries
where revenue and/or profits were expected to grow rapidly.
Q. What do you think will be the most important factors in 1999?
A. Every year we are encouraged to make projections of what is going to happen.
Sometimes we are right and manage to avoid pitfalls -- and sometimes we,
together with the majority of the investment community, are surprised, for
example by the recent strength of the yen. We will continue to focus our efforts
on finding the best businesses to invest in for your Fund, and let the
availability of those attractive businesses be the main guide to the countries
in which we should and should not place your money.
- --------------------------------------------------------------------------------
The Guardian Baillie Gifford International Fund Profile
as of December 31, 1998
- -------------------------------------------------------
- -------------------------------------------------------------------------------
Average Annual Total Returns
for Periods Ended 12/31/98
1 Year ............................................................ 21.17%
3 Years ........................................................... 16.09%
5 Years ........................................................... 11.90%
Since Inception (2/8/91) .......................................... 13.36%
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Portfolio Composition by Geographical Location
[The following table was depicted as a pie chart in the printed material.]
U.K. 22.8%
Europe 55.3%
Japan 14.6%
Pacific 3.9%
Other 0.1%
Cash & Deposits 3.45
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Holdings as of 12/31/98
Company Nature of Company Country
- --------------------------------------------------------------------------------
1. Mannesmann AG Industrial Machineries Germany
- --------------------------------------------------------------------------------
2. Acciona S.A. Construction and Hous. Spain
- --------------------------------------------------------------------------------
3. AXA UAP Financial Services France
- --------------------------------------------------------------------------------
4. Novartis AG Pharmaceuticals Switzerland
- --------------------------------------------------------------------------------
5. Glaxo Wellcome Drugs and Health Care United Kingdom
- --------------------------------------------------------------------------------
6. Zurich Allied AG Insurance Switzerland
- --------------------------------------------------------------------------------
7. Olivetti SPA Telecommunications Italy
- --------------------------------------------------------------------------------
8. Banco di Roma Banks Italy
- --------------------------------------------------------------------------------
9. Swisscom AG Telecommunications Switzerland
- --------------------------------------------------------------------------------
10. SAP AG Software Germany
- --------------------------------------------------------------------------------
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[GRAPHIC OMITTED]
[The following table was depicted as a line chart in the printed material.]
BGEM MSCI
---- ----
10/17/94 10000 10000
12/31/94 8803 8552
12/31/95 8750 8106
12/31/96 10902 8595
12/31/97 11117 7599
12/31/98 8140 5674
To give you a comparison, the chart above shows the performance of a $10,000
investment made in Baillie Gifford International
Fund and the MSCI/EAFE Index.
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- ---------------------------------------
[Photo of Edward H. Hocknell, Portfolio Manager]
Q. How did the Fund perform during 1998?
A. During 1998 as a whole, the Morgan Stanley Capital International (MSCI)
Emerging Markets Free (EMF) Index(1) return was -25.3%, compared to the Baillie
Gifford Emerging Markets Fund's return of -26.77%.
Q. What factors affected the Fund's performance?
A. The emerging markets during 1998 were not the place for faint-hearted
investors. Asia, having performed poorly in the previous year, was down 12.4%
during 1998, while Latin America fell by over 38%. The European and Middle
Eastern markets fell by 27.4%.
The Fund's performance was affected more by overall conditions in the
emerging markets than it was by particular policy decisions.
The emerging markets got off to a robust start in 1998, but it soon became
apparent that the problems which the Asian crisis had revealed in 1997 were deep
seated, and the region's markets resumed their decline in March. The
deterioration of confidence began to spread to Latin America in the following
month, as investors sought to reduce their exposure to the emerging markets in
general. The financial collapse in Russia crystallized fears about the
conditions in many other countries which were dependent on foreign inflows and,
as credit spreads widened, the impending failure of Long Term Capital Management
and other hedge funds seemed to imperil the financial system as a whole. The
reaction of investors has been characterized as a generalized `Flight to
Quality'; the emerging markets were the hardest hit by this development. Latin
America was hit especially hard in August and September due to its dependence on
foreign money which made it especially vulnerable to the general panic.
The emerging markets shared in the general recovery in the fourth quarter
- -- prices rose by 17.3% during the period -- but this was not enough to offset
the precipitous declines earlier in the year. Asia performed better than Latin
America in the closing months of the year as interest rates there started to
fall and current account deficits were declining.
Q. What was your investment strategy?
A. Our policy throughout 1998 was a fairly cautious one. The cash holding
increased, and our exposure to Latin America and Asia declined. There was some
increase in the Central European weighting and a small increase in South Africa.
Compared to the MSCI EMF Index, we were underweight in Asia and South Africa,
slightly overweight in Latin America and more positive on Central Europe. For
much of the year, our biggest single bet was the size of our cash holding.
In the fourth quarter we increased our Asian weighting, principally by
adding to our Korean exposure. We added in Europe in Hungary and by investing in
Greece. We also started to invest in Israel. In Latin America, we increased our
Mexican exposure. Cash levels fell as a result.
- --------------------------------------------------------------------------------
(1) The Morgan Stanley Capital International (MSCI) Emerging Markets Free
Index (EMF) is an unmanaged index that is generally considered to be
representative of the stock market activity of emerging markets. The Index
is a market capitalization weighted index composed of companies
representative of the market structure of 22 emerging market countries in
Europe, Latin America, and the Pacific Basin. The MSCI EMF Index excludes
closed markets and those shares in otherwise free markets which may not be
purchased by foreigners. The MSCI EMF Index is not available for direct
investment and the returns do not reflect the fees and expenses that have
been deducted from the Fund's return.
(2) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Q. What is the outlook for investment in the emerging markets?
A. As usual, it is difficult to make any useful generalizations about the
emerging markets as a whole; our policy remains highly selective. Nevertheless
there are several global factors which are affecting these markets at the
moment. Investors' aversion to risk and the widening of credit spreads have hit
all these markets, and the collapse of commodity prices has harmed many of them.
The continuing problems of Japan mean that it remains a tough competitor,
especially to its smaller Asian rivals.
The crucial element that these markets need is confidence. This is
beginning to return to some Asian markets, but the financial problems of Brazil
are still hanging over Latin America. We are encouraged that the performance of
these markets has begun to improve, but we feel that a clear resolution of
Brazil's problems is necessary before we can become more bullish about emerging
markets as a whole.
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund Profile
as of December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Returns
for Periods Ended 12/31/98(2)
================================================================================
1 Year .......................................... -26.77%
3 Years ......................................... -2.38%
Since Inception (10/17/94) ...................... -4.78%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table was depicted as a line graph in the printed material.]
BGEM MSCI
---- ----
10/17/94 10000 10000
12/31/94 8803 8552
12/31/95 8750 8106
12/31/96 10902 8595
12/31/97 11117 7599
12/31/98 8140 5674
To give you a comparison, the chart above shows the performance of a $10,000
investment made in Baillie Gifford Emerging Markets Fund and the Morgan Stanley
Capital International (MSCI) Emerging Markets Free (EMF) Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Composition by Geographical Location
[The following table was depicted as a pie graph in the printed material.]
Europe 21.9%
South Africa 4.0%
Cash & Deposits 7.3%
Asia 26.7%
Latin America 39.5%
Overseas Bonds 0.5%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top Ten Holdings
Nature
Company of Company Country
1. Infosys Technology Ltd. Computer Software India
- --------------------------------------------------------------------------------
2. Corp. Interamericana Conglomerates Mexico
Entretenimiento
- --------------------------------------------------------------------------------
3. Bank Roswoju Eksport Banks Poland
- --------------------------------------------------------------------------------
4. Younggone Corp. Retail - Apparel Korea
- --------------------------------------------------------------------------------
5. Siliconware Precision Industrial Taiwan
Industries
- --------------------------------------------------------------------------------
6. Comp. Brasilerias Retail - Food Brazil
de Dist.
- --------------------------------------------------------------------------------
7. Elektrim Electrical Equipments Poland
- --------------------------------------------------------------------------------
8. Orient Semiconductors Semiconductors Taiwan
Elect. Ltd
- --------------------------------------------------------------------------------
9. Elavadores Atlas Industrial Machines Brazil
- --------------------------------------------------------------------------------
10. Indian Opportunity Mutual Funds India
Fund
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
19
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- ----------------------------------
[Photo of Larry Luxenberg, C.F.A. Portfolio Manager]
Q. How did the Fund do in 1998?
A. For small stocks in general, 1998 was a difficult year and The Guardian Small
Cap Stock Fund was no exception. For the year ended December 31, the Fund's
return was -5.75%,(1) as compared to the -2.24% for the Russell 2000 Index,(2) a
leading index of small cap performance. The best news we can muster about small
cap stocks is that their relative performance was so bad it can only get better.
By various measures, small cap stocks underperformed large cap stocks by the
widest amount in at least a quarter century and by some accounts, perhaps 60
years.
Q. What factors affected the Fund's performance during 1998?
A. Small cap stocks peaked in the fall of 1997 and remained strong until April
1998. From that point until the fall, small cap stocks were in a major bear
market. At year-end, when other major market indices were near all-time highs,
the Russell 2000 was still off by almost 14% from its April peak.
To the extent any small cap stocks were in favor, they were the fastest
growing and more speculative ones, particularly in technology, where we lacked a
sufficient weighting, assuming a more conservative posture in late summer and
early fall. But the Fund rallied strongly at year-end.
Q. What strategies did you use to manage the Fund in 1998?
A. Our basic approach is to combine quantitative methods with our fundamental
judgments about individual companies. Fundamental knowledge of the companies is
critical, particularly when dealing with small companies, many of which have
shorter operating histories, more variable operations, and less research
coverage.
Q. What do you anticipate for 1999?
A. A January 4, 1999 analysis by Claudia Mott of Prudential Securities showed
that the difference between small and large caps was the third largest since
1926 and the largest since 1937. She also found that after those periods when
small caps lagged severely, they tended to outperform strongly over the
subsequent three-year periods.
We would like to predict that small cap stocks will begin to make up the
lost ground. We cannot time when small stocks will again have good relative
performance. We can say, however, that relative valuations are quite cheap by
historic standards and we expect that small stocks are well-positioned to regain
favor.
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) The Russell 2000 Index is an unmanaged index that is generally considered
to be representative of small-capitalization issues in the U.S. stock
market. The returns for the Russell 2000 do not reflect expenses, which
are deducted from the Fund's return.
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund Profile
as of December 31, 1998
- -----------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table was depicted as a line chart in the printed material.]
Fund S&P
---- ---
7/97 10373 10204
9/97 11750 11202
12/97 11470 10826
3/98 12976 11916
6/98 12336 11360
9/98 9166 9071
12/98 10810 10551
To give you a comparison, the chart above shows the performance of a $10,000
investment made in The Guardian Small Cap Stock Fund and in the Russell 2000
Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
Top 10 Holdings as of 12/31/98
1. AFC Cable Systems, Inc. 2.0%
- --------------------------------------------------------------------------------
2. Vlasic Foods Int'l, Inc. 1.8%
- --------------------------------------------------------------------------------
3. Earthgrains Co. 1.5%
- --------------------------------------------------------------------------------
4. Avis Rent a Car, Inc. 1.5%
- --------------------------------------------------------------------------------
5. Tredegar Industries, Inc. 1.5%
- --------------------------------------------------------------------------------
6. Financial Securities Assurance
Holdings, Ltd. 1.3%
- --------------------------------------------------------------------------------
7. Nielsen Media Research, Inc. 1.3%
- --------------------------------------------------------------------------------
8. Valassis Communications, Inc. 1.2%
- --------------------------------------------------------------------------------
9. Centex Construction Products, Inc. 1.2%
- --------------------------------------------------------------------------------
10. Monaco Coach Corp. 1.2%
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Actual Total Returns
for Periods Ended 12/31/98
================================================================================
1 Year .......................................... -5.75%
Since Inception (7/16/97) ....................... 7.20%
- --------------------------------------------------------------------------------
Sector Weightings of Common Stocks
[The following table was depicted as a pie chart in the printed material.]
Transportation 0.3%
Utilities 4.2%
Credit Cyclicals 5.4%
Financial 17.1%
Consumer Services 10.5%
Basic Industries 3.6%
Consumer Cyclicals 20.1%
Energy 4.0%
Consumer Staples 13.5%
Capital Goods 6.2%
Capital Goods/Technology 15.1%
- --------------------------------------------------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
Value Line Centurion Fund
- -------------------------------------
[Photo of Alan N. Hoffman, CFA, Senior Portfolio Manager; Philip J. Orlando,
CFA, Chief Investment Officer & Centurion Team Leader and Nancy L. Bendig,
Senior Portfolio Manager]
Q. For the year ended December 31, 1998, how did the Value Line Centurion Fund
perform?
A. For the year ended December 31, 1998, the Centurion Fund produced a total
return of 27.47%,(1) compared with total returns of 28.58% for the Standard &
Poor's (S&P) 500 Index,(2) 18.13% for the Dow Jones Industrial Average,(3) and
- -2.24% for the Russell 2000 Index.(4)
Q. What factors affected the Fund's performance?
A. Last year was an economic rollercoaster ride that can be neatly divided into
three distinct time periods. First, when the world and the financial markets
were normal from January 1 through July 20, Centurion produced a 23.00% total
return, which was in line with the S&P 500's 22.99%. Next, due to the global
meltdown phase from July 21 through October 8, Centurion's year-to-date
performance plunged to -13.49% versus 0.00% for the S&P 500. Finally, as the
markets staged a stunning rebound from October 9 through December 31, Centurion
surged by nearly 41% to close the year at 27.47%, compared with 28.58% for the
S&P 500. These figures imply relative outperformance for Centurion of more than
12% better than the S&P 500 over the last quarter of the year.
There was an extraordinary confluence of global events that conspired to
roil the financial markets into producing the worst-performing quarter this
decade for equities during the July through September period.
Fortunately, events orchestrated by the world's two premiere superpowers
stabilized and seemingly reversed these negative trends on a dime. First, the
Federal Reserve aggressively cut interest rates over a seven-week period. From
September 29 through November 17, interest rates were reduced on three separate
occasions -- by a total of 75 basis points -- at both scheduled Federal Reserve
Open Market Committee (FOMC) meetings and one nearly unprecedented reduction in
between meetings on October 15, which was the first such move in more than four
years. These interest-rate reductions were part of a coordinated global effort,
with principal focus coming from the new Euro countries, the United Kingdom and
Canada.
Second, the Japanese Parliament and their new senior officials embarked on
a bold political and economic agenda to reverse its malaise, which included four
critically important policy initiatives: a banking reform bill, an interest-rate
reduction, permanent tax cuts, and stimulative government spending. As investors
began to recognize last October the progress
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
annual total returns for owners of the variable annuity contracts or
variable life insurance policies which provide for investment in the Fund
will be lower to reflect separate account and contract/policy changes.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that that value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect the fees and expenses that have been deducted from
the Fund. Likewise, return figures for the S&P 500 Index do not reflect
any sales charges that an investor may have to pay when purchasing or
redeeming shares of the Fund.
(3) The Dow Jones Industrial Average (DJIA) is an unmanaged average of 30
industrial stocks listed on the New York Stock Exchange that, like the S&P
500 Index, is generally considered to be representative of U.S. stock
market performance. The DJIA is not available for direct investment and
its returns do not reflect the fees and expenses that have been deducted
from the Fund.
(4) The Russell 2000 Index is an unmanaged index that is generally considered
to be representative of small capitalization issues in the U.S. stock
market. The returns for the Russell 2000 Index do not reflect expenses
which are deducted from the Fund's returns. Likewise, return figures for
the Russell 2000 Index do not reflect any sales charges that an investor
may have to pay when purchasing or redeeming shares of the Fund.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
that both the U.S. and Japan had made in repairing their economic ills, the
financial markets then attempted to discount the eventual upturn, assuming that
the theoretical fiscal and monetary policy lags work their way through the
economy over time.
Q. What was your investment strategy during the year?
A. From a sector standpoint, our proprietary systems and models that comprise
the Value Line Timeliness Ranking System have continued to identify those
industries that are producing robust earnings growth, such as technology, health
care, financial services, and retailers.
Q. What is your outlook for 1999?
A. Our strategy has been consistently focused on our forecasts for decelerating
economic growth, benign inflation, lower interest rates, and a modest increase
in corporate profits. All of these factors suggest a positive bias for the
equity markets, with an emphasis on large-capitalization, blue chip growth
companies, whose earnings can accelerate at a pace several times faster than the
average stock.
- --------------------------------------------------------------------------------
Value Line Centurion Fund Profile
as of December 31, 1998
- ----------------------------------------
- --------------------------------------------------------------------------------
Portfolio Composition by Economic Sector
[The following table was depicted as a pie chart in the printed material.]
Energy 1.32%
Consumer cyclical 1.46%
Transportation .55%
Financial 17.78%
Cash .96%
Utilities 3.09%
Technology 31.21%
Capital goods 6.39%
Consumer goods/
non-durables 15.79%
Consumer growth 21.46%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Returns
for Periods Ended 12/31/98
================================================================================
1 Year .......................................... 27.47%
5 Years ......................................... 19.99%
10 Years ........................................ 19.78%
Since Inception (11/15/83) ...................... 14.96%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Holdings
1. Dell Computer Corporation
- --------------------------------------------------------------------------------
2. America Online, Inc.
- --------------------------------------------------------------------------------
3. Clear Channel Communications
- --------------------------------------------------------------------------------
4. EMC Corp
- --------------------------------------------------------------------------------
5. Cisco Systems, Inc.
- --------------------------------------------------------------------------------
6 .Air Touch Communications Inc.
- --------------------------------------------------------------------------------
7. Intel Corp.
- --------------------------------------------------------------------------------
8. Compaq Corp
- --------------------------------------------------------------------------------
9. Staples Inc.
- --------------------------------------------------------------------------------
10. Network Associates Inc.
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table was depicted as a line chart in the printed material.]
Fund S&P
---- ---
11/15/83 10000 10000
83 9180 10038
84 8420 10650
85 11108 14012
86 12982 16613
87 12611 17461
88 13568 20312
89 17841 26684
90 18833 25827
91 28662 33660
92 30361 36217
93 33156 39841
94 32422 40347
95 45416 55417
96 53291 68042
97 64689 92025
12/31/98 82457.4 118326
To give you a comparison, the chart above shows the performance of a $10,000
investment made in Value Line Centurion Fund and in the S&P 500 Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23
<PAGE>
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
- --------------------------------------------
[Photo of Nancy L. Bendig, Senior Portfolio Manager, Stephen E. Grant, Senior
Portfolio Manager & SAM Team Leader, and Bruce H. Alston, CFA, Director of Fixed
Income]
Q. How did the SAM Trust perform in 1998?
A. The Trust enjoyed an excellent year, earning a total return of 27.45%.(1)
This compared with a total return of 28.58% for the S&P 500 Index(2) and a total
return of 9.52% for the Lehman Government/Corporate Bond Index.(3) Since
inception over 11 years ago, the Trust has nearly kept pace with the S&P 500
(see the "Growth of a Hypothetical $10,000 Investment" chart on the next page).
That's a gratifying feat, considering that significant holdings of bonds and
cash have meant a much-reduced risk profile for our investors.
Among its peer group, the Trust stands high. According to Lipper
Analytical Services,(4) in the flexible variable annuity category (underlying
funds), SAM ranks 2 out of 83 funds for the year ended December 31; 10 out of 53
funds for the five-year period; and 3 out of 33 funds for the ten-year period.
Q. What factors affected performance last year?
A. SAM's returns reflected both good stock selection and good asset allocation.
The stock portion of the portfolio outperformed the S&P 500, helped in part by a
moderate overweighting in the technology sector. The year was another relatively
weak period for U.S. small- and mid-capitalization stocks, which make up about
one-third of the Trust's stockholdings, but we overcame this through good
specific stock selection. As to asset allocation, an overweighting in stocks
throughout the year helped performance. On average, the Trust held a bit over
75% of assets in stocks, compared with its long-term central tendency of 55%.
Bonds averaged about 15% of assets, with the remainder in cash equivalents.
Q. Why did you choose to overweight stocks?
A. We use Value Line's proprietary stock and bond models to determine asset
allocation. In late 1997 and in early 1998, declines in both stock prices and
interest rates caused our stock model to become more bullish. In that time
period, the Trust's stock allocation rose from 45% of assets to 75%. In late
August, 1998, the model became still more bullish, due primarily to further
declines in both stock prices and interest rates. The model directed SAM to an
85% stock allocation, where it remained through year end. The year end bond
target was 10% of assets; cash was targeted at 5%.
Q. What strategies were used in stock and bond selection?
A. For stock selection, we rely on the Value Line Timeliness Ranking System.
This proprietary tool
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies which provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of an investment,
when redeemed, may be worth more or less than the original cost.
(2) The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect the fees and expenses that have been deducted from
the Fund. Likewise, return figures for the S&P 500 Index do not reflect
any sales charges that an investor may have to pay when purchasing or
redeeming shares of the Fund.
(3) The Lehman Government/Corporate Bond Index is an unmanaged index that is
generally considered to be representative of U.S. government and corporate
bond market activity. The Lehman Government/Corporate Bond Index is not
available for direct investment and the returns do not reflect the fees
and expenses that have been deducted from the Fund.
(4) Lipper Analytical Services, Inc. is an independent mutual fund monitoring
and rating service. Its database of performance information is based on
historical total returns, which assume the reinvestment of dividends and
distributions, and the deduction of all fund expenses. Lipper returns do
not reflect the deduction of sales charges, and performance would be
different if sales charges were deducted.
- --------------------------------------------------------------------------------
24
<PAGE>
favors stocks with strong earnings momentum and strong stock price momentum.
These tend to be fast-growing companies whose stock price can be more volatile
than that of the average company. To reduce risk, we maintain a diversified
portfolio that doesn't stray too far from the industry weightings of the S&P
500. In some instances, we invest in stocks ranked only neutral by our system in
order to maintain positions in more conservative sectors such as utilities.
In bond selection, we stay with high-quality holdings. During the year, we
swapped some Treasury holdings for U.S. agencies and high-quality corporates to
take advantage of favorable yield relationships.
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
Profile as of December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Returns
for Periods Ended 12/31/98
================================================================================
1 Year .......................................... 27.45%
5 Years ......................................... 15.87%
10 Years ........................................ 17.05%
Since Inception (10/1/87) ....................... 15.48%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top Ten Stock Holdings
1. International Business Machines
2. Microsoft Corp.
3. Wal Mart Stores
4. Pfizer Inc.
5. Symbol Technologies
6. Amgen Inc.
7. Time Warner Inc.
8. Compuware Corp.
9. McDonald's Corp.
10. Biogen Inc.
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
Portfolio Composition by Asset Class
Held by the Fund on December 31, 1998
[The following table was depicted as a pie chart in the printed material.]
Stocks 85.6%
Bonds 9.3%
Cash 5.1%
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table was depicted as a line chart in the printed material.]
Date SAM Trust L G/C Index S&P 500
- ---- --------- ----------- -------
10/1/87 10000 10000 10000
87 9476 10583 7745
88 10453 11385 9010
89 13124 13006 11836
90 13104 14083 11456
91 18784 16355 14931
92 21611 17594 16065
93 24174 19535 17673
94 22994 18849 17897
95 29556 22476 24582
96 34246 23128 30182
97 39608 25388 39844
12/31/98 50481 27793 52371
To give you a comparison, the chart above shows the performance of a $10,000
investment made in the Value Line SAM Trust, the S&P 500 Index and in the Lehman
Government/Corporate Bond Index.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
25
<PAGE>
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- ---------------------------------
[Photo of John D. Laupheimer, Jr. Portfolio Manager]
Q. For the year ended December 31, 1998, how did the Series perform?
A. For the twelve months ended December 31, 1998, the Series provided a total
return of 22.32%,(1) which compares to a 28.58% return for the Standard & Poor's
500 Composite Index (the S&P 500), a popular, unmanaged index of common stock
total return performance.(2)
The past year has been quite a wild one in the equity market, with a
strong first half followed by a warning correction in the late summer and early
fall and, finally, a strong fourth quarter. Through that volatility, the Series
has done well.
Q. What factors affected the Series' performance during the year?
A. In the course of the year, we reduced a large overweighting in financial
services by about 10% because we believe that the credit trends, cost cutting,
and consolidation that have made many of those stocks attractive have run their
course. In the current low-inflation, low-interest-rate economic environment, we
view stocks' valuations as less important than companies' abilities to deliver
consistent and reliable earnings. Therefore, the assets taken from the financial
services reductions were used to boost our holdings in technology, health care,
and consumer staples stocks that we feel offer the earnings reliability in this
market. Examples of these stocks include Microsoft and IBM in technology, Pfizer
and American Home Products in health care and pharmaceuticals, and Philip Morris
in consumer staples.
We believe that our research-focused investment discipline has
helped us discern which companies' earnings are growing consistently. An
interesting example of our investment style can be found in our IBM holding. IBM
is a company that is known primarily as a hardware company but, in reality,
about 50% of its income comes from services and software. That's important
because hardware is a high-volatility, low-margin business that often carries a
high price-to-earnings ratio. Software and services represent the opposite type
of business -- low volatility, high margin -- and can generate steadier revenue
streams. When we started buying IBM earlier this year, its mid-teens multiple
reflected a hardware company, not a full-service technology provider. In
addition, the company had very solid cash flow and good earnings, and it was
engaged in a major stock buyback program, which is good for investors. In all,
IBM is a perfect stock for the portfolio. It is a large-cap, blue-chip company
with shareholder-friendly management, it has a stock price that we deem a value
because it reflects only a portion of its business, and it has been paying a
dividend. A further boost to IBM's attractiveness is that the company is at the
beginning of a major hardware product cycle. Our investment here has paid off
handsomely thus far.
Q. What are your expectations for 1999?
A. Looking ahead, we are predicting slower earnings growth for domestic equities
in 1999, as well as low inflation and low interest rates. The environment
dictates that we pay close attention to earnings consistency and reliability, so
we do not
- --------------------------------------------------------------------------------
(1) All results are historical and, therefore, are not an indication of future
results. The investment return and principal value of an investment in the
product will vary with changes in market conditions, and shares, when
redeemed, may be worth more or less than the original cost. Returns shown
do not reflect the deduction of the mortality and expense risk charges and
administration fees. Please refer to the annuity product's annual report
for performance that reflects the deduction of the fees and charges
imposed by insurance company separate accounts. All results reflect any
applicable expense subsidies and waivers, without which the performance
results would have been less favorable. Subsidies and waivers may be
rescinded at any time.
(2) The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect expenses, which have been deducted from the Fund's
return.
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
intend to modify our fundamental method for selecting stocks. Our discipline and
our research focus have proved to be sound, and we believe our approach will
continue to work in the future.
- --------------------------------------------------------------------------------
MFS Growth with Income Series
Profile as of December 31, 1998
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
(For the period from November 1, 1995, through December 31, 1998)
- --------------------------------------------------------------------------------
[The following table was depicted as a line chart in the printed material.]
[Plot points to come]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Return
as of December 31, 1998
================================================================================
1 Year 3 Years 10 Years/Life
MFS Growth with Income Series* +22.32% +25.48% +25.98%
Standard & Poor's 500 Composite Index* +28.58% +28.23% +29.06%
Consumer Price Index**+ + 1.80% + 2.30% + 2.11%
- --------------------------------------------------------------------------------
* For the period from the commencement of the Series' investment operations,
October 9, 1995, through December 31, 1998.
** Source: CDA/Wiesenberger. "Life" refers to the period from November 1,
1995, through December 31, 1998.
+ The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Cash Fund
- --------------------------------
[Photo of Alexander M. Grant, Jr. Portfolio Manager]
Q. How did The Guardian Cash Fund perform during 1998?
As of December 31, 1998, the effective 7-day annualized yield for The Guardian
Cash Fund was 4.76%.(1) The Fund produced a total return of 4.99%(2) for the
year ended December 31, 1998. In contrast, the effective 7-day annualized yield
of Tier One money market funds as measured by IBC Financial Data was 4.57%;
total return for the same category was 4.87%. IBC Financial Data is a research
firm that tracks money market funds.
Q. What was your investment strategy during the year?
A. The Guardian Cash Fund is a place for our investors to put their money while
they decide their preferred long term investment vehicle, be it stocks or bonds.
Also, some of our investors prefer the relative stability of the money markets.
To best accommodate all our investors, we will continue to try to provide a
strong 7-day yield, while offering safety and liquidity. Our investment strategy
was to create a diversified portfolio of money market instruments that presents
minimal credit risks according to our criteria. As always, we only purchased
securities from issuers that had received ratings in the two highest credit
quality categories established by nationally recognized statistical ratings
organizations like Moody's Investors Service Inc. and Standard & Poor's
Corporation for the Fund's portfolio. At year-end December 1998, most of the
portfolio (83.2%) was invested in commercial paper; the balance (16.8%) was
invested in repurchase agreements.
Q. What factors affected the Fund's performance?
A. Money market funds are directly affected by the actions of the Federal
Reserve Board. The Federal Reserve's policy-making Open Market Committee (FOMC)
cut the Fed Funds target rate on November 17, 1998 by 25 basis points to 4.75%;
this was the third cut in eight weeks. The FOMC left the rate unchanged after
the December meeting. The Fed Funds target is the rate at which banks can borrow
from each other overnight. While the Federal Reserve Board does not set this
rate, it can establish a target rate and, through open market operations, the
Fed can move member banks in the direction of that target rate. The Discount
Rate is the rate at which banks can borrow directly from the Federal Reserve.
Uncertainty with the direction of the stock market contributed to large daily
inflows and outflows of monies in the Fund. As the stock market rallied, our
investors transferred cash to equity funds. During those times when the stock
market stalled, we saw cash inflows. Another factor affecting performance was
the average maturity of the Fund's portfolio -- 20 days as of December 31, 1998.
The average Tier One money market fund as measured by IBC Financial Data had an
average maturity of 48 days.
- --------------------------------------------------------------------------------
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARaNTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $10.00 PER SHARE, IT IS POSSIBLE TO
LOSE MONEY BY INVESTING IN THE FUND.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Yields are annualized historical figures. Effective yield assumes that
income is reinvested. Yields will vary as interest rates change. Past
performance is not a guarantee of future results.
(2) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Investment return and principal value will fluctuate so that the value of
your investment, when redeemed, may be worth more or less than the
original cost.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
This page intentionally left blank.
- --------------------------------------------------------------------------------
29
<PAGE>
- ---------
Separate
Account A
- ---------
1
- ---------
- --------------------------------------------------------------------------------
The Guardian Separate Account A
- -------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
INVESTMENT DIVISIONS
--------------------------------------------------------------------------------------
Gabelli Baillie
Guardian Guardian Guardian Capital Gifford
Stock Bond Cash Asset International
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Shares owned in underlying fund-- Note 1 11,935,235 5,896,967 9,846,055 616,224 1,500,197
Net asset value per share (NAV) ........ 49.08 12.23 10.00 16.20 20.92
------------ ------------ ------------ ------------ ------------
Total Assets (Shares x NAV) .......... $585,781,334 $ 72,119,907 $ 98,460,548 $ 9,982,836 $ 31,384,115
Liabilities:
Risk charges and other liabilities ..... 189,204 7,099 10,269,640 16,950 25,122
------------ ------------ ------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets -- Note 3 ................. $585,592,130 $ 72,112,808 $ 88,190,908 $ 9,965,886 $ 31,358,993
- ------------------------------------------------------------------------------------------------------------------------------------
============ ============ ============ ============ ============
FIFO Cost ................................ $443,788,926 $ 71,082,598 $ 98,460,548 $ 10,006,589 $ 29,071,125
<CAPTION>
--------------------------------------------------------------------------------------
INVESTMENT DIVISIONS
--------------------------------------------------------------------------------------
Baillie
Gifford Guardian Value Line
Emerging Small Cap Value Line Strategic MFS Growth
Markets Stock Centurion Asset with Income
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Shares owned in underlying fund -- Note 1 351,563 494,169 7,536,639 6,144,166 276,374
Net asset value per share (NAV) ......... 7.39 12.74 30.44 25.22 20.11
------------ ------------ ------------ ------------ ------------
Total Assets (Shares x NAV) ........... $ 2,598,053 $ 6,295,709 $229,415,291 $154,955,876 $ 5,557,884
Liabilities:
Risk charges and other liabilities ...... 5,505 17,363 82,318 53,960 16,229
------------ ------------ ------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets -- Note 3 .................. $ 2,592,548 $ 6,278,346 $229,332,973 $154,901,916 $ 5,541,655
- ------------------------------------------------------------------------------------------------------------------------------------
============ ============ ============ ============ ============
FIFO Cost ................................. $ 3,470,672 $ 6,669,490 $159,672,089 $107,195,590 $ 5,112,331
</TABLE>
- --------------------------------------------------------------------------------
The Guardian Separate Account A
- -------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
INVESTMENT DIVISIONS
----------------------------------------------------------------------------------------
Gabelli Baillie
Guardian Guardian Guardian Capital Gifford
Stock Bond Cash Asset International
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Income
Income:
Reinvested dividends ................. $ 5,258,693 $ 3,916,719 $ 5,017,398 $ 16,803 $ 192,390
Expenses -- Note 4:
Mortality and expense risk charges ... 5,584,578 721,896 1,440,516 106,068 332,178
------------ ------------ ------------ ------------ ------------
Net investment income/(expense) ........ (325,885) 3,194,823 3,576,882 (89,265) (139,788)
------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain/(Loss)
from Investments
Realized gain/(loss) from investments:
Net realized gain/(loss) from sale of
investments ........................ 68,624,833 1,423,530 -- 496,707 4,787,716
Reinvested realized gain distributions 61,448,022 909,591 -- 510,105 1,602,944
------------ ------------ ------------ ------------ ------------
Net realized gain/(loss) on investments 130,072,855 2,333,121 -- 1,006,812 6,390,660
Net change in unrealized appreciation/
(depreciation) of investments ........ (32,869,807) (563,115) -- (146,465) (697,439)
------------ ------------ ------------ ------------ ------------
Net realized and unrealized gain/(loss)
from investments ....................... 97,203,048 1,770,006 -- 860,347 5,693,221
------------ ------------ ------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase/(Decrease) in Net Assets
Resulting from Operations .............. $ 96,877,163 $ 4,964,829 $ 3,576,882 $ 771,082 $ 5,553,433
- ------------------------------------------------------------------------------------------------------------------------------------
============ ============ ============ ============ ============
<CAPTION>
----------------------------------------------------------------------------------------
INVESTMENT DIVISIONS
----------------------------------------------------------------------------------------
Baillie
Gifford Guardian Value Line
Emerging Small Cap Value Line Strategic MFS Growth
Markets Stock Centurion Asset with Income
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Income
Income:
Reinvested dividends ................. $ 26,709 $ 8,064 $ 662,538 $ 4,023,739 $ --
Expenses -- Note 4:
Mortality and expense risk charges ... 35,165 72,590 2,123,575 1,480,728 35,117
------------ ------------ ------------ ------------ ------------
Net investment income/(expense) ........ (8,456) (64,526) (1,461,037) 2,543,011 (35,117)
------------ ------------ ------------ ------------ ------------
Realized and Unrealized Gain/(Loss)
from Investments
Realized gain/(loss) from investments:
Net realized gain/(loss) from sale of
investments ........................ (1,289,642) 40,330 25,211,371 15,211,337 131,422
Reinvested realized gain distributions -- 62,928 12,882,696 11,597,837 --
------------ ------------ ------------ ------------ ------------
Net realized gain/(loss) on investments (1,289,642) 103,258 38,094,067 26,809,174 131,422
Net change in unrealized appreciation/
(depreciation) of investments ........ 78,849 (439,254) 13,045,076 4,403,942 439,147
------------ ------------ ------------ ------------ ------------
Net realized and unrealized gain/(loss)
from investments ....................... (1,210,793) (335,996) 51,139,143 31,213,116 570,569
------------ ------------ ------------ ------------ ------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase/(Decrease) in Net Assets
Resulting from Operations .............. $ (1,219,249) $ (400,522) $ 49,678,106 $ 33,756,127 $ 535,452
- ------------------------------------------------------------------------------------------------------------------------------------
============ ============ ============ ============ ============
</TABLE>
See notes to financial statements
- --------------------------------------------------------------------------------
30 & 31
<PAGE>
- ---------
Separate
Account A
- ---------
1
- ---------
- --------------------------------------------------------------------------------
The Guardian Separate Account A
- -------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
INVESTMENT DIVISIONS
---------------------------------------------------------------------------------------
Gabelli Baillie
Guardian Guardian Guardian Capital Gifford
Stock Bond Cash Asset International
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------
1997 Increase/(Decrease) from Operations
- ----------------------------------------
Net investment income/(expense) ...... $ 605,354 $ 3,877,137 $ 4,085,586 $ (35,128) $ 157,705
Net realized gain/(loss) from sale of
investments ........................ 47,887,247 202,097 -- 720,243 2,902,243
Reinvested realized gain distributions 61,424,847 -- -- 449,809 1,194,480
Change in unrealized appreciation/
(depreciation) of investments ...... 38,412,340 1,635,658 -- 118,931 (881,238)
------------- ------------- ------------- ------------- -------------
Net increase/(decrease) resulting
from operations .................... 148,329,788 5,714,892 4,085,586 1,253,855 3,373,190
------------- ------------- ------------- ------------- -------------
- --------------------------
1997 Contract Transactions
- --------------------------
Net contract purchase payments ....... 10,374,116 1,586,753 3,527,527 184,369 830,875
Transfer between investment divisions 13,431,260 (1,184,645) (4,371,355) 2,637,909 (3,007,920)
Administrative charges-- Note 4 ...... (275,799) (53,203) (70,872) (2,124) (17,348)
Redemptions and annuity benefits ..... (55,936,460) (12,295,923) (21,850,781) (276,543) (4,059,503)
Transfers -- other ................... 5,536 1,051 211 (96) (2,390)
------------- ------------- ------------- ------------- -------------
Net increase/(decrease) from contract
transactions ....................... (32,401,347) (11,945,967) (22,765,270) 2,543,515 (6,256,286)
------------- ------------- ------------- ------------- -------------
Actuarial Increase in Reserves for
Contracts in Payment Period .......... 51,954 26,295 9,876 -- 4,082
------------- ------------- ------------- ------------- -------------
Total Increase/(Decrease) in Net Assets 115,980,395 (6,204,780) (18,669,808) 3,797,370 (2,879,014)
Net Assets at December 31, 1996 ...... 453,310,147 80,383,567 105,060,746 2,755,428 33,607,088
------------- ------------- ------------- ------------- -------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets at December 31, 1997 ...... $ 569,290,542 $ 74,178,787 $ 86,390,938 $ 6,552,798 $ 30,728,074
- ----------------------------------------------------------------------------------------------------------------------------------
============= ============= ============= ============= =============
- ----------------------------------------
1998 Increase/(Decrease) from Operations
- ----------------------------------------
Net investment income/(expense) ...... $ (325,885) $ 3,194,823 $ 3,576,882 $ (89,265) $ (139,788)
Net realized gain/(loss) from sale of
investments ........................ 68,624,833 1,423,530 -- 496,707 4,787,716
Reinvested realized gain distributions 61,448,022 909,591 -- 510,105 1,602,944
Change in unrealized appreciation/
(depreciation) of investments ...... (32,869,807) (563,115) -- (146,465) (697,439)
------------- ------------- ------------- ------------- -------------
Net increase/(decrease) resulting from
operations ......................... 96,877,163 4,964,829 3,576,882 771,082 5,553,433
------------- ------------- ------------- ------------- -------------
- --------------------------
1998 Contract Transactions
- --------------------------
Net contract purchase payments ....... 6,555,981 1,079,989 1,385,969 261,275 414,179
Transfer between investment divisions (18,181,147) 2,731,283 24,686,779 3,154,568 (1,298,629)
Administrative charges-- Note 4 ...... (274,791) (43,964) (61,817) (4,667) (17,111)
Redemptions and annuity benefits ..... (68,781,231) (10,826,473) (27,811,293) (772,598) (4,020,496)
Transfers -- other ................... 55,324 (1,511) (1,437) 3,428 (5,661)
------------- ------------- ------------- ------------- -------------
Net increase/(decrease) from contract
transactions ....................... (80,625,864) (7,060,676) (1,801,799) 2,642,006 (4,927,718)
------------- ------------- ------------- ------------- -------------
Actuarial Increase in Reserves for
Contracts in Payment Period .......... 50,289 29,868 24,887 -- 5,204
------------- ------------- ------------- ------------- -------------
Total Increase/(Decrease) in Net Assets 16,301,588 (2,065,979) 1,799,970 3,413,088 630,919
Net Assets at December 31, 1997 ...... 569,290,542 74,178,787 86,390,938 6,552,798 30,728,074
------------- ------------- ------------- ------------- -------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets at December 31, 1998 ...... $ 585,592,130 $ 72,112,808 $ 88,190,908 $ 9,965,886 $ 31,358,993
- ----------------------------------------------------------------------------------------------------------------------------------
============= ============= ============= ============= =============
<CAPTION>
---------------------------------------------------------------------------------------
INVESTMENT DIVISIONS
---------------------------------------------------------------------------------------
Baillie Value Line
Gifford Guardian Strategic
Emerging Small Cap Value Line Asset MFS Growth
Markets Stock Centurion Management with Income
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------
1997 Increase/(Decrease) from Operations
- ----------------------------------------
Net investment income/(expense) ...... $ (40,469) $ (10,081) $ (1,427,833) $ 1,874,877 $ 1,920
Net realized gain/(loss) from sale of
investments ........................ 1,073,259 222,969 27,333,854 12,980,580 1,204
Reinvested realized gain distributions 304,105 93,923 33,645,989 15,102,492 14,515
Change in unrealized appreciation/
(depreciation) of investments ...... (1,319,637) 65,474 (22,943,368) (10,755,630) 6,405
------------- ------------- ------------- ------------- -------------
Net increase/(decrease) resulting
from operations .................... 17,258 372,285 36,608,642 19,202,319 24,044
------------- ------------- ------------- ------------- -------------
- --------------------------
1997 Contract Transactions
- --------------------------
Net contract purchase payments ....... 271,541 286,829 3,481,121 3,549,084 15,279
Transfer between investment divisions 669,543 7,175,793 (10,003,032) (3,676,985) 745,689
Administrative charges-- Note 4 ...... (4,517) (829) (199,512) (83,697) (35)
Redemptions and annuity benefits ..... (558,217) (97,791) (20,551,346) (15,214,920) (18,903)
Transfers -- other ................... 2,273 694 (123) 442 179
------------- ------------- ------------- ------------- -------------
Net increase/(decrease) from contract
transactions ....................... 380,623 7,364,696 (27,272,892) (15,426,076) 742,209
------------- ------------- ------------- ------------- -------------
Actuarial Increase in Reserves for
Contracts in Payment Period .......... 1 -- 43,842 11,491 13
------------- ------------- ------------- ------------- -------------
Total Increase/(Decrease) in Net Assets 397,882 7,736,981 9,379,592 3,787,734 766,266
Net Assets at December 31, 1996 ...... 5,848,197 -- 199,305,680 138,872,712 --
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets at December 31, 1997 ...... $ 6,246,079 $ 7,736,981 $ 208,685,272 $ 142,660,446 $ 766,266
- ----------------------------------------------------------------------------------------------------------------------------------
============= ============= ============= ============= =============
- ----------------------------------------
1998 Increase/(Decrease) from Operations
- ----------------------------------------
Net investment income/(expense) ...... $ (8,456) $ (64,526) $ (1,461,037) $ 2,543,011 $ (35,117)
Net realized gain/(loss) from sale of
investments ........................ (1,289,642) 40,330 25,211,371 15,211,337 131,422
Reinvested realized gain distributions -- 62,928 12,882,696 11,597,837 --
Change in unrealized appreciation/
(depreciation) of investments ...... 78,849 (439,254) 13,045,076 4,403,942 439,147
------------- ------------- ------------- ------------- -------------
Net increase/(decrease) resulting from
operations ......................... (1,219,249) (400,522) 49,678,106 33,756,127 535,452
------------- ------------- ------------- ------------- -------------
- --------------------------
1998 Contract Transactions
- --------------------------
Net contract purchase payments ....... 65,817 242,043 2,150,725 2,159,644 127,208
Transfer between investment divisions (2,102,167) (785,652) (8,010,072) (4,513,121) 4,318,158
Administrative charges-- Note 4 ...... (2,920) (2,840) (142,882) (103,121) (1,209)
Redemptions and annuity benefits ..... (395,247) (511,136) (23,059,557) (19,113,430) (202,935)
Transfers -- other ................... 35 (528) 8,325 33,145 (1,344)
------------- ------------- ------------- ------------- -------------
Net increase/(decrease) from contract
transactions ....................... (2,434,482) (1,058,113) (29,053,461) (21,536,883) 4,239,878
------------- ------------- ------------- ------------- -------------
Actuarial Increase in Reserves for
Contracts in Payment Period .......... 200 -- 23,056 22,226 59
------------- ------------- ------------- ------------- -------------
Total Increase/(Decrease) in Net Assets (3,653,531) (1,458,635) 20,647,701 12,241,470 4,775,389
Net Assets at December 31, 1997 ...... 6,246,079 7,736,981 208,685,272 142,660,446 766,266
------------- ------------- ------------- ------------- -------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets at December 31, 1998 ...... $ 2,592,548 $ 6,278,346 $ 229,332,973 $ 154,901,916 $ 5,541,655
- ----------------------------------------------------------------------------------------------------------------------------------
============= ============= ============= ============= =============
</TABLE>
See notes to financial statements
- --------------------------------------------------------------------------------
32 & 33
<PAGE>
- ---------
Separate
Account A
- ---------
1
- ---------
- --------------------------------------------------------------------------------
The Guardian Separate Account A
- -------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- ----------------------
Note 1 -- Organization
- ----------------------
The Guardian Separate Account A (the Account), a unit investment trust
registered under the Investment Company Act of 1940, as amended, was established
by The Guardian Insurance & Annuity Company, Inc. (GIAC) on October 31, 1981.
GIAC is a wholly owned subsidiary of The Guardian Life Insurance Company of
America (Guardian). GIAC issues the deferred variable annuity contracts offered
through the Account. GIAC provides for accumulations and benefits under the
contracts by crediting the net contract purchase payments to one or more
investment divisions established within the Account or to the Fixed Rate Option
(FRO), as selected by the contractowner. However, a contractowner may only
invest in up to six investment divisions, including the FRO. The ten investment
options of the Account correspond to the following underlying mutual funds in
which the investment option invests: The Guardian Stock Fund, Inc. (GSF), The
Guardian Bond Fund, Inc. (GBF), The Guardian Cash Fund, Inc. (GCF), Gabelli
Capital Asset Fund (GCAF), Baillie Gifford International Fund (BGIF), Baillie
Gifford Emerging Markets Fund (BGEMF), The Guardian Small Cap Stock Fund (GSCF),
Value Line Centurion Fund, Inc., Value Line Strategic Asset Management Trust
and MFS Growth With Income Series (collectively, the Funds and individually, a
Fund). A tax-qualified and a non-tax-qualified in vestment division have been
established within each Account investment option available in the Account.
Contractowners who qualify may also purchase an optional Enhanced Death Benefit
Rider which may provide greater death benefits than the proceeds payable under
the basic contract.
GSF, GBF, GCF and GSCF each has an investment advisory agreement with
Guardian Investor Services Corporation (GISC), a wholly owned subsidiary of
GIAC. GCAF has a management agreement with GISC. BGIF and BGEMF each has an in
vestment advisory agreement with Guardian Baillie Gifford Ltd., a joint venture
company formed by GIAC and Baillie Gifford Overseas Ltd.
Under applicable insurance law, the assets and liabilities of the Account
are clearly identified and distinguished from the other assets and liabilities
of GIAC. The assets of the Account will not be charged with any liabilities
arising out of any other business conducted by GIAC, but the obligations of the
Account, including the promise to make annuity payments, are obligations of
GIAC.
Note 2 -- Significant Accounting Policies
The following is a summary of significant accounting policies of the
Account.
Investments
(a) Net proceeds of payments made by contract owners to the Account are
invested by the Account's investment divisions in shares of the corresponding
Funds at net asset value. All distributions made by a Fund are reinvested in
shares of the same Fund.
(b) The market value of the investments in the Funds is based on the net
asset value of the respective Funds as of their close of business on the
valuation date.
(c) Investment transactions are accounted for on the trade date and income
is recorded on the ex-dividend date.
(d) The cost of investments sold is determined on a first in, first out
(FIFO) basis.
- --------------------------------------------------------------------------------
34
<PAGE>
---------
Separate
Account A
---------
1
---------
- --------------------------------------------------------------------------------
Federal Income Taxes
The operations of the Account are part of the operations of GIAC and, as
such, are included in the combined tax return of GIAC. GIAC is taxed as a life
insurance company under the Internal Revenue Code of 1986, as amended.
Under current tax law, no federal income taxes are payable by GIAC with
respect to the operations of the Account.
- ---------------------------------------
Note 3 -- Net Assets, December 31, 1998
- ---------------------------------------
<TABLE>
<CAPTION>
Units Accumulation Total
Outstanding Unit Value Unit Value
----------- ---------- ----------
<S> <C> <C> <C>
REGULAR CONTRACT
Tax-Qualified Accounts:
The Guardian Stock Fund, Inc. ............. 2,612,308.034 $ 115.984452 $ 302,987,116
The Guardian Bond Fund, Inc. .............. 937,749.575 34.566553 32,414,770
The Guardian Cash Fund, Inc. .............. 1,399,257.387 24.979223 34,952,362
Gabelli Capital Asset Fund ................ 200,192.703 18.478018 3,699,164
Baillie Gifford International Fund ........ 632,761.633 21.510846 13,611,238
Baillie Gifford Emerging Markets Fund ..... 146,000.000 7.809621 1,140,205
The Guardian Small Cap Stock Fund ......... 300,061.666 10.566846 3,170,705
Value Line Centurion Fund, Inc. ........... 1,664,887.909 71.182326 118,510,594
Value Line Strategic Asset Management Trust 2,018,027.794 45.182455 91,179,450
MFS Growth With Income Series ............. 172,470.896 12.600579 2,173,233
Non-Tax-Qualified Accounts:
The Guardian Stock Fund, Inc. ............. 2,164,622.655 115.984452 251,062,572
The Guardian Bond Fund, Inc. .............. 1,026,924.734 34.566553 35,497,248
The Guardian Cash Fund, Inc. .............. 1,946,117.403 24.979223 48,612,501
Gabelli Capital Asset Fund ................ 286,880.214 18.478018 5,300,978
Baillie Gifford International Fund ........ 744,477.708 21.510846 16,014,345
Baillie Gifford Emerging Markets Fund ..... 177,501.686 7.809621 1,386,221
The Guardian Small Cap Stock Fund ......... 268,800.715 10.566846 2,840,376
Value Line Centurion Fund, Inc. ........... 1,411,119.521 71.182326 100,446,770
Value Line Strategic Asset Management Trust 1,296,932.302 45.182455 58,598,585
MFS Growth With Income Series ............. 254,823.824 12.600579 3,210,928
ENHANCED DEATH BENEFIT RIDER
Tax-Qualified Accounts:
The Guardian Stock Fund, Inc. ............. 535,018.808 12.500295 6,687,893
The Guardian Bond Fund, Inc. .............. 42,031.544 10.791462 453,582
The Guardian Cash Fund, Inc. .............. 100,443.740 10.431534 1,047,782
Gabelli Capital Asset Fund ................ 23,504.857 11.735168 275,834
Baillie Gifford International Fund ........ 29,669.070 12.630973 374,749
Baillie Gifford Emerging Markets Fund ..... 1,033.723 7.876735 8,142
The Guardian Small Cap Stock Fund ......... 10,913.743 9.439192 103,017
Value Line Centurion Fund, Inc. ........... 158,718.079 12.849354 2,039,425
Value Line Strategic Asset Management Trust 135,792.628 12.911063 1,753,227
MFS Growth With Income Series ............. 7,966.457 12.869606 102,525
</TABLE>
- --------------------------------------------------------------------------------
35
<PAGE>
- ---------
Separate
Account A
- ---------
1
- ---------
- --------------------------------------------------------------------------------
The Guardian Separate Account A
- -------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
Units Accumulation Total
Outstanding Unit Value Unit Value
----------- ---------- ----------
<S> <C> <C> <C>
Non-Tax-Qualified Accounts:
The Guardian Stock Fund, Inc. ............. 554,736.086 $ 12.500295 $ 6,934,365
The Guardian Bond Fund, Inc. .............. 126,876.641 10.791462 1,369,184
The Guardian Cash Fund, Inc. .............. 219,120.979 10.431534 2,285,768
Gabelli Capital Asset Fund ................ 58,790.018 11.735168 689,911
Baillie Gifford International Fund ........ 74,806.495 12.630973 944,879
Baillie Gifford Emerging Markets Fund ..... 7,126.860 7.876735 56,136
The Guardian Small Cap Stock Fund ......... 17,400.587 9.439192 164,247
Value Line Centurion Fund, Inc. ........... 427,824.852 12.849354 5,497,273
Value Line Strategic Asset Management Trust 159,407.445 12.911063 2,058,120
MFS Growth With Income Series ............. 3,875.780 12.869606 49,880
----------------
1,159,705,300
Contracts receiving annuity payments ...... 8,888,912
Interest of GIAC in separate account ...... 17,273,951
----------------
Total Net Assets ............................. $ 1,185,868,163
================
</TABLE>
Other Matters
The amount retained by GIAC in the Account is comprised of amounts which
GIAC allocated to the Account to facilitate the commencement of operations of
the Account and certain of the Funds, as well as amounts accruing to GIAC from
the operations of the Account. Amounts retained by GIAC in the Account may be
transferred by GIAC to its general account.
- ------------------------------------------
Note 4 -- Administrative and Mortality and
Expense Risk Charges
- ------------------------------------------
Charges deducted by GIAC from the contractholder's account include:
(1) a fixed annual $30 fee for single payment contracts and a fixed annual
$35 fee for flexible payment contracts to cover GIAC's administrative expenses.
This charge is deducted on each contract anniversary before annuitization and
upon surrender prior to annuitization. For the years ended December 31, 1998 and
1997, administrative fees amounted to $655,322 and $707,936, respectively.
(2) a charge for mortality and expense risk is computed daily and is equal
to an annual rate of 1% of the average daily net assets applicable to contract
owners. There is an additional charge for the Enhanced Death Benefit Rider
equal to an annual rate of .30% of the daily net assets of the applicable
contract. For the year ended December 31, 1998, the total mortality and expense
risk charge was $11,932,411.
(3) contingent deferred sales charges on certain partial or total
surrenders. These charges are assessed against redemptions and paid to GIAC
during the first six contract years for a Single Purchase Payment Contract. For
a Flexible Purchase Payment Contract, each payment is subject to a contingent
deferred sales charge for six years. Contingent deferred sales charges were
$338,991 for the year ended December 31, 1998.
(4) a charge for premium taxes deducted from either the contract premium
payment or upon annuitization, as determined in accordance with applicable state
law.
Currently GIAC makes no charge against the Account for GIAC's federal
income taxes. However, GIAC reserves the right to charge taxes attributable to
the Account in the future.
- --------------------------------------------------------------------------------
36
<PAGE>
---------
Separate
Account A
---------
1
---------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 5 -- Accumulation Values for the Current Year and the Four Prior Year Ends
for Both Qualified and Non-Qualified Accounts
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REGULAR CONTRACT
The Guardian Stock Fund, Inc. ....... $115.984452 $ 97.721248 $ 72.788450 $ 57.928841 $ 43.446001
The Guardian Bond Fund, Inc. ........ 34.566553 32.294381 29.924450 29.376248 25.230236
The Guardian Cash Fund, Inc. ........ 24.979223 23.998976 23.050182 22.171865 21.217142
Gabelli Capital Asset Fund .......... 18.478018 16.705120 11.831565 10.763220 --
Baillie Gifford International Fund .. 21.510846 17.927664 16.175077 14.153848 12.851309
Baillie Gifford Emerging Markets Fund 7.809621 10.770121 10.666664 8.646640 8.785416
The Guardian Small Cap Stock Fund ... 10.566846 11.323159 -- -- --
Value Line Centurion Fund, Inc. ..... 71.182326 56.395899 46.919586 40.383489 29.115003
Value Line Strategic Asset
Management Trust ................... 45.182455 35.800735 31.260980 27.247234 21.407853
MFS Growth With Income Series ....... 12.600579 10.402993 -- -- --
ENHANCED DEATH BENEFIT RIDER
The Guardian Stock Fund, Inc. ....... $ 12.500295 $ 10.563642 -- -- --
The Guardian Bond Fund, Inc. ........ 10.791462 10.112433 -- -- --
The Guardian Cash Fund, Inc. ........ 10.431534 10.052316 -- -- --
Gabelli Capital Asset Fund .......... 11.735168 10.641134 -- -- --
Baillie Gifford International Fund .. 12.630973 10.558620 -- -- --
Baillie Gifford Emerging Markets Fund 7.876735 10.895404 -- -- --
The Guardian Small Cap Stock Fund ... 9.439192 10.210823 -- -- --
Value Line Centurion Fund, Inc. ..... 12.849354 10.210823 -- -- --
Value Line Strategic Asset
Management Trust .................. 12.911063 10.260962 -- -- --
MFS Growth With Income Series ....... 12.869606 10.657050 -- -- --
</TABLE>
- -----------------------------
Note 6 -- Purchases and Sales
- -----------------------------
During the years ended December 31, 1998 and December 31, 1997, purchases
and sales of shares of the Funds were as follows:
<TABLE>
<CAPTION>
Purchases Purchases Sales Sales
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
The Guardian Stock Fund, Inc. ....... $103,072,859 $112,853,486 $123,262,009 $ 84,330,505
The Guardian Bond Fund, Inc. ........ 19,039,831 12,308,410 22,064,196 20,434,712
The Guardian Cash Fund, Inc. ........ 86,539,923 65,275,320 84,484,324 82,620,099
Gabelli Capital Asset Fund .......... 9,265,169 7,515,637 6,216,255 4,564,281
Baillie Gifford Internation al Fund.. 16,397,921 8,730,393 19,900,306 13,610,316
Baillie Gifford Emerging Markets Fund 1,475,770 8,194,196 3,933,543 7,539,126
The Guardian Small Cap Stock Fund ... 8,084,103 9,469,995 9,151,224 1,996,684
Value Line Centurion Fund, Inc. ..... 21,671,981 45,798,590 39,520,206 40,843,115
Value Line Strategic Asset
Management Trust .................. 21,405,798 25,125,559 28,981,106 23,516,968
MFS Growth With Income Series ....... 5,859,032 819,987 1,639,154 60,160
------------ ------------ ------------ ------------
Total ........................... $292,812,387 $296,091,573 $339,152,323 $279,515,966
============ ============ ============ ============
</TABLE>
NOTE: In some instances the calculation of total assets may not agree due to
rounding.
- --------------------------------------------------------------------------------
37
<PAGE>
- ---------
Separate
Account A
- ---------
1
- ---------
- --------------------------------------------------------------------------------
The Guardian Separate Account A
- -------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
The Guardian Insurance & Annuity Company, Inc.
and the Contractowners of The Guardian Separate
Account A, "Value Guard II"
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of the Guardian Stock, Guardian
Bond, Guardian Cash, Guardian Small Cap Stock, Gabelli Capital Asset, Baillie
Gifford International, Baillie Gifford Emerging Markets, Value Line Centurion,
Value Line Strategic Asset Management and MFS Growth With In come investment
divisions (constituting The Guardian Separate Account A, "Value Guard II") at
December 31, 1998, and the results of each of their operations for the year then
ended and the changes in each of their net assets for each of the two years then
ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the management of The Guardian
Insurance & Annuity Company, Inc.; our responsibility is to ex press an opinion
on these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
transfer agents of the underlying funds, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 25, 1999
38
<PAGE>
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This page intentionally left blank.
- --------------------------------------------------------------------------------
39
<PAGE>
- ------------
The Guardian
Stock Fund,
Inc.
- ------------
2
- ------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- ---------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- ----------------------
COMMON STOCKS -- 94.9%
- ----------------------
Shares Value
- --------------------------------------------------------------------------------
Aerospace and Defense--1.1%
58,100 Alliant Techsystems, Inc.* $ 4,789,619
80,000 Cordant Technologies, Inc. 3,000,000
65,200 General Dynamics Corp. 3,822,350
201,750 Precision Castparts Corp. 8,927,438
53,000 Sundstrand Corp. 2,749,375
168,100 United Technologies Corp. 18,280,875
---------------
41,569,657
---------------
Air Transportation--1.9%
98,000 Alaska Air Group, Inc.* 4,336,500
351,000 AMR Corp., DE* 20,840,625
43,000 Comair Hldgs., Inc. 1,451,250
151,000 Continental Airlines, Inc.* 5,058,500
456,000 Delta Airlines, Inc. 23,712,000
37,000 UAL Corp.* 2,208,438
250,000 US Airways Group, Inc.* 13,000,000
---------------
70,607,313
---------------
Appliance and Furniture--0.5%
206,000 Ethan Allen Interiors, Inc. 8,446,000
174,000 Furniture Brands Int'l., Inc.* 4,741,500
200,000 Herman Miller, Inc. 5,375,000
60,000 Leggett & Platt, Inc. 1,320,000
---------------
19,882,500
---------------
Automotive--2.6%
218,225 DaimlerChrysler AG 20,963,239
1,275,000 Ford Motor Co. 74,826,562
---------------
95,789,801
---------------
Automotive Parts--0.3%
38,000 Arvin Industries, Inc. 1,584,125
20,900 Danaher Corp. 1,135,131
104,500 Kaydon Corp. 4,186,531
276,933 Meritor Automotive, Inc. 5,867,518
---------------
12,773,305
---------------
Biotechnology--1.1%
209,500 Amgen, Inc.* 21,905,844
129,500 Genentech, Inc.* 10,319,531
100,000 Sepracor, Inc.* 8,812,500
---------------
41,037,875
---------------
Broadcasting--2.3%
625,400 CBS Corp.* 20,481,850
165,000 Comcast Corp. 9,683,437
739,200 Infinity Broadcasting Corp.* 20,235,600
335,000 MediaOne Group, Inc.* 15,745,000
325,000 Tele-Communications, Inc.* 17,976,562
---------------
84,122,449
---------------
Building Materials and Homebuilders--1.0%
33,000 Centex Construction Products, Inc. 1,340,625
16,500 Crossman Communities, Inc.* 455,813
150,000 D.R. Horton, Inc. 3,450,000
92,500 Lafarge Corp. 3,746,250
145,000 Lennar Corp. 3,661,250
157,800 Lone Star Industries, Inc. 5,809,012
79,650 Martin Marietta Materials, Inc. 4,953,234
83,120 Southdown, Inc. 4,919,665
36,000 U.S. Home Corp.* 1,197,000
45,700 Vulcan Materials Co. 6,012,406
---------------
35,545,255
---------------
Capital Goods-Miscellaneous Technology--0.0%
43,000 AFC Cable Systems, Inc.* 1,445,875
---------------
Chemicals--0.2%
282,000 Cambrex Corp. 6,768,000
---------------
Computer Software--6.0%
52,000 America Online, Inc.* 8,320,000
140,300 BMC Software, Inc.* 6,252,119
11,700 ChoicePoint, Inc.* 754,650
220,000 Computer Associates Int'l., Inc. 9,377,500
27,000 DST Systems, Inc.* 1,540,688
131,900 J.D. Edwards* 3,742,662
1,104,400 Microsoft Corp.* 153,166,475
340,200 Novell, Inc.* 6,166,125
495,000 Oracle Corp.* 21,346,875
104,000 Sterling Software, Inc.* 2,814,500
138,800 SunGuard Data Systems, Inc.* 5,508,625
36,000 Wind River Systems, Inc.* 1,692,000
---------------
220,682,219
---------------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
40
<PAGE>
------------
The Guardian
Stock Fund,
Inc.
------------
2
------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
Computer Systems--11.4%
434,500 Apple Computer, Inc.* $ 17,787,344
829,600 Compaq Computer Corp. 34,791,350
195,900 EMC Corp.* 16,651,500
370,000 Hewlett Packard Co. 25,275,625
89,500 Honeywell, Inc. 6,740,469
654,500 Int'l. Business Machines 120,918,875
478,200 Lexmark Int'l. Group, Inc.* 48,059,100
230,000 Pitney Bowes, Inc. 15,194,375
63,300 SCI Systems, Inc.* 3,655,575
226,400 Seagate Technology* 6,848,600
1,706,400 Storage Technology Corp.* 60,683,850
367,800 Sun Microsystems, Inc.* 31,492,875
248,000 Xerox Corp. 29,264,000
--------------
417,363,538
--------------
Conglomerates--0.6%
310,000 Textron, Inc. 23,540,625
--------------
Cosmetics and Toiletries--0.0%
21,600 Alberto-Culver Co. 545,400
--------------
Drugs and Hospitals--12.4%
560,000 Abbott Laboratories 27,440,000
269,320 Allegiance Corp. 12,557,045
197,800 Arterial Vascular Engineering, Inc.* 10,384,500
257,600 Biomet, Inc. 10,368,400
649,600 Bristol-Myers Squibb Corp. 86,924,600
346,000 Johnson and Johnson 29,020,750
385,000 Medtronic, Inc. 28,586,250
479,900 Merck & Co., Inc. 70,875,231
520,000 Mylan Laboratories, Inc. 16,380,000
27,000 Patterson Dental Co.* 1,174,500
906,600 Pfizer, Inc. 113,721,637
27,000 Safeskin Corp.* 651,375
608,700 Schering-Plough Corp. 33,630,675
182,400 Warner-Lambert Co. 13,714,200
--------------
455,429,163
--------------
Electrical Equipment--4.3%
1,541,200 General Electric Co. 157,298,725
--------------
Electronics and Instruments--0.1%
64,400 Analogic Corp. 2,423,050
42,200 Dynatech Corp.* 116,050
--------------
2,539,100
--------------
Energy-Miscellaneous--0.1%
451,300 Frontier Oil Corp.* 2,228,294
169,600 Giant Industries, Inc. 1,590,000
5,100 Holly Corp. 86,063
--------------
3,904,357
--------------
Entertainment and Leisure--0.8%
400,000 Carnival Corp. 19,200,000
158,000 Viacom, Inc.* 11,692,000
--------------
30,892,000
--------------
Financial-Banks--3.3%
9 BankBoston Corp. 350
260,000 Bank of New York, Inc. 10,465,000
34,000 BB&T Corp. 1,370,625
26,000 CCB Financial Corp. 1,482,000
15,000 Centura Banks, Inc. 1,115,625
81,000 City National Corp. 3,371,625
145,200 Comerica, Inc. 9,900,825
71,268 Commerce Bankshares, Inc. 3,028,890
20,000 Cullen Frost Bankers, Inc. 1,097,500
108,000 Firstar Corp. 10,071,000
60,000 FirstMerit Corp. 1,612,500
470,000 Fleet Financial Group, Inc. 21,003,125
84,379 Hubco, Inc. 2,541,917
22,627 M & T Bank Corp. 11,741,999
197,000 Mellon Bank Corp. 13,543,750
90,389 National City Corp. 6,553,203
75,000 Premier Bancshares, Inc., GA 1,964,063
224,848 Premier National Bancorp, Inc. 4,173,741
148,500 Union BanCal Corp. 5,058,281
45,000 U.S. Bancorp, Inc. 1,597,500
23,000 U.S. Trust Corp. 1,748,000
43,000 Webster Financial Corp. 1,179,813
36,000 Westamerica Bancorp 1,323,000
72,000 Zions Bancorp 4,491,000
--------------
120,435,332
--------------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
41
<PAGE>
- ------------
The Guardian
Stock Fund,
Inc.
- ------------
2
- ------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- ---------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998 (Continued)
Shares Value
- --------------------------------------------------------------------------------
Financial-Other--3.3%
190,200 A.G. Edwards, Inc. $ 7,084,950
294,400 American Express Co. 30,102,400
137,000 Countrywide Credit Industries, Inc. 6,875,687
31,666 Duff & Phelps Credit Rating Co. 1,735,693
258,400 Federal Home Loan Mortgage Corp. 16,650,650
434,600 Federal National Mortgage Assn. 32,160,400
338,000 Jefferies Group, Inc. 16,773,250
87,332 Legg Mason, Inc. 2,756,416
384,075 Morgan Keegan, Inc. 7,225,411
31,000 Ragen MacKenzie Group, Inc.* 370,063
28,105 Raymond James Financial, Inc. 593,718
--------------
122,328,638
--------------
Financial-Thrift--1.1%
209,800 Astoria Financial Corp. 9,598,350
160,000 BankAtlantic Bancorp, Inc. 1,140,000
246,250 BankAtlantic Bancorp, Inc. Class A 1,585,234
27,040 California Federal Bancorp, Inc.* 327,860
179,277 Charter One Financial, Inc. 4,974,937
99,000 Coastal Bancorp, Inc. 1,732,500
20,000 Coast Federal Litigation Trust* 132,500
66,625 Commercial Federal Corp. 1,544,867
220,000 Dime Bancorp, Inc. 5,816,250
40,000 Golden State Bancorp, Inc.* 665,000
40,000 Golden State Bancorp, Inc.* (warrants) 182,500
24,866 Pacific Crest Capital, Inc. 366,774
760,954 Sovereign Bancorp, Inc. 10,843,594
--------------
38,910,366
--------------
Food, Beverage and Tobacco--2.2%
180,000 Anheuser-Busch Cos., Inc. 11,812,500
71,269 CKE Restaurants, Inc. 2,097,981
107,488 Earthgrains Co. 3,325,410
136,000 Hershey Foods Corp. 8,457,500
73,000 Interstate Bakeries Corp. 1,929,938
960,000 Philip Morris Cos., Inc. 51,360,000
69,000 Tootsie Roll Industries, Inc. 2,699,625
--------------
81,682,954
--------------
Footwear--0.1%
111,200 Footstar, Inc.* 2,780,000
--------------
Household Products--0.8%
365,200 Dial Corp. 10,545,150
188,800 Procter & Gamble Co. 17,239,800
--------------
27,784,950
--------------
Insurance--2.9%
388,700 Allstate Corp. 15,013,537
55,000 Ambac Financial Group, Inc.* 3,310,312
198,000 American Bankers Ins. Group, Inc. 9,578,250
6,962 Berkshire Hathaway, Inc.* 16,359,525
153,000 Chicago Title Corp. 7,181,437
107,000 Cigna Corp. 8,272,437
36,000 Enhance Financial Svcs. Group, Inc. 1,080,000
36,300 Fidelity National Financial, Inc. 1,107,150
42,000 Financial Sec. Assur. Hldgs. Ltd. 2,278,500
163,800 Hartford Financial Svcs. Group, Inc. 8,988,525
150,000 Horace Mann Educators Corp. 4,275,000
54,000 Jefferson Pilot Corp. 4,050,000
103,270 Liberty Financial Cos., Inc. 2,788,290
57,500 Lincoln National Corp., Inc. 4,704,219
50,600 MBIA, Inc. 3,317,462
229,500 Old Republic Int'l. Corp. 5,163,750
144,000 Penn America Group, Inc. 1,305,000
67,000 Reinsurance Group of America 4,070,250
216,000 State Auto Financial Corp. 2,673,000
11,200 Transamerica Corp. 1,293,600
30,000 W.R. Berkley Corp. 1,021,875
--------------
107,832,119
--------------
Lodging--0.1%
238,000 Prime Hospitality Corp.* 2,513,875
--------------
Machinery and Equipment--0.2%
102,000 AAR Corp. 2,435,250
115,000 Graco, Inc. 3,392,500
25,000 SPX Corp.* 1,675,000
--------------
7,502,750
--------------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
42
<PAGE>
------------
The Guardian
Stock Fund,
Inc.
------------
2
------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
Merchandising-Department Stores--3.5%
122,000 Dayton Hudson Corp. $ 6,618,500
125,000 Federated Department Stores, Inc.* 5,445,312
215,000 Fred Meyer, Inc., DE* 12,953,750
238,500 Saks, Inc.* 7,527,656
27,300 Shopko Stores, Inc.* 907,725
376,800 TJX Cos., Inc. 10,927,200
1,036,000 Wal-Mart Stores, Inc. 84,369,250
--------------
128,749,393
--------------
Merchandising-Drugs--0.7%
89,250 Cardinal Health, Inc. 6,771,844
251,472 CVS Corp. 13,830,960
110,000 Walgreen Co. 6,441,875
--------------
27,044,679
--------------
Merchandising-Food--1.8%
240,000 Albertson's, Inc. 15,285,000
150,000 Kroger Co.* 9,075,000
430,390 Safeway, Inc.* 26,226,891
344,200 Supervalu, Inc. 9,637,600
225,000 Sysco Corp. 6,173,437
--------------
66,397,928
--------------
Merchandising-Mass--0.1%
205,400 K Mart Corp.* 3,145,188
--------------
Merchandising-Special--3.8%
80,000 Abercrombie & Fitch Co.* 5,660,000
123,900 Best Buy, Inc.* 7,604,362
69,000 BJ's Wholesale Club, Inc.* 3,195,563
140,000 Costco Cos., Inc.* 10,106,250
540,000 GAP, Inc. 30,375,000
752,000 Home Depot, Inc. 46,013,000
293,400 Lowes Cos., Inc. 15,018,412
412,500 Pier 1 Imports, Inc. 3,996,094
159,000 Ross Stores, Inc. 6,260,625
250,000 Tandy Corp. 10,296,875
--------------
138,526,181
--------------
Miscellaneous-Consumer Growth Cyclical--0.1%
117,100 Avis Rent A Car, Inc.* 2,832,356
59,366 Nielsen Media Research, Inc. 1,068,588
--------------
3,900,944
--------------
Miscellaneous-Consumer Growth Staples--0.7%
110,000 A.C. Nielsen Corp.* 3,107,500
190,000 American Greetings Corp. 7,801,875
52,500 Interpublic Group Cos., Inc. 4,186,875
190,000 Valassis Communications, Inc.* 9,808,750
--------------
24,905,000
--------------
Oil and Gas Producing--1.1%
301,000 Anadarko Petroleum Corp.* 9,293,375
205,000 Basin Exploration, Inc.* 2,575,313
64,300 Callon Petroleum Co.* 747,488
304,000 Chieftain Int'l., Inc.* 4,370,000
247,000 Devon Energy Corp. 7,579,812
150,700 Petromet Resources Ltd.* 273,144
224,200 Rigel Energy Corp.* 1,466,798
289,800 St. Mary Land & Exploration Co. 5,361,300
60,700 Snyder Oil Corp. 808,069
152,100 Vastar Resources, Inc. 6,568,819
--------------
39,044,118
--------------
Oil and Gas Services--0.5%
275,000 Halliburton Co. 8,146,875
312,000 Transocean Offshore, Inc. 8,365,500
55,300 Willbros Group, Inc.* 307,606
--------------
16,819,981
--------------
Oil-Integrated-Domestic--0.3%
116,200 Conoco, Inc.* 2,425,675
71,000 Sunoco, Inc. 2,560,438
460,500 Tesoro Petroleum, Inc.* 5,583,562
--------------
10,569,675
--------------
Oil-Integrated-International--1.5%
228,800 Chevron Corp. 18,976,100
489,800 Exxon Corp. 35,816,625
--------------
54,792,725
--------------
Paper and Forest Products--0.4%
245,000 Kimberly Clark Corp. 13,352,500
--------------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
43
<PAGE>
- ------------
The Guardian
Stock Fund,
Inc.
- ------------
2
- ------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- ---------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998 (Continued)
Shares Value
- --------------------------------------------------------------------------------
Publishing and Print--1.3%
230,000 Dun and Bradstreet Corp. $ 7,259,375
628,200 Time Warner, Inc. 38,987,662
--------------
46,247,037
--------------
Publishing-News--1.2%
35,100 Central Newspapers, Inc. 2,507,456
133,400 Gannett Co., Inc. 8,604,300
188,200 Harte-Hanks Communications 5,363,700
175,000 Knight Ridder, Inc.* 8,946,875
326,800 New York Times Co. 11,335,875
56,000 Tribune Co. 3,696,000
6,700 Washington Post Co. 3,872,181
--------------
44,326,387
--------------
Railroads--0.2%
182,500 Kansas City Southern Inds., Inc. 8,976,719
--------------
Semiconductors--1.7%
464,000 Advanced Micro Devices, Inc.* 13,427,000
247,500 Intel Corp. 29,344,219
307,100 Motorola, Inc. 18,752,294
--------------
61,523,513
--------------
Textile-Apparel and Production--0.2%
196,000 Jones Apparel Group, Inc.* 4,324,250
58,400 Westpoint Stevens, Inc.* 1,843,250
--------------
6,167,500
--------------
Transportation-Miscellaneous--0.2%
108,000 GATX Corp. 4,090,500
376,700 Maritrans, Inc. 2,472,094
45,000 Sea Containers Ltd. 1,347,188
--------------
7,909,782
--------------
Truckers--0.0%
32,100 FRP Pptys., Inc.* 866,700
--------------
Utilities-Electric--2.8%
105,000 BEC Energy 4,324,688
100,000 Carolina Power and Light Co. 4,706,250
50,000 Cinergy Corp. 1,718,750
153,000 Consolidated Edison, Inc. 8,089,875
158,000 DQE 6,942,125
146,740 Duke Energy Co. 9,400,531
79,800 Energy East Corp. 4,508,700
185,000 Florida Progress Corp. 8,290,312
235,000 FPL Group, Inc. 14,481,875
156,500 IPALCO Enterprises 8,675,969
7,000 Minnesota Power & Light Co. 308,000
110,000 Montana Power Co.* 6,221,875
64,500 New Century Energies, Inc. 3,144,375
58,000 NIPSCO Industries, Inc. 1,765,375
165,000 Teco Energy, Inc. 4,650,938
170,000 Texas Utilities Co. 7,936,875
145,000 UtiliCorp United, Inc.* 5,319,687
--------------
100,486,200
--------------
Utilities-Telecommunications--12.1%
230,000 Airtouch Communications, Inc.* 16,588,750
702,800 Ameritech Corp. 44,539,950
689,200 AT & T Corp. 51,862,300
680,000 Bell Atlantic Corp. 36,040,000
1,706,400 BellSouth Corp. 85,106,700
125,000 Ciena Corp.* 1,828,125
495,000 GTE Corp. 32,175,000
250,000 Lucent Technologies, Inc. 27,500,000
1,005,608 MCI WorldCom, Inc.* 72,152,374
622,000 SBC Communications, Inc. 33,354,750
211,000 Sprint Corp. 17,750,375
105,500 Sprint PCS* 2,439,688
325,000 U.S. West, Inc. 21,003,125
--------------
442,341,137
--------------
TOTAL COMMON STOCKS
(Cost $2,324,565,758) 3,479,601,428
--------------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
44
<PAGE>
------------
The Guardian
Stock Fund,
Inc.
------------
2
------------
- --------------------------------------------------------------------------------
- --------------------------
REPURCHASE AGREEMENT--5.5%
- --------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
$200,108,000 State Street Bank & Trust Co.
repurchase agreement,
dated 12/31/98, maturity
value $200,219,171 at 5.00%,
due 1/4/99 (collateralized
by $25,505,000 Federal Home Loan Bank
Notes, 5.025%, due 11/5/99,
by $115,000 Federal Home Loan Bank
Notes, 5.03%, due 10/29/99,
by $51,005,000 Federal Home Loan Bank
Notes, 5.45%, due 1/8/99,
by $25,505,000 Federal Home Loan Bank
Notes, 5.785%, due 5/18/00,
by $25,505,000 Federal National Mortgage
Assn. Notes, 4.85%, due 11/20/00,
by $25,505,000 Federal National Mortgage
Assn. Notes, 5.10%, due 9/25/00,
by $25,505,000 Federal National Mortgage
Assn. Notes, 5.81%, due 4/5/00, and
by $25,505,000 U.S. Treasury
Notes, 5.75%, due 9/30/99) $ 200,108,000
--------------
TOTAL REPURCHASE AGREEMENT
(Cost $200,108,000) 200,108,000
--------------
TOTAL INVESTMENTS--100.4%
(Cost $2,524,673,758) 3,679,709,428
LIABILITIES IN EXCESS OF
CASH, RECEIVABLES
AND OTHER ASSETS--(0.4%) (14,513,547)
--------------
- -------------------------------------------------------------------------------
NET ASSETS--100.0% $3,665,195,881
- -----------------------------------------------------------------==============
See notes to financial statements.
- --------------------------------------------------------------------------------
45
<PAGE>
- ------------
The Guardian
Stock Fund,
Inc.
- ------------
2
- ------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- ---------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1998
ASSETS
Investments, at market (cost $2,524,673,758) $ 3,679,709,428
Cash 6,965
Receivable for securities sold 22,685,922
Dividends receivable 3,209,567
Receivable for fund shares sold 772,627
Interest receivable 27,793
---------------
TOTAL ASSETS 3,706,412,302
---------------
LIABILITIES
Payable for securities purchased 31,652,490
Payable for fund shares redeemed 4,932,708
Accrued expenses 327,376
Due to affiliates 4,303,847
---------------
TOTAL LIABILITIES 41,216,421
---------------
NET ASSETS $ 3,665,195,881
===============
COMPONENTS OF NET ASSETS
Capital stock, at par $ 74,671
Additional paid-in capital 2,423,900,384
Undistributed net investment income 286,405
Accumulated net realized gain on investments 85,898,751
Net unrealized appreciation of investments 1,155,035,670
---------------
NET ASSETS $ 3,665,195,881
===============
Shares Outstanding--$0.001 par value 74,671,173
---------------
NET ASSET VALUE PER SHARE $ 49.08
===============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1998
Investment Income:
Dividends $ 39,843,836
Interest 10,132,742
Less: Foreign tax withheld (6,750)
---------------
Total Income 49,969,828
---------------
Expenses:
Investment advisory fees--Note B 16,907,183
Custodian fees 378,231
Printing expense 322,000
Registration fees 42,000
Audit fees 17,500
Directors' fees--Note B 16,000
Legal fees 5,600
Insurance expense 4,611
Transfer agent fees 2,200
Other 700
---------------
Total Expenses 17,696,025
---------------
Net Investment Income 32,273,803
---------------
Realized and Unrealized Gain/(Loss)
on Investments--Note F
Net realized gain on investments 372,509,200
Net change in unrealized appreciation
of investments 212,338,243
---------------
Net Realized and Unrealized Gain
on Investments 584,847,443
---------------
Net Increase in Net Assets
from Operations $ 617,121,246
===============
See notes to financial statements.
- --------------------------------------------------------------------------------
46
<PAGE>
------------
The Guardian
Stock Fund,
Inc.
------------
2
------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 32,273,803 $ 32,357,899
Net realized gain on investments 372,509,200 392,500,062
Net change in unrealized appreciation of investments 212,338,243 391,861,332
--------------- ---------------
Net Increase in Net Assets from Operations 617,121,246 816,719,293
--------------- ---------------
Dividends and Distributions to Shareholders from:
Net investment income (32,287,254) (32,059,486)
Net realized gain on investments (380,510,130) (344,492,912)
--------------- ---------------
Total Dividends and Distributions to Shareholders (412,797,384) (376,552,398)
--------------- ---------------
From Capital Share Transactions:
Net increase in net assets from capital share
transactions--Note G 238,685,174 555,292,020
--------------- ---------------
Net Increase in Net Assets 443,009,036 995,458,915
Net Assets:
Beginning of year 3,222,186,845 2,226,727,930
--------------- ---------------
End of year* $ 3,665,195,881 $ 3,222,186,845
=============== ===============
* Includes undistributed net investment income of: $ 286,405 $ 298,413
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
47
<PAGE>
- ---------------
The Guardian
Stock Fund,Inc.
- ---------------
2
- ---------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- -----------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year ................... $ 46.05 $ 38.59 $ 34.72 $ 27.33 $ 29.00
------------- ------------- ------------- ------------- -------------
Income from investment
operations:
Net investment
income ............................ 0.47 0.52 0.53 0.44 0.40
Net realized and unrealized
gain/(loss) on investments ........ 8.56 12.97 8.62 9.01 (0.77)
------------- ------------- ------------- ------------- -------------
Net increase/(decrease)
from investment operations ........ 9.03 13.49 9.15 9.45 (0.37)
------------- ------------- ------------- ------------- -------------
Dividends and Distributions
to Shareholders from:
Net investment income ............... (0.47) (0.52) (0.54) (0.44) (0.40)
Net realized gain ................... (5.53) (5.51) (4.74) (1.62) (0.90)
------------- ------------- ------------- ------------- -------------
Total dividends and distributions ... (6.00) (6.03) (5.28) (2.06) (1.30)
------------- ------------- ------------- ------------- -------------
Net asset value, end of year .......... $ 49.08 $ 46.05 $ 38.59 $ 34.72 $ 27.33
------------- ------------- ------------- ------------- -------------
Total return* ......................... 19.86% 35.58% 26.90% 34.65% (1.27)%
------------- ------------- ------------- ------------- -------------
Ratios/supplemental data:
Net assets, end of year
(000's omitted) ................... $ 3,665,196 $ 3,222,187 $ 2,226,728 $ 1,615,271 $ 1,038,991
Ratio of expenses
to average net assets ............ 0.52% 0.52% 0.53% 0.53% 0.53%
Ratio of net investment
income to average net assets ...... 0.95% 1.17% 1.50% 1.39% 1.49%
Portfolio turnover rate ............. 56% 51% 66% 78% 53%
</TABLE>
* Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
See notes to financial statements.
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Bond Fund,Inc.
- --------------
3
- --------------
- --------------------------------------------------------------------------------
The Guardian Bond Fund, Inc.
- ----------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------
ASSET BACKED -- 7.2%
- --------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
$ 2,700,000 Amresco 1997-1 M1F
7.42% due 3/25/27 $ 2,719,386
1,100,000 California Infrastructure
Dev. 1997-1 A7
6.42% due 9/25/08 1,145,562
5,500,000 Comed Transitional Funding Tr.
1998 A3
5.34% due 3/25/04 5,504,400
4,000,000 Illinois Power Supply Purp. Tr.
1998-1 A5
5.38% due 6/25/07 3,970,800
4,360,000 Premier Auto Tr. 1997-2 B
6.53% due 12/6/03 4,454,481
3,300,000 Sears Cr. Account Master 1998-1 A
5.80% due 8/15/05 3,320,790
6,250,000 UCFC Loan Tr. 1997-D A6
7.095% due 4/15/27 6,333,562
-------------
TOTAL ASSET BACKED
(Cost $27,232,739) 27,448,981
-------------
- ------------------------
CORPORATE BONDS -- 29.1%
- ------------------------
Aerospace-Defense--1.6%
$ 2,800,000 Lockheed Martin Corp.
6.55% due 5/15/99 $ 2,810,024
3,500,000 Raytheon Co.+
6.40% due 12/15/18 3,456,106
-------------
6,266,130
-------------
Automotive Parts--0.9%
3,500,000 Autozone, Inc.
6.00% due 11/1/03 3,470,008
-------------
Banks--0.8%
3,250,000 First Union Bank, Charlotte N.C.
5.80% due 12/1/08 3,243,084
-------------
Beverage--0.9%
3,500,000 Joseph E. Seagram & Sons, Inc.
6.40% due 12/15/03 3,474,527
-------------
Building Products--0.5%
1,700,000 Lafarge Corp.
6.375% due 7/15/05 1,743,603
-------------
Entertainment--1.9%
3,500,000 Time Warner, Inc.
6.95% due 1/15/28 3,707,190
3,500,000 Time Warner, Inc.
6.625% due 5/15/29 3,557,449
-------------
7,264,639
-------------
Financial-Other--4.6%
3,500,000 Associates Corp. of North America
5.85% due 1/15/01 3,525,210
3,500,000 Donaldson Lufkin & Jenrette
Sec. Corp.
6.11% due 5/15/01 3,507,875
7,000,000 Lehman Brothers Hldgs., Inc.
6.00% due 2/26/01 6,948,928
3,500,000 Paine Webber Group, Inc.
6.45% due 12/1/03 3,511,833
-------------
17,493,846
-------------
Homebuilders--0.9%
3,500,000 Marlin Water Trust/Cap.+
7.09% due 12/15/01 3,516,299
-------------
Hospital-Supplies--0.9%
3,500,000 Mallinckrodt, Inc.+
6.30% due 3/15/11 3,495,359
-------------
Household Products--0.9%
3,500,000 U.S. Filter Corp.
6.375% due 5/15/11 3,474,534
-------------
Insurance--1.8%
3,500,000 Conseco, Inc.
6.40% due 6/15/01 3,349,671
3,100,000 Zurich Capital Tr.+
8.376% due 6/1/37 3,440,287
-------------
6,789,958
-------------
Merchandising-Department Stores--1.9%
3,750,000 Federated Department Stores, Inc.
6.125% due 9/1/01 3,791,141
3,400,000 Wal Mart Stores, Inc.
8.75% due 12/29/06 3,481,260
-------------
7,272,401
-------------
See notes to financial statements.
+ Rule 144A restricted security.
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50
<PAGE>
--------------
The Guardian
Bond Fund,Inc.
--------------
3
--------------
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
Merchandising-Mass--0.9%
$ 3,500,000 Aramark Services, Inc.
6.75% due 8/1/04 $ 3,517,087
-------------
Miscellaneous-Capital Goods--1.3%
5,000,000 Ikon Capital, Inc.
6.73% due 6/15/01 4,883,780
-------------
Miscellaneous-Financial--0.9%
3,500,000 Comdisco, Inc.
6.13% due 8/1/01 3,480,992
-------------
Oil and Gas Producing--0.7%
2,700,000 Vastar Resources, Inc.
6.00% due 4/20/00 2,703,680
-------------
Telecommunications--3.9%
2,000,000 Cox Communications, Inc.
6.95% due 1/15/28 2,086,116
3,500,000 MCI WorldCom, Inc.
6.95% due 8/15/28 3,763,410
7,000,000 Sprint Capital Corp.
6.875% due 11/15/28 7,268,674
1,500,000 TCI Communications, Inc.
7.125% due 2/15/28 1,635,909
-------------
14,754,109
-------------
Utilities-Electric -- 1.0%
3,600,000 Niagara Mohawk Power Corp.
6.875% due 3/1/01 3,684,492
-------------
Utilities-Gas and Pipeline--2.8%
3,500,000 Williams Cos., Inc.
6.50% due 8/1/06 3,511,725
7,000,000 Williams Cos., Inc.+
5.95% due 2/15/00 6,995,037
-------------
10,506,762
-------------
TOTAL CORPORATE BONDS
(Cost $110,129,387) 111,035,290
-------------
- -------------------------
COLLATERALIZED MORTGAGE
OBLIGATION -- 1.5%
- -------------------------
$ 5,792,102 GE Capital Mortgage Svcs., Inc.
1996-3A7 7.00% due 3/25/26
(Cost $5,800,297) $ 5,821,338
-------------
- ---------------------------------
MORTGAGE PASS-THROUGHS -- 23.2%
- ---------------------------------
$ 25,700,000 FHLMC TBA
6.50% (30 yr.)(a) $ 25,901,602
1,000,786 FHLMC Pool # C00658
6.50% due 10/1/28 1,008,302
1,007,045 FHLMC Pool # C00676
6.50% due 11/1/28 1,014,608
499,584 FHLMC Pool # C16257
6.50% due 10/1/28 503,336
615,304 FHLMC Pool # C16258
6.50% due 10/1/28 619,925
2,853,781 FHLMC Pool # C16576
6.50% due 10/1/28 2,875,213
511,569 FHLMC Pool # C16778
6.50% due 10/1/28 515,411
184,851 FHLMC Pool # C16787
6.50% due 11/1/28 186,239
496,760 FHLMC Pool # C17481
6.50% due 10/1/28 500,491
972,662 FHLMC Pool # C18032
6.50% due 11/1/28 979,967
1,269,932 FHLMC Pool # E54124
7.00% due 8/1/08 1,299,000
611,477 FHLMC Pool # G00454
6.50% due 2/1/26 615,966
6,000,000 FNMA TBA
6.50% (30 yr.)(a) 6,041,304
12,400,000 FNMA TBA
6.00% (30 yr.)(a) 12,239,904
344,102 FNMA Pool # 068106
8.50% due 8/1/09 365,491
680,505 FNMA Pool # 068772
8.00% due 6/1/08 704,295
7,202 FNMA Pool # 072923
8.25% due 1/1/09 7,595
1,501,792 FNMA Pool # 303670
6.50% due 1/1/26 1,512,335
21,120 FNMA Pool # 303713
6.50% due 2/1/26 21,268
See notes to financial statements.
+ Rule 144A restricted security.
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Bond Fund,Inc.
- --------------
3
- --------------
- --------------------------------------------------------------------------------
The Guardian Bond Fund, Inc.
- ----------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998 (Continued)
Principal
Amount Value
- --------------------------------------------------------------------------------
$ 1,486,202 FNMA Pool # 326874
6.50% due 10/1/25 $ 1,496,635
947,633 FNMA Pool # 331912
6.50% due 12/1/25 954,285
470,637 FNMA Pool # 336526
6.50% due 3/1/26 473,940
507,584 FNMA Pool # 339380
6.50% due 3/1/26 510,949
759,908 FNMA Pool # 409921
6.50% due 9/1/12 770,836
732,401 FNMA Pool # 422948
6.50% due 7/1/13 742,933
939,001 FNMA Pool # 424155
6.50% due 4/1/28 945,461
708,275 FNMA Pool # 424360
6.50% due 6/1/13 718,460
729,022 FNMA Pool # 426439
6.50% due 8/1/13 739,506
759,550 FNMA Pool # 428175
6.50% due 5/1/13 770,472
810,100 FNMA Pool # 432597
6.50% due 7/1/13 821,749
1,480,270 FNMA Pool # 433685
6.50% due 11/1/28 1,490,455
993,688 FNMA Pool # 434858
6.50% due 8/1/28 1,000,524
1,183,055 FNMA Pool # 435759
6.50% due 7/1/13 1,200,068
751,549 FNMA Pool # 435890
6.50% due 7/1/13 762,357
449,316 FNMA Pool # 435942
6.50% due 7/1/13 455,778
743,131 FNMA Pool # 436824
6.50% due 7/1/13 753,817
1,484,263 FNMA Pool # 437293
6.50% due 9/1/28 1,494,475
964,520 FNMA Pool # 440697
6.50% due 11/1/28 971,156
1,071,638 FNMA Pool # 440806
6.50% due 9/1/28 1,079,011
213,183 FNMA Pool # 441940
6.50% due 9/1/28 214,650
462,371 FNMA Pool # 442281
6.50% due 10/1/28 465,552
99,984 FNMA Pool # 443163
6.50% due 9/1/28 100,672
35,714 FNMA Pool # 443678
6.50% due 9/1/28 35,959
964,036 FNMA Pool # 444986
6.50% due 10/1/28 970,669
507,688 FNMA Pool # 445861
6.50% due 9/1/28 511,181
1,474,255 FNMA Pool # 447261
6.50% due 10/1/28 1,484,398
1,301,580 FNMA Pool # 447289
6.50% due 10/1/28 1,310,535
7,724,411 FNMA Pool # 448635
6.50% due 11/1/28 7,777,555
756,556 FNMA Pool # 450950
6.50% due 11/1/28 761,867
3,002 GNMA Pool # 000375
11.50% due 7/20/00 3,095
-------------
TOTAL MORTGAGE PASS-THROUGHS
(Cost $88,333,242) 88,701,252
-------------
- --------------------------
U.S. GOVERNMENT -- 37.3%
- --------------------------
$ 13,500,000 U.S. Treasury Bonds
6.625% due 2/15/27 $ 15,967,976
9,800,000 U.S. Treasury Bonds
6.125% due 11/15/27 10,976,000
3,000,000 U.S. Treasury Notes
7.25% due 5/15/04 3,361,875
2,700,000 U.S. Treasury Notes
7.25% due 8/15/04 3,036,658
9,900,000 U.S. Treasury Notes
6.50% due 5/15/05 10,849,786
1,875,000 U.S. Treasury Notes
6.25% due 2/15/07 2,056,641
2,250,000 U.S. Treasury Notes
6.125% due 8/15/07 2,458,829
See notes to financial statements.
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52
<PAGE>
--------------
The Guardian
Bond Fund,Inc.
--------------
3
--------------
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
$ 19,135,000 U.S. Treasury Notes
6.00% due 8/15/00 $ 19,529,659
3,000,000 U.S. Treasury Notes
5.875% due 11/15/05 3,200,625
2,500,000 U.S. Treasury Notes
5.75% due 8/15/03 2,609,375
10,800,000 U.S. Treasury Notes
5.50% due 3/31/00 10,908,000
9,900,000 U.S. Treasury Notes
5.50% due 5/31/00 10,014,474
3,000,000 U.S. Treasury Notes
5.50% due 3/31/03 3,090,000
16,800,000 U.S. Treasury Notes
5.375% due 6/30/00 16,973,258
2,300,000 U.S. Treasury Notes
5.25% due 8/15/03 2,357,500
10,250,000 U.S. Treasury Notes
4.75% due 11/15/08(b) 10,330,083
13,050,000 U.S. Treasury Notes
4.625% due 11/30/00(b) 13,058,156
1,400,000 U.S. Treasury Notes
4.25% due 11/15/03 1,381,625
-------------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $139,937,631) 142,160,520
-------------
- ---------------------------
COMMERCIAL PAPER -- 18.2%
- ---------------------------
Automotive--3.8%
$ 10,000,000 Ford Motor Credit Co.
5.76% due 1/4/99(b) $ 9,995,200
4,512,000 General Motors Acceptance Corp.
5.73% due 1/4/99(b) 4,509,846
-------------
14,505,046
-------------
Banks--3.1%
11,758,000 Bank of Montreal
5.215% due 1/14/99(a) 11,735,857
-------------
Chemicals--2.4%
9,334,000 Morton Int'l., Inc.
5.15% due 2/11/99(a) 9,279,254
-------------
Conglomerates--4.3%
6,000,000 BTR Dunlop Finance, Inc.
5.30% due 1/14/99(a) 5,988,517
10,268,000 Koch Industries
5.25% due 1/4/99(b) 10,263,508
-------------
16,252,025
-------------
Miscellaneous-Consumer Growth Staples--2.9%
11,000,000 Hertz Corp.
5.27% due 1/14/99(a) 10,979,066
-------------
Publishing-News--1.7%
6,668,000 Knight Ridder, Inc.
5.40% due 1/14/99(a) 6,654,997
-------------
TOTAL COMMERCIAL PAPER
(Cost $69,406,245) 69,406,245
-------------
- ------------------------------
REPURCHASE AGREEMENT -- 0.4%
- ------------------------------
$ 1,439,000 State Street Bank & Trust Co.
repurchase agreement,
dated 12/31/98, maturity
value $1,439,799 at 5.00%
due 1/4/99 (collateralized
by Federal Home Loan Bank
Notes, $1,475,000,
5.03% due 10/29/99) $ 1,439,000
-------------
TOTAL REPURCHASE AGREEMENT
(Cost $1,439,000) 1,439,000
-------------
TOTAL INVESTMENTS--116.9%
(Cost $442,278,541) 446,012,626
PAYABLES FOR REVERSE REPURCHASE
AGREEMENTS(b)--(6.1%) (23,361,751)
PAYABLES FOR MORTGAGE
PASS-THROUGHS DELAYED
DELIVERY SECURITIES(a)--(11.6%) (44,182,810)
CASH, RECEIVABLES AND OTHER
ASSETS LESS LIABILITIES--0.8% 2,919,030
-------------
NET ASSETS--100.0% $ 381,387,095
=============
(a) Commercial paper with the total of $44,637,691 is segregated to cover
forward mortgage purchases.
(b) Commercial paper in the amount of $24,768,554 is segregated to cover
reverse repurchase agreements.
See notes to financial statements.
- --------------------------------------------------------------------------------
53
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Bond Fund,Inc.
- --------------
3
- --------------
- --------------------------------------------------------------------------------
The Guardian Bond Fund, Inc.
- ----------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1998
ASSETS
Investments, at market (cost $442,278,541) $446,012,626
Cash 961
Interest receivable 3,668,681
Receivable for fund shares sold 19,797
------------
TOTAL ASSETS 449,702,065
------------
LIABILITIES
Payable for forward mortgage
securities--Note E 44,182,810
Payable for reverse repurchase
agreements--Note D 23,361,751
Payable for fund shares redeemed 157,565
Payable for securities purchased 41,781
Accrued expenses 32,186
Due to affiliates 538,877
------------
TOTAL LIABILITIES 68,314,970
------------
NET ASSETS $381,387,095
============
COMPONENTS OF NET ASSETS
Capital stock, at par $ 3,119,313
Additional paid-in capital 373,586,094
Undistributed net investment income 183,322
Accumulated net realized gain on investments 764,281
Net unrealized appreciation of investments 3,734,085
------------
NET ASSETS $381,387,095
============
Shares Outstanding--$0.10 par value 31,193,132
------------
NET ASSET VALUE PER SHARE $ 12.23
============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1998
Investment Income:
Interest $ 22,781,497
------------
Expenses:
Investment advisory fees--Note B 1,844,563
Interest expense--reverse repurchase
agreements 419,472
Custodian fees 107,871
Printing expense 42,000
Audit fees 17,500
Directors' fees--Note B 12,500
Legal fees 2,985
Registration fees 2,652
Insurance expense 2,262
Transfer agent fees 2,200
Other 700
------------
Total Expenses 2,454,705
------------
Net Investment Income 20,326,792
------------
Realized and Unrealized Gain/(Loss)
on Investments--Note F
Net realized gain on investments 7,360,219
Net change in unrealized appreciation
of investments 676,254
------------
Net Realized and Unrealized Gain
on Investments 8,036,473
------------
Net Increase in Net Assets
from Operations $ 28,363,265
============
See notes to financial statements.
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54
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Bond Fund,Inc.
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3
--------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------- -------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 20,326,792 $ 21,276,367
Net realized gain/(loss) on investments 7,360,219 (62,653)
Net change in unrealized appreciation of investments 676,254 8,436,647
------------- -------------
Net Increase in Net Assets from Operations 28,363,265 29,650,361
------------- -------------
Dividends and Distributions to Shareholders from:
Net investment income (20,238,880) (21,605,507)
Net realized gain on investments (4,804,462) --
------------- -------------
Total Dividends and Distributions to Shareholders (25,043,342) (21,605,507)
------------- -------------
From Capital Share Transactions:
Net increase/(decrease) in net assets from capital share
transactions--Note G 22,655,261 (7,065,940)
------------- -------------
Net Increase in Net Assets 25,975,184 978,914
Net Assets:
Beginning of year 355,411,911 354,432,997
------------- -------------
End of year* $ 381,387,095 $ 355,411,911
============= =============
* Includes undistributed net investment income of: $ 183,322 $ 598,263
</TABLE>
See notes to financial statements.
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55
<PAGE>
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The Guardian
Bond Fund,Inc.
- --------------
3
- --------------
- --------------------------------------------------------------------------------
The Guardian Bond Fund, Inc.
- ----------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year ...................... $ 12.11 $ 11.83 $ 12.25 $ 11.08 $ 12.24
----------- ----------- ----------- ----------- -----------
Income from investment
operations:
Net investment
income ............................... 0.69 0.75 0.76 0.76 0.40
Net realized and unrealized gain/(loss)
on investments ....................... 0.28 0.29 (0.42) 1.17 (0.82)
----------- ----------- ----------- ----------- -----------
Net increase/(decrease)
from investment operations ........... 0.97 1.04 0.34 1.93 (0.42)
----------- ----------- ----------- ----------- -----------
Dividends and Distributions
to Shareholders from:
Net investment income .................. (0.69) (0.76) (0.76) (0.76) (0.68)
Net realized gain ...................... (0.16) -- -- -- (0.06)
----------- ----------- ----------- ----------- -----------
Total dividends and distributions ...... (0.85) (0.76) (0.76) (0.76) (0.74)
----------- ----------- ----------- ----------- -----------
Net asset value, end of
year ................................... $ 12.23 $ 12.11 $ 11.83 $ 12.25 $ 11.08
----------- ----------- ----------- ----------- -----------
Total return* .............................. 8.10% 8.99% 2.88% 17.59% (3.45)%
----------- ----------- ----------- ----------- -----------
Ratios/supplemental data:
Net assets, end of year
(000's omitted) ...................... $ 381,387 $ 355,412 $ 354,433 $ 374,462 $ 308,978
Ratio of expenses
to average net assets ................ 0.67% 0.59% 0.54% 0.54% 0.54%
Ratio of expenses (excluding interest
expense) to average net assets ....... 0.55% 0.55% N/A N/A N/A
Ratio of net investment
income to average net assets ......... 5.51% 6.15% 6.12% 6.43% 5.69%
Portfolio turnover rate ................ 287% 340% 188% 298% 311%
</TABLE>
* Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
See notes to financial statements.
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The Guardian
Cash Fund,Inc.
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Cash Fund, Inc.
- ----------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- ---------------------------
COMMERCIAL PAPER -- 82.8%
- ---------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
FINANCIAL -- 23.6%
Finance Companies -- 16.9%
$ 18,000,000 Goldman Sachs Group LP
5.10% due 3/9/99 $ 17,829,150
18,000,000 Household Fin. Corp.
5.36% due 1/6/99 17,986,600
17,500,000 Merrill Lynch & Co., Inc.
5.19% due 1/26/99 17,436,927
17,500,000 Morgan Stanley Dean Witter & Co.
5.42% due 1/11/99 17,473,653
-------------
70,726,330
-------------
Other Major Banks -- 4.1%
17,500,000 Dresdner U.S. Finance
5.21% due 1/4/99 17,492,402
-------------
Utilities-Electric -- 2.6%
11,000,000 Nat'l. Rural Utils. Coop. Fin. Corp.
5.04% due 3/24/99 10,873,720
-------------
Total Financial 99,092,452
-------------
INDUSTRIAL -- 59.2%
Automotive -- 8.3%
17,500,000 BMW U.S. Capital Corp.
5.73% due 1/13/99 17,466,575
17,500,000 Ford Motor Credit Co.
5.20% due 1/8/99 17,482,306
-------------
34,948,881
-------------
Conglomerates -- 8.4%
17,500,000 BTR Dunlop Fin., Inc.
5.32% due 1/22/99 17,445,692
18,000,000 General Electric Cap. Corp.
5.32% due 1/19/99 17,952,120
-------------
35,397,812
-------------
Entertainment -- 4.2%
17,500,000 Walt Disney Co.
5.25% due 1/14/99 17,466,823
-------------
Food and Beverage -- 4.5%
19,000,000 H. J. Heinz Co.
5.25% due 1/12/99 18,969,521
-------------
Household Products -- 5.8%
13,500,000 Clorox Co.
5.12% due 1/21/99 13,461,600
11,000,000 Colgate Palmolive Co.
5.21% due 2/5/99 10,944,282
-------------
24,405,882
-------------
Insurance -- 4.5%
19,000,000 American General Fin. Corp.
5.30% due 1/15/99 18,960,838
-------------
Machinery and Equipment -- 4.2%
17,500,000 Deere & Co.
5.65% due 1/7/99 17,483,521
-------------
Metals -- 4.2%
17,500,000 Rio Tinto America, Inc.
5.20% due 1/15/99 17,464,611
-------------
Oil-Integrated-International -- 3.9%
16,500,000 Texaco, Inc.
5.36% due 1/19/99 16,455,780
-------------
Telecommunications -- 11.2%
17,000,000 Bell Atlantic Fin. Svcs.
5.14% due 1/20/99 16,953,883
11,000,000 GTE Funding, Inc.
5.16% due 2/8/99 10,940,087
19,000,000 Lucent Technologies, Inc.
5.12% due 2/4/99 18,908,124
-------------
46,802,094
-------------
Total Industrial 248,355,763
-------------
TOTAL COMMERCIAL PAPER
(Cost $347,448,215) 347,448,215
-------------
See notes to financial statements.
- --------------------------------------------------------------------------------
58
<PAGE>
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Cash Fund,Inc.
--------------
4
--------------
- --------------------------------------------------------------------------------
- -------------------------------
REPURCHASE AGREEMENT -- 16.7%
- -------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
$69,953,000 State Street Bank & Trust Co.
repurchase agreement,
dated 12/31/98, maturity
value $69,991,863 at 5.00%
due 1/4/99 (collateralized
by $20,360,000 Federal Home
Loan Bank Notes, 5.03%
due 10/29/99, and by
$51,005,000 Federal Home
Loan Bank Notes, 5.00%
due 10/27/99) $ 69,953,000
-------------
TOTAL REPURCHASE AGREEMENT
(Cost $69,953,000) 69,953,000
-------------
TOTAL INVESTMENTS -- 99.5%
(Cost $417,401,215) 417,401,215
CASH, RECEIVABLES AND OTHER
ASSETS Less Liabilities-- 0.5% 2,081,439
-------------
NET ASSETS -- 100.0% $ 419,482,654
=============
See notes to financial statements.
- --------------------------------------------------------------------------------
59
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Cash Fund,Inc.
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Cash Fund, Inc.
- ----------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1998
ASSETS
Investments, at market (cost $417,401,215) $417,401,215
Cash 40,946
Receivable for fund shares sold 3,465,818
Interest receivable 9,716
------------
TOTAL ASSETS 420,917,695
------------
LIABILITIES
Payable for fund shares redeemed 763,104
Accrued expenses 43,004
Due to affiliates 628,933
------------
TOTAL LIABILITIES 1,435,041
------------
NET ASSETS $419,482,654
============
COMPONENTS OF NET ASSETS
Capital stock, at par $ 4,194,827
Additional paid-in capital 415,287,827
------------
NET ASSETS $419,482,654
============
Shares Outstanding-- $0.10 par value 41,948,265
------------
NET ASSET VALUE PER SHARE $ 10.00
============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1998
Investment Income:
Interest $ 22,840,655
------------
Expenses:
Investment advisory fees-- Note B 2,067,917
Custodian fees 83,556
Audit fees 17,000
Printing expense 16,500
Directors' fees-- Note B 12,500
Legal fees 2,800
Insurance expense 2,262
Transfer agent fees 2,200
Registration fees 2,000
Other 700
------------
Total Expenses 2,207,435
------------
Net Investment Income,
Representing Net Increase in
Net Assets from Operations $ 20,633,220
============
See notes to financial statements.
- --------------------------------------------------------------------------------
60
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The Guardian
Cash Fund,Inc.
--------------
4
--------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------- -------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 20,633,220 $ 19,627,700
------------- -------------
Net Increase in Net Assets from Operations 20,633,220 19,627,700
------------- -------------
Dividends to Shareholders from:
Net investment income (20,633,220) (19,627,700)
------------- -------------
From Capital Share Transactions:
Net increase/(decrease) in net assets from capital
share transactions -- Note G 51,360,205 (10,199,261)
------------- -------------
Net Increase/(Decrease) in Net Assets 51,360,205 (10,199,261)
Net Assets:
Beginning of year 368,122,449 378,321,710
------------- -------------
End of year $ 419,482,654 $ 368,122,449
============= =============
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
61
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The Guardian
Cash Fund,Inc.
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Cash Fund, Inc.
- ----------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year .......... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
----------- ----------- ----------- ----------- -----------
Income from investment
operations:
Net investment
income ..................... 0.50 0.50 0.49 0.54 0.38
Dividends to
Shareholders from:
Net investment income ...... (0.50) (0.50) (0.49) (0.54) (0.38)
----------- ----------- ----------- ----------- -----------
Net asset value, end of
year ....................... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
----------- ----------- ----------- ----------- -----------
Total return* ................ 5.10% 5.14% 4.98% 5.52% 3.82%
----------- ----------- ----------- ----------- -----------
Ratios/supplemental data:
Net assets, end of year
(000's omitted) .......... $ 419,483 $ 368,122 $ 378,322 $ 356,820 $ 386,986
Ratio of expenses to
average net assets ....... 0.53% 0.54% 0.54% 0.54% 0.54%
Ratio of net investment
income to average net assets 4.99% 5.02% 4.86% 5.39% 3.81%
</TABLE>
* Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
See notes to financial statements.
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
63
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The Guardian
Stock, Bond
& Cash
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, The Guardian Bond Fund,
The Guardian Cash Fund
- ------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- ----------------------------------------------
Note A -- Organization and Accounting Policies
- ----------------------------------------------
The Guardian Stock Fund, Inc. (GSF), The Guardian Bond Fund, Inc. (GBF)
and The Guardian Cash Fund, Inc. (GCF) (collectively, the Funds and
individually, a Fund), are each incorporated in the state of Maryland and are
diversified open-end management investment companies registered under the
Investment Company Act of 1940, as amended (1940 Act).
GSF offers two classes of shares: Class I and Class II. The Class I shares
of GSF, and shares of GBF and GCF, are only sold to certain separate accounts of
The Guardian Insurance & Annuity Company, Inc. (GIAC). GIAC is a wholly-owned
subsidiary of The Guardian Life Insurance Company of America (Guardian Life).
GSF's Class II shares are offered through the ownership of variable annuities
and variable life insurance policies issued by other insurance companies that
offer GSF as an investment option through their separate accounts. The two
classes of shares for GSF represent interests in the same portfolio of
investments, have the same rights and are generally identical in all respects
except that each class bears certain class expenses, and has exclusive voting
rights with respect to any matter to which a separate vote of any class is
required.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Significant accounting policies of the Funds are as follows:
Investments
Securities listed on national securities exchanges are valued based upon
closing prices on these exchanges. Securities traded in the over-the-counter
market and listed securities for which there have been no trades for the day are
valued at the mean of the bid and asked prices.
Pursuant to valuation procedures approved by the Board of Directors,
certain debt securities may be valued each business day by an independent
pricing service (Service). Debt securities for which quoted bid prices are
readily available and representative of the bid side of the market, in the
judgement of the Service, are valued at the bid price. Other debt securities
that are valued by the Service are carried at fair value as determined by the
Service, based on methods which include consideration of: yields or prices of
securities of comparable quality coupon, maturity and type; indications as to
values from dealers; and general market conditions.
Securities for which market quotations are not readily available,
including certain mortgage-backed securities and restricted securities, are
valued by using methods that each Fund's Board of Directors, in good faith,
believes will accurately reflect their fair value.
The valuation of securities held by GCF is based upon their amortized cost
which approximates market value, in accordance with Rule 2a-7 under the 1940
Act. Amortized cost valuations do not take into account unrealized gains and
losses.
Investment securities transactions are recorded on the date of purchase or
sale. Repurchase agreements are carried at cost, which approximates value (see
Note C).
- --------------------------------------------------------------------------------
64
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Stock, Bond
& Cash
--------------
4
--------------
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
December 31, 1998 (Continued)
Net realized gain or loss on sales of investments is determined on an
identified cost basis. Interest income, including amortization of premium and
discount, is recorded when earned. Dividends are recorded on the ex-dividend
date.
Federal Income Taxes
Each Fund qualifies and intends to remain qualified to be taxed as a
"regulated investment company" under the provisions of the Internal Revenue Code
(Code), and as such will not be subject to federal income tax on investment
income (including any realized capital gains) which is distributed to its
shareholders in accordance with the applicable provisions of the Code.
Therefore, no federal income tax provision is required.
Reclassifications of Capital Accounts
The treatment for financial statement purposes of distributions made
during the year from net investment income and net realized gains may differ
from their ultimate treatment for federal income tax purposes. These differences
primarily are caused by differences in the timing of the recognition of certain
components of income or capital gain, and the recharacterization of foreign
exchange gains or losses to either ordinary income or realized capital gains for
federal income tax purposes. Where such differences are permanent in nature,
they are reclassified in the components of net assets based on their ultimate
characterization for federal income tax purposes. Any such reclassifications
will have no effect on net assets, results of operations, or net asset value per
share of the Fund.
During the year ended December 31, 1998, GSF and GBF reclassified amounts
to paid-in capital from undistributed net investment income and accumulated net
realized gain on investments. Increases (decreases) to the various capital
accounts were as follows:
Accumulated
Undistributed net realized
net investment gain on
income investments
-------------- ------------
GSF $ 1,443 $ (1,443)
GBF (502,853) 502,853
Dividend Distributions
GSF and GBF intend to distribute each year, as dividends or capital gain
distributions, substantially all net investment income and net capital gains
realized. All such dividends or distributions are credited in the form of
additional shares of the applicable Fund at net asset value on the ex-dividend
date. Such distributions are determined in conformity with federal income tax
regulations. Differences between the recognition of income on an income tax
basis and recognition of income based on generally accepted accounting
principles may cause temporary overdistributions of net realized gains and net
investment income. Currently, the policy of GSF and GBF is to distribute net
investment income approximately every six months and net capital gains annually.
This policy is, however, subject to change at any time by each Fund's Board of
Directors.
GCF earns interest on its investments daily and distributes all of its net
investment income, increased or decreased by realized gains or losses, each day
GCF is open for business. Earnings for Saturdays, Sundays and holidays are paid
as a dividend on the next business day.
All dividends and distributions are credited in the form of additional
shares of GCF at net asset value on the payable date.
- --------------------------------------------------------------------------------
65
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The Guardian
Stock, Bond
& Cash
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, The Guardian Bond Fund,
The Guardian Cash Fund
- ------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
December 31, 1998 (Continued)
- -----------------------------------------
Note B -- Investment Advisory Agreements
and Payments to Related Parties
- -----------------------------------------
Each Fund has an investment advisory agreement with Guardian Investor
Services Corporation (GISC), a wholly-owned subsidiary of GIAC. GISC receives a
management fee from each Fund computed at the rate of .50% of the daily average
net assets during the fiscal year, payable quarterly. If total expenses of any
Fund (excluding taxes, interest and brokerage commissions, but including the
investment advisory fee) exceed 1% per annum of the average daily net assets of
the Fund, GISC has agreed to assume any such expenses. None of the Funds
exceeded this limit during the year ended December 31, 1998.
No compensation is paid by any of the Funds to a director who is deemed to
be an "interested person" (as defined in the 1940 Act) of a Fund. Each director
not deemed an "interested person" is paid an annual fee of $500 by each Fund,
and $350 for attendance at each meeting of each Fund.
- -------------------------------
Note C -- Repurchase Agreements
- -------------------------------
Collateral underlying repurchase agreements takes the form of either cash
or fully negotiable U.S. government securities. Repurchase agreements are fully
collateralized (including the interest earned thereon) and such collateral is
marked-to-market daily while the agreements remain in force. If the value of the
underlying securities falls below the value of the repurchase price plus accrued
interest, the Funds will require the seller to deposit additional collateral by
the next business day. If the request for additional collateral is not met, or
the seller defaults, the Funds maintain the right to sell the collateral and may
claim any resulting loss against the seller. Each Fund's Board of Directors has
established standards to evaluate creditworthiness of broker-dealers and banks
which engage in repurchase agreements with each Fund.
- ---------------------------------------
Note D -- Reverse Repurchase Agreements
- ---------------------------------------
GBF may enter into reverse repurchase agreements with banks or third-party
broker-dealers to borrow short-term funds. Interest on the value of reverse
repurchase agreements is based upon competitive market rates at the time of
issuance. At the time GBF enters into a reverse repurchase agreement, it
establishes and maintains cash, U.S. government securities or liquid,
unencumbered securities that are marked-to-market daily in a segregated account
with the Fund's custodian. The value of such segregated assets must be at least
equal to the value of the repurchase obligation (principal plus accrued
interest), as applicable. Reverse repurchase agreements involve the risk that
the buyer of the securities sold by GBF may be unable to deliver the securities
when the Fund seeks to repurchase them. Interest paid on reverse repurchase
agreements for the year ended December 31, 1998 amounted to $419,472.
- --------------------------------------------------------------------------------
66
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The Guardian
Stock, Bond
& Cash
--------------
4
--------------
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
December 31, 1998 (Continued)
Information regarding transactions by GBF under reverse repurchase
agreements is as follows:
Face Market
Value Value
----- -----
$13,098,938 Reverse Repurchase Agreement with Goldman
Sachs, 5.76% dated 12/30/98, to be repurchased
at $13,104,850 on 1/4/99 ........................ $13,098,938
10,262,813 Reverse Repurchase Agreement with J.P. Morgan,
5.25% dated 12/30/98, to be repurchased at
$10,263,041 on 1/4/99 ........................... 10,262,813
-----------
$23,361,751
===========
Average amount outstanding during the period .... $10,559,804
Weighted average interest rate during the period 3.94%
- ----------------------------------
Note E -- Dollar Roll Transactions
- ----------------------------------
GBF may enter into dollar roll transactions with financial institutions to
take advantage of opportunities in the mortgage market. A dollar roll
transaction involves a sale by the Fund of securities that it holds with an
agreement by the Fund to repurchase similar securities at an agreed upon price
and date. The securities repurchased will bear the same interest as those sold,
but generally will be collateralized at time of delivery by different pools of
mortgages with different prepayment histories than those securities sold. During
the period between the sale and repurchase, the Fund will not be entitled to
receive interest and principal payments on the securities sold. Dollar roll
transactions involve the risk that the buyer of the securities sold by GBF may
be unable to deliver the securities when GBF seeks to repurchase them.
- ---------------------------------
Note F -- Investment Transactions
- ---------------------------------
Purchases and proceeds from sales of securities (excluding short-term
securities) for the year ended December 31, 1998 were as follows:
GSF GBF
--- ---
Purchases ............................... $1,764,827,940 $1,050,614,537
Proceeds ................................ $1,856,118,601 $1,027,633,611
The cost of investments owned at December 31, 1998 for federal income tax
purposes was the same as for financial reporting purposes. The gross unrealized
appreciation and depreciation of investments at December 31, 1998 for GSF and
GBF were as follows:
GSF GBF
--- ---
Gross Appreciation $1,189,018,385 $ 4,600,868
Gross Depreciation (33,982,715) (866,783)
-------------- -------------
Net Unrealized Appreciation $1,155,035,670 $ 3,734,085
============== =============
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67
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The Guardian
Stock, Bond
& Cash
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, The Guardian Bond Fund,
The Guardian Cash Fund
- ------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
December 31, 1998 (Continued)
- ---------------------------------------
Note G -- Transactions in Capital Stock
- ---------------------------------------
There are 400,000,000 shares of $0.001 par value capital stock authorized
for GSF, divided into two classes, designated Class I and Class II shares. GSF
Class I consists of 300,000,000 shares and Class II consists of 100,000,000
shares. There are 100,000,000 shares of $0.10 par value capital stock authorized
for GBF and GCF. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------
Shares Amount
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
o The Guardian Stock Fund, Inc.
Shares sold 7,866,954 9,514,978 $ 380,142,286 $ 429,926,820
Shares issued in reinvestment of
dividends and distributions 8,374,382 8,346,801 412,797,384 376,552,398
Shares repurchased (11,538,716) (5,599,554) (554,254,496) (251,187,198)
- ------------------------------------------------------------------------------------------------
Net increase 4,702,620 12,262,225 $ 238,685,174 $ 555,292,020
- ------------------------------------------------------------------------------------------------
o The Guardian Bond Fund, Inc.
Shares sold 6,974,815 3,714,602 $ 87,077,087 $ 45,183,038
Shares issued in reinvestment of
dividends and distributions 2,050,219 1,799,751 25,043,342 21,605,507
Shares repurchased (7,180,997) (6,115,919) (89,465,168) (73,854,485)
- ------------------------------------------------------------------------------------------------
Net increase/(decrease) 1,844,037 (601,566) $ 22,655,261 $ (7,065,940)
- ------------------------------------------------------------------------------------------------
o The Guardian Cash Fund, Inc.
Shares sold 45,585,640 30,190,330 $ 455,856,396 $ 301,903,299
Shares issued in reinvestment of
dividends and distributions 2,063,322 1,962,770 20,633,220 19,627,700
Shares repurchased (42,512,942) (33,173,026) (425,129,411) (331,730,260)
- ------------------------------------------------------------------------------------------------
Net increase/(decrease) 5,136,020 (1,019,926) $ 51,360,205 $ (10,199,261)
- ------------------------------------------------------------------------------------------------
</TABLE>
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68
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Stock, Bond
& Cash
--------------
4
--------------
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REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors and Shareholders
The Guardian Stock Fund, Inc.
The Guardian Bond Fund, Inc.
The Guardian Cash Fund, Inc.
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of The Guardian Stock Fund, Inc., The
Guardian Bond Fund, Inc. and The Guardian Cash Fund, Inc. as of December 31,
1998, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Guardian Stock Fund, Inc., The Guardian Bond Fund, Inc. and The Guardian Cash
Fund, Inc. at December 31, 1998, the results of their operations for the year
then ended, the changes in their net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
New York, New York
February 10, 1999
- --------------------------------------------------------------------------------
69
<PAGE>
- ---------------
Gabelli Capital
Asset Fund
- ---------------
5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- -----------------------
COMMON STOCKS -- 100.1%
- -----------------------
Market
Shares Cost Value
- --------------------------------------------------------------------------------
Aerospace--0.2%
10,000 Boeing Co. $ 387,613 $ 326,250
------------ ------------
Agriculture--1.0%
88,550 Archer-Daniels-Midland
Co. 1,559,532 1,521,953
------------ ------------
Automotive: Parts and Accessories--4.2%
10,000 Dana Corp. 330,161 408,750
52,000 GenCorp Inc. 851,619 1,296,750
60,000 Modine Manufacturing Co. 2,081,405 2,175,000
53,000 Standard Motor
Products Inc. 1,168,013 1,285,250
22,000 TransPro Inc. 182,530 107,250
60,000 Wynn's International Inc. 719,079 1,327,500
------------ ------------
5,332,806 6,600,500
------------ ------------
Aviation: Parts and Services--4.1%
16,500 AAR Corp. 223,738 389,812
27,500 Barnes Group Inc. 770,907 807,812
25,000 Coltec Industries Inc. + 370,173 487,500
16,000 Curtiss-Wright Corp. 470,869 610,000
80,000 Fairchild Corp., Cl. A 1,623,662 1,260,000
7,500 Hi-Shear Industries Inc. 21,717 19,453
31,000 Hudson General Corp. 1,227,562 1,953,000
10,000 Kaman Corp., Cl. A 150,871 160,625
17,000 Moog Inc., Cl. A + 435,250 665,125
------------ ------------
5,294,750 6,353,327
------------ ------------
Broadcasting--5.1%
70,000 Ackerley Communications
Inc. 598,717 1,277,500
34,235 Chris-Craft Industries Inc. 1,422,761 1,649,699
18,000 Gray Communications
Systems Inc. 326,825 329,625
80,000 Gray Communications
Systems Inc., Cl. B 1,015,413 1,095,000
33,000 Liberty Corp. 1,614,146 1,621,125
16,500 United Television Inc. 1,394,455 1,897,500
------------ ------------
6,372,318 7,870,449
------------ ------------
Building and Construction--1.0%
25,000 CalMat Co. 773,125 771,875
30,500 Nortek Inc. 909,275 842,563
------------ ------------
1,682,400 1,614,438
------------ ------------
Business Services--0.9%
30,000 Cendant Corp. + 418,463 571,875
37,000 Nashua Corp. + 526,796 492,563
25,000 Republic Industries Inc. + 495,733 368,750
------------ ------------
1,440,992 1,433,188
------------ ------------
Cable--7.9%
150,000 Cablevision Systems
Corp., Cl. A + 1,551,661 7,528,125
70,000 MediaOne Group Inc. 2,047,177 3,290,000
17,000 Tele-Communications
Inc., Cl. A + 502,219 940,313
22,000 United International
Holdings Inc., Cl. A + 298,391 423,500
------------ ------------
4,399,448 12,181,938
------------ ------------
Consumer Products--2.9%
105,000 Carter-Wallace Inc. 1,693,052 2,060,625
18,000 Gallaher Group plc 310,807 489,375
57,000 General Cigar Holdings
Inc. + 570,016 495,188
18,000 General Cigar Holdings
Inc., Cl. B (a) 164,172 156,375
35,000 General Housewares Corp. 365,088 420,000
21,000 National Presto Industries
Inc. 824,315 895,125
------------ ------------
3,927,450 4,516,688
------------ ------------
Consumer Services--3.2%
175,000 Loewen Group Inc. 2,503,272 1,476,563
200,000 Rollins Inc. 3,862,912 3,500,000
------------ ------------
6,366,184 4,976,563
------------ ------------
Diversified Industrial--3.8%
40,000 Ampco-Pittsburgh Corp. 639,126 435,000
9,000 Crane Co. 139,950 271,688
43,000 GATX Corp. 1,214,549 1,628,625
20,000 Honeywell Inc. 1,266,661 1,506,250
58,000 Katy Industries Inc. 848,600 1,018,625
17,500 Thomas Industries Inc. 290,747 343,438
35,000 Tyler Corp.+ 76,475 214,375
50,000 WHX Corp. 625,488 503,125
------------ ------------
5,101,596 5,921,126
------------ ------------
See notes to financial statements.
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- --------------------------------------------------------------------------------
Market
Shares Cost Value
- --------------------------------------------------------------------------------
Energy and Utilities--3.4%
30,000 BJ Services Co. + $ 460,465 $ 468,750
3,000 Cilcorp Inc. 183,150 183,563
224,073 Citizens Utilities Co., Cl. B 2,217,435 1,820,593
3,000 Commonwealth Energy
System 117,240 121,500
15,000 Eastern Enterprises 589,250 656,250
90,000 Kaneb Services Inc. + 274,500 365,625
7,000 New England Electric
System 337,864 336,875
42,000 PennzEnergy Co. + 1,114,089 685,125
37,000 Pennzoil-Quaker State
Co. + 971,747 548,063
5,000 Southwest Gas Corp. 132,834 134,375
------------ ------------
6,398,574 5,320,719
------------ ------------
Entertainment--11.9%
84,664 Ascent Entertainment
Group Inc. + 915,974 624,397
24,000 Fisher Companies Inc. 1,631,566 1,644,000
40,000 GC Companies Inc. + 1,588,242 1,665,000
104,000 Tele-Communications Inc./
Liberty Media Group,
Cl. A + 1,452,465 4,790,500
45,000 Time Warner Inc. 911,719 2,792,813
77,000 USA Networks Inc. + 1,026,532 2,550,625
60,000 Viacom Inc., Cl. A + 2,005,843 4,413,750
------------ ------------
9,532,342 18,481,085
------------ ------------
Environmental Services--0.2%
63,000 EnviroSource Inc. + 638,073 322,875
------------ ------------
Equipment and Supplies--11.3%
100,000 Aeroquip-Vickers Inc. 3,610,928 2,993,750
36,000 AMETEK Inc. 634,245 803,250
36,000 CLARCOR Inc. 686,041 720,000
15,000 CTS Corp. 219,200 652,500
22,000 Daniel Industries Inc. 320,856 266,750
3,000 Eastern Co. 74,750 76,125
115,500 Fedders Corp. 682,345 671,344
63,000 Flowserve Corp. 1,588,451 1,043,438
12,500 Franklin Electric Co. Inc. 409,386 843,750
100,000 Hussmann International Inc. 1,364,427 1,937,500
40,000 IDEX Corp. 1,189,388 980,000
25,000 Interlake Corp. + 175,000 175,000
10,000 Kollmorgen Corp. 173,432 152,500
28,000 Navistar International
Corp. + 499,200 798,000
28,000 Pittway Corp. 527,107 946,750
30,000 Sequa Corp., Cl. A + 1,048,823 1,796,250
48,000 SPS Technologies Inc. + 2,053,163 2,670,000
------------ ------------
15,256,742 17,526,907
------------ ------------
Financial Services--5.3%
62,000 American Bankers
Insurance Group Inc. 3,763,691 2,999,250
62,000 Argonaut Group Inc. 1,910,351 1,519,000
20,000 Block (H & R) Inc. 864,643 900,000
10,000 Mellon Bank Corp. 620,920 687,500
55,000 Midland Co. 836,172 1,326,875
42,000 Pioneer Group Inc. 1,091,116 829,500
------------ ------------
9,086,894 8,262,125
------------ ------------
Food and Beverage--10.1%
4,000 Bestfoods Inc. 193,171 213,000
85,000 Celestial Seasonings Inc. 950,273 2,364,063
38,000 Corn Products
International Inc. 1,223,226 1,154,250
20,000 General Mills Inc. 1,370,594 1,555,000
15,000 Heinz (H.J.) Co. 809,650 849,375
4,000 Keebler Foods Co. 108,399 150,500
52,000 Kellogg Co. 1,991,795 1,774,500
50,000 PepsiCo Inc. 1,900,172 2,046,875
15,000 Quaker Oats Co. 652,458 892,500
45,000 Seagram Co. 1,543,720 1,710,000
22,000 Tootsie Roll Industries Inc. 400,141 860,750
8,000 Twinlab Corp. 151,916 105,000
78,000 Whitman Corp. 1,228,673 1,979,250
------------ ------------
12,524,188 15,655,063
------------ ------------
Health Care--1.0%
120,000 IVAX Corp. + 1,171,880 1,492,500
------------ ------------
See notes to financial statements.
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5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
SCHEDULE OF INVESTMENTS (Continued)
December 31, 1998
Market
Shares Cost Value
- --------------------------------------------------------------------------------
Hotels and Gaming--4.1%
140,000 Aztar Corp. + $ 1,035,984 $ 708,750
100,000 Gaylord Entertainment
Co., Cl. A 2,735,008 3,012,500
80,000 Hilton Hotels Corp. 1,995,189 1,529,999
100,000 Jackpot Enterprises Inc. 1,095,401 943,749
55,000 Trump Hotels & Casino
Resorts Inc. + 470,188 206,249
------------ ------------
7,331,770 6,401,247
------------ ------------
Publishing--7.5%
15,000 Harcourt General Inc. 702,375 798,750
24,000 Lee Enterprises Inc. 591,706 744,000
20,500 McClatchy Newspapers
Inc., Cl. A 559,269 725,188
6,000 McGraw-Hill Companies
Inc. 453,419 611,250
65,000 Media General Inc., Cl. A 2,626,046 3,444,999
15,000 Meredith Corp. 303,454 568,125
28,000 Penton Media Inc. 367,285 567,000
15,000 Pulitzer Publishing Co. 754,543 1,299,375
50,000 Reader's Digest Association
Inc., Cl. B 1,230,094 1,206,250
82,000 Thomas Nelson Inc. 987,793 1,107,000
7,000 Times Mirror Co., Cl. A 425,038 392,000
3,000 Tribune Co. 164,400 198,000
------------ ------------
9,165,422 11,661,937
------------ ------------
Real Estate--1.3%
35,000 Griffin Land & Nurseries
Inc. 493,263 446,250
110,000 Catellus Development
Corp. 1,826,901 1,574,375
------------ ------------
2,320,164 2,020,625
------------ ------------
Retail--1.4%
5,000 Aaron Rents Inc. 100,625 75,624
10,000 Aaron Rents Inc., Cl. A 199,750 149,375
33,000 Lillian Vernon Corp. 525,813 544,500
53,000 Neiman Marcus Group
Inc. + 1,230,033 1,321,688
25,000 Scheib (Earl) Inc. 196,312 137,500
------------ ------------
2,252,534 2,228,687
------------ ------------
Satellite--1.0%
43,000 COMSAT Corp. 944,715 1,548,000
------------ ------------
Specialty Chemicals--0.8%
20,000 Ferro Corp. 337,263 520,000
54,000 Sybron Chemicals Inc. 1,487,651 729,000
------------ ------------
1,824,914 1,249,000
------------ ------------
Telecommunications--1.8%
62,000 Frontier Corp. 1,923,865 2,108,000
20,000 GST Telecommunications
Inc. + 267,013 131,250
55,000 Rogers Communications
Inc., Cl. B + 317,794 488,125
------------ ------------
2,508,673 2,727,375
------------ ------------
Wireless Communications--4.7%
35,000 Centennial Cellular Corp.,
Cl. A + 776,012 1,435,000
70,000 Rogers Cantel Mobile
Communications Inc.,
Cl. B + 796,366 853,125
110,000 Telephone & Data
Systems Inc. 4,737,299 4,943,125
------------ ------------
6,309,677 7,231,250
------------ ------------
TOTAL
INVESTMENTS--100.1% $ 129,131,651 155,445,815
============
OTHER ASSETS AND
LIABILITIES (Net)--(0.1)% (84,848)
------------
NET ASSETS-- 100.0% $155,360,967
============
SECURITIES SOLD SHORT
Common Stock Shares Value
------ -----
Park Place Entertainment Corp
(Proceeds $68,248) 10,000 $ 63,750
============
For Federal tax purposes:
Aggregate cost $129,859,115
============
Gross unrealized appreciation $ 36,484,188
Gross unrealized depreciation (10,897,488)
------------
Net unrealized appreciation $ 25,586,700
============
(a) Security fair valued as determined by the Board of Directors.
+ Non-income producing security.
See accompanying notes to financial statements.
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5
---------------
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1998
Assets:
Investments, at value (Cost $129,131,651) $ 155,445,815
Cash 158,405
Dividends and interest receivable 87,247
Receivable for investments sold 512,570
Receivable for capital shares sold 6,734
Deferred organizational expenses 26,576
-------------
Total Assets 156,237,347
-------------
Liabilities:
Payable for investments purchased 106,915
Payable for capital shares redeemed 494,045
Payable for investment advisory fees 122,803
Security sold short, at value (Proceeds $68,248) 63,750
Other accrued expenses 88,867
-------------
Total Liabilities 876,380
-------------
Net Assets applicable to 9,592,144 shares
outstanding $ 155,360,967
=============
Net Assets consist of:
Capital stock, at par value $ 9,592
Additional paid-in capital 129,718,686
Distributions in excess of net realized gain
on investments (685,973)
Net unrealized appreciation on investments 26,318,662
-------------
Total Net Assets $ 155,360,967
=============
Net Asset Value, offering and redemption
price per share (155,360,967 / 9,592,144
shares outstanding; 500,000,000 shares
authorized of $0.001 par value) $ 16.20
=============
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
Investment Income:
Dividends (net of foreign taxes of $2,523) $ 1,308,604
Interest 504,810
-------------
Total Investment Income 1,813,414
-------------
Expenses:
Management fees 1,392,897
Custodian fees 41,740
Legal and audit fees 33,000
Directors' fees 26,400
Organizational expenses 20,000
Shareholder services fees 11,161
Miscellaneous expenses 30,440
-------------
Total Expenses 1,555,638
-------------
Net Investment Income 257,776
-------------
Net Realized and Unrealized Gain on
Investments:
Net realized gain on investments 7,189,741
Net change in unrealized
appreciation on investments
and security sold short 5,528,146
-------------
Net realized and unrealized gain on
investments 12,717,887
-------------
Net increase in net assets resulting from
operations $ 12,975,663
=============
See accompanying notes to financial statements.
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Asset Fund
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5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Operations:
Net investment income $ 257,776 $ 118,286
Net realized gain on investments 7,189,741 7,046,284
Net change in unrealized appreciation on investments
and security sold short 5,528,146 17,681,316
------------- -------------
Net increase in net assets resulting from operations 12,975,663 24,845,886
------------- -------------
Distributions to shareholders:
Net investment income (257,776) (118,286)
In excess of net investment income -- (8,067)
Net realized gain on investments (7,198,434) (7,046,284)
In excess of net realized gain on investments (626,865) (29,472)
------------- -------------
Total distributions to shareholders (8,083,075) (7,202,109)
------------- -------------
Capital share transactions:
Net increase in net assets from capital share transactions 45,118,114 36,244,957
------------- -------------
Net increase in net assets 50,010,702 53,888,734
Net Assets:
Beginning of period 105,350,265 51,461,531
------------- -------------
End of period $ 155,360,967 $ 105,350,265
============= =============
</TABLE>
See accompanying notes to financial statements.
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Asset Fund
---------------
5
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NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- ------------------
1. -- Organization
- ------------------
The Gabelli Capital Asset Fund (the "Fund"), a series of Gabelli Capital
Series Funds, Inc. (the "Company"), was organized on April 8, 1993 as a Maryland
corporation. The Company is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund's primary objective is growth of capital. The Fund
commenced investment operations on May 1, 1995. Shares of the Fund are available
to the public only through the purchase of certain variable annuity and variable
life insurance contracts issued by The Guardian Insurance & Annuity Company,
Inc.
- -------------------------------------
2. -- Significant Accounting Policies
- -------------------------------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
Security Valuation
Portfolio securities listed or traded on a nationally recognized
securities exchange, quoted by the National Association of Securities Dealers
Automated Quotations, Inc. ("Nasdaq") or traded on foreign exchanges are valued
at the last sale price on that exchange as of the close of business on the day
the securities are being valued (if there were no sales that day, the security
is valued at the average of the closing bid and asked prices or, if there were
no asked prices quoted on that day, then the security is valued at the closing
bid price on that day). All other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest average of the bid and asked prices. Portfolio securities traded on more
than one national securities exchange or market are valued according to the
broadest and most representative market, as determined by Gabelli Funds, Inc.
(the "Adviser"). Securities and assets for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Directors. Short term debt securities with remaining maturities of 60 days or
less are valued at amortized cost, unless the Directors determine such does not
reflect the securities' fair value, in which case these securities will be
valued at their fair value as determined by the Directors. Debt instruments
having a greater maturity are valued at the highest bid price obtained from a
dealer maintaining an active market in those securities. Options are valued at
the last sale price on the exchange on which they are listed. If no sales of
such options have taken place that day, they will be valued at the mean between
their closing bid and asked prices.
Short Sales
The Fund is authorized to engage in short-selling, which obligates the
Fund to replace the security borrowed by purchasing the security at the current
market value sometime in the future. The Fund would incur a loss if the price of
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund would realize a gain if the price
of the security declines between those dates. Until the Fund replaces the
borrowed security,
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5
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- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1998
the Fund will maintain a segregated account with cash and/or U.S. Government
securities sufficient to cover its short position on a daily basis.
Securities Transactions and Investment Income
Securities transactions are accounted for on the trade date with realized
gain or loss on investments determined by using the identified cost method.
Interest income (including amortization of premium and accretion of discount) is
recorded as earned. Dividend income is recorded on the ex-dividend date.
Dividends and Distributions to Shareholders.
Dividends and distributions to shareholders are recorded on the
ex-dividend date. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund.
Provision for Income Taxes.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended. As a result, a Federal income tax provision is not required.
Organizational Expenses.
A total of $100,000 in expenses was incurred in connection with the
organization of the Fund. These costs were advanced by the Guardian Insurance &
Annuity Company Inc. and will be reimbursed by the Fund. These organizational
costs were deferred and are being amortized on a straight-line basis over a
period of 60 months from the date the Fund commenced investment operations.
- ----------------------------------------
3. -- Agreements with Affiliated Parties
- ----------------------------------------
Pursuant to a management agreement (the "Management Agreement"), the Fund
will pay Guardian Investor Services Corporation (the "Manager") a fee, computed
daily and paid monthly, at the annual rate of 1.00% of the value of the Fund's
average daily net assets. Pursuant to an Investment Advisory Agreement among the
Fund, the Manager and Gabelli Funds, Inc. (the "Adviser"), the Adviser, under
the supervision of the Company's Board of Directors and the Manager, manages the
Fund's assets in accordance with the Fund's investment objectives and policies,
makes investment decisions for the Fund, places purchase and sale orders on
behalf of the Fund, provides investment research and provides facilities and
personnel required for the Fund's administrative needs. The Adviser may delegate
its administrative role and currently has done so to First Data Investor
Services Group, Inc., the Fund's Sub-Administrator (the "Sub-Administrator").
The Adviser will supervise the performance of administrative and professional
services provided by others and pays the compensation of the Sub-Administrator
and all Officers and Directors of the Company who are its affiliates. As
compensation for its services and the related expenses borne by the Adviser, the
Manager pays the Adviser a fee, computed daily and paid monthly, at the annual
rate of 0.75% of the value of the Fund's average daily net assets.
- --------------------------
4. -- Portfolio Securities
- --------------------------
Purchases and sales of securities for the year ended December 31, 1998,
other than short term securities, aggregated $108,006,193 and $56,865,560,
respec-
- --------------------------------------------------------------------------------
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Gabelli Capital
Asset Fund
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5
---------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1998
tively. For the year ended December 31, 1998, the purchases and proceeds from
the security sold short were $0 and $68,248, respectively.
- ----------------------------------
5. -- Transactions with Affiliates
- ----------------------------------
During the year ended December 31, 1998, the Fund paid brokerage
commissions of $187,764 to Gabelli & Company, Inc. and its affiliates.
- --------------------------------
6. -- Capital Stock Transactions
- --------------------------------
Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 4,460,537 $ 73,364,220 3,454,754 $ 50,227,654
Shares issued upon re-
investment of dividends 512,885 8,083,075 478,228 7,202,109
Shares redeemed (2,262,453) (36,329,181) (1,507,694) (21,184,806)
---------- ------------ ---------- ------------
Net increase 2,710,969 $ 45,118,114 2,425,288 $ 36,244,957
========== ============ ========== ============
</TABLE>
- -----------------------
7. -- Subsequent Event:
- -----------------------
On February 10, 1999, the Adviser reorganized its operations and corporate
structure by transferring a portion of its assets and liabilities to a successor
adviser, Gabelli Funds, LLC, which is wholly owned by Gabelli Asset Management
Inc., a newly formed publicly traded company that is 80% owned by the former
adviser. Counsel to the former Adviser has concluded that the ownership change
does not constitute an assignment as defined by the Investment Company Act of
1940.
- --------------------------------------------------------------------------------
77
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Asset Fund
- ---------------
5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996 1995+
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of period ........... $ 15.31 $ 11.55 $ 10.70 $ 10.00
--------- --------- -------- --------
Net investment income .......................... 0.03 0.02 0.02 0.03(a)
Net realized and unrealized gain on investments 1.74 4.88 1.16 0.80
--------- --------- -------- --------
Total from investment operations ............... 1.77 4.90 1.18 0.83
--------- --------- -------- --------
Distributions to shareholders:
Net investment income .......................... (0.03) (0.02) (0.02) (0.03)
Net realized gain on investments ............... (0.78) (1.12) (0.31) (0.09)
In excess of net realized gain on investments .. (0.07) (0.00)(b) -- (0.01)
--------- --------- -------- --------
Total distributions ............................ (0.88) (1.14) (0.33) (0.13)
--------- --------- -------- --------
Net asset value, end of period .................... $ 16.20 $ 15.31 $ 11.55 $ 10.70
========= ========= ======== ========
Total return++ ................................. 11.7% 42.6% 11.0% 8.4%
========= ========= ======== ========
Ratios to average net assets and supplemental data:
Net assets, end of period (in 000's) .............. $ 155,361 $ 105,350 $ 51,462 $ 26,364
Ratio of net investment income to average
net assets ...................................... 0.19% 0.17% 0.21% 0.75%(c)
Ratio of operating expenses to average
net assets ...................................... 1.12% 1.17% 1.31% 1.78%(d)
Portfolio turnover rate ........................... 43% 65% 53% 81%
</TABLE>
- ------------
+ From commencement of operations on May 1, 1995.
++ Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the
period including reinvestment of dividends. Total return for the period of
less than one year is not annualized.
(a) Net investment income before expenses assumed by the Manager and Adviser
was $0.03.
(b) Amount represents less than $0.005 per share.
(c) Annualized.
(d) The ratio of operating expenses to average net assets before reimbursement
of expenses assumed by the Manager and Adviser would have been 1.92% for
the period ended December 31, 1995.
See accompanying notes to financial statements.
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5
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Gabelli Capital Asset Fund
(a series of Gabelli Capital Series Funds, Inc.)
We have audited the accompanying statement of assets and liabilities,
including the schedules of investments, and security sold short of Gabelli
Capital Asset Fund (the Fund) (a series of Gabelli Capital Series Funds, Inc.)
as of December 31, 1998, and the related statement of operations for the year
then ended, and the statement of changes in net assets for the two years in the
period then ended and the financial highlights for the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of mate-rial misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998 by correspondence with the custodian
and broker. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Gabelli Capital Asset Fund at December 31, 1998, and the results of its
operations for the year then ended, and the changes in its net assets for the
two years in the period then ended and the financial highlights for the periods
indicated therein, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
February 3, 1999
- --------------------------------------------------------------------------------
79
<PAGE>
- ---------------
Baillie Gifford
International
Fund
- ---------------
6
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford International Fund
- ----------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- ----------------------
COMMON STOCKS -- 96.7%
- ----------------------
Shares Value
- --------------------------------------------------------------------------------
AUSTRALIA -- 1.8%
Banks -- 1.1%
221,600 Commonwealth Bank of Australia* $ 3,145,365
280,600 National Australia Bank 4,229,891
Beverages -- 0.5%
1,163,700 Fosters Brewing Group 3,151,881
Business Services -- 0.2%
61,910 Brambles Industries Ltd. 1,508,011
-----------
12,035,148
-----------
CHILE -- 0.0%
Mining -- 0.0%
129,500 Antofagasta Hldgs. 387,274
-----------
FRANCE -- 6.8%
Construction Materials -- 2.0%
144,350 Lafarge 13,709,506
Financial Services -- 3.3%
154,000 AXA UAP 22,310,857
Oil-Integrated -- 1.5%
86,550 Elf Aquitaine 10,000,233
-----------
46,020,596
-----------
GERMANY -- 15.4%
Automobiles -- 2.1%
15,530 Bayerische Motoren Werke AG 12,048,656
3,106 Bayerische Motoren Werke AG - New* 2,301,638
Banks -- 1.9%
161,500 Bayerische Vereinsbank AG 12,645,956
Chemicals -- 0.9%
159,800 BASF AG 6,098,212
Drugs and Health Care -- 1.0%
99,440 GEHE AG 6,861,634
Footwear -- 1.2%
75,500 Adidas AG 8,199,628
Industrial Machineries -- 4.3%
254,655 Mannesmann AG 29,184,630
Insurance -- 2.0%
27,450 Munchener Ruckvers 13,291,822
Software -- 2.0%
32,570 SAP AG 14,070,803
-----------
104,702,979
-----------
HONG KONG -- 1.0%
Conglomerates -- 0.7%
725,000 Hutchison Whampoa 5,123,361
Real Estate -- 0.3%
250,000 Cheung Kong Hldgs.* 1,798,944
-----------
6,922,305
-----------
HUNGARY -- 0.3%
Pharmaceuticals -- 0.3%
51,700 Richter Gedeon VEG 2,202,068
-----------
IRELAND -- 2.7%
Banks -- 1.3%
512,000 Allied Irish Bank 9,160,262
Construction Materials -- 1.4%
555,000 CRH PLC 9,488,588
-----------
18,648,850
-----------
ITALY -- 8.7%
Banks -- 4.3%
9,152,000 Banco di Roma* 15,498,261
785,200 Sao Paolo IMI SPA* 13,866,667
Telecommunications -- 4.4%
4,572,000 Olivetti SPA* 15,899,483
1,625,444 Telecom. Italia SPA 13,861,175
-----------
59,125,586
-----------
JAPAN -- 14.6%
Automotive -- 0.5%
101,000 Honda Motor Co. 3,314,551
Automotive Parts -- 0.6%
213,000 Denso Corp. 3,937,815
Chemicals -- 1.3%
408,000 Kao Corp. 9,203,008
Drugs and Health Care -- 0.8%
260,000 Sankyo Co. 5,680,672
Electronics -- 3.1%
160,000 Canon, Inc. 3,417,957
659,000 Matsushita Electric Works 6,732,817
41,000 Rohm Co. 3,731,889
47,600 Sony Corp. 3,465,263
41,000 TDK Corp. 3,746,395
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
80
<PAGE>
---------------
Baillie Gifford
International
Fund
---------------
6
---------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
Financial Services -- 3.3%
142,800 Credit Saison Co. $ 3,517,895
300,000 Nomura Securities Co. Ltd.* 2,613,888
134,100 Promise Co. 6,974,861
729,000,000 Sanwa Int'l. Financial 5,142,658
12,800 Shohkoh Fund & Co. 4,121,362
Leisure Products -- 0.4%
18,100 Toho Co. 2,478,443
Merchandising-Mass -- 0.7%
33,500 Ryohin Keikaku Co. Ltd. 4,459,752
Photography -- 0.6%
105,000 Fuji Photo Film Co. 3,900,929
Retail Trade -- 1.1%
107,000 Ito Yokado Co. 7,477,222
Telecommunications -- 2.2%
975 Nippon Tele. & Tel. Corp. 7,520,566
187 NTT Mobile Comm. Network, Inc. 7,691,729
------------
99,129,672
------------
NETHERLANDS -- 3.2%
Broadcasting and Publishing -- 2.0%
360,000 Ver Ned Uitgevers 13,566,828
Computer Services -- 1.2%
304,300 CMG PLC 8,017,699
------------
21,584,527
------------
NEW ZEALAND -- 0.1%
Telecommunications -- 0.1%
389,412 Telecom. Corp. of New Zealand 850,379
------------
PEOPLE'S REPUBLIC OF CHINA -- 0.4%
Telecommunications -- 0.4%
1,648,000 China Telecom.* 2,850,328
------------
POLAND -- 0.7%
Electrical Equipments -- 0.7%
428,950 Elektrim 4,643,903
------------
SINGAPORE -- 0.6%
Publishing -- 0.6%
344,846 Singapore Press Hldgs. 3,759,678
------------
SPAIN -- 5.6%
Banks -- 1.6%
559,800 Banco Santander S.A. 11,107,768
Construction and Housing -- 4.0%
334,800 Acciona S.A. 27,303,209
------------
38,410,977
------------
SWEDEN -- 2.3%
Construction and Mining Equipment -- 0.7%
216,000 Atlas Copco AB 4,679,008
Telecommunications -- 1.6%
449,000 LM Ericsson 10,665,739
------------
15,344,747
------------
SWITZERLAND -- 9.7%
Business Services -- 1.2%
18,309 Adecco S.A. 8,356,805
Insurance -- 3.1%
28,080 Zurich Allied AG* 20,788,644
Pharmaceuticals -- 3.2%
11,210 Novartis AG 22,033,195
Telecommunications -- 2.2%
35,550 Swisscom AG* 14,880,432
------------
66,059,076
------------
UNITED KINGDOM -- 22.8%
Banks -- 3.4%
252,000 Barclays* 5,463,698
325,000 Halifax PLC* 4,596,382
670,000 Lloyds TSB Group PLC 9,539,625
188,000 National Westminster Bank Co. PLC 3,638,810
Conglomerates -- 3.7%
1,382,000 Hanson PLC 10,998,139
1,123,000 Rentokil Initial PLC 8,489,201
994,153 Williams Hldgs. 5,681,818
Data Services -- 0.4%
253,933 Reuters Group PLC 2,678,974
Drugs and Health Care -- 4.1%
633,000 Glaxo Wellcome 21,790,596
438,000 Smithkline Beecham 6,070,364
Electronics -- 0.4%
373,000 Electrocomponents 2,460,226
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
81
<PAGE>
- ---------------
Baillie Gifford
International
Fund
- ---------------
6
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford International Fund
- ----------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998 (Continued)
Shares Value
- --------------------------------------------------------------------------------
Financial Services -- 0.7%
316,000 CGU PLC $ 4,982,289
Food, Beverage and Tobacco -- 2.3%
961,900 Imperial Tobacco 10,068,068
418,702 Whitbread 5,370,293
Industrial Machineries -- 0.6%
278,000 Smiths Industries PLC* 3,985,945
Insurance -- 0.4%
186,000 Prudential Corp. 2,837,342
Leisure Products -- 1.4%
243,000 Granada Group 4,259,262
2,052,000 Thomson Travel Group 5,591,095
Newspapers -- 0.3%
300,000 Southnews PLC 1,839,176
Oil-International -- 1.6%
748,870 BP Amoco PLC 11,147,824
Telecommunications -- 2.7%
492,000 British Telecom. 7,446,619
343,991 Cable & Wireless Co.* 3,137,582
483,000 Vodafone Group 7,848,048
Transportation -- 0.8%
398,000 BAA PLC 4,674,963
220,000 Stagecoach Hldgs. 880,877
------------
155,477,216
------------
TOTAL COMMON STOCKS
(Cost $481,793,169) 658,155,309
------------
- ----------------------------
REPURCHASE AGREEMENT -- 3.3%
- ----------------------------
Principal
Amount Value
- -------------------------------------------------------------------------------
$22,465,000 State Street Bank & Trust Co.
repurchase agreement, dated
12/31/98, maturity value
$22,474,984 at 4.00% due 1/4/99
(collateralized by $22,920,000
U.S. Treasury Notes,
7.875% due 11/15/04) $ 22,465,000
------------
TOTAL REPURCHASE AGREEMENT
(Cost $22,465,000) 22,465,000
------------
TOTAL INVESTMENTS -- 100.0%
(Cost $504,258,169) 680,620,309
LIABILITIES IN EXCESS OF CASH,
RECEIVABLES AND OTHER
ASSETS -- (0.0%) (330,247)
------------
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $680,290,062
============
- --------------------------------------------------------------------------------
Glossary of terms:
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
82
<PAGE>
---------------
Baillie Gifford
International
Fund
---------------
6
---------------
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1998
ASSETS
Investments, at market (cost $504,258,169) $ 680,620,309
Cash 433
Foreign currency (cost $1,200,279) 1,054,683
Dividends receivable 642,472
Dividend reclaims receivable 481,566
Receivable for fund shares sold 32,391
Interest receivable 2,496
-------------
Total Assets 682,834,350
-------------
LIABILITIES
Payable for fund shares redeemed 654,476
Accrued expenses 257,180
Payable for investments purchased 82,353
Due to affiliates 1,550,279
-------------
TOTAL LIABILITIES 2,544,288
-------------
NET ASSETS $ 680,290,062
=============
COMPONENTS OF NET ASSETS
Capital stock, at par $ 3,251,218
Additional paid-in capital 495,369,356
Distributions in excess of net investment income (2,558,540)
Accumulated net realized gain on investments
and foreign currency related transactions 7,981,289
Net unrealized appreciation of investments
and translation of other assets and
liabilities denominated in foreign currencies 176,246,739
-------------
NET ASSETS $ 680,290,062
=============
Shares Outstanding -- $0.10 par value 32,512,180
-------------
NET ASSET VALUE PER SHARE $ 20.92
=============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1998
Investment Income:
Dividends $ 9,724,963
Interest 772,143
Less: Foreign tax withheld (1,176,388)
-------------
Total Income 9,320,718
-------------
Expenses:
Investment advisory fees -- Note B 4,891,710
Custodian fees 854,877
Printing expense 180,000
Audit fees 21,000
Directors' fees -- Note B 12,500
Legal fees 2,950
Insurance expense 2,784
Transfer agent fees 2,200
Registration fees 915
Other 700
-------------
Total Expenses 5,969,636
-------------
Net Investment Income 3,351,082
-------------
Realized and Unrealized Gain/(Loss)
on Investments and Foreign Currencies -- Note C
Net realized gain on investments -- Note A 40,138,373
Net realized gain on foreign currency
related transactions -- Note A 349,065
Net change in unrealized appreciation of
investments -- Note C 70,908,064
Net change in unrealized depreciation from
translation of other assets and liabilities
denominated in foreign currencies -- Note C 100,002
-------------
Net Realized and Unrealized Gain on
Investments and Foreign Currencies 111,495,504
-------------
Net Increase in Net Assets
from Operations $ 114,846,586
=============
See notes to financial statements.
- --------------------------------------------------------------------------------
83
<PAGE>
- ---------------
Baillie Gifford
International
Fund
- ---------------
6
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford International Fund
- ----------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------- -------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 3,351,082 $ 3,812,500
Net realized gain on investments and
foreign currency related transactions 40,487,438 23,438,047
Net change in unrealized appreciation/
(depreciation) on investments and
translation of other assets and liabilities
denominated in foreign currencies 71,008,066 27,252,164
------------- -------------
Net Increase in Net Assets from Operations 114,846,586 54,502,711
------------- -------------
Dividends and Distributions to Shareholders from:
Net investment income (3,351,082) (3,812,500)
Distributions in excess of net investment income (409,367) (4,530,809)
Net realized gain on investments (33,666,022) (20,727,823)
------------- -------------
Total Dividends and Distribution to Shareholders (37,426,471) (29,071,132)
------------- -------------
From Capital Share Transactions:
Net increase in net assets from capital share
transactions -- Note E 68,158,477 53,077,150
------------- -------------
Net Increase in Net Assets 145,578,592 78,508,729
Net Assets:
Beginning of year 534,711,470 456,202,741
------------- -------------
End of year* $ 680,290,062 $ 534,711,470
============= =============
* Includes distributions in excess of net investment
income of: $ (2,558,540) $ (4,371,711)
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
84
<PAGE>
---------------
Baillie Gifford
International
Fund
---------------
6
---------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year .............................. $ 18.27 $ 17.26 $ 15.37 $ 14.69 $ 14.69
----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income .......................... 0.13 0.15 0.15 0.16 0.15
Net realized and unrealized
gain/(loss) on investments and
translation of other assets and
liabilities denominated
in foreign currencies ........................ 3.73 1.91 2.21 1.49 (0.02)
----------- ----------- ----------- ----------- -----------
Net increase from
investment operations ........................ 3.86 2.06 2.36 1.65 0.13
----------- ----------- ----------- ----------- -----------
Dividends and Distributions to
Shareholders from:
Net investment income .......................... (0.11) (0.15) (0.14) (0.15) (0.13)
Distributions in excess of net
investment income ............................ (0.01) (0.15) (0.10) (0.12) --
Net realized gain on investments
and foreign currency related
transactions ................................. (1.09) (0.75) (0.23) (0.70) --
----------- ----------- ----------- ----------- -----------
Total dividends and distributions .............. (1.21) (1.05) (0.47) (0.97) (0.13)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year ....................... $ 20.92 $ 18.27 $ 17.26 $ 15.37 $ 14.69
----------- ----------- ----------- ----------- -----------
Total return* ...................................... 21.17% 11.93% 15.41% 11.23% 0.87%
----------- ----------- ----------- ----------- -----------
Ratios/supplemental data:
Net assets, end of year
(000's omitted) .............................. $ 680,290 $ 534,711 $ 456,203 $ 317,287 $ 303,050
Ratio of expenses to average
net assets ................................... 0.98% 0.97% 0.98% 0.99% 1.03%
Ratio of net investment income
to average net assets ........................ 0.55% 0.74% 0.94% 0.97% 1.11%
Portfolio turnover
rate ......................................... 47% 51% 38% 52% 27%
</TABLE>
* Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
See notes to financial statements.
- --------------------------------------------------------------------------------
85
<PAGE>
- ---------------
Baillie Gifford
Emerging
Markets Fund
- ---------------
7
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- ----------------------
COMMON STOCKS -- 84.5%
- ----------------------
Shares Value
- --------------------------------------------------------------------------------
ARGENTINA -- 5.0%
Gas Distribution -- 0.7%
33,033 Transportadora de Gas Del Sur ADR* $ 334,459
Oil and Gas -- 0.5%
66,738 Perez Companc S.A. 282,556
Real Estate -- 1.1%
20,356 IRSA Inversiones Y Represente GDR 566,157
Retail-Food -- 1.4%
88,890 Imp. Y Exp. Patagonia 693,966
Telecommunications -- 1.3%
23,600 Telefonica de Argentina S.A. ADR 659,325
-----------
2,536,463
-----------
BRAZIL -- 12.3%
Banks -- 1.0%
1,080,000 Banco Itau S.A. 527,343
Food, Beverage and Tobacco -- 0.8%
980,000 Comp. Cerv. Ria Brahma 428,238
Industrial Machineries -- 1.9%
91,634 Elevadores Atlas 985,882
Real Estate -- 0.4%
18,100 Brazil Realty S.A. GDR 227,692
Retail-Food -- 2.2%
71,200 Comp. Brasileiras de Dist. ADR 1,103,600
Telecommunications -- 2.7%
33,093,000 Telecom. Centro Sul Participacoes* 287,300
5,030,000 Telecom. de Sao Paolo* 432,938
66,176,000 Telecom. Sudeste Celular
Participacoes S.A. 279,316
50,400,000 Telesp. Celular Participacoes* 371,232
Textile-Apparel and Production -- 0.6%
136,800 Confeccoes Guararapes S.A. 283,042
Tobacco -- 1.6%
124,000 Souza Cruz (Cia) 800,463
Utilities-Electric and Water -- 1.1%
25,000,000 Comp. Energetica de Minas 475,875
2,873,276 Emp. Bandeirante de Energia S.A.* 30,913
-----------
6,233,834
-----------
CHILE -- 2.7%
Chemicals -- 1.2%
17,240 Sociedad Quimica Y Minera
de Chile S.A. ADR 580,773
Mining -- 0.7%
120,000 Antofagasta Hldgs. 358,863
Mutual Funds -- 0.4%
8,930 Genesis Chile Fund 221,018
Telecommunications -- 0.4%
9,700 Comp. de Telecom. de Chile ADR 200,669
-----------
1,361,323
-----------
COLOMBIA -- 2.2%
Banks -- 0.3%
17,000 Banco Ganadero S.A. ADR 154,063
Gas Distribution -- 0.8%
100,100 Promigas S.A. 386,486
Retail-Food -- 0.9%
193,578 Almacenes Exito S.A. 417,924
Tobacco -- 0.2%
76,018 Coltabaco 147,242
-----------
1,105,715
-----------
CZECH REPUBLIC -- 2.0%
Financial Services -- 0.5%
40,000 IKS KB Plus 265,205
Telecommunications -- 1.5%
50,000 SPT Telecom. AS* 762,964
-----------
1,028,169
-----------
GREECE -- 2.3%
Telecommunications -- 2.3%
17,290 OTE - SA Telecom. Org.* 460,235
26,200 Panafon Hellenic Telecom. S.A.* 702,087
-----------
1,162,322
-----------
HUNGARY -- 6.6%
Food, Beverage and Tobacco -- 1.7%
20,000 Pick Szeged RT 849,543
Lodging -- 1.8%
42,500 Danubius Hotel* 889,815
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
86
<PAGE>
----------------
Baillie Gifford
Emerging Markets
Fund
----------------
7
----------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
Pharmaceuticals -- 1.7%
20,000 Richter Gedeon VEG $ 851,864
Plastics -- 1.4%
26,000 Pannonplast 735,667
-----------
3,326,889
-----------
INDIA -- 6.0%
Computer Software -- 4.1%
200 Aptech Ltd. 2,706
20,800 Infosys Technology Ltd. 1,448,947
16,000 NIIT Ltd. 611,726
Mutual Funds -- 1.9%
113,500 Indian Opportunity Fund* 978,938
-----------
3,042,317
-----------
ISRAEL -- 1.1%
Electronic Equipment -- 1.1%
15,400 ECI Telecom. Ltd.* 548,625
-----------
MALAYSIA -- 0.2%
Food, Beverage and Tobacco -- 0.2%
130,000 RJ Reynolds Berhad 102,974
-----------
MEXICO -- 14.5%
Conglomerates -- 1.6%
17,200 Fomento Economico Mexicano ADR* 457,950
55,000 Grupo Carso S.A. de C.V. ADR 373,625
Financial Services -- 0.8%
500,000 Grupo Financiero Banorte* 428,990
Food, Beverage and Tobacco -- 3.5%
260,000 Grupo Continental 628,545
234,000 Grupo Industrial Bi mbo S.A. 448,774
54,049 Grupo Industrial Ma seca S.A.
de C.V. ADR* 672,234
Media and Entertainment -- 3.6%
527,000 Corp. Interamerican a Entretenimiento* 1,436,257
14,683 Grupo Television S. A. de C.V. ADR* 362,487
Real Estate -- 1.0%
181,034 Corp. Geo S.A.* 502,517
Retail Trade -- 2.1%
40,300 Grupo Elektra S.A. GDR 201,500
266,600 Organiz. Soriana 861,129
Telecommunications -- 1.9%
143,772 Grupo Carso Global Telecom.* 484,706
10,190 Telefonos de Mexico S.A. ADR 496,126
-----------
7,354,840
-----------
PEOPLE'S REPUBLIC OF CHINA -- 2.3%
Household Products -- 1.4%
770,000 Guandong Kelon Elec. Hldgs. 685,761
Utilities-Electric -- 0.9%
1,540,000 Beijing Datang Power Gen. Co. 462,143
-----------
1,147,904
-----------
PERU -- 1.5%
Mining -- 0.8%
29,300 Comp. de Minas Buenaventura ADR 380,900
Telecommunications -- 0.7%
31,700 Telefonica del Peru S.A. ADR* 402,194
-----------
783,094
-----------
PHILIPPINES -- 0.2%
Business Services -- 0.1%
675,000 Int'l. Container Terminal Svcs.* 56,395
Food and Beverage -- 0.1%
385,368 RFM Corp. 59,616
-----------
116,011
-----------
POLAND -- 7.4%
Banks -- 4.3%
60,000 Bank Handlowy Warsaw 740,171
61,800 Bank Roswoju Eksport 1,426,154
Electrical Equipment -- 2.1%
100,000 Elektrim* 1,082,621
Telecommunications -- 1.0%
99,750 Telekomunikacja Polska GDR* 508,725
-----------
3,757,671
-----------
PORTUGAL -- 1.0%
Financial Services -- 1.0%
15,050 Comp. de Seguros Tranquilidade 480,545
-----------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
87
<PAGE>
- ---------------
Baillie Gifford
International
Fund
- ---------------
7
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998 (Continued)
Shares Value
- --------------------------------------------------------------------------------
SINGAPORE -- 0.2%
Construction -- 0.2%
98,000 Clipsal Industries Ltd. $ 98,000
-----------
SOUTH AFRICA -- 4.0%
Brewing -- 1.0%
30,509 South African Breweries 513,810
Conglomerates -- 1.0%
82,000 Rembrandt Group Ltd. 487,242
Consumer Goods -- 1.0%
237,000 Ellerine Hldgs. 510,993
Miscellaneous Financial -- 0.6%
10,000 Anglo American Corp.
of South Africa 281,480
Retail-Mass -- 0.4%
54,692 Pepkor Ltd.* 227,485
-----------
2,021,010
-----------
SOUTH KOREA -- 7.8%
Electronic Equipments -- 2.6%
15,000 Sam Hwa Electronics Co.* 734,414
77,500 Sam Young Electronics Co.* 592,685
Health Care -- 1.1%
48,901 Medison Co. 569,089
Metals and Steel -- 1.8%
55,000 Pohang Iron & Steel Co. Ltd. ADR 928,125
Retail-Apparel-- 2.3%
42,000 Younggone Corp.* 1,127,681
-----------
3,951,994
-----------
SRI LANKA -- 0.8%
Banks -- 0.8%
225,800 National Development Bank 422,364
-----------
TAIWAN -- 2.9%
Banks -- 0.0%
92 ICBC 88
Drugs and Health Care -- 0.7%
450,000 Test Rite Int'l.* 337,989
Electronics and Instruments -- 0.7%
210,000 Taiwan Secom* 404,097
Insurance -- 0.9%
134,000 Cathay Life Insurance Co. Ltd.* 432,526
Miscellaneous-Cons. Growth Cyclical -- 0.6%
150,000 Lee Chi Enterprises Co. Ltd.* 288,641
-----------
1,463,341
-----------
UNITED KINGDOM -- 1.5%
Food and Beverage -- 0.8%
228,074 Coca Cola Beverage* 401,659
Mutual Funds -- 0.7%
21,350 East Europe Development Fund* 376,614
-----------
778,273
-----------
TOTAL COMMON STOCKS
(Cost $46,489,872) 42,823,678
-----------
- ------------------------
PREFERRED STOCKS -- 1.2%
- ------------------------
Shares Value
- --------------------------------------------------------------------------------
94,000 Confeccoes Guararapes S.A. $ 175,039
3,200,000 Telecom. De Sao Paolo 436,183
-----------
TOTAL PREFERRED STOCKS
(Cost $1,047,060) 611,222
-----------
- -------------------------
CONVERTIBLE BONDS -- 7.0%
- -------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
$ 349,000 Ashanti Capital
5.50% due 3/15/03 $ 289,234
1,075,000 Metro Pacific Capital,
2.50% due 4/11/03 960,781
1,100,000 Orient Semiconductor Elect. Ltd.
1.50% due 2/26/03 1,013,375
200,000 RFM Capital,
2.75% due 5/30/06 183,000
1,100,000 Siliconware Precision Industries
.50% due 7/21/04 1,111,330
-----------
TOTAL CONVERTIBLE BONDS
(Cost $3,785,489) 3,557,720
-----------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
88
<PAGE>
----------------
Baillie Gifford
Emerging Markets
Fund
----------------
7
----------------
- --------------------------------------------------------------------------------
- ----------------------------
REPURCHASE AGREEMENT -- 4.5%
- ----------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
$2,279,000 State Street Bank & Trust Co.
repurchase agreement,
dated 12/31/98, maturity value
$2,280,013 at 4.00% due 1/4/99
(collateralized by $2,330,000
U.S. Treasury Notes, 6.625%
due 6/30/01) $ 2,279,000
-----------
TOTAL REPURCHASE AGREEMENT
(Cost $2,279,000) 2,279,000
-----------
TOTAL INVESTMENTS -- 97.2%
(Cost $53,601,421) 49,271,620
CASH, RECEIVABLES AND OTHER
ASSETS LESS LIABILITIES -- 2.8% 1,391,941
-----------
- --------------------------------------------------------------------------------
NET ASSETS -- 100.0% $50,663,561
===========
- --------------------------------------------------------------------------------
Glossary of terms:
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
See notes to financial statements.
- --------------------------------------------------------------------------------
89
<PAGE>
- ---------------
Baillie Gifford
International
Fund
- ---------------
7
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1998
ASSETS
Investments, at market (cost $53,601,421) $ 49,271,620
Cash 788
Foreign currency (cost $1,308,187) 1,311,807
Receivable for securities sold 191,750
Dividends receivable 169,890
Interest receivable 43,367
Receivable for fund shares sold 14,718
Dividend reclaims receivable 897
Deferred organization expenses 400
------------
TOTAL ASSETS 51,005,237
------------
LIABILITIES
Payable for fund shares redeemed 87,294
Accrued expenses 44,622
Due to affiliates 209,760
------------
TOTAL LIABILITIES 341,676
------------
NET ASSETS $ 50,663,561
============
COMPONENTS OF NET ASSETS
Capital stock, at par $ 685,638
Additional paid-in capital 69,201,067
Distributions in excess of net investment income (32,675)
Accumulated net realized loss on
investments and foreign currency
related transactions (14,856,202)
Net unrealized depreciation on investments
and translation of other assets and
liabilities denominated in foreign currencies (4,334,267)
------------
NET ASSETS $ 50,663,561
============
Shares Outstanding -- $0.10 par value 6,856,378
------------
NET ASSET VALUE PER SHARE $ 7.39
============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1998
Investment Income:
Dividends $ 1,553,957
Interest 237,978
Less: Foreign tax withheld (67,125)
------------
Total Income 1,724,810
------------
Expenses:
Investment advisory fees -- Note B 649,564
Custodian fees 248,616
Printing expense 25,000
Audit fees 21,000
Directors' fees -- Note B 12,500
Registration fees 7,000
Transfer agent fees 2,200
Insurance expense 1,769
Legal fees 1,019
Deferred organization expense 507
Other 700
------------
Total Expenses 969,875
------------
Net Investment Income 754,935
------------
Realized and Unrealized Gain/(Loss) on
Investments and Foreign Currencies -- Note C
Net realized loss on investments -- Note A (13,492,473)
Net realized loss on foreign currency related
transactions -- Note A (357,845)
Net change in unrealized appreciation of
investments -- Note C (7,910,953)
Net change in unrealized appreciation from
translation of other assets and liabilities
denominated in foreign currencies-- Note C (14,069)
------------
Net Realized and Unrealized Loss on
Investments and Foreign Currencies (21,775,340)
------------
Net Decrease in Net Assets
from Operations $(21,020,405)
============
See notes to financial statements.
- --------------------------------------------------------------------------------
90
<PAGE>
----------------
Baillie Gifford
Emerging Markets
Fund
----------------
7
----------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------ ------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 754,935 $ 734,015
Net realized gain/(loss) on investments and foreign
currency related transactions (13,850,318) 2,641,526
Net change in unrealized appreciation/(depreciation)
on investments and translation of other assets and
liabilities denominated in foreign currencies (7,925,022) (4,534,373)
------------ ------------
Net Decrease in Net Assets from Operations (21,020,405) (1,158,832)
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income -- (470,207)
Net realized gains on investments and
foreign currency related transactions -- (2,641,526)
In excess of net realized
gains on investments and foreign currency
related transactions -- (1,578,227)
Tax return of capital (481,281) --
------------ ------------
Total Dividends and Distributions to Shareholders (481,281) (4,689,960)
------------ ------------
From Capital Share Transactions:
Increase/(Decrease) in net assets from capital
share transactions -- Note E (14,848,462) 25,800,397
------------ ------------
Net Increase/(Decrease) in Net Assets (36,350,148) 19,951,605
Net Assets:
Beginning of year 87,013,709 67,062,104
------------ ------------
End of year* $ 50,663,561 $ 87,013,709
============ ============
* Includes distributions in excess of net investment
income of: $ (32,675) $ (562,888)
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
91
<PAGE>
- ---------------
Baillie Gifford
International
Fund
- ---------------
7
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
October 17,
Year Ended December 31, 1994* to
---------------------------------------------------------------- December 31,
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..................... $ 10.17 $ 10.54 $ 8.46 $ 8.68 $ 9.87
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income/(loss) ............ 0.09 0.09 0.07 0.07 (0.01)
Net realized and unrealized gain/(loss)
on investments and translation of other
assets and liabilities denominated in
foreign currency ...................... (2.81) 0.12 2.01 (0.12) (1.17)
---------- ---------- ---------- ---------- ----------
Net increase/(decrease) from investment
operations ............................ (2.72) 0.21 2.08 (0.05) (1.18)
---------- ---------- ---------- ---------- ----------
Dividends and Distributions
to Shareholders from:
Net investment income ................... -- (0.06) -- (0.07) (0.01)
Distributions in excess of
net investment income ................ -- -- -- (0.10) --
Net realized gain on investments and
foreign currency related transactions . -- (0.33) -- -- --
In excess of net realized gain
on investments ........................ -- (0.19) -- -- --
Tax return of capital ................... (0.06) -- -- -- --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions ....... (0.06) (0.58) -- (0.17) (0.01)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period .............. $ 7.39 $ 10.17 $ 10.54 $ 8.46 $ 8.68
---------- ---------- ---------- ---------- ----------
Total return(a) ............................. (26.77)% 1.97% 24.59% (0.60%) (11.97)%
---------- ---------- ---------- ---------- ----------
Ratios/supplemental data:
Net assets, end of period (000's omitted) $ 50,664 $ 87,014 $ 67,062 $ 34,218 $ 24,069
Ratio of expenses to average net assets . 1.49% 1.40% 1.53% 1.67% 2.28%(b)
Ratio of net investment income to average
net assets ............................ 1.16% 0.76% 0.85% 0.89% 0.94%(b)
Portfolio turnover rate ................. 69% 64% 46% 52% --
</TABLE>
* Commencement of public offering of the Fund's shares.
(a) Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
(b) Annualized.
See notes to financial statements.
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
93
<PAGE>
- ------------
The Guardian
Small Cap
Stock Fund
- ------------
8
- ------------
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- ---------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- ----------------------
COMMON STOCKS -- 92.2%
- ----------------------
Shares Value
- --------------------------------------------------------------------------------
Aerospace and Defense -- 1.7%
23,200 Alliant Techsystems, Inc.* $ 1,912,550
49,000 Hawker Pacific Aerospace* 171,500
31,000 Kaman Corp. 497,937
7,300 LMI Aerospace, Inc.* 45,625
14,000 Precision Castparts Corp. 619,500
-----------
3,247,112
-----------
Appliance and Furniture -- 2.0%
57,900 Ethan Allen Interiors, Inc. 2,373,900
32,000 Furniture Brands Int'l., Inc.* 872,000
33,000 LA-Z Boy, Inc. 587,813
-----------
3,833,713
-----------
Automotive Parts -- 0.6%
18,100 Arvin Industries, Inc. 754,544
30,000 Automobile Protection Corp.* 352,500
-----------
1,107,044
-----------
Building Materials and Homebuilders -- 10.9%
58,600 Centex Construction Products, Inc. 2,380,625
35,000 Coachmen Industries, Inc.* 918,750
18,000 Crossman Communities, Inc.* 497,250
33,000 D. R. Horton, Inc. 759,000
99,300 Engle Homes, Inc. 1,520,531
50,000 Giant Cement Hldgs., Inc.* 1,237,500
64,200 Juno Lighting, Inc. 1,500,675
33,000 Lafarge Corp. 1,336,500
38,500 Lennar Corp. 972,125
61,600 Lone Star Industries, Inc. 2,267,650
89,700 Monaco Coach Corp.* 2,377,050
47,550 National RV Hldgs., Inc.* 1,224,412
7,000 NCI Building Systems, Inc.* 196,875
30,900 Southdown, Inc. 1,828,894
82,000 Thor Industries, Inc. 2,091,000
-----------
21,108,837
-----------
Capital Goods-Miscellaneous -- 0.4%
44,500 Dispatch Mgmt. Svcs. Corp.* 180,781
33,000 Dynamex, Inc.* 129,938
36,000 Hawk Corp.* 301,500
34,350 Western Staff Svcs., Inc.* 214,687
-----------
826,906
-----------
Capital Goods-Miscellaneous Technology -- 4.7%
26,800 Acxiom Corp.* 830,800
116,500 AFC Cable Systems, Inc.* 3,917,313
26,500 Kaydon Corp. 1,061,656
38,700 National Computer Systems, Inc. 1,431,900
17,000 Profit Recovery Group Int'l., Inc.* 636,438
36,800 Xircom, Inc.* 1,251,200
-----------
9,129,307
-----------
Chemicals -- 3.3%
30,000 Cambrex Corp. 720,000
28,500 MacDermid, Inc. 1,115,062
59,000 Myers Industries, Inc. 1,692,563
126,400 Tredegar Industries, Inc. 2,844,000
-----------
6,371,625
-----------
Computer Software -- 4.5%
27,000 American Mgmt. Systems, Inc.* 1,080,000
89,000 Docucorp, Inc.* 539,562
26,000 Legato Systems, Inc.* 1,714,375
35,000 Macromedia, Inc.* 1,179,063
21,700 Pervasive Software, Inc.* 417,725
186,000 System Software Association, Inc.* 1,307,813
6,000 Visio Corp.* 219,375
49,200 Wind River Systems, Inc.* 2,312,400
-----------
8,770,313
-----------
Computer Systems -- 0.6%
9,500 Henry Jack & Associates, Inc. 472,625
40,200 HTE, Inc.* 201,000
65,000 The Intercept Group, Inc.* 471,250
-----------
1,144,875
-----------
Cosmetics and Toiletries -- 0.8%
36,800 Regis Corp. 1,472,000
-----------
Drugs and Hospitals -- 6.2%
43,000 Arterial Vascular Engineering, Inc.* 2,257,500
9,300 Biomatrix, Inc.* 541,725
38,900 Boron LePore & Associates, Inc.* 1,342,050
100,000 Genesis Health Ventures, Inc.* 875,000
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
94
<PAGE>
------------
The Guardian
Small Cap
Stock Fund
------------
8
------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
135,000 Integrated Health Svcs., Inc. $ 1,906,875
32,000 King Pharmaceuticals, Inc.* 844,000
33,700 Maxxim Medical, Inc.* 1,002,575
200,000 NovaCare, Inc.* 500,000
22,500 Promedco Mgmt. Co.* 135,000
71,000 Steris Corp.* 2,019,062
19,350 United Payors & United Prov., Inc.* 551,475
------------
11,975,262
------------
Electrical Equipment -- 1.4%
17,400 Esterline Technologies Corp.* 378,450
70,000 Integrated Process Equipment Corp.* 752,500
17,500 Kopin Corp.* 367,500
36,600 Plexus Corp.* 1,239,825
------------
2,738,275
------------
Financial-Banks -- 3.7%
21,100 Cullen Frost Bankers, Inc. 1,157,863
63,348 Peoples Heritage Financial Group 1,266,960
24,900 U.S. Bancorp, Inc. 494,887
26,500 U.S. Trust Corp.* 2,014,000
56,000 Valley National Bancorp 1,578,500
16,500 Westamerica Bancorp 606,375
------------
7,118,585
------------
Financial-Other -- 1.2%
16,700 Freedom Securities Corp. 252,588
6,100 Jefferies Group, Inc. 302,712
15,000 Mech Financial, Inc. 416,250
34,000 Morgan Keegan, Inc. 639,625
28,000 Ragen Mackenzie Group, Inc.* 334,250
21,000 Southwest Securities Group, Inc. 422,625
------------
2,368,050
------------
Financial-Thrift -- 0.6%
27,500 BankAtlantic Bancorp, Inc. 177,031
10,800 Coast Federal Litigation Trust* 71,550
40,000 Waddell & Reed Financial, Inc.* 947,500
------------
1,196,081
------------
Food, Beverage and Tobacco -- 9.1%
25,000 Adolph Coors Co.* 1,410,938
73,000 Bob Evans Farms, Inc. 1,902,562
49,500 CKE Restaurants, Inc.* 1,457,156
96,600 Earthgrains Co. 2,988,563
34,900 Fresh Foods, Inc.* 165,775
15,700 McCormick & Co., Inc. 530,856
117,000 Ralcorp Hldgs., Inc.* 2,135,250
97,600 Ruby Tuesday, Inc.* 2,074,000
18,952 Tootsie Roll Industries, Inc. 741,497
15,000 U.S. Foodservice* 735,000
147,000 Vlasic Foods Int'l., Inc.* 3,500,438
------------
17,642,035
------------
Household Products -- 0.3%
59,000 Home Products Int'l., Inc.* 586,312
------------
Insurance -- 8.8%
26,600 American Heritage Life Investments 650,038
17,500 American Safety Insurance Group* 168,437
30,000 Chicago Title Corp. 1,408,125
30,000 Enhance Financial Svcs. Group, Inc. 900,000
27,720 Fidelity National Financial, Inc. 845,460
47,000 Financial Sec. Assur. Hldgs. Ltd. 2,549,750
36,000 First American Financial Corp. 1,156,500
44,100 Harleysville Group, Inc. 1,138,331
16,000 Landamerica Financial Group, Inc. 893,000
7,000 Markel Corp.* 1,267,000
45,000 Penn America Group, Inc. 407,812
70,800 Philadelphia Consolid. Hldg. Corp.* 1,601,850
11,000 Reinsurance Group of America 668,250
46,000 State Auto Financial Corp. 569,250
33,300 Stewart Information Svcs. Corp. 1,931,400
27,750 W.R. Berkley Corp. 945,234
------------
17,100,437
------------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
95
<PAGE>
- ------------
The Guardian
Small Cap
Stock Fund
- ------------
8
- ------------
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- ---------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998 (Continued)
Shares Value
- --------------------------------------------------------------------------------
Lodging -- 0.7%
59,000 Silverleaf Resorts, Inc.* $ 549,438
59,800 Sunterra Corp.* 897,000
------------
1,446,438
------------
Machinery and Equipment -- 3.6%
6,150 AAR Corp. 146,831
40,000 Dril-Quip, Inc.* 710,000
18,000 Graco, Inc. 531,000
91,000 JLG Industries, Inc. 1,421,875
26,800 Manitowoc Co., Inc. 1,189,250
56,000 Northwest Pipe Co.* 903,000
20,100 SPX Corp.* 1,346,700
31,125 Varlen Corp. 717,820
------------
6,966,476
------------
Merchandising-Department Stores -- 0.2%
11,900 Shopko Stores, Inc.* 395,675
------------
Merchandising-Food -- 1.0%
152,600 Grand Union Co.* 1,869,350
------------
Merchandising-Special -- 6.5%
47,100 1-800 Contacts, Inc.* 847,800
56,000 Ames Department Stores, Inc.* 1,512,000
32,000 BJ's Wholesale Club, Inc.* 1,482,000
53,000 Department 56, Inc.* 1,990,813
48,000 Eagle Hardware and Garden, Inc.* 1,560,000
15,000 Hughes Supply, Inc. 438,750
20,000 Miami Computer Supplies* 492,500
74,100 PC Connection, Inc.* 1,306,012
33,000 Trans World Entertainment Corp.* 629,063
70,300 Zale Corp.* 2,267,175
------------
12,526,113
------------
Miscellaneous-Consumer Growth Cyclical -- 1.2%
135,000 Nielsen Media Research, Inc.* 2,430,000
------------
Miscellaneous-Consumer Growth Staples -- 2.9%
68,000 A.C. Nielsen Corp.* 1,921,000
40,000 Access Worldwide, Inc.* 335,000
48,000 Innotrac Corp.* 870,000
46,400 Valassis Communications, Inc.* 2,395,400
------------
5,521,400
------------
Oil and Gas Producing -- 1.1%
30,000 Basin Exploration, Inc.* 376,875
21,800 Callon Petroleum Co.* 253,425
30,000 Newfield Exploration Co.* 626,250
14,000 Snyder Oil Corp. 186,375
22,000 Stone Energy Corp.* 632,500
------------
2,075,425
------------
Oil and Gas Services -- 2.2%
93,000 B.J. Services Co.* 1,453,125
50,000 Cooper Cameron Corp.* 1,225,000
110,000 Varco Int'l., Inc.* 852,500
60,000 Veritas DGC, Inc.* 780,000
------------
4,310,625
------------
Publishing-News -- 1.8%
44,400 Harte-Hanks Communications 1,265,400
6,200 Pulitzer Publishing Co. 537,075
56,900 World Color Press, Inc.* 1,731,894
------------
3,534,369
------------
Real Estate Investment Trust -- 1.5%
12,000 Brandywine Realty Trust 214,500
47,000 Colonial Pptys. Trust, Inc. 1,251,375
40,000 Kilroy Realty Corp. 920,000
12,000 Mills Corp. 238,500
77,000 Stratus Pptys., Inc.* 288,750
------------
2,913,125
------------
Textile-Apparel and Production--2.5%
40,900 Columbia Sportswear Co.* 690,188
29,000 Mohawk Industries, Inc.* 1,219,813
65,000 Shaw Industries, Inc.* 1,576,250
40,000 Tropical Sportswear Int'l. Corp.* 1,435,000
------------
4,921,251
------------
Transportation-Miscellaneous -- 1.8%
118,900 Avis Rent A Car, Inc.* 2,875,894
4,300 Central Parking Corp. 139,481
13,200 Sea Containers Ltd. 395,175
------------
3,410,550
------------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
96
<PAGE>
------------
The Guardian
Small Cap
Stock Fund
------------
8
------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
Utilities-Gas and Electric -- 3.2%
26,600 BEC Energy* $ 1,095,588
32,000 Black Hills Corp. 844,000
9,000 Central Hudson Gas & Elec. Corp.* 402,750
17,900 IPALCO Enterprises 992,331
14,500 Minnesota Power & Light Co. 638,000
5,500 Otter Tail Power Co. 219,312
23,000 SIGCORP, Inc. 820,812
31,000 TNP Enterprises, Inc. 1,176,063
------------
6,188,856
------------
Utilities-Telecommunications -- 0.7%
60,000 Primus Telecomm. Group, Inc.* 990,000
43,000 Startec Global Communications
Corp.* 413,875
------------
1,403,875
------------
Utilities-Water -- 0.5%
19,000 E'Town Corp. 900,125
------------
TOTAL COMMON STOCKS
(Cost $159,761,882)
178,550,422
------------
- ----------------------------
REPURCHASE AGREEMENT -- 7.3%
- ----------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
$ 14,177,000 State Street Bank & Trust Co.
repurchase agreement,
dated 12/31/98, maturity
value $14,184,876 at 5.00%
due 1/4/99 (collateralized by
$14,465,000 Fed. Home Loan
Bank Notes, 5.03% due 10/29/99) $ 14,177,000
------------
TOTAL REPURCHASE AGREEMENT
(Cost $14,177,000)
14,177,000
------------
TOTAL INVESTMENTS--99.5%
(Cost $173,938,882)
192,727,422
CASH, RECEIVABLES AND OTHER
ASSETS LESS LIABILITIES--0.5% 865,479
------------
NET ASSETS--100.0% $193,592,901
============
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
97
<PAGE>
- ------------
The Guardian
Small Cap
Stock Fund
- ------------
8
- ------------
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- ---------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1998
ASSETS
Investments, at market (cost $173,938,882) $ 192,727,422
Cash 5,999
Receivable for securities sold 784,761
Receivable for fund shares sold 531,560
Dividends receivable 93,006
Interest receivable 1,969
Other assets 616
-------------
TOTAL ASSETS 194,145,333
-------------
LIABILITIES
Payable for securities purchased 270,381
Accrued expenses 23,704
Due to afffiliates 258,347
-------------
TOTAL LIABILITIES 552,432
-------------
NET ASSETS $ 193,592,901
=============
COMPONENTS OF NET ASSETS
Capital stock, at par $ 1,519,191
Additional paid-in capital 185,369,315
Accumulated net realized loss
on investments (12,084,145)
Net unrealized appreciation of investments 18,788,540
-------------
NET ASSETS $ 193,592,901
=============
Shares Outstanding -- $0.10 par value 15,191,909
-------------
NET ASSET VALUE PER SHARE $ 12.74
=============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1998
Investment Income:
Dividends $ 810,622
Interest 343,339
-------------
Total Income 1,153,961
-------------
Expenses:
Investment advisory fees -- Note B 819,606
Custodian fees 82,532
Printing expense 28,906
Audit fees 17,500
Directors' fees -- Note B 16,000
Transfer agent fees 2,200
Insurance expense 1,421
Legal fees 1,200
Registration fees 900
Other 700
Deferred organization expense 194
-------------
Total Expenses 971,159
-------------
Net Investment Income 182,802
-------------
Realized and Unrealized Gain/(Loss)
on Investments -- Note C
Net realized loss on investments -- Note A (12,128,562)
Net change in unrealized appreciation of
investments -- Note C 11,582,495
-------------
Net Realized and Unrealized Loss
on Investments (546,067)
-------------
Net Decrease in Net Assets
from Operations $ (363,265)
=============
See notes to financial statements.
- --------------------------------------------------------------------------------
98
<PAGE>
------------
The Guardian
Small Cap
Stock Fund
------------
8
------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Period from
April 2,
Year Ended 1997+ to
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 182,802 $ 165,805
Net realized gain/(loss) on investments (12,128,562) 1,925,041
Net change in unrealized appreciation of investments 11,582,495 7,206,045
------------- -------------
Net Increase/(Decrease) in Net Assets from Operations (363,265) 9,296,891
------------- -------------
Dividends and Distributions to Shareholders from:
Net investment income (181,463) (165,805)
Net realized gain on investments (848,131) (1,063,633)
------------- -------------
Total Dividends and Distributions to Shareholders (1,029,594) (1,229,438)
------------- -------------
From Capital Share Transactions:
Increase in net assets from capital share
transactions--Note E 107,236,357 79,681,950
------------- -------------
Net Increase in Net Assets 105,843,498 87,749,403
Net Assets:
Beginning of period 87,749,403 --
------------- -------------
End of period $ 193,592,901 $ 87,749,403
============= =============
</TABLE>
+ Commencement of operations.
See notes to financial statements.
- --------------------------------------------------------------------------------
99
<PAGE>
- ------------
The Guardian
Small Cap
Stock Fund
- ------------
8
- ------------
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- ---------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
Year Ended April 2, 1997*
December 31, to December 31,
1998 1997
-----------------------------
<S> <C> <C>
Net asset value,
beginning of period ................................... $ 13.63 $ 10.00
----------- -----------
Income from investment
operations:
Net investment
income .............................................. 0.01 0.03
Net realized and
unrealized gain/
(loss) on investments ............................... (0.79) 3.80
----------- -----------
Net increase/(decrease)
from investment
operations .......................................... (0.78) 3.83
----------- -----------
Dividends and Distributions
to Shareholders from:
Net investment income ................................. (0.01) (0.03)
Net realized gain ..................................... (0.10) (0.17)
----------- -----------
Total dividends and
distributions ....................................... (0.11) (0.20)
----------- -----------
Net asset value, end of
period ................................................ $ 12.74 $ 13.63
----------- -----------
Total return(a) ........................................... (5.75)% 38.32%
----------- -----------
Ratios/supplemental data:
Net assets, end of period
(000's omitted) ..................................... $ 193,593 $ 87,749
Ratio of expenses to
average net assets .................................. 0.89% 0.96%(b)
Ratio of net investment
income to average net assets ........................ 0.17% 0.48%(b)
Portfolio turnover
rate ................................................ 59% 22%
</TABLE>
* Commencement of operations.
(a) Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
(b) Annualized.
See notes to financial statements.
- --------------------------------------------------------------------------------
100
<PAGE>
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
101
<PAGE>
- ----------------
GIAC Funds, Inc.
- ----------------
8
- ----------------
- --------------------------------------------------------------------------------
GIAC Funds, Inc. (including: Baillie Gifford
International Fund, Baillie Gifford Emerging Markets
Fund and The Guardian Small Cap Stock Fund)
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- ----------------------------------------------
Note A -- Organization and Accounting Policies
- ----------------------------------------------
GIAC Funds, Inc. (the Company) is a diversified open-end management
investment company registered under the Investment Company Act of 1940, as
amended (1940 Act), which was incorporated in Maryland on October 29, 1990.
Shares of the Company are offered in three series: Baillie Gifford International
Fund (BGIF), Baillie Gifford Emerging Markets Fund (BGEMF) and The Guardian
Small Cap Stock Fund (GSCSF). The series are collectively referred to herein as
the "Funds". Shares of the Funds are only sold to certain separate accounts of
The Guardian Insurance & Annuity Company, Inc. (GIAC). GIAC is a wholly-owned
subsidiary of The Guardian Life Insurance Company of America (Guardian Life).
The Funds are available for investment only through certain variable annuity and
variable life insurance contracts issued by GIAC.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Valuation of Investments
Securities listed on foreign exchanges and for which market quotations are
readily available are valued at the closing price on the exchange on which the
securities are traded at the close of the appropriate exchange or, if there have
been no sales during the day, at the mean of the closing bid and asked prices.
Securities traded in the over-the-counter market are valued at the mean between
the bid and asked prices. Securities listed or traded on any domestic (U.S.)
exchanges are valued at the last sale price or, if there have been no sales
during the day, at the mean of the closing bid and asked prices. Securities for
which market quotations are not readily available, including restricted
securities and illiquid assets, are valued at fair value as determined in good
faith by or under the direction of the Company's Board of Directors. Investing
outside of the U.S. may involve certain considerations and risks not typically
associated with domestic investments, including: the possibility of political
and economic unrest and different levels of governmental supervision and
regulation of foreign securities markets.
Repurchase agreements are carried at cost which approximates market value
(See Note D).
Foreign Currency Translation
The books and records of the Funds are maintained in U.S. dollars as
follows:
(1) The foreign currency market value of investment securities and other
assets and liabilities stated in foreign currencies are translated into U.S.
dollars at the current rate of exchange.
(2) Purchases, sales, income and expenses are translated at the rate of
exchange prevailing on the respective dates of such transactions.
The resulting gains and losses are included in the Statement of Operations
as follows:
Realized foreign exchange gains and losses, which result from changes in
foreign exchange rates between the date on which the Funds earn dividends and
interest or pay foreign withholding taxes or other expenses and the date on
which U.S. dollar equivalent amounts are actually received or paid, are included
in net realized gain or loss on foreign currency related transactions. Realized
foreign exchange gains and
- --------------------------------------------------------------------------------
102
<PAGE>
----------------
GIAC Funds, Inc.
----------------
8
----------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
losses which result from changes in foreign exchange rates between the trade and
settlement dates on security and currency transactions are also included in net
realized gains or losses on foreign currency related transactions. Net currency
gains and losses from valuing investments and other assets and liabilities
denominated in foreign currency at the period end exchange rate are reflected in
net change in unrealized appreciation or depreciation from translation of other
assets and liabilities denominated in foreign currencies.
Forward Foreign Currency Contracts
The Funds may enter into forward foreign currency contracts in connection
with planned purchases or sales of securities, or to hedge against changes in
currency exchange rates affecting the values of securities denominated in a
particular currency. A forward foreign currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. Fluctuations in the value of forward foreign currency exchange contracts
are recorded for book purposes as unrealized gains or losses on foreign currency
related transactions by the Funds. When forward contracts are closed, the Funds
record realized gains or losses equal to the differences between the values of
such forward contracts at the time each was opened and the value at the time
each was closed. Such amounts are recorded in net realized gain or loss on
foreign currency related transactions. None of the Funds will enter into a
forward foreign currency contract if such contract would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency.
Securities Transactions and Investment Income
Securities transactions are recorded on the trade date. Net realized gains
or losses on sales of investments are determined on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on an accrual basis. Dividends on foreign securities are recorded when
the Funds are informed of the dividend.
Taxes
Each Fund intends to continue to qualify to be taxed as a "regulated
investment company" under the provisions of the Internal Revenue Code (Code),
and as such will not be subject to federal income tax on income (including any
realized capital gains) which is distributed to its shareholders in accordance
with the provisions of the Code. Therefore, no federal income tax provision is
required. Losses on security transactions arising after October 31 are treated
as arising on the first day of the Funds' next fiscal year.
Investment income received from investments in foreign currencies may be
subject to foreign withholding tax. Whenever possible, the Funds will attempt to
operate so as to qualify for reduced tax rates or tax exemptions in those
countries with which the United States has a tax treaty.
At December 31, 1998, for federal income tax purposes, BGEMF had a net
capital loss carryforward of $12,410,035 which expires in 2006. GSCSF had a net
capital loss carryforward of $9,591,694 which expires in 2006.
Dividends and Distributions to Shareholders
The Funds intend to distribute each year, as dividends, substantially all
net investment income and net realized capital gains. All such dividends or
distributions are credited in the form of additional shares of the Funds at net
asset value on the ex-dividend date. Such distributions are determined in
conformity with federal income tax regulations. Differences between the
recognition of income on an in-
- --------------------------------------------------------------------------------
103
<PAGE>
- ----------------
GIAC Funds, Inc.
- ----------------
8
- ----------------
- --------------------------------------------------------------------------------
GIAC Funds, Inc. (including: Baillie Gifford
International Fund, Baillie Gifford Emerging Markets
Fund and The Guardian Small Cap Stock Fund)
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1998
come tax basis and recognition of income based on generally accepted accounting
principles may cause temporary overdistributions of net realized gains and net
investment income. Currently, the Funds' policy is to distribute net investment
income approximately every six months and net capital gains once a year. This
policy is, however, subject to change at any time by the Company's Board of
Directors.
Reclassifications of Capital Accounts
The treatment for financial statement purposes of distributions made
during the year from net investment income and net realized gains may differ
from their ultimate treatment for federal income tax purposes. These differences
primarily are caused by differences in the timing of the recognition of certain
components of income or capital gain and the recharacterization of foreign
exchange gains or losses to either ordinary income or realized capital gains for
federal income tax purposes. Where such differences are permanent in nature,
they are reclassified in the components of net assets based on their ultimate
characterization for federal income tax purposes. Any such reclassifications
will have no effect on net assets, results of operations, or net asset value per
share of the Funds.
During the year ended December 31, 1998, BGIF, BGEMF and GSCSF
reclassified amounts to paid-in capital from undistributed/(overdistributed) net
investment income and accumulated net realized gain/(loss) on investments and
foreign currency related transactions. Increases (decreases) to the various
capital accounts were as follows:
Undistributed/ Accumulated
(overdistributed) net realized
Paid-in net investment gain/(loss) on
capital income investments
------- ------ -----------
BGIF $ (40,882) $ 2,222,538 $(2,181,656)
BGEMF (489,890) 256,559 233,331
GSCSF (29,801) (1,339) 31,140
- ------------------------------------------
Note B -- Investment Management Agreements
and Payments to Related Parties
- ------------------------------------------
BGIF and BGEMF have an investment management agreement with Guardian
Baillie Gifford Limited (GBG), a Scottish corporation formed through a joint
venture between GIAC and Baillie Gifford Overseas Limited (BG Overseas). GBG is
responsible for the overall investment management of the Funds' portfolios
subject to the supervision of the Company's Board of Directors. GBG has entered
into sub-investment management agreements with BG Overseas pursuant to which BG
Overseas is responsible for the day-to-day management of BGIF and BGEMF. GBG
continually monitors and evaluates the performance of BG Overseas.
As compensation for its services, GBG receives a management fee computed
at the annual rate of .80% of BGIF's average daily net assets and 1.00% of
BGEMF's average daily net assets. One-half of these fees (.40% relating to BGIF
and .50% relating to BGEMF) are payable by GBG to BG Overseas for its services.
Payment of the sub-investment management fees does not represent a separate or
additional expense to the Funds.
GSCSF has an investment advisory agreement with Guardian Investor Services
Corporation (GISC), a wholly-owned subsidiary of GIAC. GISC receives a
management fee from GSCSF at an annual rate of .75% of its average daily net
assets.
No compensation is paid by the Company to a director who is deemed to be
an "interested person" (as defined in the 1940 Act) of the Company. Each
director not deemed an "interested person" is paid an annual fee of $500 and
$350 for attendance at each meeting of the Company.
- --------------------------------------------------------------------------------
104
<PAGE>
----------------
GIAC Funds, Inc.
----------------
8
----------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998
- ---------------------------------
Note C -- Investment Transactions
- ---------------------------------
Purchases and proceeds from sales of securities (excluding short-term
securities) for the year ended December 31, 1998 were as follows:
BGIF BGEMF GSCSF
---- ----- -----
Purchases ........................ $302,399,763 $40,837,642 $158,908,669
Proceeds ......................... $280,799,736 $53,343,729 $ 62,430,156
The cost of investments owned at December 31, 1998 for federal income tax
purposes for BGIF, BGEMF and GSCSF are the same as for financial reporting
purposes. The gross unrealized appreciation and depreciation of investments
excluding foreign currency at December 31, 1998 were as follows:
BGIF BGEMF GSCSF
---- ----- -----
Gross Appreciation ............... $185,044,687 $ 3,848,181 $ 25,105,674
Gross Depreciation ............... (8,682,547) (8,177,982) (6,317,134)
------------ ----------- ------------
Net Unrealized Appreciation/
(Depreciation) ................. $176,362,140 $(4,329,801) $ 18,788,540
============ =========== ============
Forward foreign currency contracts represent commitments to purchase or
sell a specified amount of foreign currency at a future date and at a future
price. Risks may arise from the potential inability of a counterparty to meet
the terms of a contract and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar.
- -------------------------------
Note D -- Repurchase Agreements
- -------------------------------
Collateral underlying repurchase agreements takes the form of either cash
or fully negotiable U.S. government securities. Repurchase agreements are fully
collateralized (including the interest earned thereon) and such collateral is
marked-to-market daily while the agreements remain in force. If the value of the
underlying securities falls below the value of the repurchase price plus accrued
interest, the Funds will require the seller to deposit additional collateral by
the next business day. If the request for additional collateral is not met, or
the seller defaults, the Funds maintain the right to sell the collateral and may
claim any resulting loss against the seller. The Company's Board of Directors
has established standards to evaluate the creditworthiness of broker-dealers and
banks which engage in repurchase agreements with the Funds.
- --------------------------------------------------------------------------------
105
<PAGE>
- ----------------
GIAC Funds, Inc.
- ----------------
8
- ----------------
- --------------------------------------------------------------------------------
GIAC Funds, Inc. (including: Baillie Gifford
International Fund, Baillie Gifford Emerging Markets
Fund and The Guardian Small Cap Stock Fund)
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1998
- ---------------------------------------
Note E -- Transactions in Capital Stock
- ---------------------------------------
There are 1,000,000,000 shares of $0.10 par value capital stock authorized
for each of the Funds. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
Shares Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
o Baillie Gifford International Fund
Shares sold 6,525,306 5,510,606 $ 133,897,400 $ 103,914,585
Shares issued through reinvestment
of dividends and distributions 1,785,599 1,589,325 37,426,471 29,071,132
Shares repurchased (5,068,012) (4,262,859) (103,165,394) (79,908,567)
- ------------------------------------------------------------------------------------------------------------
Net increase 3,242,893 2,837,072 $ 68,158,477 $ 53,077,150
- ------------------------------------------------------------------------------------------------------------
o Baillie Gifford Emerging Markets Fund
Shares sold 1,108,146 4,436,117 $ 9,553,044 $ 52,148,316
Shares issued through reinvestment
of dividends and distributions 58,765 461,151 481,282 4,689,960
Shares repurchased (2,863,295) (2,709,884) (24,882,788) (31,037,879)
- ------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (1,696,384) 2,187,384 $ (14,848,462) $ 25,800,397
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Period from Period from
Year Ended April 2, 1997+ Year Ended April 2, 1997+
December to December December to December
31, 1998 31, 1997 31, 1998 31, 1997
- ------------------------------------------------------------------------------------------------------------
Shares Amount
- ------------------------------------------------------------------------------------------------------------
o The Guardian Small Cap Stock Fund
Shares sold 11,667,174 6,957,498 $ 145,794,573 $ 86,846,310
Shares issued through reinvestment
of dividends and distributions 73,035 92,788 1,029,594 1,229,438
Shares repurchased (2,987,585) (611,001) (39,587,810) (8,393,798)
- ------------------------------------------------------------------------------------------------------------
Net increase 8,752,624 6,439,285 $ 107,236,357 $ 79,681,950
- ------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
- --------------------------------------------------------------------------------
106
<PAGE>
----------------
GIAC Funds, Inc.
----------------
8
----------------
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors and Shareholders
GIAC Funds, Inc.
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the GIAC Funds, Inc. (comprising,
respectively, the Baillie Gifford International Fund, Baillie Gifford Emerging
Markets Fund and The Guardian Small Cap Stock Fund), as of December 31, 1998,
and the related statements of operations for the year then ended, and the
statements of changes in net assets and the financial highlights for each of the
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective funds constituting the GIAC Funds, Inc. at December 31,
1998, the results of their operations for the year then ended, the changes in
their net assets and the financial highlights for each of the periods indicated
therein, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
February 10, 1999
- --------------------------------------------------------------------------------
107
<PAGE>
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Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- ----------------------
COMMON STOCKS -- 96.6%
- ----------------------
Shares Value
- --------------------------------------------------------------------------------
Advertising -- 0.9%
125,000 Omnicom Group, Inc. $ 7,250,000
------------
Auto Parts-Replacement -- 1.5%
200,000 Federal-Mogul Corp. 11,900,000
------------
Bank -- 5.6%
125,000 First Union Corp. 7,601,562
200,000 Mellon Bank Corp. 13,750,000
175,000 State Street Corp. 12,173,438
200,000 Zions Bancorporation 12,475,000
------------
46,000,000
------------
Bank-Midwest -- 0.7%
85,000 Fifth Third Bancorp 6,061,562
------------
Coal/Alternate Energy -- 0.9%
150,000 AES Corp.* 7,106,250
------------
Computer & Peripherals -- 13.6%
200,000 Cisco Systems, Inc.* 18,562,500
375,000 Compaq Computer Corp. 15,726,563
320,000 Dell Computer Corp.* 23,420,000
235,000 EMC Corp.* 19,975,000
75,000 International Business Machines Corp. 13,856,250
300,000 Storage Technology Corp.* 10,668,750
100,000 Sun Microsystems, Inc.* 8,562,500
------------
110,771,563
------------
Computer Software & Services -- 6.1%
280,000 BMC Software, Inc.* 12,477,500
100,000 Microsoft Corp.* 13,868,750
225,000 Network Associates, Inc.* 14,906,250
200,000 Oracle Corp.* 8,625,000
------------
49,877,500
------------
Diversified Companies -- 1.2%
135,000 Tyco International, Ltd. 10,184,063
------------
Drug -- 9.3%
50,000 Amgen Inc.* 5,228,125
100,000 Biogen, Inc.* 8,300,000
85,000 Genzyme Corp.* 4,228,750
125,000 Lilly (Eli) & Co. 11,109,375
90,000 Merck & Co., Inc. 13,291,875
100,000 Pfizer, Inc. 12,543,750
200,000 Schering-Plough Corp. 11,050,000
140,000 Warner-Lambert Co. 10,526,250
------------
76,278,125
------------
Drugstore -- 0.7%
100,000 Walgreen Co. 5,856,250
------------
Electrical Equipment -- 1.6%
125,000 General Electric Co. 12,757,813
------------
Entertainment -- 2.7%
406,500 Clear Channel Communications, Inc.* 22,154,250
------------
Environmental -- 0.9%
300,000 Allied Waste Industries, Inc.* 7,087,500
------------
Financial Services -- 3.9%
140,000 American Express Co. 14,315,000
200,000 Citigroup Inc. 9,900,000
145,000 FINOVA Group, Inc. (The) 7,820,937
------------
32,035,937
------------
Food Processing -- 0.9%
350,000 Tyson Foods, Inc. Class "A" 7,437,500
------------
Grocery -- 2.3%
125,000 Albertson's, Inc. 7,960,938
180,000 Safeway, Inc.* 10,968,750
------------
18,929,688
------------
Homebuilding -- 1.6%
280,000 Centex Corp. 12,617,500
------------
Household Products -- 3.0%
65,000 Clorox Co. (The) 7,592,812
100,000 Colgate-Palmolive Co. 9,287,500
260,000 Dial Corp. (The) 7,507,500
------------
24,387,812
------------
Insurance-Diversified -- 1.1%
90,000 American International Group, Inc. 8,696,250
------------
Insurance-Life -- 2.1%
160,000 Equitable Companies, Inc. (The) 9,260,000
100,000 SunAmerica Inc. 8,112,500
------------
17,372,500
------------
Internet -- 2.8%
140,000 America Online, Inc.* 22,400,000
------------
Machinery -- 1.1%
200,000 Ingersoll-Rand Co. 9,387,500
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
108
<PAGE>
---------------
Value Line
Centurion Fund,
Inc.
---------------
9
---------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
Medical Supplies -- 2.6%
150,000 Cardinal Health, Inc. $ 11,381,250
120,000 Johnson & Johnson 10,065,000
------------
21,446,250
------------
Office Equipment & Supplies -- 1.9%
350,000 Staples, Inc.* 15,290,625
------------
Oilfield Services/Equipment -- 1.3%
400,000 Transocean Offshore, Inc. 10,725,000
------------
Precision Instrument -- 0.9%
100,000 Eastman Kodak Co. 7,200,000
------------
Recreation -- 1.8%
260,000 Electronic Arts Inc.* 14,592,500
------------
Retail Building Supply -- 2.2%
110,000 Home Depot, Inc. (The) 6,730,625
220,000 Lowe's Companies, Inc. 11,261,250
------------
17,991,875
------------
Retails-Special Lines -- 4.7%
200,000 Bed Bath & Beyond Inc.* 6,825,000
225,000 Gap, Inc. 12,656,250
185,000 Tandy Corp. 7,619,688
270,000 Williams-Sonoma, Inc.* 10,884,375
------------
37,985,313
------------
Retail Store -- 4.7%
200,000 Costco Companies, Inc.* 14,437,500
250,000 Dayton Hudson Corp. 13,562,500
125,000 Wal-Mart Stores, Inc.* 10,179,687
------------
38,179,687
------------
Securities Brokerage -- 1.0%
150,000 Schwab (Charles) Corp. 8,428,125
------------
Semiconductor -- 3.8%
150,000 Intel Corp. 17,784,375
200,000 Maxim Integrated Products, Inc.* 8,737,500
100,000 Vitesse Semiconductor Corp.*. 4,562,500
------------
31,084,375
------------
Telecommunications Equipment -- 2.4%
50,000 Lucent Technologies Inc. 5,500,000
200,000 Tellabs, Inc.* 13,712,500
------------
19,212,500
------------
Telecommunication Services -- 2.2%
250,000 AirTouch Communications, Inc.* 18,031,250
------------
Thrift -- 3.2%
130,000 Dime Bancorp, Inc. 3,436,875
220,400 Federal Home Loan Mortgage Corp. 14,202,025
115,000 Federal National Mortgage
Association 8,510,000
------------
26,148,900
------------
Tobacco -- 1.3%
200,000 Philip Morris Companies, Inc. 10,700,000
------------
Trucking/Transportation Leasing -- 0.6%
120,000 CNF Transportation Inc. 4,507,500
------------
TOTAL COMMON STOCKS AND
TOTAL INVESTMENT SECURITIES -- 99.1%
(Cost $519,687,787)
808,073,463
------------
Principal
Amount
- ---------
REPURCHASE AGREEMENT -- 1.2%
(including accrued interest)
$10,100,000 Collateralized by $9,820,000 U.S.
Treasury Notes 5 3/4%, due 4/30/02,
with a value of $10,312,045. (With
First Chicago Capital Markets, Inc.
4.35%, dated 12/31/98 due 1/4/99,
delivery value $10,104,882) 10,101,220
------------
EXCESS OF LIABILITIES OVER CASH
AND RECEIVABLES -- (-0.3%) (2,967,533)
------------
NET ASSETS -- 100.0% $815,207,150
============
NET ASSET VALUE PER
OUTSTANDING SHARE
($815,207,150 / 26,784,319
shares outstanding)
$ 30.44
============
* Non-income producing
See notes to financial statements.
- --------------------------------------------------------------------------------
109
<PAGE>
- ---------------
Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1998
ASSETS:
Investment securities, at value
(cost $519,687,787) $ 808,073,463
Repurchase agreement (cost $10,101,220) 10,101,220
Cash 59,470
Dividends receivable 389,112
Receivable for capital shares sold 249,132
-------------
TOTAL ASSETS 818,872,397
-------------
LIABILITIES:
Payable for securities purchased 2,351,760
Payable for capital shares repurchased 788,254
Accrued expenses:
Advisory fee 324,989
GIAC administrative service fee 140,000
Other 60,244
-------------
TOTAL LIABILITIES 3,665,247
-------------
NET ASSETS $ 815,207,150
=============
NET ASSETS consist of:
Capital stock, at $1.00 par value
(authorized 50,000,000, outstanding 26,784,319 shares) $ 26,784,319
Additional paid-in capital 435,377,402
Undistributed investment income 2,223,794
Undistributed net realized gain on investments 62,435,959
Net unrealized appreciation of investments 288,385,676
-------------
NET ASSETS $ 815,207,150
=============
NET ASSET VALUE PER
OUTSTANDING SHARE
($815,207,150 / 26,784,319
shares outstanding) $ 30.44
=============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1998
Investment Income:
Dividends $ 4,635,331
Interest 1,919,507
-------------
Total Income 6,554,838
-------------
Expenses:
Investment advisory fee 3,632,919
GIAC administrative service fee 525,639
Custodian fees 71,242
Auditing and legal fees 40,357
Insurance and dues 16,261
Directors' fees and expenses 15,170
Postage and other 13,563
Printing and stationery 2,524
-------------
Total Expenses Before Custody Credits 4,317,675
Less: Custody Credits (2,629)
-------------
Net Expenses 4,315,046
-------------
Net Investment Income 2,239,792
-------------
Net Realized and Unrealized Gain
on Investments:
Net realized gain 62,454,321
Change in net unrealized appreciation 117,641,538
-------------
Net Realized Gain and Change in Net
Unrealized Appreciation on Investments 180,095,859
-------------
Net Increase in Net Assets from Operations $ 182,335,651
=============
See notes to financial statements.
- --------------------------------------------------------------------------------
110
<PAGE>
---------------
Value Line
Centurion Fund,
Inc.
---------------
9
---------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
for the Years Ended
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Operations:
Net investment income $ 2,239,792 $ 2,435,676
Net realized gain on investments 62,454,321 45,610,251
Change in net unrealized appreciation 117,641,538 83,192,727
------------- -------------
Net increase in net assets from operations 182,335,651 131,238,654
------------- -------------
Distributions to Shareholders:
Net investment income (2,335,121) (2,225,662)
Net realized gain from investment transactions (45,405,144) (114,003,360)
------------- -------------
Total distributions (47,740,265) (116,229,022)
------------- -------------
Capital Share Transactions:
Proceeds from sale of shares 66,666,181 80,062,970
Proceeds from reinvestment of distributions to shareholders 47,740,265 116,229,022
Cost of shares repurchased (153,885,228) (130,551,904)
------------- -------------
Net (decrease) increase from capital share transactions (39,478,782) 65,740,088
------------- -------------
Total Increase in Net Assets 95,116,604 80,749,720
Net Assets:
Beginning of year 720,090,546 639,340,826
------------- -------------
End of year $ 815,207,150 $ 720,090,546
============= =============
Undistributed Net Investment Income, at End of Year $ 2,223,794 $ 2,319,123
============= =============
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
111
<PAGE>
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Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- ------------------------------------
1 -- Significant Accounting Policies
- ------------------------------------
Value Line Centurion Fund, Inc. (the "Fund") is an open-end diversified
management investment company registered under the Investment Company Act of
1940, as amended, whose primary investment objective is long-term growth of
capital. The Fund's portfolio will usually consist of common stocks ranked 1 or
2 for year-ahead performance by The Value Line Investment Survey, one of the
nation's major investment advisory services.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.
(A) Security Valuation
Securities listed on a securities exchange and over-the-counter securities
traded on the NASDAQ national market are valued at the closing sales price on
the date as of which the net asset value is being determined. In the absence of
closing sales prices for such securities and for securities traded in the
over-the-counter market, the security is valued at the midpoint between the
latest available and representative asked and bid prices. Short-term instruments
with maturities of 60 days or less are valued at amortized cost, which
approximates market value. Short-term instruments with maturities greater than
60 days, at the date of purchase, are valued at the midpoint between the latest
available and representative asked and bid prices and, commencing 60 days prior
to maturity such securities are valued at amortized cost. Other assets and
securities for which market valuations are not readily available are valued at
fair value as the Board of Directors may determine in good faith.
(B) Repurchase Agreements
In connection with transactions in repurchase agreements, the Fund's
custodian takes possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. In the event of default of the
obligation to repurchase, the Fund has the right to liquidate the collateral and
apply the proceeds in satisfaction of the obligation. Under certain
circumstances, in the event of default or bankruptcy by the other party to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
(C) Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholder. Therefore, no federal income tax
provision is required.
(D) Dividends and Distributions
It is the Fund's policy to distribute to its shareholders, as dividends
and as capital gains distributions, all the net investment income for the year
and all net capital gains realized by the Fund, if any. Such distributions are
determined in accordance with income tax
- --------------------------------------------------------------------------------
112
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Centurion Fund,
Inc.
---------------
9
---------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
regulations which may differ from generally accepted accounting principles. All
dividends or distributions will be payable in shares of the Fund at the net
asset value on the ex-dividend date. This policy is, however, subject to change
at any time by the Board of Directors.
(E) Amortization
Discounts on debt securities are amortized to interest income over the
life of the security with a corresponding increase to the security's cost basis;
premiums on debt securities are not amortized.
(F) Investments
Securities transactions are recorded on a trade date basis. Realized gains
and losses from securities transactions are recorded on the identified cost
basis. Interest income on investments adjusted for amortization of discount,
including original issue discount required for federal income tax purposes, is
earned from settlement date and recognized on the accrual basis. Dividend income
is recorded on the ex-dividend date.
- ----------------------------------------------
2 -- Capital Share Transactions, Dividends and
Distributions
- ----------------------------------------------
Shares of the Fund are available to the public only through the purchase
of certain contracts issued by The Guardian Insurance and Annuity Company, Inc.
(GIAC). Transactions in capital stock were as follows:
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
Shares sold 2,514,811 3,037,284
Shares issued in reinvestment
of dividends and distributions 1,781,353 4,477,235
---------- ----------
4,296,164 7,514,519
Shares repurchased 5,730,080 5,048,869
---------- ----------
Net (decrease) increase (1,433,916) 2,465,650
========== ==========
Dividends per share from
net investment income $ .09 $ .09
========== ==========
Distributions per share from
net realized gains $ 1.75 $ 4.61
========== ==========
- --------------------------------------------------------------------------------
113
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Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------
3 -- Purchases and Sales of Securities
- --------------------------------------
Purchases and sales of investment securities, excluding short-term
investments, were as follows:
Year Ended
December 31,
1998
------------
PURCHASES:
Investment Securities $772,078,189
============
SALES:
Investment Securities $797,255,940
============
At December 31, 1998, the aggregate cost of investment securities and
repurchase agreement for federal income tax purposes is $530,878,434. The
aggregate appreciation and depreciation of investments for the year ended
December 31, 1998, based on a comparison of investment values and their costs
for federal income tax purposes is $289,498,419 and $2,202,170 respectively,
resulting in a net appreciation of $287,296,249.
- ---------------------------------------------
4 -- Investment Advisory Contract, Management
Fees and Transactions with Affiliates
- ---------------------------------------------
An advisory fee of $3,632,919 was paid or payable to Value Line, Inc. (the
Adviser), the Fund's investment adviser, for the year ended December 31, 1998.
This was computed at an annual rate of 1/2 of 1% of the average daily net assets
of the Fund during the year and paid monthly. The Adviser provides research,
investment programs, supervision of the investment portfolio and pays costs of
administrative services, office space, equipment and compensation of
administrative, bookkeeping, and clerical personnel necessary for managing the
affairs of the Fund. The Adviser also provides persons, satisfactory to the
Fund's Board of Directors, to act as officers and employees of the Fund and pays
their salaries and wages. The Fund bears all other costs and expenses.
Certain officers and directors of the Adviser and Value Line Securities,
Inc., (the Fund's distributor and a registered broker/dealer) and of GIAC are
also officers and directors of the Fund. A former officer of GIAC who is also a
director of the Fund was paid a fee of $2,718 for the year ended December 31,
1998. During the year ended December 31, 1998, the Fund paid brokerage
commissions totalling $785,670 to Value Line Securities, Inc., a wholly owned
subsidiary of the Adviser, which clears its transactions through unaffiliated
brokers.
The Fund has an agreement with GIAC to reimburse GIAC for expenses
incurred in performing administrative and internal accounting functions in
connection with the establishment of contract-owner accounts and their ongoing
maintenance, printing and distribution of shareholder reports and providing
ongoing shareholder servicing functions. Such reimbursement is limited to an
amount no greater than $18.00 times the average number of accounts at the end of
each quarter during the year. During the year ended December 31, 1998, the Fund
incurred expenses of $525,639 in connection with such services rendered by GIAC.
- --------------------------------------------------------------------------------
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9
---------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 25.52 $ 24.83 $ 24.25 $ 17.83 $ 18.52
--------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income .09 .09 .08 .12 .10
Net gains or losses on securities (both realized
and unrealized) 6.67 5.30 3.71 6.96 (.51)
--------- --------- --------- --------- ---------
Total from investment operations 6.76 5.39 3.79 7.08 (.41)
--------- --------- --------- --------- ---------
Less distributions:
Dividends from net investment income (.09) (.09) (.12) (.10) (.01)
Distributions from capital gains (1.75) (4.61) (3.09) (.56) (.27)
--------- --------- --------- --------- ---------
Total distributions (1.84) (4.70) (3.21) (.66) (.28))
--------- --------- --------- --------- ---------
Net asset value, end of year $ 30.44 $ 25.52 $ 24.83 $ 24.25 $ 17.83
========= ========= ========= ========= =========
---------
Total return** +27.47% +21.39% +17.34% +40.08% -2.21%
========= ========= ========= ========= =========
Ratios/Supplemental Data:
Net assets, end of year (in thousands) $ 815,207 $ 720,091 $ 639,341 $ 525,449 $ 352,745
Ratio of operating expenses to average
net assets .59%(1) .60%(1) .59%(1) .62% .61%
Ratio of net investment income to average
net assets .31% .35% .36% .60% .57%
Portfolio turnover rate 112% 85% 141% 114% 122%
</TABLE>
(1) After offset of custody credits. Excluding the custody credits would not
have changed the expense ratio.
** Total returns do not reflect the effects of charges deducted under the
terms of GIAC's variable contracts. Including such charges would reduce
the total returns for all periods shown.
See notes to financial statements.
- --------------------------------------------------------------------------------
115
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Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
December 31, 1998
To the Shareholders and Board of Directors of
Value Line Centurion Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Value Line Centurion Fund, Inc.
(the "Fund") at December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 9, 1999
- --------------------------------------------------------------------------------
116
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Inc.
---------------
9
---------------
- --------------------------------------------------------------------------------
Other Information (unaudited)
- ----------
Year 2000.
- ----------
Like other mutual funds, the Fund could be adversely affected if the
computer systems used by the Adviser and other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." The Adviser is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by the Fund's
other major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact to the Fund.
The Year 2000 Problem is expected to impact corporations which may include
issuers of portfolio securities held by the Fund, to varying degrees based upon
various factors, including, but not limited to, the corporation's industry
sector and degree of technological sophistication. The Fund is unable to predict
what impact, if any, the Year 2000 Problem will have on issuers of the portfolio
securities held by the Fund.
- --------------------------------------------------------------------------------
117
<PAGE>
- ---------------
Value Line
Strategic Asset
Management
- ---------------
10
- ---------------
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
- -------------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- ----------------------
COMMON STOCKS -- 85.6%
- ----------------------
Shares Value
- --------------------------------------------------------------------------------
Advertising -- 1.4%
48,000 Interpublic Group of
Companies, Inc. $ 3,828,000
198,000 Omnicom Group, Inc. 11,484,000
144,000 Snyder Communications, Inc.* 4,860,000
-------------
20,172,000
-------------
Aerospace/Defense -- 1.2%
13,000 Cordant Technologies, Inc. 487,500
104,000 General Dynamics Corp. 6,097,000
89,000 Gulfstream Aerospace Corp.* 4,739,250
77,000 Litton Industries, Inc.* 5,024,250
-------------
16,348,000
-------------
Air Transport -- 0.7%
120,000 Comair Holdings, Inc. 4,050,000
95,000 SkyWest, Inc. 3,105,312
106,500 Southwest Airlines Co. 2,389,594
-------------
9,544,906
-------------
Apparel -- 0.2%
66,000 V.F. Corp. 3,093,750
-------------
Auto Parts-Original Equipment -- 0.4%
36,000 Magna International, Inc. Class "A" 2,232,000
164,000 Tower Automotive, Inc.* 4,089,750
-------------
6,321,750
-------------
Auto Parts-Replacement -- 0.5%
120,300 Federal-Mogul Corp. 7,157,850
-------------
Bank -- 2.9%
152,000 AmSouth Bancorporation 6,935,000
94,000 Chase Manhattan Corp. 6,397,875
123,999 First Union Corp. 7,540,689
88,000 Mellon Bank Corp. 6,050,000
165,000 North Fork Bancorporation, Inc. 3,949,688
67,000 SouthTrust Corp. 2,474,812
119,500 Zions Bancorporation 7,453,813
-------------
40,801,877
-------------
Bank- Midwest -- 2.2%
115,000 Bank One Corp. 5,872,188
80,000 Comerica Inc. 5,455,000
103,000 Fifth Third Bancorp 7,345,187
111,000 First Tennessee National Corp. 4,224,937
70,000 Northern Trust Corp. 6,111,875
34,000 Old Kent Financial Corp. 1,581,000
-------------
30,590,187
-------------
Beverage-Alcoholic -- 0.2%
62,000 Coors (Adolph) Co. Class "B" 3,499,125
-------------
Building Materials -- 0.2%
80,000 Masco Corp. 2,300,000
-------------
Cable TV -- 1.3%
151,000 Cablevision Systems Corp. Class "A" 7,578,313
135,000 Comcast Corp. Class "A"* 7,922,812
62,000 EchoStar Communications Corp.
Class "A"* 2,999,250
-------------
18,500,375
-------------
Coal/Alternate Energy -- 0.5%
159,000 AES Corp.* 7,532,625
-------------
Computer & Peripherals -- 6.2%
144,000 American Power Conversion Corp.* 6,975,000
175,000 Apple Computer, Inc.* 7,164,062
86,000 Cisco Systems, Inc.* 7,981,875
159,000 Compaq Computer Corp. 6,668,063
105,000 Dell Computer Corp.* 7,684,687
131,000 EMC Corp.* 11,135,000
118,000 International Business Machines
Corp. 21,800,500
73,000 Sun Microsystems, Inc.* 6,250,625
218,000 Unisys Corp.* 7,507,375
120,000 Xircom, Inc.* 4,080,000
-------------
87,247,187
-------------
Computer Software & Services -- 6.4%
12,202 Acclaim Entertainment, Inc.* 149,475
123,000 American Management Systems, Inc.* 4,920,000
86,000 Citrix Systems, Inc.* 8,347,375
166,000 Compuware Corp.* 12,968,750
66,000 Comverse Technology, Inc.* 4,686,000
101,000 Electronics For Imaging, Inc.* 4,058,937
135,000 Fiserv, Inc.* 6,944,063
15,000 IMRglobal Corp.* 441,562
33,000 Keane, Inc.* 1,317,937
87,000 Mercury Interactive Corp.* 5,502,750
156,000 Microsoft Corp.* 21,635,250
110,000 Oracle Corp.* 4,743,750
203,000 Paychex, Inc. 10,441,813
129,000 Siebel Systems, Inc.* 4,377,938
-------------
90,535,600
-------------
See notes to financial statements.
- --------------------------------------------------------------------------------
118
<PAGE>
---------------
Value Line
Strategic Asset
Management
---------------
10
---------------
Shares Value
- --------------------------------------------------------------------------------
Diversified Companies -- 1.4%
72,000 Danaher Corp. $ 3,910,500
158,000 Tyco International, Ltd. 11,919,125
31,000 United Technologies Corp. 3,371,250
-------------
19,200,875
-------------
Drug -- 7.1%
74,000 ALZA Corp.* 3,866,500
134,000 Amgen Inc.* 14,011,375
148,000 Biogen, Inc.* 12,284,000
120,000 Forest Laboratories, Inc.* 6,382,500
49,000 Genzyme Corp.* 2,437,750
83,000 MedImmune, Inc.* 8,253,312
161,000 Mylan Laboratories, Inc. 5,071,500
143,000 Pfizer, Inc. 17,937,563
18,000 Quintiles Transnational Corp.* 960,750
216,000 Schering-Plough Corp. 11,934,000
40,000 Separcor, Inc.* 3,525,000
85,000 Warner-Lambert Co. 6,390,937
111,000 Watson Pharmaceuticals, Inc.* 6,979,125
-------------
100,034,312
-------------
Drugstore -- 1.1%
131,000 CVS Corp. 7,205,000
159,000 Rite Aid Corp. 7,880,438
-------------
15,085,438
-------------
Electrical Utility-Central -- 1.8%
87,000 CMS Energy Corp. 4,214,062
110,000 DTE Energy Co. 4,716,250
142,000 Houston Industries, Inc. 4,561,750
130,000 Northern States Power Co. 3,607,500
125,000 Unicom Corp. 4,820,313
102,000 Wisconsin Energy Corp. 3,206,625
-------------
25,126,500
-------------
Electric Utility-East -- 1.6%
60,000 Baltimore Gas and Electric Co. 1,852,500
80,000 Carolina Power & Light Co. 3,765,000
26,000 Consolidated Edison, Inc. 1,374,750
78,000 Florida Progress Corp. 3,495,375
260,000 Niagara Mohawk Power Corp.* 4,192,500
75,000 PECO Energy Co. 3,121,875
150,000 Southern Co. (The) 4,359,375
-------------
22,161,375
-------------
Electrical Equipment -- 0.7%
87,000 General Electric Co. 8,879,438
48,000 Semtech Corp.* 1,722,000
-------------
10,601,438
-------------
Electronics -- 2.3%
101,000 Gemstar International Group, Ltd.* 5,782,250
116,000 Lexmark International Group, Inc.
Class "A"* 11,658,000
228,750 Symbol Technologies, Inc. 14,625,703
-------------
32,065,953
-------------
Entertainment -- 2.6%
168,000 CBS Corp.* 5,502,000
114,000 Chancellor Media Corp.* 5,457,750
127,000 Clear Channel Communications, Inc.* 6,921,500
91,000 Jacor Communications, Inc. 5,858,125
222,000 Time Warner, Inc. 13,777,875
-------------
37,517,250
-------------
Environmental -- 0.2%
135,000 Allied Waste Industries, Inc.* 3,189,375
-------------
Financial Services -- 0.2%
32,498 Associates First Capital Corp.
Class "A"* 1,377,103
21,000 Citigroup Inc. 1,039,500
-------------
2,416,603
-------------
Food Processing -- 0.8%
114,000 Earthgrains Co. (The) 3,526,875
127,000 Quaker Oats Co. (The) 7,556,500
-------------
11,083,375
-------------
Food Wholesalers -- 0.4%
192,000 Supervalu, Inc. 5,376,000
-------------
Foreign Telecommunication -- 0.4%
52,000 Nokia Corp. (ADR) Class "A" 6,262,750
-------------
Furniture/Home Furnishings -- 0.6%
32,000 Ethan Allen Interiors, Inc. 1,312,000
110,000 Furniture Brands International, Inc.* 2,997,500
132,000 Miller (Herman), Inc. 3,547,500
-------------
7,857,000
-------------
See notes to financial statements.
- --------------------------------------------------------------------------------
119
<PAGE>
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Value Line
Strategic Asset
Management
- ---------------
10
- ---------------
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
- -------------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
Shares Value
- --------------------------------------------------------------------------------
Grocery -- 2.6%
146,000 Albertson's, Inc. $ 9,298,375
122,000 Kroger Co.* 7,381,000
148,000 Meyer (Fred), Inc.* 8,917,000
186,800 Safeway Inc.* 11,383,125
--------------
36,979,500
--------------
Healthcare Information Systems -- 0.2%
117,000 HBO & Co. 3,356,437
--------------
Home Appliance -- 0.6%
146,000 Maytag Corp. 9,088,500
--------------
Homebuilding -- 0.4%
80,000 Centex Corp. 3,605,000
110,000 Lennar Corp. 2,777,500
--------------
6,382,500
--------------
Hotel/Gaming -- 0.1%
107,000 Rio Hotel & Casino, Inc.* 1,698,625
--------------
Household Products -- 0.5%
64,000 Clorox Co. (The) 7,476,000
--------------
Industrial Services -- 0.6%
60,000 Labor Ready Inc.* 1,181,250
64,000 Metzler Group Inc.* 3,116,000
78,000 Robert Half International, Inc.* 3,485,625
--------------
7,782,875
--------------
Insurance-Diversified -- 1.2%
106,000 American Bankers
Insurance Group, Inc. 5,127,750
83,000 American General Corp. 6,474,000
51,000 American International Group, Inc. 4,927,875
--------------
16,529,625
--------------
Insurance-Life -- 1.3%
146,000 AFLAC, Inc. 6,424,000
79,000 Jefferson-Pilot Corp. 5,925,000
66,000 SunAmerica Inc. 5,354,250
--------------
17,703,250
--------------
Insurance-Property/Casualty -- 0.4%
31,000 Progressive Corp. 5,250,625
--------------
Internet -- 1.3%
70,000 America Online, Inc.* 11,200,000
40,000 CMGI, Inc.* 4,260,000
66,000 Macromedia, Inc.* 2,223,375
6,000 Network Appliance, Inc.* 270,000
--------------
17,953,375
--------------
Machinery -- 0.9%
60,000 Applied Power, Inc. Class "A" 2,265,000
74,000 Briggs & Stratton Corp. 3,690,750
93,000 Ingersoll-Rand Co. 4,365,187
100,000 Terex Corp.* 2,856,250
--------------
13,177,187
--------------
Medical Services -- 1.1%
42,000 CIGNA Corp. 3,247,125
120,000 Health Management Associates,
Inc. Class "A"* 2,595,000
40,000 PacifiCare Health Systems, Inc.
Class "B"* 3,180,000
74,000 WellPoint Health Networks Inc.* 6,438,000
--------------
15,460,125
--------------
Medical Supplies -- 3.9%
120,000 Allegiance Corp. 5,595,000
127,000 Allergan, Inc. 8,223,250
104,000 Arterial Vascular
Engineering, Inc.* 5,460,000
178,000 Becton, Dickinson & Co. 7,598,375
16,000 Centocor, Inc.* 722,000
93,000 McKesson Corp. 7,352,813
49,000 Medtronic, Inc. 3,638,250
106,000 Safeskin Corp.* 2,557,250
55,000 Sofamor Danek Group, Inc.* 6,696,250
89,000 VISX, Inc.* 7,781,937
--------------
55,625,125
--------------
Natural Gas-Diversified -- 0.6%
12,000 El Paso Energy Corp. 417,750
141,000 Enron Corp. 8,045,813
--------------
8,463,563
--------------
Newspaper -- 0.3%
140,000 News Corp., Ltd. (ADR) 3,701,250
--------------
Office Equipment & Supplies -- 1.9%
175,000 Office Depot, Inc.* 6,464,063
126,000 Pitney Bowes, Inc. 8,323,875
272,437 Staples, Inc.* 11,902,091
--------------
26,690,029
--------------
Paper & Forest Products -- 0.0%
37,000 Mail-Well, Inc.* 423,187
--------------
See notes to financial statements.
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<PAGE>
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Strategic Asset
Management
---------------
10
---------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
Precision Instrument -- 0.6%
48,000 Hutchinson Technology Inc.* $ 1,710,000
71,000 Waters Corp.* 6,194,750
--------------
7,904,750
--------------
Publishing -- 0.6%
90,000 McGraw-Hill Companies, Inc. (The) 9,168,750
--------------
Recreation -- 1.6%
58,000 Action Performance Companies, Inc.* 2,051,750
127,000 Carnival Corp. 6,096,000
166,000 Harley-Davidson, Inc. 7,864,250
174,000 Royal Caribbean Cruises, Ltd. 6,438,000
--------------
22,450,000
--------------
Restaurant -- 1.4%
145,000 Brinker International, Inc.* 4,186,875
167,000 McDonald's Corp. 12,796,375
70,000 Papa John's International, Inc.* 3,088,750
--------------
20,072,000
--------------
Retail-Building Supply -- 1.2%
168,000 Home Depot Inc. (The) 10,279,500
148,000 Lowe's Companies, Inc. 7,575,750
--------------
17,855,250
--------------
Retail-Special Lines -- 5.1%
70,520 Abercrombie & Fitch Co. Class "A"* 4,989,290
104,000 AnnTaylor Stores Corp.* 4,101,500
38,000 Barnes & Noble, Inc.* 1,615,000
300,000 Bed Bath & Beyond, Inc.* 10,237,500
200,000 Best Buy Co., Inc.* 12,275,000
96,000 Borders Group, Inc.* 2,394,000
82,000 Circuit City Stores-Circuit City Group 4,094,875
100,500 Dollar Tree Stores, Inc.* 4,390,594
157,500 Gap, Inc. 8,859,375
65,000 Insight Enterprises, Inc.* 3,306,875
35,000 Micro Warehouse, Inc.* 1,183,437
334,000 TJX Companies, Inc. 9,686,000
82,000 Tandy Corp. 3,377,375
28,000 Williams-Sonoma, Inc.* 1,128,750
--------------
71,639,571
--------------
Retail Store -- 3.0%
144,000 Dayton-Hudson Corp. 7,812,000
230,000 Kmart Corp.* 3,521,875
174,000 Kohl's Corp.* 10,690,125
245,000 Wal-Mart Stores, Inc. 19,952,187
--------------
41,976,187
--------------
Semiconductor -- 2.1%
132,000 Micron Technology, Inc.* 6,674,250
49,000 Motorola, Inc. 2,992,062
83,000 PMC-Sierra, Inc.* 5,239,375
51,000 QLogic Corp.* 6,674,625
45,000 TranSwitch Corp.* 1,752,188
132,000 Vitesse Semiconductor Corp.* 6,022,500
--------------
29,355,000
--------------
Semiconductor Capital Equipment -- 0.3%
74,000 Altera Corp.* 4,504,750
--------------
Telecommunications Equipment -- 0.8%
170,000 General Instrument Corp.* 5,769,375
177,000 Tekelec* 2,931,562
40,000 Tellabs, Inc.* 2,742,500
--------------
11,443,437
--------------
Telecommunication Services -- 4.6%
107,000 AirTouch Communications, Inc.* 7,717,375
188,000 BellSouth Corp. 9,376,500
170,000 Century Telephone Enterprises, Inc. 11,475,000
124,000 GeoTel Communications Corp.* 4,619,000
130,000 MediaOne Group, Inc.* 6,110,000
72,000 Pacific Gateway Exchange, Inc.* 3,460,500
190,000 SBC Communications Inc. 10,188,750
40,000 SkyTel Communications, Inc.* 885,000
96,000 U.S. West, Inc. 6,204,000
128,000 WinStar Communications, Inc.* 4,992,000
--------------
65,028,125
--------------
Textile -- 0.1%
48,000 WestPoint Stevens, Inc.* 1,515,000
--------------
Thrift -- 0.7%
133,000 Dime Bancorp, Inc. 3,516,189
44,000 Golden West Financial Corp. 4,034,250
68,000 GreenPoint Financial Corp. 2,388,500
--------------
9,938,939
--------------
See notes to financial statements.
- --------------------------------------------------------------------------------
121
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Strategic Asset
Management
- ---------------
10
- ---------------
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
- -------------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
Shares Value
- --------------------------------------------------------------------------------
Toiletries/Cosmetics -- 0.1%
44,000 Avon Products, Inc. $ 1,947,000
--------------
TOTAL COMMON STOCKS
(Cost $818,592,284) 1,210,164,013
--------------
- ---------------------------------
U.S. TREASURY OBLIGATIONS -- 3.5%
- ---------------------------------
Principal
Amount
---------
$10,000,000 U.S. Treasury Notes 6 1/2%,
due 5/31/02 10,562,800
13,500,000 U.S. Treasury Notes 5 1/2%,
due 5/31/03 13,932,270
20,000,000 U.S. Treasury Bonds 7 1/4%,
due 8/15/22 24,859,400
--------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $43,379,722) 49,354,470
--------------
- ------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 4.4%
- ------------------------------------------
13,500,000 Federal National Mortgage
Association 4.750%, due 11/14/03 13,360,815
10,000,000 Federal National Mortgage
Association 5.750%, due 6/15/05 10,369,700
13,000,000 Federal National Mortgage
Association 6.50%, due 7/16/07 14,046,500
10,000,000 Federal National Mortgage
Association Pool 380188
6.450%, due 4/1/08 10,325,000
14,000,000 Federal Home Loan Mortgage Corp.
5 3/4%, due 4/15/08 14,507,780
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS (Cost $60,527,969) 62,609,795
--------------
- -------------------------------
CORPORATE BONDS & NOTES -- 1.4%
- -------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
Chemical-Diversified -- 0.4%
5,000,000 Goodrich (B.F.) Co. (The)
Notes 6.45%, 4/15/08 $ 5,091,750
--------------
Telecommunication Services -- 1.0%
5,000,000 AirTouch Communications Inc.
Notes 6.65%, due 5/1/08 5,297,000
5,000,000 MCI Worldcom, Inc. Sr. Notes
6.40%, due 8/15/05 5,184,550
4,000,000 MCI Worldcom, Inc. Sr. Notes
6.50%, due 4/15/10 4,202,000
--------------
14,683,550
--------------
TOTAL CORPORATE BONDS & NOTES
(Cost $18,963,198) 19,775,300
--------------
TOTAL INVESTMENT SECURITIES -- 94.9%
(Cost $941,463,173) 1,341,903,578
--------------
REPURCHASE AGREEMENT -- 4.2%
(includes accrued interest)
$59,700,000 Collateralized by $37,945,000
U.S. Treasury Notes 6 3/8%, due
3/31/01, and $19,985,000 U.S.
Treasury Notes 5 3/4%, due
4/30/03, with a combined value of
$60,941,993 (with First Chicago
Capital Markets, Inc., 4.35%,
dated 12/31/98, due 1/4/99,
delivery value of $59,728,855) 59,707,214
--------------
CASH AND RECEIVABLES LESS
LIABILITIES -- 0.9% 12,672,905
--------------
NET ASSETS -- 100.0% $1,414,283,697
==============
NET ASSET VALUE PER
OUTSTANDING SHARE $ 25.22
($1,414,283,697 / 56,070,175 ==============
* Non-income producing.
See notes to financial statements.
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STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1998
ASSETS
Investment in securities, at value
(cost $941,463,173) $ 1,341,903,578
Repurchase agreement (cost $59,707,214) 59,707,214
Cash 98,172
Receivable for securities sold 12,417,746
Interest and dividends receivable 2,488,829
Receivable for shares sold 98,945
---------------
TOTAL ASSETS 1,416,714,484
---------------
LIABILITIES
Payable for securities purchased 969,063
Payable for shares repurchased 632,398
Accrued expenses:
Advisory fee 564,750
GIAC administrative service fee 180,000
Other 84,576
---------------
TOTAL LIABILITIES 2,430,787
---------------
NET ASSETS $ 1,414,283,697
===============
NET ASSETS CONSIST OF:
Capital stock, at $0.01 par value
(authorized unlimited, outstanding
56,070,175 shares) $ 560,702
Additional paid-in capital 918,572,748
Undistributed net investment income 15,360,902
Undistributed net realized gain on investments 79,348,940
Net unrealized appreciation of investments 400,440,405
---------------
NET ASSETS $ 1,414,283,697
===============
NET ASSET VALUE PER
OUTSTANDING SHARE
($1,414,283,697 / 56,070,175
shares outstanding) $ 25.22
===============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1998
Investment Income:
Interest $ 16,132,187
Dividends (Net of foreign withholding
tax of $29,649) 6,808,183
---------------
Total Income 22,940,370
---------------
Expenses:
Investment advisory fee 6,293,798
GIAC administrative service fee 720,784
Custodian fees 163,828
Audit and legal fees 40,359
Insurance and dues 23,295
Trustees' fees and expenses 19,416
Taxes and other 15,169
Printing and stationery 2,524
---------------
Total Expenses Before Custody Credits 7,279,173
Less: Custody Credits (21,195)
---------------
Net Expenses 7,257,978
---------------
Net Investment Income 15,682,392
---------------
Net Realized and Unrealized Gain on
Investments:
Net realized gain 79,864,542
Net change in unrealized appreciation 215,856,062
---------------
Net Realized Gain and Change in
Unrealized Appreciation on Investments 295,720,604
---------------
Net Increase in Net Assets from Operations $ 311,402,996
===============
See notes to financial statements.
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STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Operations:
Net investment income $ 15,682,392 $ 35,186,725
Net realized gain on investments 79,864,542 101,703,718
Change in net unrealized appreciation 215,856,062 30,109,960
--------------- ---------------
Net increase in net assets from operations 311,402,996 167,000,403
--------------- ---------------
Distributions to Shareholders:
Net investment income (35,369,549) (26,826,322)
Net realized gain from investment transactions (101,947,527) (122,913,330)
--------------- ---------------
Total distributions (137,317,076) (149,739,652)
--------------- ---------------
Trust Share Transactions:
Proceeds from sale of shares 98,680,308 69,411,109
Proceeds from reinvestment of distributions to shareholders 137,317,076 149,739,652
Cost of shares repurchased (192,389,054) (112,606,824)
--------------- ---------------
Net increase from Trust share transactions 43,608,330 106,543,937
--------------- ---------------
Total Increase in Net Assets 217,694,250 123,804,688
Net Assets:
Beginning of year 1,196,589,447 1,072,784,759
--------------- ---------------
End of year $ 1,414,283,697 $ 1,196,589,447
=============== ===============
Undistributed Net Investment Income, at End of Year $ 15,360,902 $ 35,048,059
=============== ===============
</TABLE>
See notes to financial statements.
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NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- ------------------------------------
1 -- Significant Accounting Policies
- ------------------------------------
Value Line Strategic Asset Management Trust (the "Trust") is an open-end,
diversified management investment company registered under the Investment
Company Act of 1940, as amended, which seeks to achieve a high total investment
return consistent with reasonable risk by investing primarily in a broad range
of common stocks, bonds and money market instruments. The Trust will attempt to
achieve its objective by following an asset allocation strategy based on data
derived from computer models for the stock and bond markets that shifts the
assets of the Trust among equity, debt and money market securities as the models
indicate and its investment adviser, Value Line, Inc. (the "Adviser"), deems
appropriate.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies consistently followed
by the Trust in the preparation of its financial statements.
(A) Security Valuation.
Securities listed on a securities exchange and over-the-counter securities
traded on the NASDAQ national market are valued at the closing sales price on
the date as of which the net asset value is being determined. In the absence of
closing sales prices for such securities and for securities traded in the
over-the-counter market, the security is valued at the midpoint between the
latest available and representative bid and asked prices.
The Board of Trustees has determined that the value of bonds and other
fixed-income securities be calculated on the valuation date by reference to
valuations obtained from an independent pricing service which determines
valuations for normal institutional-size trading units of debt securities,
without exclusive reliance upon quoted prices. This service takes into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data in determining valuations.
Short-term instruments with maturities of 60 days or less are valued at
amortized cost which approximates market value. Short-term instruments with
maturities greater than 60 days at the date of purchase are valued at the
midpoint between the latest available and representative asked and bid prices,
and commencing 60 days prior to maturity such securities are valued at amortized
cost. Other assets and securities for which market valuations are not readily
available are valued at fair value as the Board of Trustees may determine in
good faith.
(B) Repurchase Agreements.
In connection with transactions in repurchase agreements, the Trust's
custodian takes possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. In the event of default of the
obligation to repurchase, the Trust has the right to liquidate the collateral
and apply
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NOTES TO FINANCIAL STATEMENTS
December 31, 1998
the proceeds in satisfaction of the obligation. Under certain circumstances, in
the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral or proceeds may be subject to
legal proceedings.
(C) Federal Income Taxes.
It is the Trust's policy to qualify under, and comply with, the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholder.
Therefore, no federal income tax provision is required.
(D) Dividends and Distributions.
It is the Trust's policy to distribute to its shareholders, as dividends
and as capital gains distributions, all the net investment income for the year
and all the net capital gains realized by the Trust, if any. Such distributions
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. All dividends or distributions will be
payable in shares of the Trust at the net asset value on the ex-dividend date.
This policy is, however, subject to change at any time by the Board of Trustees.
(E) Amortization.
Discounts on debt securities are amortized to interest income over the
life of the security with a corresponding increase to the security's cost basis;
premiums on debt securities are not amortized.
(F) Investments.
Securities transactions are recorded on a trade date basis. Realized gains
and losses from securities transactions are recorded on the identified cost
basis. Interest income, adjusted for amortization of discount, including
original issue discount required for federal income tax purposes, is earned from
settlement date and recognized on the accrual basis. Dividend income is recorded
on the ex-dividend date.
- ----------------------------------------
2 -- Trust Share Transactions, Dividends
and Distributions
- ----------------------------------------
Shares of the Trust are available to the public only through the purchase
of certain contracts issued by The Guardian Insurance & Annuity Company, Inc.
(GIAC). Transactions in shares of beneficial interest in the Trust were as
follows:
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
Shares sold 4,261,820 3,117,519
Shares issued in reinvestment
of dividends and distributions 6,157,716 7,049,889
---------- ----------
10,419,536 10,167,408
Shares repurchased 8,418,685 5,083,552
---------- ----------
Net increase 2,000,851 5,083,856
========== ==========
Dividends per share from net
investment income $ .68 $ .55
========== ==========
Distributions per share from
net realized gains $ 1.96 $ 2.52
========== ==========
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NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------
3 -- Purchases and Sales of Securities
- --------------------------------------
Purchases and sales of investment securities, excluding short-term
investments, were as follows:
Year Ended
December 31,
1998
--------------
PURCHASES:
U.S. Treasury and Government
Agency Obligations $ 138,887,461
Other Investment Securities 1,137,183,764
--------------
$1,276,071,225
==============
SALES & MATURITIES:
U.S. Treasury and Government
Agency Obligations $ 515,328,475
Other Investment Securities 865,983,039
--------------
$1,381,311,514
==============
At December 31, 1998, the aggregate cost of investment securities and
repurchase agreement for federal income tax purposes is $1,001,195,574. The
aggregate appreciation and depreciation of investments at December 31, 1998,
based on a comparison of investment values and their costs for federal income
tax purposes is $406,532,723 and $6,117,505, respectively, resulting in a net
appreciation of $400,415,218.
- ---------------------------------------------
4 -- Investment Advisory Contract, Management
Fees and Transactions with Affiliates
- ---------------------------------------------
An advisory fee of $6,293,798 was paid or payable to the Adviser, for the
year ended December 31, 1998. This was computed at an annual rate of 1/2 of 1%
of the average daily net assets of the Trust during the year and paid monthly.
The Adviser provides research, investment programs, supervision of the
investment portfolio and pays costs of administrative services, office space,
equipment and compensation of administrative, bookkeeping and clerical personnel
necessary for managing the affairs of the Trust. The Adviser also provides
persons, satisfactory to the Trust's Board of Trustees, to act as officers and
employees of the Trust and pays their salaries and wages. The Trust bears all
other costs and expenses.
Certain officers and directors of the Adviser and Value Line Securities,
Inc. (the Trust's distributor and a registered broker/dealer), and of GIAC are
also officers and Trustees of the Trust. A former officer of GIAC who is also a
trustee of the Trust was paid a fee of $2,718 by the Trust for the year ended
December 31, 1998. During the year ended December 31, 1998, the Trust paid
brokerage commissions totalling $859,104 to Value Line Securities, Inc., a
wholly owned subsidiary of the Adviser, which clears its transactions through
unaffiliated brokers.
The Trust has an agreement with GIAC to reimburse GIAC for expenses
incurred in performing administrative and internal accounting functions in
connection with the establishment of contract-owner accounts and their ongoing
maintenance, printing and distribution of shareholder reports and providing
ongoing shareholder servicing functions. Such reimbursement is limited to an
amount no greater than $18.00 times the average number of accounts at the end of
each quarter during the year. During the year ended December 31, 1998, the Trust
incurred expenses of $720,784 in connection with such services rendered by GIAC.
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- -------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 22.13 $ 21.90 $ 20.27 $ 16.13 $ 17.01
----------- ----------- ----------- ----------- -----------
Income (loss) from investment operations:
Net investment income .30 .65 .53 .39 .26
Net gains or losses on securities
(both realized and unrealized) 5.43 2.65 2.56 4.17 (1.09)
----------- ----------- ----------- ----------- -----------
Total from investment operations 5.73 3.30 3.09 4.56 (.83)
----------- ----------- ----------- ----------- -----------
Less distributions:
Dividends from net investment income (.68) (.55) (.37) (.26) (.01)
Distributions from capital gains (1.96) (2.52) (1.09) (.16) (.04)
----------- ----------- ----------- ----------- -----------
Total distributions (2.64) (3.07) (1.46) (.42) (.05)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year $ 25.22 $ 22.13 $ 21.90 $ 20.27 $ 16.13
=========== =========== =========== =========== ===========
Total return** +27.45% +15.66% +15.87% +28.54% -4.88%
=========== =========== =========== =========== ===========
Ratios/Supplemental Data:
Net assets, end of year (in thousands) $ 1,414,284 $ 1,196,589 $ 1,072,785 $ 876,509 $ 662,721
Ratio of operating expenses to average
net assets .58%(1) .59%(1) .58%(1) .60% .60%
Ratio of net investment income to average
net assets 1.25% 3.08% 2.70% 2.18% 1.65%
Portfolio turnover rate 106% 58% 71% 63% 100%
</TABLE>
(1) After custody credits. Excluding the custody credits would not have
changed the expense ratio.
** Total returns do not reflect the effects of charges deducted under the
terms of GIAC's variable contracts. Including such charges would reduce
the total returns for all periods shown.
See notes to financial statements.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
Value Line Strategic Asset Management Trust
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Value Line Strategic Asset
Management Trust (the "Trust") at December 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 9, 1999
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- -------------------------------------------
Other Information (unaudited)
- ----------
Year 2000.
- ----------
Like other mutual funds, the Fund could be adversely affected if the
computer systems used by the Adviser and other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." The Adviser is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by the Fund's
other major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact to the Fund.
The Year 2000 Problem is expected to impact corporations which may include
issuers of portfolio securities held by the Fund, to varying degrees based upon
various factors, including, but not limited to, the corporation's industry
sector and degree of technological sophistication. The Fund is unable to predict
what impact, if any, the Year 2000 Problem will have on issuers of the portfolio
securities held by the Fund.
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<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------
U.S. STOCKS -- 89.5%
- --------------------
Shares Value
- --------------------------------------------------------------------------------
Aerospace -- 3.4%
53,205 Allied Signal, Inc. $ 2,357,648
20,608 General Dynamics Corp. 1,208,144
7,067 Lockheed-Martin Corp. 598,928
36,975 United Technologies Corp. 4,021,031
------------
8,185,751
Automotive -- 0.7%
27,220 Federal Mogul Corp. 1,619,590
------------
Banks and Credit Companies -- 5.6%
8,900 Bankers Trust Corp. 760,394
10,294 Comerica, Inc. 701,922
10,915 Firstar Corp. 1,017,824
7,988 Fleet Financial Group, Inc. 356,964
26,562 National City Corp. 1,925,745
12,826 Northern Trust Corp. 1,119,870
25,572 State Street Corp. 1,778,852
54,804 US Bancorp 1,945,542
30,277 Washington Mutual, Inc. 1,156,203
75,717 Wells Fargo Co. 3,023,947
------------
13,787,263
------------
Broadcasting -- 0.1%
5,200 Infinity Broadcasting Corp.* 142,350
------------
Business Machines -- 3.9%
22,014 International Business Machines
Corp. 4,067,086
13,500 Sun Microsystems, Inc.* 1,155,938
36,925 Xerox Corp. 4,357,150
------------
9,580,174
------------
Business Services -- 0.5%
4,669 Computer Sciences Corp. 300,859
16,715 DST Systems, Inc.* 953,799
------------
1,254,658
------------
Chemicals -- 0.5%
25,126 Air Products & Chemicals, Inc. 1,005,040
4,349 Du Pont (E.I.) de Nemours
& Co., Inc. 230,769
------------
1,235,809
------------
Computer Software-Personal Computers -- 2.1%
36,422 Microsoft Corp.* 5,051,276
------------
Computer Software-Services -- 0.2%
4,700 EMC Corp.* 399,500
------------
Computer Software-Systems -- 1.6%
16,002 BMC Software, Inc.* 713,089
33,758 Computer Associates International,
Inc. 1,438,935
41,554 Oracle Corp.* 1,792,016
------------
3,944,040
------------
Consumer Goods and Services -- 9.9%
33,564 Black & Decker Corp. 1,881,682
8,481 Clorox Co. 990,687
12,682 Colgate-Palmolive Co. 1,177,841
48,354 Gillette Co. 2,336,103
48,339 Kimberly-Clark Corp. 2,634,475
42,700 Newell Co. 1,761,375
87,345 Philip Morris Cos., Inc. 4,672,957
30,283 Procter & Gamble Co. 2,765,216
65,400 Service Corp. International 2,489,288
47,187 Tyco International Ltd. 3,559,669
------------
24,269,293
------------
Electrical Equipment -- 2.7%
28,350 Emerson Electric Co. 1,715,175
38,931 General Electric Co. 3,973,395
13,496 Honeywell, Inc. 1,016,418
------------
6,704,988
------------
Electronics -- 1.2%
24,700 Intel Corp. 2,928,494
------------
Entertainment -- 2.1%
53,400 Disney (Walt) Co. 1,602,000
23,620 MediaOne Group, Inc.* 1,110,140
36,920 Time Warner, Inc. 2,291,348
------------
5,003,488
------------
Financial Institutions -- 2.4%
60,760 Associates First Capital Corp., "A" 2,574,705
49,298 Federal Home Loan Mortgage Corp. 3,176,640
------------
5,751,345
------------
See notes to financial statements.
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-----------
MFS Growth
with Income
Series
-----------
11
-----------
Shares Value
- --------------------------------------------------------------------------------
Food and Beverage Products -- 3.7%
24,500 Anheuser Busch Cos., Inc. $ 1,607,812
16,600 Bestfoods Co. 883,950
4,452 Coca-Cola Co. 297,727
48,571 Hershey Foods Corp. 3,020,509
25,238 Interstate Bakeries Corp. 667,230
10,400 PepsiCo., Inc. 425,750
67,962 Ralston-Purina Co. 2,200,270
------------
9,103,248
------------
Insurance -- 8.5%
52,850 Allstate Corp. 2,041,331
12,100 American International Group, Inc. 1,169,162
10,930 Chubb Corp. 709,084
33,798 CIGNA Corp. 2,613,008
14,500 Equitable Cos., Inc. 839,188
54,070 Hartford Financial Services Group,
Inc. 2,967,091
24,387 Lincoln National Corp. 1,995,161
13,681 MBIA, Inc. 896,961
22,017 Progressive Corp. 3,729,129
52,668 Torchmark Corp. 1,859,839
16,838 Transamerica Corp. 1,944,789
------------
20,764,743
------------
Manufacturing -- 0.4%
18,800 Illinois Tool Works, Inc. 1,090,400
------------
Medical and Health Products -- 11.0%
75,966 American Home Products Corp. 4,277,835
6,400 Arterial Vascular Engineering, Inc.* 336,000
32,611 Bristol-Myers Squibb Co. 4,363,759
9,100 Eli Lilly & Co. 808,763
38,243 Johnson & Johnson 3,207,632
31,431 McKesson Corp. 2,485,013
2,539 Merck & Co., Inc. 374,979
44,415 Pfizer, Inc. 5,571,307
34,140 Pharmacia & Upjohn, Inc. 1,933,177
21,190 Schering Plough Corp. 1,170,747
32,611 Warner-Lambert Co. 2,451,940
------------
26,981,152
------------
Medical and Health Technology and Services -- 2.9%
100 Fresenius National Medical
Care, Inc.* 3
21,100 Guidant Corp. 2,326,275
40,000 HEALTHSOUTH Corp.* 617,500
16,600 Medtronic, Inc. 1,232,550
58,275 Tenet Healthcare Corp.* 1,529,719
32,535 United Healthcare Corp. 1,401,038
------------
7,107,085
------------
Oils -- 3.6%
4,310 Chevron Corp. 357,461
20,500 Conoco, Inc., "A"* 427,938
50,287 Exxon Corp. 3,677,237
30,561 Mobil Corp. 2,662,627
24,669 Texaco, Inc. 1,304,373
11,059 USX-Marathon Group 333,152
------------
8,762,788
------------
Photographic Products -- 0.6%
19,310 Eastman Kodak Co. 1,390,320
------------
Pollution Control -- 0.4%
20,916 Waste Management, Inc. 975,209
------------
Printing and Publishing -- 1.1%
19,949 Gannett Co., Inc. 1,286,711
21,701 Tribune Co. 1,432,266
------------
2,718,977
------------
Railroads -- 0.2%
11,263 Burlington Northern Santa Fe
Railway Co. 380,126
------------
Restaurants and Lodging -- 0.2%
7,500 McDonald's Corp. 574,688
------------
Stores -- 5.6%
11,200 American Stores Co. 413,700
29,666 CVS Corp. 1,631,630
23,110 Dayton Hudson Corp. 1,253,717
28,466 Home Depot, Inc. 1,741,763
26,650 Nordstrom, Inc. 924,422
30,306 Office Depot, Inc.* 1,119,428
66,487 Rite Aid Corp. 3,295,262
68,880 TJX Cos., Inc. 1,997,520
15,172 Wal-Mart Stores, Inc. 1,235,570
------------
13,613,012
------------
See notes to financial statements.
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133
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
Shares Value
- --------------------------------------------------------------------------------
Supermarkets -- 3.0%
16,300 Albertsons, Inc. $ 1,038,106
20,712 Kroger Co.* 1,253,076
21,990 Meyer (Fred), Inc.* 1,324,898
62,370 Safeway, Inc.* 3,800,672
------------
7,416,752
------------
Telecommunications -- 6.9%
49,230 Alltel Corp. 2,944,569
6,400 Ameritech Corp. 405,600
28,760 Bell Atlantic Corp. 1,524,280
8,923 Cisco Systems, Inc.* 828,166
15,823 Lucent Technologies, Inc.* 1,740,530
48,634 MCI WorldCom, Inc.* 3,489,489
60,580 SBC Communications, Inc. 3,248,603
29,574 Sprint Corp. 2,487,913
9,187 Sprint PCS* 212,449
------------
16,881,599
------------
Utilities-Electric -- 3.0%
17,200 CMS Energy Corp. 833,125
28,300 FirstEnergy Corp. 921,519
16,700 GPU, Inc. 737,931
11,852 New Century Energies, Inc. 577,785
27,800 Peco Energy Co. 1,157,175
16,075 Pinnacle West Capital Corp. 681,178
34,367 Texas Utilities Co. 1,604,509
19,249 Unicom Corp. 742,290
------------
7,255,512
------------
Utilities-Gas -- 0.9%
28,824 Columbia Energy Group 1,664,586
15,035 KN Energy, Inc. 546,898
------------
2,211,484
------------
Utilities-Telephone -- 0.6%
29,944 BellSouth Corp. 1,493,457
------------
TOTAL U.S. STOCKS $218,578,571
------------
- ----------------------
FOREIGN STOCKS -- 5.0%
- ----------------------
Bermuda -- 0.7%
9,692 Ace Ltd. (Insurance) 333,768
17,286 EXEL Ltd.,"A" (Insurance) 1,296,450
------------
1,630,218
------------
Canada -- 0.6%
28,251 Canadian National Railway Co.
(Railroads) 1,465,521
------------
France -- 0.2%
17,225 Alcatel Alsthom Compagnie,
ADR (Telecommunications) 420,936
------------
Italy -- 0.3%
45,869 Sao Paolo Imi S.p.A. (Banks and
Credit Cos.) 811,054
------------
Japan -- 0.3%
19,210 AFLAC, Inc. (Insurance) 845,240
------------
Switzerland -- 0.3%
375 Nestle S.A. (Food and Beverage
Products) 816,345
------------
United Kingdom -- 2.6%
36,891 British Petroleum PLC, ADR (Oils) 3,504,645
116,600 Rentokil Initial PLC, (Environmental
Services) 880,096
98,000 Reuters Group PLC (Business
Services) 1,032,334
13,800 Reuters Group PLC, ADR (Business
Services) 874,575
------------
6,291,650
------------
TOTAL FOREIGN STOCKS $ 12,280,964
------------
TOTAL STOCKS
(Identified Cost, $199,297,058) $230,859,535
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
134
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MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
- ----------------------------------
CONVERTIBLE PREFERRED STOCKS--0.5%
- ----------------------------------
Shares Value
- --------------------------------------------------------------------------------
Agriculture -- 0.1%
4,200 Monsanto Co., 6.50%* $ 205,800
------------
Consumer Goods and Services -- 0.1%
4,398 Newell Financial Trust Co.,
5.25%##* 231,995
------------
Utilities-Electric -- 0.3%
5,475 Houston Industries, Inc., 7.00% 582,403
5,700 Texas Utilities Co., 3.315% 275,025
------------
857,428
------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Identified Cost, $995,432) $ 1,295,223
------------
- -----------------------------
SHORT-TERM OBLIGATION -- 5.0%
- -----------------------------
Principal
Amount
(000 Omitted)
- -------------
$12,055 Federal Home Loan Mortgage
Corp., due 1/04/99, at
Amortized Cost 12,050,479
------------
TOTAL INVESTMENTS
(Identified Cost, $212,342,969) $244,205,237
OTHER ASSETS LESS LIABILITIES 105,030
------------
NET ASSETS -- 100.0% $244,310,267
============
* Non-income producing security.
# SEC Rule 144A restriction.
See notes to financial statements.
- --------------------------------------------------------------------------------
135
<PAGE>
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MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
STATEMENT OF ASSETS
AND LIABILITIES
December 31, 1998
ASSETS
Receivable for Series shares sold $ 555,812
Investments, at value
(identified cost $212,342,969) 244,205,237
Cash 12,703
Receivable for investments sold 169,839
Dividends receivable 253,513
Receivable from investment adviser 39,616
Deferred organization expenses 3,250
Other assets 458
-------------
TOTAL ASSETS 245,240,428
-------------
LIABILITIES
Payable for investments purchased 361,877
Payable for Series shares reacquired 528,650
Payable to affiliates:
Management fee 5,004
Shareholder servicing agent fee 234
Accrued expenses and other liabilities 34,396
-------------
TOTAL LIABILITIES 930,161
-------------
NET ASSETS $ 244,310,267
=============
NET ASSETS CONSIST OF:
Paid-in capital $ 210,795,582
Unrealized appreciation on investments
and translation of assets and liabilities
in foreign currencies 31,862,633
Accumulated undistributed net realized gain
on investments and foreign currency
transactions 646,503
Accumulated undistributed net investment
income 1,005,549
-------------
TOTAL ASSETS $ 244,310,267
=============
SHARES OF BENEFICIAL INTEREST
OUTSTANDING 12,146,049
-------------
NET ASSET VALUE PER SHARE
(net assets / shares of beneficial
interest outstanding) $ 20.11
=============
STATEMENT OF OPERATIONS
Year Ended
December 31, 1998
Net Investment Income:
Income --
Dividends $ 1,856,517
Interest 478,388
Foreign taxes withheld (17,880)
-------------
Total investment income 2,317,025
-------------
Expenses --
Management fee 1,040,559
Trustees' compensation 1,971
Shareholder servicing agent fee 48,381
Administrative fee 15,383
Custodian fee 54,530
Printing 51,777
Postage 11
Auditing fees 11,121
Legal fees 1,632
Amortization of organization expenses 1,837
-------------
Total expenses 1,227,202
Fees paid indirectly (4,154)
Reimbursement of expenses to
investment adviser 85,624
-------------
Net expenses 1,308,672
-------------
Net investment income $ 1,008,353
-------------
Realized and Unrealized Gain (Loss)
on Investments:
Realized gain (loss) (identified cost basis) --
Investment transactions $ 784,125
Foreign currency transactions (2,805)
-------------
Net Realized Gain on Investments and
Foreign Currency Transactions 781,320
-------------
Change in unrealized appreciation --
Investments 26,597,351
Translation of assets and liabilities in
foreign currencies 430
-------------
Net Unrealized Gain on Investments and
Foreign Currency Translation 26,597,781
-------------
Net Realized and Unrealized Gain on
Investments and Foreign Currency 27,379,101
-------------
Increase in Net Assets from Operations $ 28,387,454
=============
See notes to financial statements.
- --------------------------------------------------------------------------------
136
<PAGE>
-----------
MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------ ------------
<S> <C> <C>
Increase (decrease) in net assets:
From Operations --
Net investment income $ 1,008,353 $ 234,505
Net realized gain on investments and foreign currency transactions 781,320 962,798
Net unrealized gain on investments and foreign currency translation 26,597,781 4,430,038
------------ ------------
Increase in net assets from operations 28,387,454 5,627,341
------------ ------------
Distributions Declared to Shareholders --
From net investment income -- (236,004)
From net realized gain on investments and foreign currency transactions -- (962,798)
In excess of net investment income -- (501)
In excess of net realized gain on investments and foreign currency transactions -- (143,538)
------------ ------------
Total distributions declared to shareholders -- (1,342,841)
------------ ------------
Net increase in net assets from Series share transactions 157,877,743 44,586,457
------------ ------------
Total Increase in Net Assets 186,265,197 48,870,957
Net Assets:
At beginning of period 58,045,070 9,174,113
------------ ------------
At end of period (including accumulated undistributed net
investment income of $1,005,549 and $0, respectively) $244,310,267 $ 58,045,070
============ ============
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
137
<PAGE>
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MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- ------------------------------
1 -- Business and Organization
- ------------------------------
MFS Growth with Income Series (the Series) is a diversified series of
MFS(R) Variable Insurance Trustsm (the Trust) which is comprised of the
following 13 series: MFS(R) Bond Series, MFS(R) Emerging Growth Series,
MFS(R)/Foreign & Colonial Emerging Markets Equity Series, MFS Growth with Income
Series, MFS(R) High Income Series, MFS(R) Limited Maturity Series, MFS(R) Money
Market Series, MFS(R) New Discovery Series, MFS(R) Research Series, MFS(R) Total
Return Series, MFS(R) Utilities Series, MFS(R) Value Series, and MFS(R) World
Government Series. The Series is organized as a Massachusetts business trust and
is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The shareholders of each Series of the
Trust are separate accounts of insurance companies which offer variable annuity
and/or life insurance policies. As of December 31, 1998, there were 45
shareholders in the Series.
- ------------------------------------
2 -- Significant Accounting Policies
- ------------------------------------
General
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations
Equity securities listed on securities exchanges or reported through the
NASDAQ system are reported at market value using last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are reported at market value using last quoted bid prices. Short-term
obligations, which mature in 60 days or less, are valued at amortized cost,
which approximates market value. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith by
or at the direction of the Trustees.
Foreign Currency Translation
Investment valuations, other assets, and liabilities initially expressed
in foreign currencies are converted each business day into U.S. dollars based
upon current exchange rates. Purchases and sales of foreign investments, income,
and expenses are converted into U.S. dollars based upon currency exchange rates
prevailing on the respective dates of such transactions. Gains and losses
attributable to foreign currency exchange rates on sales of securities are
recorded for financial statement purposes as net realized gains and losses on
investments. Gains and losses attributable to foreign exchange rate movements on
income and expenses are recorded for financial statement purposes as foreign
currency transaction gains and losses. That portion of both realized and
unrealized gains and losses on investments that results from fluctuations in
foreign currency exchange rates is not separately disclosed.
Deferred Organization Expenses
Costs incurred by the Series in connection with its organization have been
deferred and are being amortized on a straight-line basis over a five-year
period beginning on the date of commencement of Series' operations.
- --------------------------------------------------------------------------------
138
<PAGE>
-----------
MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
Forward Foreign Currency Exchange Contracts
The Series may enter into forward foreign currency exchange contracts for
the purchase or sale of a specific foreign currency at a fixed price on a future
date. Risks may arise upon entering into these contracts from the potential
inability of counterparties to meet the terms of their contracts and from
unanticipated movements in the value of a foreign currency relative to the U.S.
dollar. The Series may enter into forward contracts for hedging purposes as well
as for non-hedging purposes. For hedging purposes, the Series may enter into
contracts to deliver or receive foreign currency it will receive from or require
for its normal investment activities. The Series may also use contracts in a
manner intended to protect foreign currency-denominated securities from declines
in value due to unfavorable exchange rate movements. For non-hedging purposes,
the Series may enter into contracts with the intent of changing the relative
exposure of the Series' portfolio of securities to different currencies to take
advantage of anticipated changes. The forward foreign currency exchange
contracts are adjusted by the daily exchange rate of the underlying currency and
any gains or losses are recorded as unrealized until the contract settlement
date. On contract settlement date, the gains or losses are recorded as realized
gains or losses on foreign currency transactions.
Investment Transactions and Income
Investment transactions are recorded on the trade date. Interest income is
recorded on the accrual basis. All discount is accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividends received in cash are recorded on the ex-dividend date. Dividend and
interest payments received in additional securities are recorded on the
ex-dividend or ex-interest date in an amount equal to the value of the security
on such date.
Fees Paid Indirectly
The Series' custody fee is calculated as a percentage of the Series' month
end net assets. The fee is reduced according to an arrangement that measures the
value of cash deposited with the custodian by the Series. This amount is shown
as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions
The Series' policy is to comply with the provisions of the Internal
Revenue Code (the Code) applicable to regulated investment companies and to
distribute to shareholders all of its taxable income, including any net realized
gain on investments. Accordingly, no provision for federal income or excise tax
is provided. The Series files a tax return annually using tax accounting methods
required under provisions of the Code, which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized gain
reported on these financial statements may differ from that reported on the
Series' tax return.
Distributions to shareholders are recorded on the ex-dividend date. The
Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions
- --------------------------------------------------------------------------------
139
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
in excess of tax basis earnings and profits are reported in the financial
statements as a tax return of capital. Differences in the recognition or
classification of income between the financial statements and tax earnings and
profits, which result in temporary over-distributions for financial statement
purposes, are classified as distributions in excess of net investment income or
net realized gains. During the year ended December 31, 1998, accumulated
undistributed net investment income decreased by $2,804, accumulated
undistributed net realized gain on investments and foreign currency transactions
increased by $21,326 and paid-in capital decreased by $18,522 due to differences
between book and tax accounting for foreign currency transactions and return of
capital distributions. This change had no effect on the net assets or net asset
value per share.
- ---------------------------------
3 -- Transactions with Affiliates
- ---------------------------------
Investment Adviser
The Series has an investment advisory agreement with Massachusetts
Financial Services Company (MFS) to provide overall investment advisory and
administrative services, and general office facilities. The management fee is
computed daily and paid monthly at an annual rate of 0.75% of the Series'
average daily net assets. Prior to October 2, 1998, the Series had a temporary
expense reimbursement agreement whereby MFS voluntarily agreed to pay all of the
Series' operating expenses, exclusive of management fees. The Series in turn
paid MFS an expense reimbursement fee not greater than 0.25% of average daily
net assets.
The Series pays no compensation directly to its Trustees who are officers
of the investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS, and MFS Service Center,
Inc. (MFSC).
Administrator
The Series has an administrative services agreement with MFS to provide
the Series with certain financial, legal, shareholder servicing, compliance, and
other administrative services. As a partial reimbursement for the cost of
providing these services, the Series pays MFS an administrative fee at the
following annual percentages of the Series' average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Shareholder Servicing Agent
MFSC, a wholly owned subsidiary of MFS, earns a fee for its services as
shareholder servicing agent. The fee is calculated as a percentage of the
Series' average daily net assets at an effective annual rate of 0.035%.
- -------------------------
4 -- Portfolio Securities
- -------------------------
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$227,490,924 and $74,778,919, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Series, as computed on a federal income tax basis, are
as follows:
Aggregate cost $213,046,979
============
Gross unrealized appreciation $ 34,701,803
Gross unrealized depreciation (3,543,545)
------------
Net unrealized appreciation $ 31,158,258
============
- --------------------------------------------------------------------------------
140
<PAGE>
-----------
MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- ----------------------------------
5 -- Shares of Beneficial Interest
- ----------------------------------
The Series' Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest.
Transactions in Series shares were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares sold 10,781,895 $ 197,503,394 3,352,466 $ 52,088,626
Shares issued to shareholders in reinvestment
of distributions -- -- 83,407 1,342,851
Shares reacquired (2,166,542) (39,625,651) (611,729) (8,845,020)
------------- ------------- ------------- -------------
Net increase 8,615,353 $ 157,877,743 2,824,144 $ 44,586,457
============= ============= ============= =============
</TABLE>
- -------------------
6 -- Line of Credit
- -------------------
The Series and other affiliated funds participate in an $805 million
unsecured line of credit provided by a syndication of banks under a line of
credit agreement. Borrowings may be made to temporarily finance the repurchase
of Series shares. Interest is charged to each fund, based on its borrowings, at
a rate equal to the bank's base rate. In addition, a commitment fee, based on
the average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated to
the Series for the year ended December 31, 1998 was $262.
- --------------------------------------------------------------------------------
141
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended
December 31, Period Ended
------------------------------------------- December 31,
1998 1997 1996 1995*
----------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value, beginning of period .................................. $ 16.44 $ 12.98 $ 10.61 $ 10.00
----------- ----------- ----------- -----------
Income from investment operations##:
Net investment income(ss.)........................................... 0.13 0.16 0.18 0.05
Net realized and unrealized gain on investments and foreign
currency ........................................................... 3.54 3.70 2.42 0.61
----------- ----------- ----------- -----------
Total from investment operations .................................. 3.67 3.86 2.60 0.66
----------- ----------- ----------- -----------
Less Distributions Declared to Shareholders:
From net investment income .......................................... -- (0.07) (0.09) (0.05)
From net realized gain on investments and foreign currency
transactions ....................................................... -- (0.29) (0.13) --
In excess of net realized gain on investments and foreign
currency transactions .............................................. -- (0.04) (0.01) --
----------- ----------- ----------- -----------
Total distributions declared to shareholders ...................... -- (0.40) (0.23) (0.05)
----------- ----------- ----------- -----------
Net asset value, end of period ........................................ $ 20.11 $ 16.44 $ 12.98 $ 10.61
----------- ----------- ----------- -----------
Total return .......................................................... 22.32% 29.78% 24.46% 6.64%++
Ratios (to average net assets)/Supplemental data(ss.).:
Expenses## .......................................................... 0.95% 1.00% 1.01% 1.00%+
Net investment income ............................................... 0.73% 0.93% 1.52% 2.20%+
Portfolio turnover .................................................... 57% 42% 41% 2%
Net assets at end of period (000 omitted) ............................. $ 244,310 $ 58,045 $ 9,174 $ 365
</TABLE>
* For the period from the commencement of the Series' investment operations,
October 9, 1995, through December 31, 1995
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian. The Series' expenses are calculated without reduction for
this expense offset arrangement.
ss. Prior to October 2, 1998, subject to reimbursement by the Series, the
investment adviser voluntarily agreed to maintain the expenses of the
Series, exclusive of management fees, at not more than 0.25% of average
daily net assets. To the extent actual expenses were over/under this
limitation, the net investment income (loss) per share and ratios would
have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income (loss) ........................................ $ 0.14 $(0.13) $(0.05) $(0.41)
Ratios (to average net assets):
Expenses## ....................................................... 0.88% 1.10% 2.07% 21.44%+
Net investment income (loss) ..................................... 0.80% 0.82% 0.46% (18.24)%+
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
142
<PAGE>
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MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Trustees of the MFS Variable Insurance Trust and Shareholders of MFS
Growth with Income Series:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Growth with Income Series (one of the
series constituting MFS Variable Insurance Trust) as of December 31, 1998, the
related statement of operations for the year then ended, the statements of
changes in net assets for the years ended December 31, 1998 and 1997, and the
financial highlights for each of the years in the four-year period ended
December 31, 1998. These financial statements and financial highlights are the
responsibility of the Series' management. Our responsibility is to express an
opinion on these statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
December 31, 1998 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the MFS Growth with
Income Series at December 31, 1998, the results of its operations, the changes
in its net assets, and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
February 4, 1999
- --------------------------------------------------------------------------------
143
<PAGE>
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with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
MFS PREPARES FOR THE YEAR 2000
MFS Investment Management(R) is committed to the effective use of technology in
managing investments, delivering high-quality service to our fund shareholders,
and supporting the financial advisers who sell our products. With that in mind,
we created a separately funded Year 2000 Program Management Office in 1996
composed of a specialized staff reporting directly to MFS senior management.
The Year 2000 (Y2K) problem arose because date fields in computers and software
applications have traditionally used two-digit codes. Since the dawn of the
computer age, the implied first two digits have been "1" and "9". In the year
2000, that can no longer be the case because computer applications may assume
"00" refers to 1900. Our team of dedicated business and technology managers,
working with outside experts, is taking reasonable steps to ascertain the Y2K
compliance of MFS' internal systems. We are also working with our vendors to
seek reasonable assurances that their systems are or will be compliant. MFS
realizes that investors are also concerned about whether the companies in the
Funds' portfolios are addressing their internal Y2K issues. As MFS' portfolio
managers and research analysts meet with the managements of portfolio companies
as part of the MFS(R) Original Researchsm process, one of the many factors they
may consider is a company's Y2K preparedness.
Year 2000 compliance is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K phenomenon.
While MFS is making an effort to ensure the integrity of its internal systems,
there are significant systems interdependencies in the domestic and foreign
securities markets, external vendor systems, and the internal business
environments of its portfolio companies. There can be no assurance that the
steps MFS has taken will be sufficient to avoid any adverse impact on the Funds.
However, MFS will continue to review and test its internal systems.
- --------------------------------------------------------------------------------
144
<PAGE>
[LOGO] GUARDIAN (TM)
The Guardian Insurance & Annuity Company, Inc
201 Park Avenue South
New York, New York 10003
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