N-30D 1 variablecontracts.txt ANNUAL REPORT -------------------------------------------------------------------------------- The Guardian Stock Fund ------------------------------------- [PHOTO OMITTED] Richard Goldman Portfolio Manager Objective: Long-term growth of capital Portfolio: At least 80% common stocks and securities convertible into common stocks. Inception: April 13, 1983 Net Assets at December 31, 2001: $2,060,451,429 Richard Goldman, who was named portfolio manager of The Guardian Stock Fund and head of Guardian's Common Stock Department starting July 23, 2001, comes to Guardian from Citigroup Asset Management where he was responsible for $4.5 billion in mutual fund, variable annuity and institutional assets. Mr. Goldman managed the Smith Barney Diversified Large Cap Growth Fund from 1996 through June 2001. His 17 years of industry experience includes several years as Director of Citigroup's Institutional Investor Relations Department where he was responsible for relationships with the company's institutional investors and rating agencies. Mr. Goldman has a B.S. in Finance and Economics from Lehigh University and an Executive M.B.A. in Finance from New York University. Q: How did the Fund perform during 2001? A: The year 2001 was a difficult year for the economy, the stock market and The Guardian Stock Fund. The S&P 500 Index(1) was down 11.88%, the NASDAQ Composite Index(2) (which is heavily weighted towards technology companies) was down 20.82%, and The Guardian Stock Fund was down 21.44%.(3) The markets continued to be extremely volatile by historical standards as investors dealt with a gamut of issues ranging from declining corporate profitability to the war on terrorism. Most of the underperformance relative to the benchmark occurred in the first quarter of the year, mostly due to the Fund's overweight position in technology-related companies. During the fourth quarter, the Fund's holdings in large cap pharmaceutical companies modestly hurt relative performance as this more stable sector fell out of favor when the market began to speculate on a quick economic recovery. Q: Can you review what changes you've made since taking over as Portfolio Manager? A: When I assumed responsibility for the Fund at the end of July, I set two priorities. My first priority was to review the portfolio's risk and return characteristics and rebalance it, within the Fund's investment guidelines and policies, to reflect investment positions I was more comfortable with. My initial review of the Fund's portfolio led me to make several changes to the holdings. For example, we increased the positions in companies with very strong balance sheets and operating cash flows including several processing, pharmaceutical and financial companies. We believe these companies will have more financial flexibility in these tougher economic times and should come out of this recessionary environment stronger than their weaker competition. We also increased our ownership in energy-related companies, emphasizing exposure to North American gas ownership and services, which we ================================================================================ "My team and Ihave been refining and clarifying our investment process to rigorously incorporate both quantitative models and fundamental research. In addition, we've reinforced our risk management strategies in an effort to produce as favorable a risk-adjusted return as possible. Our investment philosophy is based on the belief that the best way for a core fund to deliver exceptional performance is through 'hitting singles and doubles' and not 'swinging for the fences'." ================================================================================ -------------------------------------------------------------------------------- (1) The S&P 500 Index is an unmanaged index of 500 primarily 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. (2) The NASDAQ Composite Index is a broad-based capitalization-weighted index of all NASDAQ National Market stocks. The Index is not available for direct investment and its returns do not reflect the fees and expenses that have been deducted from the Fund. (3) 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 an investor's share, when redeemed, may be worth more or less than the original cost. -------------------------------------------------------------------------------- 10 -------------------------------------------------------------------------------- think are attractively valued and provide upside potential when an economic recovery comes. My second priority was to deploy the disciplined investment approach I was trained in and used when I was managing portfolios for sophisticated institutional accounts. My team and I have been refining and clarifying our investment process to rigorously incorporate both quantitative models and fundamental research. In addition, we've reinforced our risk management strategies in an effort to produce as favorable a risk-adjusted return as possible. Our investment philosophy is based on the belief that the best way for a core fund to deliver exceptional performance is through "hitting singles and doubles" and not "swinging for the fences." Q: What is your outlook for 2002? A: We expect the market to remain highly volatile as investors adjust to the rapidly changing economic and geopolitical environment. We believe that the economy, and stock market, should stabilize during the year, but that subsequent growth will be more in line with traditional growth rates, rather than the exceptional growth which we experienced in the late 1990's. In this context, we're working hard to identify the companies which are best positioned to benefit from this more normal rate of growth. As I mentioned earlier, we think this includes companies with stronger balance sheets (less debt) and more robust cash flows. These companies tend to be the market leaders in their sectors, and their ability to fund growth internally without accessing the public markets gives them a competitive advantage in gaining share in difficult times. -------------------------------------------------------------------------------- The Guardian Stock Fund Profile ------------------------------------- -------------------------------------------------------------------------------- Top Ten Holdings as of December 31, 2001 Percent of Total Company Net Assets -------------------------------------------------------------------------------- 1. Microsoft Corp. 3.81% -------------------------------------------------------------------------------- 2. Johnson & Johnson 3.59% -------------------------------------------------------------------------------- 3. Wal-Mart Stores, Inc 3.49% -------------------------------------------------------------------------------- 4. Int'l. Business Machines 2.82% -------------------------------------------------------------------------------- 5. Pfizer, Inc. 2.77% -------------------------------------------------------------------------------- 6. AOL Time Warner, Inc. 2.55% -------------------------------------------------------------------------------- 7. American Int'l. Group, Inc. 2.47% -------------------------------------------------------------------------------- 8. General Electric Co. 2.46% -------------------------------------------------------------------------------- 9. Verizon Comm. 2.15% -------------------------------------------------------------------------------- 10. Philip Morris Cos., Inc. 1.86% -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 11 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Sector Weightings for The Guardian Stock Fund as of December 31, 2001 [The following table was depicted as a pie chart in the printed material.] Telecommunications 4.85% Conglomerates 1.60% Consumer Cyclicals 4.90% Financial 14.57% Utilities 5.24% Consumer Staples 24.14% Energy 7.95% Basic Industries 1.11% Cash 5.58% Technology 17.82% Capital Goods 4.72% Consumer Services 7.52% -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS(1) FOR PERIODS ENDED DECEMBER 31, 2001 Since Fund Inception 1 Year 5 Years 10 Years (4/13/83) -------------------------------------------------------------------------------- The Guardian Stock Fund (21.44)% 6.45% 12.75% 13.84% -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (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 an investor's share, when redeemed, may be worth more or less than the original cost. -------------------------------------------------------------------------------- 12 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Growth of a Hypothetical $10,000 Investment [The following table was depicted as a line chart in the printed material.] The Guardian Stock Fund S&P 500 Index Cost of Living ----------------------- ------------- -------------- 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 98 135440 120810 17287 138555 126826 17322 99 177629 163104 17232 177564 153710 17629 00 144965 142548 17813 123756 133028 18268 12/31/01 113879 125651 18017 A hypothetical $10,000 investment made at the inception of The Guardian Stock Fund on April 13, 1983 would have grown to $113,879 on December 31, 2001. 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 $125,651. 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. -------------------------------------------------------------------------------- 13 -------------------------------------------------------------------------------- The Guardian VC 500 Index Fund ------------------------------------- [PHOTO OMITTED] Jonathan C. Jankus, C.F.A. Portfolio Manager Objective: Seeks to track the investment performance of the Standard & Poor's 500 Composite Stock Price Index ("the S&P 500 Index") Portfolio: Common stocks of companies included in the S&P 500 Index, which emphasizes securities issued by large U.S. companies Inception: August 25, 1999 Net Assets at December 31, 2001: $366,543,862 Q: How did the Fund perform this year? A: For the year ending December 31, 2001, the Fund's return was -11.92%.(1) The Fund's objective is to track the returns of the S&P 500 Index,(2) a theoretical portfolio of 500 blue-chip stocks, which returned -11.88% over the same period. The S&P 500 Index is theoretical in the sense that it is computed as though it was purchased and subsequently rebalanced without any costs or expenses. For the period from Fund inception on August 25, 1999 to December 31, 2001, the Fund's annualized return was -6.42% compared to a total annualized return of -6.42% for the S&P 500 Index. Q: What factors affected the Fund's performance? A: Stock market returns were negative for the second year in a row, as measured by the S&P 500 Index, the first time that has happened since 1973-74. As an index fund, the Fund's goal is to mimic the returns of the theoretical S&P 500 Index portfolio. We attempt to do so by holding nearly all 500 of the stocks in the Index in approximately the same weights as they are represented in the Index. We attempt to minimize trading costs and trade only when rebalancings are required by capitalization changes in the Index or when dividends need to be reinvested. Q: What are your expectations for the coming year? A: We will continue to manage the portfolio so as to be fully invested in stocks, attempt to track the investment performance of the S&P 500 Index and keep trading costs to a minimum. If history is any indication, indexing has proven to be a good long-term strategy. ================================================================================ "We will continue to manage the portfolio so as to be fully invested in stocks, attempt to track the investment performance of the S&P 500 Index and keep trading costs to a minimum. If history is any indication, indexing has proven to be a good long-term strategy." ================================================================================ At the time of this writing, the Federal Reserve has lowered short-term interest rates dramatically in the hope of stimulating the economy and income tax cuts have come from the Bush administration. Historically, these actions have boded well for equities, but corporate profitability remains a question. At the very least, valuation levels are far more attractive now than they were two years ago. -------------------------------------------------------------------------------- (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. Since January 1, 2000 the investment adviser for the Fund has assumed certain ordinary operating expenses for the Fund. Without this assumption of expenses, returns would have been lower. Past performance is not a guarantee of future results. Investment return and principal value will fluctuate so that an investor's share, when redeemed, may be worth more or less than the original cost. (2) "S&P," "S&P 500(R)," "Standard & Poor's 500" and, "500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Guardian Investor Services LLC. The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Fund. The S&P 500 Index is an unmanaged index of 500 primarily 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. -------------------------------------------------------------------------------- 14 -------------------------------------------------------------------------------- The Guardian VC 500 Index Fund Profile -------------------------------------- -------------------------------------------------------------------------------- Sector Weightings for The Guardian VC 500 Index Fund as of December 31, 2001 [The following table was depicted as a pie chart in the printed material.] Health Care 14.20% Utilities 2.30% Transportation 0.70% Consumer Non-Cyclicals 8.00% Consumer Cyclicals 8.20% Financial 20.00% Energy 6.50% Telecommunications 5.40% Technology 18.90% Consumer Services 5.20% Basic Materials 3.60% Industrials 3.80% Commercial Services 3.20% -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Sector Weightings for the S&P 500 Index as of December 31, 2001 [The following table was depicted as a pie chart in the printed material.] Health Care 14.20% Utilities 2.40% Transportation 0.70% Consumer Non-Cyclicals 8.10% Consumer Cyclicals 8.10% Financial 20.00% Energy 6.50% Telecommunications 5.20% Technology 18.90% Consumer Services 5.10% Basic Materials 3.80% Industrials 3.80% Commercial Services 3.20% -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Top Ten Holdings as of December 31, 2001 Percent of Total Company Net Assets -------------------------------------------------------------------------------- 1. General Electric Co. 3.69% -------------------------------------------------------------------------------- 2. Microsoft Corp. 3.18% -------------------------------------------------------------------------------- 3. Exxon Mobil Corp. 2.42% -------------------------------------------------------------------------------- 4. Wal-Mart Stores, Inc. 2.41% -------------------------------------------------------------------------------- 5. Pfizer, Inc. 2.34% -------------------------------------------------------------------------------- 6. Citigroup, Inc. 2.27% -------------------------------------------------------------------------------- 7. Int'l. Business Machines 1.99% -------------------------------------------------------------------------------- 8. American Int'l. Group, Inc. 1.96% -------------------------------------------------------------------------------- 9. Intel Corp. 1.89% -------------------------------------------------------------------------------- 10. Johnson & Johnson 1.71% -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS(1) FOR PERIODS ENDED DECEMBER 31, 2001 -------------------------------------------------------------------------------- 1 Year ............................................................... (11.92)% Since Inception (8/25/99) ............................................ (6.42)% -------------------------------------------------------------------------------- (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. Since January 1, 2000 the investment adviser for the Fund has assumed certain ordinary operating expenses for the Fund. Without this assumption of expenses, returns would have been lower. Past performance is not a guarantee of future results. Investment return and principal value will fluctuate so that an investor's share, when redeemed, may be worth more or less than the original cost. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Growth of Hypothetical $10,000 Investment [The following table was depicted as a line chart in the printed material.] Guardian VC 500 Index Fund S&P 500 ---------- ------- 9/13/99 10000 10000 12/99 10874 10909 06/00 10823 10865 12/00 9931 9970 6/01 9268 9304 12/01 8747 8788 -------------------------------------------------------------------------------- 15 -------------------------------------------------------------------------------- The Guardian VC Asset Allocation Fund ------------------------------------- [PHOTO OMITTED] Jonathan C. Jankus, C.F.A. Portfolio Manager Objective: Long-term total investment return consistent with moderate investment risk. Portfolio: Purchases shares of The Guardian Stock Fund, The Guardian VC 500 Index Fund, The Guardian Bond Fund and The Guardian Cash Fund. Inception: September 15, 1999 Net Assets at December 31, 2001: $44,767,988 Q: How did the Fund perform this year? A: For the year ending December 31, 2001, the Fund's total return was -9.03%.(1) This return lags the -3.69% return experienced by its passive composite benchmark (60% of the S&P 500 Index(2) and 40% of the Lehman Aggregate Bond Index(3) rebalanced monthly). For the period from Fund inception on September 15, 1999 to December 31, 2001, the Fund's annualized return has been 0.79% compared to 0.64% for the benchmark. Q: What factors affected the Fund's performance? A: For the first time since 1973-74, equity returns were negative for two consecutive years. The overall market, as measured by the S&P 500 Index, achieved a total return of -11.88% during 2001, while the NASDAQ over-the-counter market declined by over 20%, as measured by the NASDAQ Composite Index.(4) The Fund's performance was negatively impacted by both an overly aggressive stance on the market and overly aggressive stock selection early in the year, prior to our change to a more neutral equity indexation strategy in May. A more in-depth analysis of the latter can be found in the annual report of The Guardian Stock Fund. The Fund's performance was enhanced by the excellent results of its bond holdings. More on this can be found in the annual report of The Guardian Bond Fund. Q: What are your expectations for the coming year? A: Our investing will, of course, continue to be guided by our quantitative model which, as of year-end, has us invested 86% in stocks, 10% in bonds and 4% in cash. This is more aggressive than our neutral 60/40/0 allocation, indicating that we consider the overall stock market to be undervalued relative to fixed income alternatives. ================================================================================ "Our investing will, of course, continue to be guided by our quantitative model which, as of year-end, has us invested 86% in stocks, 10% in bonds and 4% in cash. This is more aggressive than our neutral 60/40/0 allocation, indicating that we consider the overall stock market to be undervalued relative to fixed income alternatives." ================================================================================ At the time of this writing, the Federal Reserve has lowered short-term interest rates dramatically in the hope of stimulating the economy and income tax cuts have come from the Bush administration. Historically, these actions have boded well for equities, but corporate profitability remains a question. At the very least, valuation levels are far more attractive now than they were two years ago. -------------------------------------------------------------------------------- (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 an investor's share, when redeemed, may be worth more or less than the original cost. (2) The S&P 500 Index is an unmanaged index of 500 primarily 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. (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 its returns do not reflect the fees and expenses that have been deducted from the Fund. (4) The NASDAQ Composite Index is a broad-based capitalization-weighted index of all NASDAQ National Market stocks. The Index is not available for direct investment, and its returns do not reflect the fees and expenses that have been deducted from the Fund. -------------------------------------------------------------------------------- 16 -------------------------------------------------------------------------------- The Guardian VC Asset Allocation Fund Profile --------------------------------------------- -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS(1) FOR PERIODS ENDED DECEMBER 31, 2001 -------------------------------------------------------------------------------- 1 Year ................................................................ (9.03)% Since Inception (9/15/99) ............................................. 0.79% -------------------------------------------------------------------------------- (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 an investor's share, when redeemed, may be worth more or less than the original cost. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Portfolio Composition by Asset Class as of December 31, 2001 [The following table was depicted as a pie chart in the printed material.] Cash 4% Fixed Income 10% Common Stocks 86% -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Growth of a Hypothetical $10,000 Investment [The following table was depicted as a line chart in the printed material.] The Guardian VC Asset S&P 500 Lehman Aggregate Allocation Fund Index Bond Index --------------------- ------- ---------------- 9/17/99 10000 10000 10000 12/99 10802 11039 10038 12/00 11193 9970 11207 12/01 10184 8788 12151 To give you a comparison, the chart above shows the performance of a $10,000 investment made in The Guardian VC Asset Allocation Fund, the S&P 500 Index and the Lehman Aggregate Bond Index. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 17 -------------------------------------------------------------------------------- The Guardian VC High Yield Bond Fund ------------------------------------- [PHOTO OMITTED] [PHOTO OMITTED] Peter J. Liebst Thomas G. Sorell C.F.A. Co-Portfolio Manager Co-Portfolio Manager Objective: Seeks current income. Capital appreciation is a secondary objective. Portfolio: At least 75% is invested in corporate bonds and other debt securities that, at the time of purchase, are rated below investment grade or are unrated. Inception: September 13, 1999 Net Assets at December 31, 2001: $32,209,954 Q: How did the Fund perform during 2001? A: The Guardian VC High Yield Bond Fund posted a 3.56%(1) total return for calendar year 2001. This compared to an average 0.97% return for the 79 variable annuity high yield bond funds tracked by Lipper Analytical Services(2) and ranked The Guardian VC High Yield Bond Fund in the 2nd percentile of the Lipper peer group. The Lehman Brothers Corporate High Yield Index(3) posted a 5.28% return for the year 2001. Q: What factors affected the Fund's performance? A: Calendar 2001 was a roller coaster ride for the high yield market as returns swung from positive to negative, closing out the year with a strong tone. Despite the fluctuations, the high yield market, as measured by the Lehman Brothers Corporate High Yield Index, posted a 5.28% return for 2001, its best nominal return since 1997. Throughout the year, the market battled a flood of negative events including a U.S. economic recession, rapid credit deterioration in several significant industries, and rising default rates. The year began with a wave of optimism supported by the Federal Reserve Board's (Fed) two rate reductions totaling 1% in January. Encouraged by the belief that the Fed was actively managing the slowing economy, the high yield market appeared to accept that a recovery was imminent and rallied to post a remarkable return of 7.49% for the first month of the year, as measured by the Lehman Brothers Corporate High Yield Index. By March this bullish outlook had turned to skepticism and the high yield market's performance followed the deteriorating economy by posting negative returns for both the second and third quarters, which more than offset the market's first quarter positive return, as measured by the Index. A strong fourth quarter performance of 5.71% by the Index reflected the market's renewed belief that the worst of the economic deterioration was over and the fiscal and monetary initiatives undertaken during the year would lead to an economic rebound in 2002. ================================================================================ "At year-end, the Fund remains cautious with regard to the timing of a notable improvement in the U.S. economy. Therefore we will continue to manage a diversified investment portfolio with an emphasis on credit quality and liquidity." ================================================================================ Specific industry and individual credits had significant impact on high yield returns during 2001. Generally the market saw an overall deterioration in credit quality as demonstrated by the number of speculative grade firms downgraded by Moody's Investors Service (a nationally recognized statistical ratings organization), which surpassed upgrades by a 3.56-to-one ratio. Further aggravating the market was the amount of debt entering the high yield market as a result of downgrades from investment grade status. According to Moody's, $122 billion of investment grade debt was downgraded to the high yield market during 2001 (not including upgrades of lower grade debt -------------------------------------------------------------------------------- (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 figures 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 an investor's share, 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 loads, and performance would be different if sales loads were deducted. (3) The Lehman Brothers Corporate High Yield Bond Index is an unmanaged index that is generally considered to be representative of corporate high yield bond market activity. The Index is not available for direct investment and the returns do not reflect the fees and expenses that have been deducted from the Fund. -------------------------------------------------------------------------------- 18 -------------------------------------------------------------------------------- throughout the year). This alone represents a nearly 1.5-to-one ratio to 2001's total high yield new issuance of $83.3 billion. As would be expected in a period of significant credit erosion, the level of defaults rose within the speculative grade market to 11% for 2001 compared to 7% in 2000. While avoiding numerous credit "land mines," the Fund was not immune to the rapid credit and price deterioration experienced throughout the high yield market. The most dramatic single factor impacting the high yield market during 2001 was the swift and deep decline in the wireline telecommunications sector. At the beginning of the year, this sector represented over 13.78% of the total high yield market, by far the largest single industry sector. This emerging industry found itself caught with a glut of new capacity coming online just as demand was dropping in conjunction with the overall economy, causing it to be the worst performing area of the high yield market in 2001 with a total return of -49%, as measured by the Lehman Brothers Corporate High Yield Index. If the performance of the high yield market was measured excluding the negative impact of the wireline telecommunications sector, the market would have earned a total return of 10.97%, a notable improvement from its actual return of 5.28%. As the Fund is a diversified fund, we were adversely impacted by the performance of the wireline telecommunications sector in 2001. The Fund entered the year with an overweight in the industry, which, although reduced early in the year, caused a notable drag on the Fund's overall 2001 performance. Q: What was your investment strategy during the year and what is your outlook for the future? A: The Fund's overall strategy was to maximize the total return of a diversified fixed-income portfolio principally composed of below investment grade securities with up to 25% invested in convertible securities. Specifically, we sought to identify attractive asset allocation weightings based on analysis of industry fundamentals, issuer credit worthiness and risk/return profile, and relative value of individual issue. Throughout 2001, stronger credit quality and larger, more liquid issues were emphasized. During 2001, less than 10% of the Fund was invested in convertible securities. At year-end, the Fund remains cautious with regard to the timing of a notable improvement in the U.S. economy. Therefore we will continue to manage a diversified investment portfolio with an emphasis on credit quality and liquidity. -------------------------------------------------------------------------------- The Guardian VC High Yield Bond Fund Profile -------------------------------------------- -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS(1) FOR PERIODS ENDED DECEMBER 31, 2001 -------------------------------------------------------------------------------- 1 Year ................................................................ 3.56% Since Inception (9/13/99) ............................................. 0.03% -------------------------------------------------------------------------------- (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 figures 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 an investor's share, when redeemed, may be worth more or less than the original cost. -------------------------------------------------------------------------------- Growth of a Hypothetical $10,000 Investment [The following table was depicted as a line chart in the printed material.] The Guardian VC High Lehman Brothers Yield Bond Fund Corporate High Yield --------------- -------------------- 9/13/99 10000 10000 12/99 10277 10108 6/00 10206 9985 12/00 9653 9514 6/01 9811 9887 12/01 10006 10016 To give you a comparison, the chart shows the performance of a $10,000 investment made in The Guardian VC High Yield Bond Fund and the Lehman Brothers Corporate High Yield Index. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 19 -------------------------------------------------------------------------------- The Guardian Stock Fund ------------------------------- Schedule of Investments December 31, 2001 ------------------------------------------------------------------------------- Common Stocks -- 94.6% ------------------------------------------------------------------------------- Shares Value ------------------------------------------------------------------------------- Aerospace and Defense -- 0.7% 125,700 General Dynamics Corp. $ 10,010,748 49,800 Northrop Grumman Corp. * 5,020,338 -------------- 15,031,086 ------------------------------------------------------------------------------- Biotechnology -- 0.6% 206,400 Amgen, Inc. * 11,649,216 ------------------------------------------------------------------------------- Broadcasting and Publishing -- 1.2% 242,700 Clear Channel Comm., Inc. * 12,355,857 485,300 USA Networks, Inc. * 13,253,543 -------------- 25,609,400 ------------------------------------------------------------------------------- Chemicals - Major -- 0.4% 259,600 Dow Chemical Co. 8,769,288 ------------------------------------------------------------------------------- Computer Services -- 2.1% 316,100 Automatic Data Processing, Inc. 18,618,290 173,500 Electronic Data Systems Corp. 11,893,425 104,300 First Data Corp. 8,182,335 149,200 Paychex, Inc. 5,199,620 -------------- 43,893,670 ------------------------------------------------------------------------------- Computer Software -- 7.7% 270,300 Adobe Systems, Inc. 8,392,815 397,500 BMC Software, Inc. * 6,507,075 955,600 Compuware Corp. * 11,266,524 233,200 Intuit, Inc. * 9,976,296 1,186,400 Microsoft Corp. * 78,599,000 894,900 Oracle Corp. * 12,358,569 225,300 PeopleSoft, Inc. * 9,057,060 454,400 SunGard Data Systems, Inc. * 13,145,792 193,100 VERITAS Software Corp. * 8,656,673 -------------- 157,959,804 ------------------------------------------------------------------------------- Computer Systems -- 3.8% 1,015,000 EMC Corp. * 13,641,600 480,300 Int'l. Business Machines 58,097,088 559,200 Sun Microsystems, Inc. * 6,878,160 -------------- 78,616,848 ------------------------------------------------------------------------------- Conglomerates -- 4.7% 203,700 Danaher Corp. 12,285,147 1,265,900 General Electric Co. 50,737,272 144,700 Loews Corp. 8,013,486 424,900 Tyco Int'l. Ltd. 25,026,610 -------------- 96,062,515 ------------------------------------------------------------------------------- Drugs and Hospitals -- 12.4% 389,500 American Home Products Corp. 23,899,720 132,000 Biovail Corp. * 7,425,000 397,800 Bristol-Myers Squibb Corp. 20,287,800 192,400 Elan Corp. PLC * 8,669,544 217,100 Eli Lilly & Co. 17,051,034 121,600 Forest Laboratories, Inc. * 9,965,120 480,200 HCA, Inc. 18,506,908 509,000 Health Management Associates, Inc. * 9,365,600 346,150 IVAX Corp. * 6,971,461 123,100 Laboratory Corp. of America Hldgs. * 9,952,635 517,000 Merck & Co., Inc. 30,399,600 170,800 Mylan Laboratories, Inc. 6,405,000 1,430,600 Pfizer, Inc. 57,009,410 239,100 Shire Pharmaceuticals Group PLC * 8,751,060 203,200 Teva Pharmaceutical Inds. Ltd. ADR 12,523,216 184,300 Universal Health Svcs., Inc. * 7,884,354 -------------- 255,067,462 ------------------------------------------------------------------------------- Electrical Equipment -- 0.8% 670,100 Flextronics Int'l. Ltd. * 16,075,699 ------------------------------------------------------------------------------- Electronics - Semiconductors -- 2.4% 166,100 Analog Devices, Inc. * 7,373,179 448,100 AVX Corp. 10,570,679 973,800 Intel Corp. 30,626,010 -------------- 48,569,868 ------------------------------------------------------------------------------- Energy - Miscellaneous -- 2.8% 832,900 El Paso Corp. 37,155,669 106,600 Ultramar Diamond Shamrock Corp. 5,274,568 377,100 Valero Energy Corp. 14,375,052 -------------- 56,805,289 ------------------------------------------------------------------------------- Entertainment and Leisure -- 3.6% 1,638,900 AOL Time Warner, Inc. * 52,608,690 486,000 Viacom, Inc. * 21,456,900 -------------- 74,065,590 ------------------------------------------------------------------------------- Financial - Banks -- 6.3% 350,800 Bank of America Corp. 22,082,860 243,100 Bank of New York, Inc. 9,918,480 406,466 Citigroup, Inc. 20,518,404 118,600 Fifth Third Bancorp 7,273,738 188,400 FleetBoston Financial Corp. 6,876,600 294,500 M & T Bank Corp. 21,454,325 219,500 National City Corp. 6,418,180 187,800 North Fork Bancorp., Inc. 6,007,722 89,800 Northern Trust Corp. 5,407,756 159,000 TCF Financial Corp. 7,628,820 388,200 Wells Fargo & Co. 16,867,290 -------------- 130,454,175 ------------------------------------------------------------------------------- Financial - Other -- 2.7% 214,400 Concord EFS, Inc. * 7,028,032 303,000 Federal Home Loan Mortgage Corp. 19,816,200 243,000 Federal National Mortgage Assn. 19,318,500 207,432 Legg Mason, Inc. 10,367,451 -------------- 56,530,183 ------------------------------------------------------------------------------- Financial - Thrift -- 1.7% 297,500 Dime Bancorp, Inc. 10,733,800 427,700 Golden West Financial Corp. 25,170,145 -------------- 35,903,945 ------------------------------------------------------------------------------- Food, Beverage and Tobacco -- 5.2% 544,400 Coca-Cola Co. 25,668,460 296,600 Kraft Foods, Inc. 10,093,298 475,400 PepsiCo., Inc. 23,147,226 See notes to financial statements. * Non-income producing security. -------------------------------------------------------------------------------- 30 -------------------------------------------------------------------------------- Shares Value ------------------------------------------------------------------------------- 835,400 Philip Morris Cos., Inc. $ 38,303,090 425,800 The Pepsi Bottling Group, Inc. 10,006,300 -------------- 107,218,374 ------------------------------------------------------------------------------- Hospital Supplies -- 4.4% 114,900 Baxter Int'l., Inc. 6,162,087 1,251,800 Johnson & Johnson 73,981,380 203,400 Medtronic, Inc. * 10,416,114 -------------- 90,559,581 ------------------------------------------------------------------------------- Household Products -- 1.8% 207,900 Colgate-Palmolive Co. 12,006,225 318,900 Procter & Gamble Co. 25,234,557 -------------- 37,240,782 ------------------------------------------------------------------------------- Insurance -- 3.8% 642,100 American Int'l. Group, Inc. 50,982,740 168,600 Marsh & McLennan Cos., Inc. 18,116,070 95,600 St. Paul Cos., Inc. 4,203,532 180,900 UnumProvident Corp. 4,795,659 -------------- 78,098,001 ------------------------------------------------------------------------------- Merchandising - Department Stores -- 0.3% 176,700 Federated Department Stores, Inc. * 7,227,030 ------------------------------------------------------------------------------- Merchandising - Drugs -- 1.8% 169,800 AmerisourceBergen Corp. 10,790,790 145,950 Cardinal Health, Inc. 9,437,127 505,900 Walgreen Co. 17,028,594 -------------- 37,256,511 ------------------------------------------------------------------------------- Merchandising - Food -- 0.2% 194,100 Sysco Corp. 5,089,302 ------------------------------------------------------------------------------- Merchandising - Mass -- 3.5% 1,247,900 Wal-Mart Stores, Inc. 71,816,645 ------------------------------------------------------------------------------- Merchandising - Special -- 1.1% 433,500 Home Depot, Inc. 22,112,835 ------------------------------------------------------------------------------- Metals - Aluminum -- 0.7% 395,900 Alcoa, Inc. 14,074,245 ------------------------------------------------------------------------------- Miscellaneous - Capital Goods -- 0.9% 86,300 Minnesota Mng. & Mfg. Co. 10,201,523 171,100 W.W. Grainger, Inc. 8,212,800 -------------- 18,414,323 ------------------------------------------------------------------------------- Oil and Gas Producing -- 1.6% 176,220 Apache Corp. 8,789,854 456,100 Occidental Petroleum Corp. 12,100,333 307,700 Unocal Corp. 11,098,739 -------------- 31,988,926 ------------------------------------------------------------------------------- Oil and Gas Services -- 3.2% 330,300 B.J. Svcs. Co. * 10,718,235 514,424 GlobalSantaFe Corp. 14,671,372 375,500 Nabors Industries, Inc. * 12,890,915 185,600 Schlumberger Ltd. * 10,198,720 445,000 Weatherford Int'l., Inc. * 16,580,700 65,059,942 -------------- ------------------------------------------------------------------------------- Oil - Integrated - International -- 2.3% 264,300 ChevronTexaco Corp. 23,683,923 485,400 Royal Dutch Petroleum Co. * 23,794,308 47,478,231 -------------- ------------------------------------------------------------------------------- Semiconductors - Communications -- 0.8% 580,600 Texas Instruments, Inc. 16,256,800 ------------------------------------------------------------------------------- Semiconductors - Equipment -- 0.9% 266,700 Applied Materials, Inc. * 10,694,670 142,500 KLA-Tencor Corp. * 7,062,300 -------------- 17,756,970 ------------------------------------------------------------------------------- Telecommunications -- 3.6% 774,200 SBC Comm., Inc. 30,325,414 934,800 Verizon Comm. 44,365,608 -------------- 74,691,022 ------------------------------------------------------------------------------- Telecommunications - Equipment -- 1.2% 693,500 Cisco Systems, Inc. * 12,559,285 2,064,400 Lucent Technologies, Inc. * 12,985,076 -------------- 25,544,361 ------------------------------------------------------------------------------- Utilities - Electric and Water -- 3.4% 310,800 Dominion Resources, Inc. 18,679,080 274,800 Duke Energy Co. 10,788,648 249,700 Exelon Corp. 11,955,636 175,000 Pinnacle West Capital Corp. 7,323,750 215,000 PPL Corp. 7,492,750 314,000 TXU Corp. 14,805,100 -------------- 71,044,964 ------------------------------------------------------------------------------- Total Common Stocks (Cost $1,951,002,287) 1,949,992,883 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Repurchase Agreement -- 5.6% ------------------------------------------------------------------------------- Principal Amount Value ------------------------------------------------------------------------------- $ 115,345,000 State Street Bank and Trust Co. repurchase agreement, dated 12/31/2001, maturity value $115,356,278 at 1.76%, due 1/2/2002 (1) (Cost $115,345,000) $ 115,345,000 ------------------------------------------------------------------------------- Total Investments -- 100.2% (Cost $2,066,347,287) 2,065,337,883 Liabilities in Excess of Cash, Receivables and Other Assets -- (0.2)% (4,886,454) ------------------------------------------------------------------------------- Net Assets -- 100% $2,060,451,429 ------------------------------------------------------------------------------- (1) The repurchase agreement is fully collateralized by U.S. Government and/or agency obligations based on market prices at the date of the portfolio. Glossary: ADR -- American Depositary Receipt. See notes to financial statements. * Non-income producing security. -------------------------------------------------------------------------------- 31 -------------------------------------------------------------------------------- The Guardian Stock Fund ------------------------------- Statement of Assets and Liabilities December 31, 2001 ASSETS Investments, at market (cost $2,066,347,287) $ 2,065,337,883 Cash 263 Dividends receivable 1,971,816 Receivable for fund shares sold 245,113 Interest receivable 5,639 Other assets 16,719 --------------- Total Assets 2,067,577,433 --------------- LIABILITIES Payable for securities purchased 4,594,279 Payable for fund shares redeemed 1,429,301 Accrued expenses 225,982 Due to affiliates 876,442 --------------- Total Liabilities 7,126,004 --------------- Net Assets $ 2,060,451,429 =============== COMPONENTS OF NET ASSETS Capital stock, at par $ 71,204 Additional paid-in capital 2,396,684,754 Undistributed net investment income 8,915,564 Accumulated net realized loss on investments (344,210,689) Net unrealized depreciation of investments (1,009,404) --------------- Net Assets $ 2,060,451,429 =============== Shares Outstanding -- $0.001 par value 71,203,956 =============== Net Asset Value Per Share $ 28.94 =============== Statement of Operations Year Ended December 31, 2001 INVESTMENT INCOME Dividends $ 22,999,065 Interest 4,296,718 Less: Foreign tax withheld (17,367) --------------- Total Income 27,278,416 --------------- Expenses: Investment advisory fees -- Note B 12,124,331 Printing expense 368,000 Custodian fees 272,000 Legal fees 40,000 Insurance expense 27,064 Loan commitment fees -- Note H 24,491 Audit fees 19,500 Directors' fees -- Note B 15,303 Registration fees 2,500 Other 680 --------------- Total Expenses 12,893,869 --------------- Net Investment Income 14,384,547 --------------- REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS-- NOTE F Net realized loss on investments (343,590,697) Net change in unrealized appreciation of investments-- Note F (336,988,926) --------------- Net Realized and Unrealized Loss on Investments (680,579,623) --------------- NET DECREASE IN NET ASSETS FROM OPERATIONS $ (666,195,076) =============== See notes to financial statements. -------------------------------------------------------------------------------- 32 -------------------------------------------------------------------------------- Statement of Changes in Net Assets
Year Ended December 31, 2001 2000 --------------- --------------- INCREASE/(DECREASE) IN NET ASSETS From Operations: Net investment income $ 14,384,547 $ 3,157,055 Net realized gain/(loss) on investments (343,590,697) 460,933,642 Net change in unrealized appreciation of investments (336,988,926) (1,186,815,870) --------------- --------------- Net Decrease in Net Assets from Operations (666,195,076) (722,725,173) --------------- --------------- Dividends and Distributions to Shareholders from: Net investment income (6,151,807) (2,718,544) Net realized gain on investments (18,307,091) (601,480,456) --------------- --------------- Total Dividends and Distributions to Shareholders (24,458,898) (604,199,000) --------------- --------------- From Capital Share Transactions: Net increase/(decrease) in net assets from capital share transactions -- Note G (421,520,041) 324,462,555 --------------- --------------- Net Decrease in Net Assets (1,112,174,015) (1,002,461,618) NET ASSETS: Beginning of year 3,172,625,444 4,175,087,062 --------------- --------------- End of year * $ 2,060,451,429 $ 3,172,625,444 =============== =============== * Includes undistributed net investment income of: $ 8,915,564 $ 679,836
See notes to financial statements. -------------------------------------------------------------------------------- 33 -------------------------------------------------------------------------------- The Guardian Stock Fund ------------------------------- Financial Highlights Selected data for a share of capital stock outstanding throughout the years indicated:
Year Ended December 31, --------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------------------------------------------------------------------------------------- Net asset value, beginning of year ..................... $ 37.21 $ 55.20 $ 49.08 $ 46.05 $ 38.59 ------------- ------------- ------------- ------------- ------------- Income from investment operations: Net investment income ................. 0.20 0.04 0.24 0.47 0.52 Net realized and unrealized gain/ (loss) on investments .............. (8.16) (9.77) 14.49 8.56 12.97 ------------- ------------- ------------- ------------- ------------- Net increase/(decrease) from investment operations ......................... (7.96) (9.73) 14.73 9.03 13.49 ------------- ------------- ------------- ------------- ------------- Dividends and Distributions to Shareholders from: Net investment income ................. (0.08) (0.04) (0.24) (0.47) (0.52) Net realized gain on investments ...... (0.23) (8.22) (8.37) (5.53) (5.51) ------------- ------------- ------------- ------------- ------------- Total dividends and distributions ..... (0.31) (8.26) (8.61) (6.00) (6.03) ------------- ------------- ------------- ------------- ------------- Net asset value, end of year ............. $ 28.94 $ 37.21 $ 55.20 $ 49.08 $ 46.05 ------------- ------------- ------------- ------------- ------------- Total return* ............................ (21.44)% (18.39)% 31.17% 19.86% 35.58% ------------- ------------- ------------- ------------- ------------- Ratios/supplemental data: Net assets, end of year (000's omitted) .................... $ 2,060,451 $ 3,172,625 $ 4,175,087 $ 3,665,196 $ 3,222,187 Ratio of expenses to average net assets ................. 0.53% 0.52% 0.52% 0.52% 0.52% Ratio of net investment income to average net assets ....... 0.59% 0.08% 0.45% 0.95% 1.17% Portfolio turnover rate ............................... 137% 106% 74% 56% 51%
* 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. -------------------------------------------------------------------------------- 34 (This page intentionally left blank.) -------------------------------------------------------------------------------- 35 -------------------------------------------------------------------------------- The Guardian VC 500 Index Fund ------------------------------- Schedule of Investments December 31, 2001 -------------------------------------------------------------------------------- Common Stocks -- 95.4% -------------------------------------------------------------------------------- Shares Value -------------------------------------------------------------------------------- Aerospace and Defense -- 1.3% 35,311 Boeing Co. $ 1,369,361 6,579 General Dynamics Corp. 523,951 3,383 Goodrich Corp. 90,055 14,219 Lockheed Martin Corp. 663,601 2,793 Northrop Grumman Corp. 281,562 11,637 Raytheon Co. 377,853 5,987 Rockwell Int'l. Corp. 106,928 4,090 TRW, Inc. 151,494 20,371 United Technologies Corp. 1,316,578 ------------ 4,881,383 -------------------------------------------------------------------------------- Air Transportation -- 0.2% 5,032 AMR Corp. * 111,560 4,028 Delta Airlines, Inc. 117,859 24,935 Southwest Airlines Co. 460,799 2,197 US Airways Group, Inc. * 13,929 ------------ 704,147 -------------------------------------------------------------------------------- Appliance and Furniture -- 0.1% 6,425 Leggett & Platt, Inc. 147,775 2,492 Maytag Corp. 77,327 2,180 Whirlpool Corp. 159,859 ------------ 384,961 -------------------------------------------------------------------------------- Automotive -- 0.5% 59,898 Ford Motor Co. 941,597 17,960 General Motors Corp. 872,856 ------------ 1,814,453 -------------------------------------------------------------------------------- Automotive Parts -- 0.2% 2,375 Cooper Tire & Rubber Co. 37,905 4,843 Dana Corp. 67,221 18,330 Delphi Automotive Systems Corp. 250,388 5,631 Genuine Parts Co. 206,658 5,198 Goodyear Tire & Rubber Co. 123,764 2,844 Johnson Controls, Inc. 229,653 ------------ 915,589 -------------------------------------------------------------------------------- Biotechnology -- 1.3% 34,152 Amgen, Inc. * 1,927,539 4,866 Biogen, Inc. * 279,065 6,216 Chiron Corp. * 272,509 6,966 MedImmune, Inc. * 322,874 42,592 Pharmacia Corp. 1,816,549 867 Viasys Healthcare, Inc. * 17,522 ------------ 4,636,058 -------------------------------------------------------------------------------- Broadcasting and Publishing -- 0.6% 19,234 Clear Channel Comm., Inc. * 979,203 30,939 Comcast Corp. * 1,113,804 6,823 Univision Comm., Inc. * 276,059 ------------ 2,369,066 -------------------------------------------------------------------------------- Building Materials and Homebuilders -- 0.3% 1,942 Centex Corp. 110,869 1,954 Crane Co. 50,101 1,450 KB Home 58,145 15,055 Masco Corp. 368,847 1,379 Pulte Homes, Inc. 61,600 5,129 Sherwin - Williams Co. 141,048 3,309 Vulcan Materials Co. 158,633 ------------ 949,243 -------------------------------------------------------------------------------- Business Services -- 0.0% 5,742 Robert Half Int'l., Inc. * 153,311 -------------------------------------------------------------------------------- Capital Goods - Heavy Duty Trucks -- 0.1% 1,349 Cummins Engine, Inc. 51,990 2,256 Eaton Corp. 167,869 1,944 Navistar Int'l. Corp., Inc. 76,788 2,506 PACCAR, Inc. 164,444 ------------ 461,091 -------------------------------------------------------------------------------- Capital Goods - Miscellaneous Technology -- 0.0% 3,485 TMP Worldwide, Inc. * 149,507 -------------------------------------------------------------------------------- Chemicals - Major -- 0.7% 29,384 Dow Chemical Co. 992,592 34,140 E.I. Du Pont de Nemours & Co. 1,451,291 3,536 Hercules, Inc. * 35,360 7,209 Rohm & Haas Co. 249,648 ------------ 2,728,891 -------------------------------------------------------------------------------- Chemicals - Miscellaneous -- 0.5% 1,347 Acuity Brands, Inc. * 16,299 7,463 Air Products & Chemicals, Inc. 350,089 3,609 Avery Dennison Corp. 204,017 2,521 Eastman Chemical Co. 98,369 4,177 Ecolab, Inc. 168,124 1,019 FMC Corp. * 60,631 1,646 Great Lakes Chemical Corp. 39,965 5,513 PPG Industries, Inc. 285,132 5,258 Praxair, Inc. 290,504 2,739 Sealed Air Corp. * 111,806 2,477 Sigma - Aldrich 97,619 ------------ 1,722,555 -------------------------------------------------------------------------------- Computer Services -- 1.0% 20,437 Automatic Data Processing, Inc. 1,203,739 15,319 Electronic Data Systems Corp. 1,050,117 12,826 First Data Corp. 1,006,200 12,222 Paychex, Inc. 425,937 ------------ 3,685,993 -------------------------------------------------------------------------------- Computer Software -- 5.0% 7,829 Adobe Systems, Inc. 243,091 1,765 Autodesk, Inc. 65,782 7,976 BMC Software, Inc. * 130,567 8,956 Broadvision, Inc. * 24,539 6,047 Citrix Systems, Inc. * 137,025 18,867 Computer Associates Int'l., Inc. 650,723 5,520 Computer Sciences Corp. * 270,370 12,042 Compuware Corp. * 141,975 6,106 Fiserv, Inc. * 258,406 6,830 Intuit, Inc. * 292,187 See notes to financial statements. * Non-income producing security. -------------------------------------------------------------------------------- 36 -------------------------------------------------------------------------------- Shares Value -------------------------------------------------------------------------------- 2,705 Mercury Interactive Corp. * $ 91,916 176,204 Microsoft Corp. * 11,673,515 10,397 Novell, Inc. * 47,722 183,782 Oracle Corp. * 2,538,029 8,649 Parametric Technology Corp. * 67,549 9,625 PeopleSoft, Inc. * 386,925 4,350 Sabre Hldgs. Corp. * 184,223 14,835 Siebel Systems, Inc. * 415,083 13,011 VERITAS Software Corp. * 583,283 ------------ 18,202,910 -------------------------------------------------------------------------------- Computer Systems -- 4.3% 11,427 Apple Computer, Inc. * 250,251 55,296 Compaq Computer Corp. 539,689 5,602 Comverse Technology, Inc. * 125,317 85,154 Dell Computer Corp. * 2,314,486 72,250 EMC Corp. * 971,065 10,575 Gateway, Inc. * 85,023 63,606 Hewlett Packard Co. 1,306,467 60,265 Int'l. Business Machines 7,289,654 4,198 Lexmark Int'l. Group, Inc. * 247,682 3,159 NCR Corp. * 116,441 10,658 Network Appliance, Inc. * 233,090 8,080 Pitney Bowes, Inc. 303,889 3,017 QLogic Corp. * 134,287 106,624 Sun Microsystems, Inc. * 1,311,475 10,368 Unisys Corp. * 130,015 22,729 Xerox Corp. 236,836 ------------ 15,595,667 -------------------------------------------------------------------------------- Conglomerates -- 5.0% 4,666 Danaher Corp. 281,406 337,120 General Electric Co. 13,511,770 6,457 Loews Corp. 357,589 4,616 Textron, Inc. 191,379 70,182 Tyco Int'l. Ltd. 4,133,720 ------------ 18,475,864 -------------------------------------------------------------------------------- Containers - Metal and Plastic -- 0.0% 902 Ball Corp. 63,771 -------------------------------------------------------------------------------- Containers - Paper -- 0.1% 1,729 Bemis Co., Inc. 85,032 5,196 Pactiv Corp. * 92,229 1,613 Temple-Inland, Inc. 91,506 ------------ 268,767 -------------------------------------------------------------------------------- Cosmetics and Toiletries -- 0.5% 1,853 Alberto-Culver Co. 82,903 7,768 Avon Products, Inc. 361,212 1,756 Bausch & Lomb, Inc. 66,131 34,524 Gillette Co. 1,153,102 3,137 Int'l. Flavors & Fragrances, Inc. 93,200 ------------ 1,756,548 -------------------------------------------------------------------------------- Drugs and Hospitals -- 8.5% 50,708 Abbott Laboratories 2,826,971 4,308 Allergan, Inc. 323,315 49,232 American Home Products Corp. 3,020,875 63,627 Bristol-Myers Squibb Corp. 3,244,977 41,122 Eli Lilly & Co. 3,229,722 5,768 Forest Laboratories, Inc. * 472,688 17,598 HCA, Inc. 678,227 12,757 HEALTHSOUTH Corp. * 189,059 5,564 Humana, Inc. * 65,599 7,482 King Pharmaceuticals, Inc. * 315,217 3,368 Manor Care, Inc. * 79,855 80,315 Merck & Co., Inc. 4,722,522 215,435 Pfizer, Inc. 8,585,085 47,899 Schering-Plough Corp. 1,715,263 10,615 Tenet Healthcare Corp. * 623,313 10,384 UnitedHealth Group 734,876 3,466 Watson Pharmaceuticals, Inc. * 108,798 2,073 Wellpoint Health Networks, Inc. * 242,230 ------------ 31,178,592 -------------------------------------------------------------------------------- Electrical Equipment -- 0.7% 6,385 American Power Conversion Corp. * 92,327 14,027 Emerson Electric Co. 800,942 26,495 Honeywell Int'l., Inc. 896,061 2,878 ITT Industries, Inc. 145,339 6,262 Jabil Circuit, Inc. * 142,273 6,397 Molex, Inc. 197,987 10,466 Sanmina Corp. * 208,273 21,387 Solectron Corp. * 241,245 ------------ 2,724,447 -------------------------------------------------------------------------------- Electronics and Instruments -- 0.1% 2,576 Power-One, Inc. * 26,816 7,417 Symbol Technologies, Inc. 117,782 3,070 Tektronix, Inc. * 79,144 1,904 Thomas & Betts Corp. 40,270 ------------ 264,012 -------------------------------------------------------------------------------- Electronics - Semiconductors -- 2.5% 11,260 Advanced Micro Devices, Inc. * 178,584 12,662 Altera Corp. * 268,688 11,781 Analog Devices, Inc. * 522,958 220,169 Intel Corp. 6,924,315 11,831 LSI Logic Corp. * 186,693 19,519 Micron Technology, Inc. * 605,089 5,678 National Semiconductor Corp. * 174,826 18,568 Palm, Inc. * 72,044 4,286 Visteon Corp. 64,461 ------------ 8,997,658 -------------------------------------------------------------------------------- See notes to financial statements. * Non-income producing security. -------------------------------------------------------------------------------- 37 -------------------------------------------------------------------------------- The Guardian VC 500 Index Fund ------------------------------- Schedule of Investments December 31, 2001 (Continued) Shares Value -------------------------------------------------------------------------------- Energy - Miscellaneous -- 0.5% 10,673 Dynegy, Inc. $ 272,161 16,670 El Paso Corp. 743,649 26,900 Williams Cos., Inc. 686,488 11,236 Xcel Energy, Inc. 311,687 ------------ 2,013,985 -------------------------------------------------------------------------------- Entertainment and Leisure -- 3.0% 153,712 AOL Time Warner, Inc. * 4,934,155 2,868 Brunswick Corp. 62,408 19,143 Carnival Corp. 537,535 9,901 Harley-Davidson, Inc. 537,723 3,838 Harrah's Entertainment, Inc. * 142,044 5,646 Hasbro, Inc. 91,635 14,106 Mattel, Inc. 242,623 65,944 Viacom, Inc. * 2,911,428 68,423 Walt Disney Co. 1,417,725 ------------ 10,877,276 -------------------------------------------------------------------------------- Finance Companies -- 0.3% 15,185 Household Int'l., Inc. 879,819 7,180 Stilwell Financial, Inc. 195,440 ------------ 1,075,259 -------------------------------------------------------------------------------- Financial - Banks -- 8.5% 12,125 AmSouth Bancorporation 229,163 58,201 Bank of America Corp. 3,663,753 24,081 Bank of New York, Inc. 982,505 38,152 Bank One Corp. 1,489,836 22,930 BB&T Corp. 828,002 164,630 Citigroup, Inc. 8,310,522 5,843 Comerica, Inc. 334,804 18,841 Fifth Third Bancorp 1,155,519 35,459 FleetBoston Financial Corp. 1,294,254 8,218 Huntington Bancshares, Inc. 141,267 64,994 J.P. Morgan Chase & Co. 2,362,532 13,898 KeyCorp 338,277 15,623 Mellon Financial Corp. 587,737 19,668 National City Corp. 575,092 7,289 Northern Trust Corp. 438,944 9,462 PNC Financial Svcs. Group 531,764 7,448 Regions Financial Corp. 222,993 11,129 SouthTrust Corp. 274,552 10,653 State Street Corp. 556,619 9,559 SunTrust Banks, Inc. 599,349 9,495 Synovus Financial Corp. 237,850 62,388 U.S. Bancorp 1,305,781 4,488 Union Planters Corp. 202,544 45,900 Wachovia Corp. 1,439,424 63,767 Wells Fargo & Co. 2,770,676 3,016 Zions Bancorp 158,581 ------------ 31,032,340 -------------------------------------------------------------------------------- Financial - Other -- 3.8% 43,316 American Express Co. 1,545,948 3,439 Bear Stearns Cos., Inc. 201,663 6,822 Capital One Financial Corp. 368,047 45,378 Charles Schwab Corp. 701,998 15,772 Concord EFS, Inc. * 517,006 3,877 Countrywide Credit Industries, Inc. 158,841 22,674 Federal Home Loan Mortgage Corp. 1,482,879 37,326 Federal National Mortgage Assn. 2,967,417 8,660 Franklin Resources, Inc. 305,438 5,984 H & R Block, Inc. 267,485 8,070 Lehman Brothers Hldgs., Inc. 539,076 27,886 MBNA Corp. 981,587 27,479 Merrill Lynch & Co., Inc. 1,432,205 36,432 Morgan Stanley Dean Witter & Co. 2,038,006 4,027 T. Rowe Price Group, Inc. 139,858 5,335 USA Education, Inc. 448,247 ------------ 14,095,701 -------------------------------------------------------------------------------- Financial - Thrift -- 0.4% 7,106 Charter One Financial, Inc. 192,928 5,194 Golden West Financial Corp. 305,667 28,733 Washington Mutual, Inc. 939,569 ------------ 1,438,164 -------------------------------------------------------------------------------- Food, Beverage and Tobacco -- 4.9% 1,221 Adolph Coors Co. 65,201 29,385 Anheuser-Busch Cos., Inc. 1,328,496 21,727 Archer-Daniels-Midland Co. 311,782 2,241 Brown-Forman Corp. 140,287 13,368 Campbell Soup Co. 399,302 88,791 Coca-Cola Co. 4,186,496 13,758 Coca-Cola Enterprises, Inc. 260,576 17,584 ConAgra, Inc. 417,972 5,004 Fortune Brands, Inc. 198,108 9,317 General Mills, Inc. 484,577 11,415 H.J. Heinz Co. 469,385 4,474 Hershey Foods Corp. 302,890 13,288 Kellogg Co. 399,969 57,875 PepsiCo., Inc. 2,817,934 79,708 Philip Morris Cos., Inc. 3,654,612 25,751 Sara Lee Corp. 572,445 12,446 Starbucks Corp. * 237,096 9,416 The Pepsi Bottling Group, Inc. 221,276 18,713 Unilever NV 1,078,056 5,345 UST, Inc. 187,075 7,395 W.M. Wrigley Jr. Co. 379,881 ------------ 18,113,416 -------------------------------------------------------------------------------- Footwear -- 0.1% 8,879 NIKE, Inc. 499,355 1,917 Reebok Int'l. Ltd. * 50,800 ------------ 550,155 -------------------------------------------------------------------------------- See notes to financial statements. * Non-income producing security. -------------------------------------------------------------------------------- 38 -------------------------------------------------------------------------------- Shares Value -------------------------------------------------------------------------------- Gold Mining -- 0.1% 17,534 Barrick Gold Corp. $ 279,661 10,726 Placer Dome, Inc. 117,021 ------------ 396,682 -------------------------------------------------------------------------------- Hospital Supplies -- 3.1% 19,394 Baxter Int'l., Inc. 1,040,100 8,433 Becton Dickinson & Co., Inc. 279,554 8,787 Biomet, Inc. 271,518 13,142 Boston Scientific Corp. * 316,985 1,659 C.R. Bard, Inc. 107,005 10,051 Guidant Corp. * 500,540 105,767 Johnson & Johnson 6,250,830 39,569 Medtronic, Inc. 2,026,328 2,807 St. Jude Medical, Inc. * 217,964 6,421 Stryker Corp. 374,794 ------------ 11,385,618 -------------------------------------------------------------------------------- Household Products -- 1.4% 2,661 Black & Decker Corp. 100,399 7,743 Clorox Co. 306,236 18,368 Colgate-Palmolive Co. 1,060,752 8,730 Newell Rubbermaid, Inc. 240,686 42,402 Procter & Gamble Co. 3,355,270 1,892 Snap-On, Inc. 63,685 2,795 Stanley Works 130,163 1,896 Tupperware Corp. 36,498 ------------ 5,293,689 -------------------------------------------------------------------------------- Insurance -- 4.1% 4,664 Aetna, Inc. 153,865 17,215 AFLAC, Inc. 422,801 23,717 Allstate Corp. 799,263 3,463 Ambac Financial Group, Inc. 200,369 90,464 American Int'l. Group, Inc. 7,182,842 8,573 Aon Corp. 304,513 5,737 Chubb Corp. 395,853 4,903 Cigna Corp. 454,263 5,262 Cincinnati Financial Corp. 200,745 11,059 Conseco, Inc. * 49,323 7,760 Hartford Financial Svcs. Group, Inc. 487,561 4,980 Jefferson-Pilot Corp. 230,425 10,086 John Hancock Financial Svcs. 416,552 6,149 Lincoln Nat'l. Corp., Inc. 298,657 9,020 Marsh & McLennan Cos., Inc. 969,199 4,853 MBIA, Inc. 260,266 24,545 MetLife, Inc. 777,586 3,507 MGIC Investment Corp. 216,452 2,418 Progressive Corp. 361,007 9,346 Providian Financial Corp. 33,178 4,182 SAFECO Corp. 130,269 7,020 St. Paul Cos., Inc. 308,669 4,107 Torchmark Corp. 161,528 7,903 UnumProvident Corp. 209,509 ------------ 15,024,695 -------------------------------------------------------------------------------- Lodging -- 0.3% 27,888 Cendant Corp. * 546,884 12,075 Hilton Hotels Corp. 131,859 7,981 Marriott Int'l., Inc. 324,427 6,507 Starwood Hotels & Resorts Worldwide, Inc. 194,234 ------------ 1,197,404 -------------------------------------------------------------------------------- Machinery and Construction Maintenance -- 0.3% 11,238 Caterpillar, Inc. 587,185 7,686 Deere & Co. 335,571 2,595 Fluor Corp. 97,053 ------------ 1,019,809 -------------------------------------------------------------------------------- Machinery - Industrial Specialty -- 0.5% 3,065 Cooper Industries, Inc. 107,030 6,655 Dover Corp. 246,701 9,951 Illinois Tool Works, Inc. 673,882 5,235 Ingersoll-Rand Co. 218,875 4,020 Pall Corp. 96,721 3,826 Parker-Hannifin Corp. 175,652 5,935 Thermo Electron Corp. * 141,609 ------------ 1,660,470 -------------------------------------------------------------------------------- Merchandising - Department Stores -- 0.9% 3,709 Big Lots, Inc. 38,573 2,784 Dillards, Inc. 44,544 10,824 Dollar General Corp. 161,277 12,067 Family Dollar Stores, Inc. 361,769 6,472 Federated Department Stores, Inc. * 264,705 10,906 Kohl's Corp. * 768,219 9,786 May Department Stores Co. 361,886 4,381 Nordstrom, Inc. 88,628 29,435 Target Corp. 1,208,307 ------------ 3,297,908 -------------------------------------------------------------------------------- Merchandising - Drugs -- 0.7% 14,595 Cardinal Health, Inc. 943,713 9,324 McKesson Corp. 348,718 33,325 Walgreen Co. 1,121,719 ------------ 2,414,150 -------------------------------------------------------------------------------- Merchandising - Food -- 0.7% 13,259 Albertson's, Inc. 417,526 26,542 Kroger Co. * 553,932 16,546 Safeway, Inc. * 690,795 4,335 Supervalu, Inc. 95,890 22,018 Sysco Corp. 577,312 4,599 Winn-Dixie Stores, Inc. 65,536 ------------ 2,400,991 -------------------------------------------------------------------------------- See notes to financial statements. * Non-income producing security. -------------------------------------------------------------------------------- 39 -------------------------------------------------------------------------------- The Guardian VC 500 Index Fund ------------------------------- Schedule of Investments December 31, 2001 (Continued) Shares Value -------------------------------------------------------------------------------- Merchandising - Mass -- 2.6% 8,611 J.C. Penney Co., Inc. $ 231,636 16,040 K Mart Corp. * 87,578 10,755 SearsRoebuck & Co. 512,368 153,479 Wal-Mart Stores, Inc. 8,832,717 ------------ 9,664,299 -------------------------------------------------------------------------------- Merchandising - Special -- 2.6% 3,666 AutoZone, Inc. * 263,219 9,450 Bed, Bath & Beyond, Inc. * 320,355 6,855 Best Buy Co., Inc. * 510,560 6,810 Circuit City Stores, Inc. 176,719 14,733 Costco Wholesale Corp. * 653,850 12,876 CVS Corp. 381,130 83,650 Home Depot, Inc. 4,266,986 25,182 Lowe's Cos., Inc. 1,168,697 9,742 Office Depot, Inc. * 180,617 6,071 RadioShack Corp. 182,737 14,938 Staples, Inc. * 279,341 28,139 The Gap, Inc. 392,258 13,960 The Limited, Inc. 205,491 4,778 Tiffany & Co. 150,364 9,179 TJX Cos., Inc. 365,875 6,468 Toys R Us, Inc. * 134,146 ------------ 9,632,345 -------------------------------------------------------------------------------- Metals - Aluminum -- 0.4% 10,454 Alcan Aluminum Ltd. 375,612 28,259 Alcoa, Inc. 1,004,608 ------------ 1,380,220 -------------------------------------------------------------------------------- Metals - Copper -- 0.1% 4,712 Freeport-McMoran Copper & Gold, Inc. * 63,093 6,400 Newmont Mining Corp. 122,304 2,577 Phelps Dodge Corp. 83,495 ------------ 268,892 -------------------------------------------------------------------------------- Metals - Miscellaneous -- 0.1% 2,626 Allegheny Technologies, Inc. 43,985 4,281 Engelhard Corp. 118,498 5,954 Inco Ltd. * 100,861 ------------ 263,344 -------------------------------------------------------------------------------- Metals - Steel -- 0.1% 2,540 Nucor Corp. 134,518 2,907 USX-U.S. Steel Corp. 52,646 2,795 Worthington Industries, Inc. 39,689 ------------ 226,853 -------------------------------------------------------------------------------- Miscellaneous - Capital Goods -- 0.7% 6,913 Applera Corp.-Applied Biosystems Group 271,474 1,542 Millipore Corp. 93,599 12,962 Minnesota Mng. & Mfg. Co. 1,532,238 3,304 PerkinElmer, Inc. 115,706 3,817 Quintiles Transnational Corp. * 61,263 3,109 W.W. Grainger, Inc. 149,232 6,362 Zimmer Hldgs., Inc. * 194,295 ------------ 2,417,807 -------------------------------------------------------------------------------- Miscellaneous - Consumer Growth Cyclical -- 0.1% 1,347 Nat'l. Svc. Industries, Inc. 2,721 4,024 Sapient Corp. * 31,065 18,560 Yahoo, Inc. * 329,255 ------------ 363,041 -------------------------------------------------------------------------------- Miscellaneous - Consumer Growth Staples -- 0.4% 2,079 American Greetings Corp. 28,649 5,594 Convergys Corp. * 209,719 4,688 Equifax, Inc. 113,215 9,646 IMS Health, Inc. 188,194 12,280 Interpublic Group Cos., Inc. 362,751 6,064 Omnicom Group, Inc. 541,818 ------------ 1,444,346 -------------------------------------------------------------------------------- Natural Gas - Diversified -- 0.0% 24,427 Enron Corp. 14,656 -------------------------------------------------------------------------------- Oil and Gas Producing -- 0.5% 8,205 Anadarko Petroleum Corp. 466,454 4,517 Apache Corp. 225,288 6,924 Burlington Resources, Inc. 259,927 4,237 Devon Energy Corp. 163,760 3,796 EOG Resources, Inc. 148,462 12,129 Occidental Petroleum Corp. 321,782 7,968 Unocal Corp. 287,406 ------------ 1,873,079 -------------------------------------------------------------------------------- Oil and Gas Services -- 0.7% 10,989 Baker Hughes, Inc. 400,769 14,047 Halliburton Co. 184,016 2,003 McDermott Int'l., Inc. * 24,577 4,808 Nabors Industries, Inc. * 165,059 4,390 Noble Drilling Corp. * 149,435 3,089 Rowan Cos., Inc. * 59,834 25,858 Schlumberger Ltd. 1,420,897 10,410 Transocean Sedco Forex, Inc. 352,066 ------------ 2,756,653 -------------------------------------------------------------------------------- Oil - Integrated - Domestic -- 0.4% 2,918 Amerada Hess Corp. 182,375 2,285 Ashland, Inc. 105,293 3,103 Kerr-McGee Corp. 170,044 12,416 Phillips Petroleum Co. 748,188 2,747 Sunoco, Inc. 102,573 10,103 USX-Marathon Group 303,090 ------------ 1,611,563 -------------------------------------------------------------------------------- Oil - Integrated - International -- 4.5% 34,890 ChevronTexaco Corp. 3,126,493 20,453 Conoco, Inc. 578,820 225,890 Exxon Mobil Corp. 8,877,477 76,381 Royal Dutch Petroleum Co. 3,744,196 ------------ 16,326,986 -------------------------------------------------------------------------------- See notes to financial statements. * Non-income producing security. -------------------------------------------------------------------------------- 40 -------------------------------------------------------------------------------- Shares Value -------------------------------------------------------------------------------- Paper and Forest Products -- 0.7% 1,880 Boise Cascade Corp. $ 63,939 7,396 Georgia-Pacific Corp. 204,204 15,813 Int'l. Paper Co. 638,054 17,424 Kimberly-Clark Corp. 1,041,955 3,417 Louisiana-Pacific Corp. 28,839 3,245 Mead Corp. 100,238 3,299 Westvaco Corp. 93,857 7,044 Weyerhaeuser Co. 380,939 3,589 Willamette Industries, Inc. 187,059 ------------ 2,739,084 -------------------------------------------------------------------------------- Photography -- 0.1% 9,496 Eastman Kodak Co. 279,467 -------------------------------------------------------------------------------- Pollution Control -- 0.2% 6,459 Allied Waste Industries, Inc. * 90,814 20,478 Waste Management, Inc. 653,453 ------------ 744,267 -------------------------------------------------------------------------------- Publishing and Printing -- 0.7% 2,313 Deluxe Corp. 96,175 2,827 Dow Jones & Co., Inc. 154,722 14,348 Gannett Co., Inc. 964,616 646 Imagistics Int'l., Inc. * 7,978 2,397 Knight-Ridder, Inc. 155,637 6,391 McGraw-Hill Cos., Inc. 389,723 1,628 Meredith Corp. 58,038 5,156 Moody's Corp. 205,518 5,213 New York Times Co. 225,462 3,843 R.R. Donnelley & Sons Co. 114,099 9,770 Tribune Co. 365,691 ------------ 2,737,659 -------------------------------------------------------------------------------- Railroads -- 0.4% 12,825 Burlington Northern Santa Fe 365,897 6,986 CSX Corp. 244,860 12,594 Norfolk Southern Corp. 230,848 8,115 Union Pacific Corp. 462,555 ------------ 1,304,160 -------------------------------------------------------------------------------- Restaurants -- 0.4% 3,865 Darden Restaurants, Inc. 136,821 42,341 McDonald's Corp. 1,120,766 4,810 Tricon Global Restaurants * 236,652 3,721 Wendy's Int'l., Inc. 108,542 ------------ 1,602,781 -------------------------------------------------------------------------------- Semiconductors - Communications -- 1.2% 9,838 Applied Micro Circuits Corp. * 111,366 8,515 Broadcom Corp. * 348,008 8,089 Conexant Systems, Inc. * 116,158 10,406 Linear Technology Corp. 406,250 10,748 Maxim Integrated Products, Inc. * 564,378 10,442 PMC-Sierra, Inc. * 221,997 5,987 Rockwell Collins, Inc. 116,747 67,032 Texas Instruments, Inc. 1,876,896 6,003 Vitesse Semiconductor Corp. * 74,617 10,889 Xilinx, Inc. * 425,215 ------------ 4,261,632 -------------------------------------------------------------------------------- Semiconductors - Equipment -- 0.6% 14,954 Agilent Technologies, Inc. * 426,338 26,621 Applied Materials, Inc. * 1,067,502 6,069 KLA-Tencor Corp. * 300,780 4,664 Novellus Systems, Inc. * 183,995 5,707 Teradyne, Inc. * 172,009 ------------ 2,150,624 -------------------------------------------------------------------------------- Telecommunications -- 4.6% 112,961 AT & T Corp. 2,049,113 61,358 BellSouth Corp. 2,340,808 9,342 Citizens Comm. Co. * 99,586 54,388 Qwest Comm. Int'l., Inc. 768,502 118,759 SBC Comm., Inc. 4,651,790 29,016 Sprint Corp. (FON Group) 582,641 30,676 Sprint Corp. (PCS Group) * 748,801 88,548 Verizon Comm. 4,202,488 94,552 WorldCom, Inc.-WorldCom Group * 1,331,292 ------------ 16,775,021 -------------------------------------------------------------------------------- Telecommunications - Equipment -- 2.7% 25,589 ADC Telecomm., Inc. * 117,709 2,665 Andrew Corp. * 58,337 9,292 Avaya, Inc. * 112,898 259,451 Cisco Systems, Inc. * 4,698,658 30,452 Corning, Inc. 271,632 43,092 JDS Uniphase Corp. * 374,038 111,502 Lucent Technologies, Inc. 701,348 71,900 Motorola, Inc. 1,079,938 104,314 Nortel Networks Corp. 782,355 24,792 QUALCOMM, Inc. * 1,251,996 5,332 Scientific Atlanta, Inc. 127,648 13,398 Tellabs, Inc. * 200,434 ------------ 9,776,991 -------------------------------------------------------------------------------- Telecommunications - Specialty -- 0.3% 10,249 ALLTEL Corp. 632,671 29,022 Global Crossing Ltd. * 24,378 25,046 Nextel Comm., Inc. * 274,504 ------------ 931,553 -------------------------------------------------------------------------------- Textile - Apparel and Production -- 0.1% 5,534 Cintas Corp. * 265,632 1,720 Liz Claiborne, Inc. 85,570 3,666 V.F. Corp. 143,011 ------------ 494,213 -------------------------------------------------------------------------------- Transportation - Miscellaneous -- 0.2% 10,052 FedEx Corp. * 521,498 1,975 Ryder Systems, Inc. 43,746 ------------ 565,244 -------------------------------------------------------------------------------- See notes to financial statements. * Non-income producing security. -------------------------------------------------------------------------------- 41 -------------------------------------------------------------------------------- The Guardian VC 500 Index Fund ------------------------------- Schedule of Investments December 31, 2001 (Continued) Shares Value -------------------------------------------------------------------------------- Utilities - Electric and Water -- 2.2% 17,420 AES Corp. * $ 284,817 4,082 Allegheny Energy, Inc. 147,850 4,492 Ameren Corp. 190,012 10,547 American Electric Power, Inc. 459,111 9,778 Calpine Corp. * 164,173 4,616 CenturyTel, Inc. 151,405 5,206 CiNergy Corp. 174,037 4,321 CMS Energy Corp. 103,834 6,944 Consolidated Edison, Inc. 280,260 5,361 Constellation Energy Group, Inc. 142,334 8,100 Dominion Resources, Inc. 486,810 5,396 DTE Energy Co. 226,308 25,272 Duke Energy Co. 992,179 10,667 Edison Int'l. * 161,072 7,226 Entergy Corp. 282,609 10,496 Exelon Corp. 502,548 9,928 FirstEnergy Corp. 347,281 5,757 FPL Group, Inc. 324,695 11,114 Mirant Corp. * 178,046 5,246 Niagara Mohawk Hldgs., Inc. * 93,012 6,761 NiSource, Inc. 155,909 1,247 NiSource, Inc.-SAILS * 2,893 12,674 PG&E Corp. * 243,848 2,774 Pinnacle West Capital Corp. 116,092 4,778 PPL Corp. 166,513 6,747 Progress Energy, Inc. 303,817 6,809 Public Svc. Enterprise Group, Inc. 287,272 9,739 Reliant Energy, Inc. 258,278 22,427 Southern Co. 568,524 8,410 TXU Corp. 396,531 ------------ 8,192,070 -------------------------------------------------------------------------------- Utilities - Gas and Pipeline -- 0.2% 4,496 KeySpan Corp. 155,786 3,748 Kinder Morgan, Inc. 208,726 1,486 NICOR, Inc. 61,877 1,948 ONEOK, Inc. 34,752 1,159 Peoples Energy Corp. 43,961 6,743 Sempra Energy 165,541 ------------ 670,643 -------------------------------------------------------------------------------- Wireless Communications -- 0.5% 118,204 AT & T Wireless Svcs., Inc. * 1,698,591 -------------------------------------------------------------------------------- Total Common Stocks (Cost $412,826,586) 349,540,280 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- U.S. Government -- 0.4% -------------------------------------------------------------------------------- Principal Amount Value -------------------------------------------------------------------------------- U.S. Treasury Bill $ 1,500,000 1.80%, 2/7/2002 (Cost $1,497,233) $ 1,497,233 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Repurchase Agreement -- 4.2% -------------------------------------------------------------------------------- Principal Amount Value -------------------------------------------------------------------------------- $ 15,361,000 State Street Bank and Trust Co. repurchase agreement, dated 12/31/2001, maturity value $15,362,502 at 1.76%, due 1/2/2002 (1) (Cost $15,361,000) $ 15,361,000 -------------------------------------------------------------------------------- Total Investments -- 100.0% (Cost $429,684,819) 366,398,513 Cash, Receivables and Other Assets Less Liabilities -- 0.0% 145,349 -------------------------------------------------------------------------------- Net Assets -- 100% $366,543,862 -------------------------------------------------------------------------------- (1) The repurchase agreement is fully collateralized by U.S. Government and/or agency obligations based on market prices at the date of the portfolio. Purchased Futures Contracts -------------------------------------------------------------------------------- Unrealized Contracts Description Expiration Appreciation -------------------------------------------------------------------------------- 54 S&P 500 Index 3/2002 $ 358,606 -------------------------------------------------------------------------------- At December 31, 2001 The Guardian VC 500 Index Fund had sufficient cash and/or securities to cover margin requirements on open futures contracts. See notes to financial statements. * Non-income producing security. -------------------------------------------------------------------------------- 42 -------------------------------------------------------------------------------- Statement of Assets and Liabilities December 31, 2001 ASSETS Investments, at market (cost $429,684,819) $ 366,398,513 Cash 56,814 Dividends receivable 354,238 Receivable for fund shares sold 7,800 Interest receivable 751 Other assets 1,417 ------------- Total Assets 366,819,533 ------------- LIABILITIES Payable for variation margin 136,350 Accrued expenses 52,302 Payable for fund shares redeemed 9,790 Due to affiliates 77,229 ------------- Total Liabilities 275,671 ------------- Net Assets $ 366,543,862 ============= COMPONENTS OF NET ASSETS Capital stock, at par $ 43,301 Additional paid-in capital 430,758,504 Undistributed net investment income 119,079 Accumulated net realized loss on investments (1,449,322) Net unrealized depreciation on investments (62,927,700) ------------- Net Assets $ 366,543,862 ============= Shares Outstanding -- $0.001 par value 43,300,817 ============= Net Asset Value Per Share $ 8.47 ============= Statement of Operations Year Ended December 31, 2001 INVESTMENT INCOME Dividends $ 4,216,440 Interest 467,729 Less: Foreign tax withheld (18,918) ------------- Total Income 4,665,251 ------------- Expenses: Investment advisory fees -- Note B 822,006 Custodian fees 138,593 Registration fees 47,216 Printing expense 38,105 Audit fees 19,500 Directors' fees -- Note B 15,303 Legal fees 4,727 Loan commitment fees -- Note H 2,966 Insurance expense 2,077 Other 1,206 ------------- Total Expenses before reimbursement 1,091,699 Less: Expenses assumed by investment adviser (171,052) ------------- Net Expenses 920,647 ------------- Net Investment Income 3,744,604 ------------- REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS -- NOTE F Net realized loss on investments (1,416,473) Net change in unrealized depreciation of investments (44,319,007) ------------- Net Realized and Unrealized Loss on Investments (45,735,480) ------------- NET DECREASE IN NET ASSETS FROM OPERATIONS $ (41,990,876) ============= See notes to financial statements. -------------------------------------------------------------------------------- 43 -------------------------------------------------------------------------------- The Guardian VC 500 Index Fund ------------------------------ Statement of Changes in Net Assets
Year Ended December 31, 2001 2000 ------------- ------------- INCREASE/(DECREASE) IN NET ASSETS From Operations: Net investment income $ 3,744,604 $ 2,679,354 Net realized gain/(loss) on investments (1,416,473) 159,467 Net change in unrealized appreciation/(depreciation) of investments (44,319,007) (33,360,570) ------------- ------------- Net Decrease in Net Assets from Operations (41,990,876) (30,521,749) ------------- ------------- Dividends and Distributions to Shareholders from: Net investment income (3,701,855) (2,612,262) Net realized gain on investments (88,140) (455,143) ------------- ------------- Total Dividends and Distributions to Shareholders (3,789,995) (3,067,405) ------------- ------------- From Capital Share Transactions: Net increase in net assets from capital share transactions -- Note G 117,724,599 110,384,913 ------------- ------------- Net Increase in Net Assets 71,943,728 76,795,759 NET ASSETS: Beginning of year 294,600,134 217,804,375 ------------- ------------- End of year * $ 366,543,862 $ 294,600,134 ============= ============= * Includes undistributed net investment income of: $ 119,079 $ 75,228
See notes to financial statements. -------------------------------------------------------------------------------- 44 -------------------------------------------------------------------------------- Financial Highlights Selected data for a share of capital stock outstanding throughout the periods indicated:
Period From Year Ended December 31, August 25, 1999+ ----------------------------- to December 31, 2001 2000 1999 ------------------------------------------------- Net asset value, beginning of period .......................... $ 9.72 $ 10.75 $ 10.14 ----------- ----------- ----------- Income from investment operations: Net investment income ........................ 0.09 0.09 0.03 Net realized and unrealized gain/ (loss) on investments ..................... (1.25) (1.01) 0.61 ----------- ----------- ----------- Net increase/(decrease) from investment operations ................................ (1.16) (0.92) 0.64 ----------- ----------- ----------- Dividends and Distributions to Shareholders from: Net investment income ........................ (0.09) (0.09) (0.03) Net realized gain on investments ............. (0.00)(a) (0.02) -- ----------- ----------- ----------- Total dividends and distributions ............ (0.09) (0.11) (0.03) ----------- ----------- ----------- Net asset value, end of period .................. $ 8.47 $ 9.72 $ 10.75 ----------- ----------- ----------- Total return* ................................... (11.92)% (8.66)% 6.38%(b) ----------- ----------- ----------- Ratios/supplemental data: Net assets, end of period (000's omitted) ........................... $ 366,544 $ 294,600 $ 217,804 Ratio of expenses to average net assets ........................ 0.28% 0.28% 0.36%(c) Ratio of expenses after custody credits to average net assets ........................ N/A N/A 0.29%(c) Ratio of expenses, excluding waivers, to average net assets ........................ 0.33% 0.34% 0.36%(c) Ratio of net investment income to average net assets ........................ 1.14% 0.93% 0.99%(c) Portfolio turnover rate ...................................... 1% 1% 1%
+ Commencement of investment operations. * Total returns do not reflect the effects of charges deducted pursuant to the terms of GIAC's variable contracts. Inclusion of such charges would reduce the total returns for all periods shown. (a) Rounds to less than $0.01. (b) Not annualized. (c) Annualized. See notes to financial statements. -------------------------------------------------------------------------------- 45 -------------------------------------------------------------------------------- The Guardian VC Asset Allocation Fund ------------------------------------- Schedule of Investments December 31, 2001 -------------------------------------------------------------------------------- Mutual Funds -- 71.3% -------------------------------------------------------------------------------- Shares Value ------------------------------------------------------------------------------- Equity -- 58.7% 3,100,828 The Guardian VC 500 Index Fund $ 26,264,013 ------------------------------------------------------------------------------- Fixed Income -- 12.6% 470,055 The Guardian Bond Fund, Inc. 5,635,955 ------------------------------------------------------------------------------- Total Mutual Funds (Cost $34,150,852) 31,899,968 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- U.S. Government -- 4.5% ------------------------------------------------------------------------------- Principal Amount Value ------------------------------------------------------------------------------- U.S. Treasury Bill $ 2,000,000 2.14%, 1/17/2002 (Cost $1,998,098) $ 1,998,098 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- Repurchase Agreements -- 24.5% ------------------------------------------------------------------------------- $ 5,000,000 Lehman Brothers repurchase agreement, dated 12/31/2001, maturity value $5,000,472 at 1.70%, due 1/2/2002 (1) $ 5,000,000 5,985,000 State Street Bank and Trust Co. repurchase agreement, dated 12/31/2001, maturity value $5,985,585 at 1.76%, due 1/2/2002 (1) 5,985,000 ------------------------------------------------------------------------------- Total Repurchase Agreements (Cost $10,985,000) 10,985,000 ------------------------------------------------------------------------------- Total Investments -- 100.3% (Cost $47,133,950) 44,883,066 Liabilities in Excess of Cash, Receivables and Other Assets -- (0.3)% (115,078) ------------------------------------------------------------------------------- Net Assets -- 100% $ 44,767,988 ------------------------------------------------------------------------------- (1) The repurchase agreement is fully collateralized by U.S. Government and/or agency obligations based on market prices at the date of the portfolio. Purchased (P)/Sold (S) Futures Contracts -------------------------------------------------------------------------------- Unrealized Contracts Type Description Expiration Appreciation -------------------------------------------------------------------------------- 14 S U.S. Treasury Notes, 5 Year 3/2002 $ 16,047 41 P S&P 500 Index 3/2002 316,312 -------------------------------------------------------------------------------- $ 332,359 -------------------------------------------------------------------------------- At December 31, 2001 The Guardian VC Asset Allocation Fund had sufficient cash and/or securities to cover margin requirements on open futures contracts. See notes to financial statements. -------------------------------------------------------------------------------- 46 -------------------------------------------------------------------------------- Statement of Assets and Liabilities December 31, 2001 ASSETS Investments, at identified cost* $ 47,133,950 ============ Investments, at market 33,898,066 Repurchase agreements 10,985,000 ------------ Total Investments 44,883,066 Cash 947 Receivable for fund shares sold 20,468 Interest receivable 529 Other assets 121 ------------ Total Assets 44,905,131 ------------ LIABILITIES Payable for margin variation 110,744 Accrued expenses 21,173 Due to affiliates 5,226 ------------ Total Liabilities 137,143 ------------ Net Assets $ 44,767,988 ============ COMPONENTS OF NET ASSETS Capital stock, at par $ 5,193 Additional paid-in capital 51,718,551 Undistributed net investment income 722,390 Accumulated net realized loss on investments (5,759,621) Net unrealized depreciation of investments (1,918,525) ------------ Net Assets $ 44,767,988 ============ Shares Outstanding -- $0.001 par value 5,192,633 ============ Net Asset Value Per Share $ 8.62 ============ Statement of Operations Year Ended December 31, 2001 INVESTMENT INCOME Interest $ 751,450 Dividends 600,426 ------------ Total Income 1,351,876 ------------ Expenses: Investment advisory fees -- Note B 207,553 Custodian fees 31,111 Audit fees 18,500 Directors' fees -- Note B 16,703 Printing expense 8,649 Legal fees 800 Registration fees 507 Loan commitment fees -- Note H 200 Insurance expense 118 Other 680 ------------ Total Expenses before reimbursement 284,821 Less: Expenses assumed by investment adviser(1) (122,243) ------------ Net Expenses 162,578 ------------ Net Investment Income 1,189,298 ------------ REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS -- NOTE F Net realized loss on investments (2,251,511) Net realized loss on sale of underlying funds (3,765,113) Net realized gains received from underlying funds 33,322 Net change in unrealized depreciation of investments -- Note F 907,753 ------------ Net Realized and Unrealized Loss on Investments (5,075,549) ------------ NET DECREASE IN NET ASSETS FROM OPERATIONS $ (3,886,251) ============ * Includes repurchase agreement. (1) The fund does not impose any additional advisory fees for the portion of the fund's assets invested in other Guardian Funds. See notes to financial statements. -------------------------------------------------------------------------------- 47 -------------------------------------------------------------------------------- The Guardian VC Asset Allocation Fund ------------------------------------- Statement of Changes in Net Assets
Year Ended December 31, 2001 2000 ------------ ------------ INCREASE/(DECREASE) IN NET ASSETS From Operations: Net investment income $ 1,189,298 $ 1,270,593 Net realized gain/(loss) on investments (5,983,302) 2,653,886 Net change in unrealized appreciation/(depreciation) of investments 907,753 (3,216,838) ------------ ------------ Net Increase/(Decrease) in Net Assets from Operations (3,886,251) 707,641 ------------ ------------ Dividends and Distributions to Shareholders from: Net investment income (477,616) (1,260,466) Net realized gain on investments (1,095,289) (2,660,471) ------------ ------------ Total Dividends and Distributions to Shareholders (1,572,905) (3,920,937) ------------ ------------ From Capital Share Transactions: Net increase in net assets from capital share transactions -- Note G 11,599,671 14,091,013 ------------ ------------ Net Increase in Net Assets 6,140,515 10,877,717 NET ASSETS: Beginning of year 38,627,473 27,749,756 ------------ ------------ End of year * $ 44,767,988 $ 38,627,473 ============ ============ * Includes undistributed net investment income of: $ 722,390 $ 10,844
See notes to financial statements. -------------------------------------------------------------------------------- 48 -------------------------------------------------------------------------------- Financial Highlights Selected data for a share of capital stock outstanding throughout the periods indicated:
Period From Year Ended December 31, September 15, 1999+ ---------------------------- to December 31, 2001 2000 1999 ------------------------------------------------- Net asset value, beginning of period ................... $ 9.83 $ 10.68 $ 9.94 ---------- ---------- ---------- Income from investment operations: Net investment income ................. 0.24 0.37 0.12 Net realized and unrealized gain/(loss) on investments ..................... (1.12) (0.05) 0.74 ---------- ---------- ---------- Net increase/(decrease) from investment operations ......................... (0.88) 0.32 0.86 ---------- ---------- ---------- Dividends and Distributions to Shareholders from: Net investment income ................. (0.10) (0.36) (0.12) Net realized gain on investments ...... (0.23) (0.81) -- ---------- ---------- ---------- Total dividends and distributions ..... (0.33) (1.17) (0.12) ---------- ---------- ---------- Net asset value, end of period ........... $ 8.62 $ 9.83 $ 10.68 ---------- ---------- ---------- Total return* ............................ (9.03)% 3.00% 8.67%(a) ---------- ---------- ---------- Ratios/supplemental data: Net assets, end of period (000's omitted) .................... $ 44,768 $ 38,627 $ 27,750 Ratio of expenses to average net assets ................. 0.39%(c) 0.48%(c) 0.67%(b)(c) Gross expense ratio ................... 0.56%(d) 0.73%(d) 0.98%(b)(d) Ratio of net investment income to average net assets ....... 2.87% 3.83% 4.09%(b) Portfolio turnover rate ............... 29% 12% 0%
+ Commencement of operations. * Total returns do not reflect the effects of charges deducted pursuant to the terms of GIAC's variable contracts. Inclusion of such charges would reduce the total returns for all periods shown. (a) Not annualized. (b) Annualized. (c) Amounts do not include expenses of the underlying funds. (d) Amounts include expenses of the underlying funds. See notes to financial statements. -------------------------------------------------------------------------------- 49 -------------------------------------------------------------------------------- The Guardian VC High Yield Bond Fund ------------------------------------ Schedule of Investments December 31, 2001 -------------------------------------------------------------------------------- Corporate Bonds -- 92.6% -------------------------------------------------------------------------------- Rating Principal Moody's/ Amount S&P* Value -------------------------------------------------------------------------------- Aerospace -- 5.5% $ 500,000 Alliant Techsystems, Inc. Sr. Sub. Nt. 8.50% due 5/15/2011 B2/B $ 520,000 310,000 BE Aerospace, Inc. Sr. Sub. Nt. 9.50% due 11/1/2008 B2/B 273,575 410,000 K & F Ind., Inc. Sr. Sub. Nt. Ser. B 9.25% due 10/15/2007 B2/B 410,000 600,000 Sequa Corp. Sr. Nt. 8.875% due 4/1/2008 Ba3/BB 561,000 ------------ 1,764,575 -------------------------------------------------------------------------------- Broadcasting -- 2.1% 154,000 Allbritton Comm. Co. Sr. Sub. Nt. Ser. B 8.875% due 2/1/2008 B3/B- 157,850 205,000 Clear Channel Comm. Sr. Sub. Nt. Ser. B 8.125% due 12/15/2007 Ba2/BB+ 212,175 154,000 Emmis Comm. Corp. Sr. Sub. Nt 8.125% due 3/15/2009 B2/B- 147,455 153,000 Sinclair Broadcast Group, Inc. Sr. Sub. Nt. 8.75% due 12/15/2007 B2/B 152,618 ------------ 670,098 -------------------------------------------------------------------------------- Cable and Wireless Video -- 7.0% Adelphia Comm. Corp. Sr. Nt. Ser. B 150,000 10.50% due 7/15/2004 B2/B+ 150,563 Sr. Nt. 82,000 10.25% due 6/15/2011 B2/B+ 81,795 Charter Comm. Hldgs. Sr. Nt. 158,000 10.00% due 4/1/2009 B2/B+ 162,147 Sr. Nt. 462,000 10.75% due 10/1/2009 B2/B+ 487,410 620,000 CSC Hldgs., Inc. Sr. Nt. 7.625% due 4/1/2011 Ba1/BB+ 620,854 154,000 Echostar DBS Corp. Sr. Nt. 9.25% due 2/1/2006 B1/B+ 157,080 308,000 Insight Midwest LP Sr. Nt. 10.50% due 11/1/2010 B1/B+ 332,640 308,000 Pegasus Comm. Corp. Sr. Nt. Ser. B 9.625% due 10/15/2005 B3/CCC+ 277,200 ------------ 2,269,689 -------------------------------------------------------------------------------- Chemicals -- 2.0% 80,000 Compass Minerals Group, Inc. Sr. Sub. Nt. + 10.00% due 8/15/2011 B3/B 83,000 155,000 Equistar Chemicals LP Sr. Nt. 10.125% due 9/1/2008 Ba2/BBB- 155,775 308,000 Millennium America, Inc. Sr. Nt. 9.25% due 6/15/2008 Ba1/BBB- 314,160 78,000 OM Group, Inc. Sr. Sub. Nt. + 9.25% due 12/15/2011 B3/B+ 79,560 ------------ 632,495 ------------------------------------------------------------------------------- Consumer Durables -- 3.0% 355,000 Briggs & Stratton Corp. Sr. Nt. 8.875% due 3/15/2011 Ba1/BBB- 370,975 154,000 Sealy Mattress Co. Sr. Sub. Nt. + 9.875% due 12/15/2007 B2/B- 154,000 300,000 Simmons Co. Sr. Sub. Nt. Ser. B 10.25% due 3/15/2009 B3/B- 303,000 154,000 Steinway Musical Instruments, Inc. Sr. Nt. + 8.75% due 4/15/2011 Ba3/BB- 152,460 ------------ 980,435 -------------------------------------------------------------------------------- Consumer Non-Durables -- 5.1% 78,000 Armkel LLC Sr. Sub. Nt. + 9.50% due 8/15/2009 B2/B- 81,900 Elizabeth Arden, Inc. Sr. Nt. Ser. D 175,000 10.375% due 5/15/2007 B2/B 167,125 Sr. Sec. Nt. Ser. B 330,000 11.75% due 2/1/2011 B1/B+ 338,250 410,000 Playtex Products, Inc. Sr. Sub. Nt. 9.375% due 6/1/2011 B2/B 432,550 250,000 St. John Knits Int'l., Inc. Sr. Sub. Nt. 12.50% due 7/1/2009 B3/B- 247,500 See notes to financial statements. * Unaudited. + Rule 144A restricted security. -------------------------------------------------------------------------------- 50 -------------------------------------------------------------------------------- Rating Principal Moody's/ Amount S&P* Value -------------------------------------------------------------------------------- $ 350,000 William Carter Co. Sr. Sub. Nt. + 10.875% due 8/15/2011 B3/B- $ 374,500 ------------ 1,641,825 -------------------------------------------------------------------------------- Diversified Media -- 3.7% 154,000 Advanstar Comm., Inc. Sr. Sub. Nt. 12.00% due 2/15/2011 B2/B- 109,340 330,000 American Media Operations, Inc. Sr. Sub. Nt. 10.25% due 5/1/2009 B2/B- 333,300 103,000 Lamar Media Corp. Sr. Sub. Nt. 8.625% due 9/15/2007 Ba3/B 107,378 500,000 Premier Parks, Inc. Sr. Nt. 9.75% due 6/15/2007 B3/B 507,500 154,000 Primedia, Inc. Sr. Nt. 8.875% due 5/15/2011 Ba3/BB- 138,600 ------------ 1,196,118 -------------------------------------------------------------------------------- Energy -- 6.3% AmeriGas Partners LP Sr. Nt. + 103,000 10.00% due 4/15/2006 Ba3/BB+ 108,665 Sr. Nt. + 103,000 8.875% due 5/20/2011 Ba3/BB+ 106,090 205,000 Belden & Blake Corp. Sr. Sub. Nt. Ser. B 9.875% due 6/15/2007 Caa3/CCC- 169,125 Chesapeake Energy Corp. Sr. Nt. Ser. B 130,000 7.875% due 3/15/2004 B1/B+ 130,325 Sr. Nt. 103,000 8.125% due 4/1/2011 B2/B+ 99,910 356,000 Dresser, Inc. Sr. Nt. 9.375% due 4/15/2011 B2/B 363,120 300,000 Newpark Resources, Inc. Sr. Sub. Nt. Ser. B 8.625% due 12/15/2007 B2/B+ 278,250 390,000 Pride Int'l., Inc. Sr. Nt. 9.375% due 5/1/2007 Ba2/BB+ 410,475 39,000 Stone Energy Corp. Sr. Sub. Nt. + 8.25% due 12/15/2011 B2/B+ 39,585 154,000 Vintage Petroleum, Inc. Sr. Sub. Nt. 7.875% due 5/15/2011 Ba3/BB- 150,920 155,000 Westport Resources Corp. Sr. Sub. Nt. + 8.25% due 11/1/2011 Ba3/BB- 156,550 ------------ 2,013,015 -------------------------------------------------------------------------------- Financial -- 1.4% 155,000 AmeriCredit Corp. Sr. Sub. Nt. 9.875% due 4/15/2006 Ba1/BB- 145,700 308,000 General Motors Acceptance Corp. Nt. 6.875% due 9/15/2011 A2/BBB+ 301,704 ------------ 447,404 -------------------------------------------------------------------------------- Food and Tobacco -- 7.5% Constellation Brands, Inc. Sr. Sub. Nt. 52,000 8.625% due 8/1/2006 Ba2/BB 53,560 Sr. Sub. Nt. 103,000 8.50% due 3/1/2009 Ba3/B+ 103,515 350,000 Del Monte Corp. Sr. Sub. Nt. 9.25% due 5/15/2011 B3/B- 365,750 600,000 Jack in the Box, Inc. Sr. Sub. Nt. 8.375% due 4/15/2008 Ba3/BB- 605,250 205,000 Land O Lakes, Inc. Sr. Nt. + 8.75% due 11/15/2011 Ba3/BB 197,825 400,000 Michael Foods, Inc. Sr. Sub. Nt. Ser. B 11.75% due 4/1/2011 B2/B- 432,000 345,000 Premium Standard Farms, Inc. Sr. Nt. 9.25% due 6/15/2011 B1/BB 353,625 155,000 Sbarro, Inc. Sr. Nt. 11.00% due 9/15/2009 Ba3/B+ 148,800 155,000 Smithfield Foods, Inc. Sr. Nt. + 8.00% due 10/15/2009 Ba2/BB+ 159,650 ------------ 2,419,975 -------------------------------------------------------------------------------- Food and Drug Retailers -- 2.0% 308,000 Delhaize America, Inc. Nt. 8.125% due 4/15/2011 Baa3/BBB- 338,062 350,000 Rite Aid Corp. Sr. Nt. 7.625% due 4/15/2005 Caa2/B- 304,500 ------------ 642,562 -------------------------------------------------------------------------------- See notes to financial statements. * Unaudited. + Rule 144A restricted security. -------------------------------------------------------------------------------- 51 -------------------------------------------------------------------------------- The Guardian VC High Yield Bond Fund ------------------------------------ Schedule of Investments December 31, 2001 (Continued) Rating Principal Moody's/ Amount S&P* Value -------------------------------------------------------------------------------- Forest Products and Containers -- 4.7% $ 330,000 Kappa Beheer BV Sr. Sub. Nt. 10.625% due 7/15/2009 B2/B $ 356,400 308,000 Norske Skog Canada Ltd. Sr. Nt. + 8.625% due 6/15/2011 Ba2/BB 319,550 165,000 Packaging Corp. of America Sr. Sub. Nt. 9.625% due 4/1/2009 Ba2/BB- 180,675 330,000 Stone Container Corp. Sr. Nt. 9.75% due 2/1/2011 B2/B 350,625 310,000 Tembec Industries, Inc. Sr. Nt. 8.50% due 2/1/2011 Ba1/BB+ 320,850 ------------ 1,528,100 -------------------------------------------------------------------------------- Gaming and Leisure -- 7.4% 500,000 Hollywood Casino Corp. Sr. Nt. 11.25% due 5/1/2007 B3/B 540,625 Intrawest Corp. Sr. Nt. 330,000 9.75% due 8/15/2008 B1/B+ 321,750 Sr. Nt. 135,000 10.50% due 2/1/2010 B1/B+ 135,169 300,000 Mandalay Resort Group Sr. Sub. Nt. Ser. B 10.25% due 8/1/2007 Ba3/BB- 311,250 310,000 Meristar Hosp. Oper. Fin. Sr. Nt. + 10.50% due 6/15/2009 B1/BB- 310,387 154,000 Park Place Entertainment Corp. Sr. Nt. 7.50% due 9/1/2009 Baa3/BBB- 150,032 155,000 Sun Int'l. Hotels Ltd. Sr. Sub. Nt. 8.875% due 8/15/2011 Ba3/B+ 146,087 472,000 Waterford Gaming LLC Sr. Nt. + 9.50% due 3/15/2010 B1/B+ 483,800 ------------ 2,399,100 -------------------------------------------------------------------------------- Health Care -- 6.1% 500,000 Fisher Scientific Int'l., Inc. Sr. Sub. Nt. 9.00% due 2/1/2008 B3/B- 512,500 330,000 Fresenius Medical Care Capital Tr. 9.00% due 12/1/2006 Ba3/B+ 339,900 450,000 HCA-The Healthcare Corp. Nt. 8.75% due 9/1/2010 Ba1/BB+ 486,000 205,000 Insight Health Svcs. Corp. Sr. Sub. Nt. + 9.875% due 11/1/2011 B3/B- 212,175 400,000 Triad Hospitals, Inc. Sr. Nt. Ser. B 8.75% due 5/1/2009 B1/B- 417,000 ------------ 1,967,575 -------------------------------------------------------------------------------- Housing -- 2.5% 154,000 D.R. Horton, Inc. Sr. Nt. 8.00% due 2/1/2009 Ba1/BB 152,460 310,000 Lennar Corp. Sr. Nt. 7.625% due 3/1/2009 Ba1/BB+ 310,000 103,000 Meritage Corp. Sr. Nt. 9.75% due 6/1/2011 B1/B 106,219 195,000 Schuler Homes, Inc. Sr. Nt. 9.00% due 4/15/2008 Ba3/B+ 198,900 51,000 WCI Communities, Inc. Sr. Sub. Nt. 10.625% due 2/15/2011 B1/B 52,657 ------------ 820,236 -------------------------------------------------------------------------------- Information Technology -- 3.2% 400,000 Flextronics Int'l. Ltd. Sr. Sub. Nt. 9.875% due 7/1/2010 Ba2/BB- 420,000 600,000 Iron Mountain, Inc. Sr. Sub. Nt. 8.625% due 4/1/2013 B2/B 624,000 ------------ 1,044,000 -------------------------------------------------------------------------------- Manufacturing -- 1.0% Terex Corp. Sr. Sub. Nt. 155,000 10.375% due 4/1/2011 B2/B 161,200 Sr. Sub. Nt. + 155,000 9.25% due 7/15/2011 B2/B 155,000 ------------ 316,200 -------------------------------------------------------------------------------- Metals and Minerals -- 0.5% 154,000 Luscar Coal Ltd. Sr. Nt. + 9.75% due 10/15/2011 Ba3/BB 159,390 -------------------------------------------------------------------------------- See notes to financial statements. * Unaudited. + Rule 144A restricted security. -------------------------------------------------------------------------------- 52 -------------------------------------------------------------------------------- Rating Principal Moody's/ Amount S&P* Value -------------------------------------------------------------------------------- Retail -- 1.7% $ 308,000 J.C. Penney Co., Inc. Sr. Nt. 6.90% due 8/15/2026 Ba2/BBB- $ 302,000 155,000 Petco Animal Supplies, Inc. Sr. Sub. Nt. + 10.75% due 11/1/2011 B3/B 158,100 78,000 Rent-A-Center, Inc. Sr. Sub. Nt. Ser. C + 11.00% due 8/15/2008 B1/B 79,170 ------------ 539,270 -------------------------------------------------------------------------------- Services -- 4.3% Allied Waste NA, Inc. Sr. Nt. 154,000 7.625% due 1/1/2006 Ba3/BB- 152,075 Sr. Nt. + 166,000 8.50% due 12/1/2008 Ba3/BB- 167,660 Sr. Sub. Nt. 412,000 10.00% due 8/1/2009 B2/B+ 424,360 330,000 United Rentals, Inc. Sr. Sub. Nt. 9.00% due 4/1/2009 B2/BB- 321,750 308,000 Waste Management, Inc. Sr. Nt. 7.375% due 8/1/2010 Ba1/BBB 314,934 ------------ 1,380,779 -------------------------------------------------------------------------------- Telecommunications -- 1.4% 340,000 Flag Telecomm. Hldgs. Ltd. Sr. Nt. 11.625% due 3/30/2010 B2/B 142,800 320,000 Globix Corp. Sr. Nt. 12.50% due 2/1/2010 NR/CC 64,000 900,000 GT Group Telecomm., Inc. Sr. Disc. Nt. 0/13.25% due 2/1/2010 (1) Caa1/B- 117,000 300,000 Williams Comm. Group, Inc. Sr. Nt. 11.70% due 8/1/2008 Caa1/CCC+ 123,000 ------------ 446,800 -------------------------------------------------------------------------------- Transportation -- 4.7% 308,000 American Axle & Mfg., Inc. Sr. Sub. Nt. 9.75% due 3/1/2009 B1/B+ 318,010 311,000 Collins & Aikman Products Co. Sr. Nt + 10.75% due 12/31/2011 B1/B 311,778 Delco Remy Int'l., Inc. Sr. Sub. Nt. 206,000 10.625% due 8/1/2006 B2/B 203,425 Sr. Sub. Nt. 102,000 11.00% due 5/1/2009 B2/B 104,040 185,000 Hayes Lemmerz Int'l., Inc. Sr. Sub. Nt. 11.00% due 7/15/2006++ C/D 8,325 154,000 Lear Corp. Sr. Nt. Ser. B 8.11% due 5/15/2009 Ba1/BB+ 155,795 308,000 Pennzoil-Quaker State Sr. Nt. + 10.00% due 11/1/2008 Ba3/BB- 321,860 78,000 Teekay Shipping Corp. Sr. Nt. + 8.875% due 7/15/2011 Ba2/BB- 79,950 ------------ 1,503,183 -------------------------------------------------------------------------------- Utilities -- 1.7% 154,000 Aes Corp. Sr. Nt. 8.875% due 2/15/2011 Ba1/BB 135,520 465,000 Calpine Canada Energy Sr. Nt. 8.50% due 5/1/2008 Ba1/BB+ 425,300 ------------ 560,820 -------------------------------------------------------------------------------- Wireless Communications -- 7.8% 375,000 Airgate PCS, Inc. Sr. Sub. Disc. Nt. 0/13.50% due 10/1/2009 (1) Caa1/CCC 285,000 155,000 American Tower Corp. Sr. Nt. 9.375% due 2/1/2009 B3/B- 124,775 205,000 Crown Castle Int'l. Corp. Sr. Nt. 10.75% due 8/1/2011 B3/B 200,388 154,000 Horizon PCS, Inc. Sr. Disc. Nt. 0/14.00% due 10/1/2010 (1) Caa1/CCC 79,310 155,000 iPCS, Inc. Sr. Disc. Nt. 0/14.00% due 7/15/2010 (1) Caa1/CCC 102,300 154,000 Nextel Comm., Inc. Sr. Disc. Nt. 0/9.75% due 10/31/2007 (1) B1/B 110,110 See notes to financial statements. * Unaudited. + Rule 144A restricted security. ++ Non-income producing, security in default. -------------------------------------------------------------------------------- 53 -------------------------------------------------------------------------------- The Guardian VC High Yield Bond Fund ------------------------------------ Schedule of Investments December 31, 2001 (Continued) Rating Principal Moody's/ Amount S&P* Value -------------------------------------------------------------------------------- $ 300,000 Nextel Partners, Inc. Sr. Nt. 11.00% due 3/15/2010 B3/CCC+ $ 243,000 308,000 Pinnacle Hldgs., Inc. Sr. Disc. Nt. 0/10.00% due 3/15/2008 (1) Caa1/CCC- 75,460 Telecorp PCS, Inc. Sr. Sub. Disc. Nt. 154,000 11.625% due 4/15/2009 B3/NR 133,980 Sr. Sub. Nt. 330,000 10.625% due 7/15/2010 B3/NR 382,800 Triton PCS, Inc. Sr. Sub. Disc. Nt. 330,000 11.00% due 5/1/2008 B2/B- 298,650 Sr. Sub. Nt. + 135,000 8.75% due 11/15/2011 B2/B- 135,000 345,000 U.S. Unwired, Inc. Sr. Sub. Disc. Nt. Ser. B 0/13.375% due 11/1/2009 (1) B3/CCC+ 243,225 154,000 Ubiquitel Operating Co. Sr. Sub. Disc. Nt. + 0/14.00% due 4/15/2010 (1) Caa1/CCC 82,390 ------------ 2,496,388 -------------------------------------------------------------------------------- Total Corporate Bonds (Cost $30,264,448) 29,840,032 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Sovereign Debt -- 1.0% -------------------------------------------------------------------------------- $ 308,000 United Mexican States Nt. 8.375% due 1/14/2011 (Cost $313,241) $ 319,550 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Warrants -- 0.1% -------------------------------------------------------------------------------- Shares Value -------------------------------------------------------------------------------- 900 GT Group Telecomm., Inc. $ 4,500 exp. 2/1/2010 330 Horizon PCS, Inc. 132 exp. 10/1/2010 + 500 Leap Wireless Int'l., Inc. 20,000 exp. 4/15/2010 + 330 Leap Wireless Int'l., Inc. 6,600 exp. 4/15/2010 + 200 Ubiquitel Operating Co. 10,000 exp. 4/15/2010 170 XM Satellite Radio, Inc. 51 exp. 3/3/2010 + -------------------------------------------------------------------------------- Total Warrants (Cost $36,590) 41,283 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Repurchase Agreement -- 4.3% -------------------------------------------------------------------------------- Principal Amount Value -------------------------------------------------------------------------------- $ 1,377,000 State Street Bank and Trust Co. repurchase agreement, dated 12/31/2001, maturity value $1,377,134 at 1.76% due 1/2/2002 (2) (Cost $1,377,000) $ 1,377,000 -------------------------------------------------------------------------------- Total Investments - 98.0% (Cost $31,991,279) 31,577,865 Cash, Receivables and Other Assets Less Liabilities - 2.0% 632,089 -------------------------------------------------------------------------------- Net Assets - 100% $ 32,209,954 -------------------------------------------------------------------------------- (1) Step-up bond. (2) The repurchase agreement is fully collateralized by U.S. Government and/or agency obligations based on market prices at the date of the portfolio. See notes to financial statements. * Unaudited. + Rule 144A restricted security. -------------------------------------------------------------------------------- 54 -------------------------------------------------------------------------------- Statement of Assets and Liabilities December 31, 2001 ASSETS Investments, at market (cost $31,991,279) $ 31,577,865 Cash 103 Interest receivable 671,599 Receivable for fund shares sold 4,917 Other assets 207 ------------ Total Assets 32,254,691 ============ LIABILITIES Accrued expenses 24,615 Payable for fund shares redeemed 3,747 Due to affiliates 16,375 ------------ Total Liabilities 44,737 ------------ Net Assets $ 32,209,954 ============ COMPONENTS OF NET ASSETS Capital stock, at par $ 3,963 Additional paid-in capital 38,185,912 Accumulated net realized loss on investments (5,566,507) Net unrealized depreciation of investments (413,414) ------------ Net Assets $ 32,209,954 ============ Shares Outstanding -- $0.001 par value 3,962,911 ============ Net Asset Value Per Share $ 8.13 ============ Statement of Operations Year Ended December 31, 2001 INVESTMENT INCOME Interest $ 3,069,048 ------------ Expenses: Investment advisory fees -- Note B 186,739 Custodian fees 43,787 Audit fees 23,500 Directors' fees -- Note B 15,303 Printing expense 7,600 Legal fees 800 Loan commitment fees -- Note H 276 Registration fees 200 Insurance expense 191 Other 680 ------------ Total Expenses 279,076 ------------ Net Investment Income 2,789,972 ------------ REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS-- NOTE F Net realized loss on investments (4,383,991) Net change in unrealized depreciation of investments 2,323,178 ------------ Net Realized and Unrealized Loss on Investments (2,060,813) ------------ NET INCREASE IN NET ASSETS FROM OPERATIONS $ 729,159 ============ See notes to financial statements. -------------------------------------------------------------------------------- 55 -------------------------------------------------------------------------------- The Guardian VC High Yield Bond Fund ------------------------------------ Statement of Changes in Net Assets
Year Ended December 31, 2001 2000 ------------ ------------ INCREASE/(DECREASE) IN NET ASSETS From Operations: Net investment income $ 2,789,972 $ 2,383,231 Net realized loss on investments (4,383,991) (1,023,745) Net change in unrealized appreciation/(depreciation) of investments 2,323,178 (2,984,116) ------------ ------------ Net Increase/(Decrease) in Net Assets from Operations 729,159 (1,624,630) ------------ ------------ Dividends to Shareholders from: Net investment income (2,808,473) (2,366,885) ------------ ------------ From Capital Share Transactions: Net increase in net assets from capital share transactions -- Note G 7,454,942 4,937,631 ------------ ------------ Net Increase in Net Assets 5,375,628 946,116 NET ASSETS: Beginning of year 26,834,326 25,888,210 ------------ ------------ End of year* $ 32,209,954 $ 26,834,326 ============ ============ * Includes undistributed net investment income of: $ -- $ 17,384
See notes to financial statements. -------------------------------------------------------------------------------- 56 -------------------------------------------------------------------------------- Financial Highlights Selected data for a share of capital stock outstanding throughout the periods indicated:
Period From Year Ended December 31, September 13, 1999+ --------------------------- to December 31, 2001 2000 1999 ------------------------------------------------- Net asset value, beginning of period ................... $ 8.61 $ 10.04 $ 9.99 ---------- ---------- ---------- Income from investment operations: Net investment income ................. 0.77 0.85 0.23 Net realized and unrealized gain/ (loss) on investments .............. (0.47) (1.44) 0.05 ---------- ---------- ---------- Net increase/(decrease) from investment operations ......................... 0.30 (0.59) 0.28 ---------- ---------- ---------- Dividends to Shareholders from: Net investment income ................. (0.78) (0.84) (0.23) ---------- ---------- ---------- Net asset value, end of period ........... $ 8.13 $ 8.61 $ 10.04 ---------- ---------- ---------- Total return* ............................ 3.56% (6.07)% 2.78%(a) ---------- ---------- ---------- Ratios/supplemental data: Net assets, end of period (000's omitted) .................... $ 32,210 $ 26,834 $ 25,888 Ratio of expenses to average net assets ................. 0.90% 0.90% 1.14%(b) Ratio of expenses after custody credits to average net assets ...... N/A N/A 0.99%(b) Ratio of net investment income to average net assets ....... 8.96% 9.11% 7.66%(b) Portfolio turnover rate ............... 140% 155% 43%
+ Commencement of operations. * Total returns do not reflect the effects of charges deducted pursuant to the terms of GIAC's variable contracts. Inclusion of such charges would reduce the total returns for all periods shown. (a) Not annualized. (b) Annualized. See notes to financial statements. -------------------------------------------------------------------------------- 57 -------------------------------------------------------------------------------- The Guardian Variable Contract Funds, The Guardian Bond Fund, The Guardian Cash Fund ------------------------------------------------ Combined Notes to Financial Statements December 31, 2001 -------------------------------------------------------------------------------- Note A -- Organization and Accounting Policies -------------------------------------------------------------------------------- The Guardian Variable Contract Funds, Inc. (GVCF) was organized in March 1983 and was formerly known as "The Guardian Stock Fund, Inc." prior to September 13, 1999. Shares are offered in four series: The Guardian Stock Fund (GSF), The Guardian VC 500 Index Fund (GVC500IF), The Guardian VC Asset Allocation Fund (GVCAAF), and The Guardian VC High Yield Bond Fund (GVCHYBF). The Guardian Life Insurance Company of America (Guardian Life) commenced investment into GVCHYBF on August 17, 1999, GVC500IF on August 25, 1999 and GVCAAF on September 15, 1999, with 107,281 shares for $1,072,813; 20,027,804 shares for $200,278,036; and 2,500,000 shares for $25,000,000, respectively, to facilitate operations. GVCF, The Guardian Bond Fund, Inc. (GBF) and The Guardian Cash Fund, Inc. (GCF) 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). Each series of GVCF and GBF and GCF are referred to collectively as the "Funds" and individually as a "Fund." GSF offers two classes of shares: Class I and Class II. The Class I shares of GSF, and shares of GVC500IF, GVCAAF, GVCHYBF, 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 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. As of December 31, 2001, no Class II shares have been issued. 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. In GVCAAF, investments in the underlying Funds are valued at the closing net asset value of each underlying Fund on the day of valuation. 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). Net realized gain or loss on sales of investments is determined on an identified cost basis. Interest income, including amortization/accretion of premium/discount, is recorded when earned. Dividends are recorded on the ex-dividend date. -------------------------------------------------------------------------------- 70 -------------------------------------------------------------------------------- Combined Notes to Financial Statements December 31, 2001 (Continued) In November 2000, the American Institute of Certified Public Accountants (AICPA) issued a revised version of the AICPA Audit and Accounting Guide, Audits of Investment Companies (the Guide). The Guide is effective for annual financial statements issued for fiscal years beginning after December 15, 2000. The revised Guide requires the Funds to amortize premium and discount on all fixed-income securities. Such amortization is included in net investment income but did not impact the net assets or the distributions of the Funds. For GVCHYBF and GBF, the cumulative effect of this accounting change did not result in a significant impact to the amortized cost of debt securities held as of January 1, 2001, nor to the corresponding effect on undistributed net investment income and unrealized appreciation (depreciation) as of January 1, 2001. The effect of this change on net investment income, net realized gain (loss) on investments and net change in unrealized appreciation (depreciation) on investments for the year ended December 31, 2001 was not significant to GVCHYBF and GBF. The statement of changes in net assets and the financial highlights for prior periods have not been restated to reflect this change in accounting policy. Foreign Currency Translation GSF, GVC500IF and GVCHYBF are permitted to buy international securities that are not U.S. dollar denominated. Their books and records are maintained in U.S. dollars as follows: (1) The foreign currency market value of investment securities and other assets and liabilities stated in foreign currencies are translated into U.S. dollars at the current rate of exchange. (2) Security purchases and 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 a Fund earns dividends and interest or pays foreign withholding taxes or other expenses and the date on which U.S. dollar equivalent amounts are actually received or paid, are included in net realized gains or losses on foreign currency related transactions. Realized foreign exchange gains and losses which result from changes in foreign exchange rates between the trade and settlement dates on security and currency transactions are also included in net realized gains and losses on foreign currency related transactions. Net currency gains and losses from valuing 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 assets and liabilities denominated in foreign currencies. Forward Foreign Currency Contracts GSF, GVC500IF and GVCHYBF 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 exchange rate. Risks may arise from the potential inability of a counterparty to meet the terms of a contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. Fluctuations in the value of forward foreign currency exchange contracts are recorded for book purposes as unrealized gains or losses on foreign currency related transactions by the Fund. When forward contracts are closed, the Funds will record realized gains or losses equal to the difference 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 gains or losses on foreign currency related transactions. The Funds will not enter into a forward foreign currency contract if such contract would obligate the applicable Fund to deliver an amount of foreign currency in excess of the value of the Funds' portfolio securities or other assets denominated in that currency. Futures Contracts GSF, GVC500IF, GVCAAF and GVCHYBF may enter into financial futures contracts for the delayed delivery of securities, currency or contracts based on financial indices at a fixed price on a future date. In entering into such contracts, the Funds are required to deposit -------------------------------------------------------------------------------- 71 -------------------------------------------------------------------------------- The Guardian Variable Contract Funds, The Guardian Bond Fund, The Guardian Cash Fund ------------------------------------------------ Combined Notes to Financial Statements December 31, 2001 (Continued) either in cash or securities an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the Funds each day, depending on the daily fluctuations in the value of the underlying security, and are recorded for financial statement purposes as variation margins by the Funds. The daily changes in the variation margin are recognized as unrealized gains or losses by the Funds. The Funds' investments in financial futures contracts are designed to hedge against anticipated future changes in interest or exchange rates or securities prices (or for non-hedging purposes). Should interest or exchange rates or securities prices or prices of futures contracts move unexpectedly, the Funds may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. 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. For the year ended December 31, 2001, for federal income tax purposes, the following Funds have post October capital losses and net capital losses carryforward of: Post October Capital Loss Expiration Capital Loss Carryforward Date ------------ ------------ ---- GSF $ 15,217,321 $326,068,710 2009 GVC500IF -- 1,090,651 2009 GVCAAF -- 5,427,268 2009 GVCHYBF 869,676 158,772 2007 GVCHYBF -- 965,463 2008 GVCHYBF -- 3,495,561 2009 GBF 163,623 -- 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, 2001, certain Funds reclassified amounts to paid-in capital from undistributed/(overdistributed) net investment income and accumulated net realized gain/(loss) on investment. 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 ------- ----------------- -------------- GSF -- $ 2,988 $ (2,988) GVC500IF -- 1,102 (1,102) GVCAAF -- (136) 136 GVCHYBF $ (1,118) 1,117 1 GBF (188,641) 153,356 35,285 Dividend Distributions GSF, GVC500IF, GVCAAF, GVCHYBF 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, GVC500IF, GVCAAF, GVCHYBF 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. -------------------------------------------------------------------------------- 72 -------------------------------------------------------------------------------- Combined Notes to Financial Statements December 31, 2001 (Continued) GCF earns interest on its investments and declares 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 declared 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. The tax character of distributions paid to shareholders during 2001 were as follows: 2001 Ordinary Long-Term Income Capital Gain Total ----------- ------------- ------------ GSF $ 6,151,807 $ 18,307,091 $ 24,458,898 GVC500IF 3,789,995 -- 3,789,995 GVCAAF 554,053 1,018,852 1,572,905 GVCHYBF 2,808,473 -- 2,808,473 GBF 21,748,858 1,685,008 23,433,866 GCF 16,315,042 -- 16,315,042 For the year ended December 31, 2001, the components of distributable earnings on a tax basis were as follows: Undistributed Undistributed Unrealized Ordinary Long-Term Gain Appreciaiton Income (Loss) Carryforward (Depreciation) ------------- ------------------- -------------- GSF $ 8,912,576 $(341,286,031) $ (3,934,055) GVC500IF 119,078 (1,090,651) (62,927,763) GVCAAF 722,390 (5,427,268) (1,918,525) GVCHYBF -- (5,489,472) (490,450) GBF 86,131 (159,113) (364,631) -------------------------------------------------------------------------------- Note B -- Investment Advisory Agreements and Payments to or from Related Parties -------------------------------------------------------------------------------- Each Fund has an investment advisory agreement with Guardian Investor Services LLC (GIS, formerly known as "Guardian Investor Services Corporation"), a wholly-owned subsidiary of GIAC. GSF, GVCAAF, GBF and GCF pay investment advisory fees at an annual rate of .50% of the average daily net assets of each Fund. GVC500IF and GVCHYBF pay investment advisory fees at an annual rate of .25% and .60% respectively, of their average daily net assets. GIS voluntarily assumes a portion of the ordinary operating expenses (excluding interest expense associated with securities lending) that exceeds .28% of the average daily net assets of GVC500IF. GIS subsidized .05% of the ordinary operating expenses of GVC500IF or $171,052 for the year ended December 31, 2001. If total expenses of the Funds, except GVC500IF (excluding taxes, interest and brokerage commissions, but including the investment advisory fee) exceed 1% per annum of the average daily net assets of the Funds, GIS has agreed to assume any such excess expenses. None of the Funds exceeded this limit during the year ended December 31, 2001. There are no duplicative advisory fees charged to GVCAAF on assets invested in other Guardian Funds. Under an SEC exemptive order, advisory fees are paid at the underlying Fund level. 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. GVCAAF received $600,426 of dividends from other Guardian mutual funds. -------------------------------------------------------------------------------- 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 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. -------------------------------------------------------------------------------- 73 -------------------------------------------------------------------------------- The Guardian Variable Contract Funds, The Guardian Bond Fund, The Guardian Cash Fund ------------------------------------------------ Combined Notes to Financial Statements December 31, 2001 (Continued) -------------------------------------------------------------------------------- Note D -- Reverse Repurchase Agreements -------------------------------------------------------------------------------- GBF, GVCAAF and GVCHYBF 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, GVCAAF and GVCHYBF enter into a reverse repurchase agreement, the Funds establish and maintain cash, U.S. government securities or liquid, unencumbered securities that are marked-to-market daily in a segregated account with the Funds' 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, GVCAAF and GVCHYBF may be unable to deliver the securities when the Funds seek to repurchase them. Interest paid by GBF on reverse repurchase agreements for the year ended December 31, 2001 amounted to $29,791. Information regarding transactions by GBF under reverse repurchase agreements is as follows: Average amount outstanding during the period ....................................................... $5,513,740 Weighted average interest rate during the period ....................................................... 1.13% -------------------------------------------------------------------------------- Note E -- Dollar Roll Transactions -------------------------------------------------------------------------------- GBF, GVCAAF and GVCHYBF 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, GVCAAF and GVCHYBF may be unable to deliver the securities when the Funds seek to repurchase them. -------------------------------------------------------------------------------- Note F -- Investment Transactions -------------------------------------------------------------------------------- Purchases and proceeds from sales of securities (excluding short-term securities) for the year ended December 31, 2001 were as follows: GSF GVC500IF --- -------- Purchases ..................... $3,184,390,306 $ 105,384,482 Proceeds ...................... $3,653,391,098 $ 3,719,988 GVCAAF GVCHYBF ------ ------- Purchases ..................... $ 28,632,368 $ 46,689,906 Proceeds ...................... $ 6,844,698 $ 38,615,291 GBF --- Purchases ..................... $1,510,951,709 Proceeds ...................... $1,506,161,722 -------------------------------------------------------------------------------- 74 -------------------------------------------------------------------------------- Combined Notes to Financial Statements December 31, 2001 (Continued) The cost of investments owned at December 31, 2001 for federal income tax purposes was substantially the same as the cost for financial reporting purposes. The gross unrealized appreciation and depreciation of investments at December 31, 2001 for GSF, GVC500IF, GVCAAF, GVCHYBF and GBF were as follows: GSF GVC500IF --- -------- Gross Appreciation ................ $ 126,199,487 $ 23,224,383 Gross Depreciation ................ (130,133,542) (86,152,146) -------------- ------------ Net Unrealized Depreciation ..... $ (3,934,055) $(62,927,763) ============== ============ GVCAAF GVCHYBF ------ ------- Gross Appreciation ................ $ 117,471 $ 928,161 Gross Depreciation ................ (2,035,996) (1,418,611) -------------- ------------ Net Unrealized Depreciation ..... $ (1,918,525) $ (490,450) ============== ============ GBF --- Gross Appreciation ................ $ 2,483,449 Gross Depreciation ................ (2,848,080) -------------- Net Unrealized Depreciation ..... $ (364,631) ============== -------------------------------------------------------------------------------- Note G -- Transactions in Capital Stock -------------------------------------------------------------------------------- There are 800,000,000 shares of $0.001 par value capital stock authorized for GVCF divided into two classes, designated Class I and Class II shares. GSF Class I consists of 300,000,000 shares; GVC500IF Class I consists of 200,000,000 shares; GVCAAF Class I and GVCHYBF Class I each consist of 100,000,000 shares; and GSF Class II consists of 100,000,000 shares. There are 100,000,000 shares of $0.10 par value capital stock authorized for each of GBF and GCF. Through December 31, 2001, no Class II shares of GSF were issued. Transactions in capital stock were as follows:
Year Ended December 31, Year Ended December 31, 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------------------- Shares Amount ------------------------------------------------------------------------------------------------------------------------- o The Guardian Stock Fund Shares sold 3,815,255 6,150,247 $ 122,786,296 $ 334,877,079 Shares issued in reinvestment of dividends and distributions 784,694 14,951,639 24,458,898 604,199,000 Shares repurchased (18,650,149) (11,483,808) (568,765,235) (614,613,524) ------------------------------------------------------------------------------------------------------------------------- Net increase/(decrease) (14,050,200) 9,618,078 $(421,520,041) $ 324,462,555 ------------------------------------------------------------------------------------------------------------------------- o The Guardian VC 500 Index Fund Shares sold 13,181,683 10,014,181 $ 119,420,668 $ 110,068,245 Shares issued in reinvestment of dividends and distributions 408,501 302,724 3,526,181 3,067,405 Shares repurchased (611,918) (261,850) (5,222,250) (2,750,737) ------------------------------------------------------------------------------------------------------------------------- Net increase 12,978,266 10,055,055 $ 117,724,599 $ 110,384,913 ------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------
75 -------------------------------------------------------------------------------- The Guardian Variable Contract Funds, The Guardian Bond Fund, The Guardian Cash Fund ------------------------------------------------ Combined Notes to Financial Statements December 31, 2001 (Continued)
Year Ended December 31, Year Ended December 31, 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------------------- Shares Amount ------------------------------------------------------------------------------------------------------------------------- o The Guardian VC Asset Allocation Fund Shares sold 1,514,707 1,061,518 $ 13,674,648 $ 11,487,547 Shares issued in reinvestment of dividends and distributions 177,529 390,191 1,572,906 3,920,937 Shares repurchased (428,231) (122,064) (3,647,883) (1,317,471) ------------------------------------------------------------------------------------------------------------------------- Net increase 1,264,005 1,329,645 $ 11,599,671 $ 14,091,013 ------------------------------------------------------------------------------------------------------------------------- o The Guardian VC High Yield Bond Fund Shares sold 1,744,621 312,625 $ 15,630,031 $ 2,944,132 Shares issued in reinvestment of dividends and distributions 340,888 263,303 2,808,473 2,366,885 Shares repurchased (1,239,376) (38,841) (10,983,562) (373,386) ------------------------------------------------------------------------------------------------------------------------- Net increase 846,133 537,087 $ 7,454,942 $ 4,937,631 ------------------------------------------------------------------------------------------------------------------------- o The Guardian Bond Fund Shares sold 7,257,437 1,974,860 $ 88,866,716 $ 23,012,516 Shares issued in reinvestment of dividends and distributions 1,928,395 1,975,990 23,063,933 22,960,166 Shares repurchased (9,581,533) (6,673,170) (118,325,022) (77,439,370) ------------------------------------------------------------------------------------------------------------------------- Net decrease (395,701) (2,722,320) $ (6,394,373) $ (31,466,688) ------------------------------------------------------------------------------------------------------------------------- o The Guardian Cash Fund Shares sold 47,189,875 39,378,558 $ 471,898,754 $ 393,785,445 Shares issued in reinvestment of dividends 1,631,504 2,498,242 16,315,042 24,982,418 Shares repurchased (39,602,863) (47,985,843) (396,028,632) (479,858,436) ------------------------------------------------------------------------------------------------------------------------- Net increase/(decrease) 9,218,516 (6,109,043) $ 92,185,164 $ (61,090,573) -------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- Note H -- Line of Credit -------------------------------------------------------------------------------- A $100,000,000 line of credit available to all of the Funds and other related Guardian Funds has been established with State Street Bank and Trust Company and Bank of Montreal. The rate of interest charged on any borrowing is based upon the prevailing Federal Funds rate at the time of the loan plus .50% calculated on a 360 day basis per annum. For the year ended December 31, 2001, none of the funds borrowed against this line of credit. The Funds are obligated to pay State Street Bank and Trust Company and Bank of Montreal a commitment fee computed at a rate of .08% per annum on the average daily unused portion of the revolving credit. -------------------------------------------------------------------------------- Note I -- Management Information -------------------------------------------------------------------------------- The directors and officers are named below. Information about their principal occupations during the past five years and certain other current affiliations is also provided. The business address of each director and officer is 7 Hanover Square, New York, New York 10004, unless otherwise noted. The "Guardian Fund Complex" referred to in this biographical information is composed of (1) GVCF (2) GBF (3) GCF, (4) The Park Avenue Portfolio (a series trust that issues its shares in ten series), and (5) GIAC Funds, Inc. (formerly GBG Funds) (a series fund that issues its shares in three series). -------------------------------------------------------------------------------- 76 -------------------------------------------------------------------------------- Combined Notes to Financial Statements December 31, 2001 (Continued) The Statement of Additional Information includes additional information about fund directors and is available upon request, without charge, by calling (800) 221-3253. The information provided in the following section has not been audited by the independent auditors for the Funds. Name and Address and Age Title Business History -------------------------------------------------------------------------------- "Interested" Directors:* Arthur V. Ferrara (71) Director Retired. Former Chairman of The Board 70 Baldwin Farms South and Chief Executive Officer, The Greenwich, Connecticut Guardian Life Insurance Company of 06831 America 1/93 to 12/95; President, Director and Chief Executive Officer prior thereto. Director (Trustee) of all of the mutual funds within the Guardian Fund Complex. Leo R. Futia (82) Director Retired. Former Chairman of The Board 18 Interlaken Road and Chief Executive Officer, The Greenwich, Connecticut Guardian Life Insurance Company of 06830 America; Director since 5/70. Director (Trustee) of all of the mutual funds within the Guardian Fund Complex. Director (Trustee) of various mutual funds sponsored by Value Line, Inc. Joseph D. Sargent (64) Director Chairman of the Board and Chief Executive Officer, The Guardian Life Insurance Company of America, since 1/02; President, Chief Executive Officer, and Director prior thereto. Director (Trustee) of The Guardian Insurance & Annuity Company, Inc., Guardian Investor Services LLC, Park Avenue Securities LLC and all of the mutual funds within the Guardian Fund Complex. Independent Directors: Frank J. Fabozzi (53) Director Adjunct Professor of Finance, School of 858 Tower View Circle Management - Yale University 2/94 to New Hope, Pennsylvania present; Visiting Professor of Finance 18938 and Accounting, Sloan School of Management -- Massachusetts Institute of Technology prior thereto. Editor, Journal of Portfolio Management. Director (Trustee) of all the mutual funds within the Guardian Fund Complex. Director (Trustee) of various closed-end investment companies sponsored by Blackstone Financial Management. William W. Hewitt, Jr. (73) Director Retired. Former Executive Vice P.O. Box 2359 President, Shearson Lehman Brothers, Princeton, New Jersey Inc. Director (Trustee) of all of the 08543 mutual funds within the Guardian Fund Complex. Director (Trustee) of various mutual funds sponsored by Mitchell Hutchins Asset Management, Inc. and Paine Webber, Inc. * "Interested" Director means one who is an "interested person" under the Investment Company Act of 1940 by virtue of a current or past position with The Guardian Life Insurance Company of America, the indirect parent company of Guardian Investor Services LLC, the investment adviser of certain Funds in the Guardian Fund Complex. -------------------------------------------------------------------------------- 77 -------------------------------------------------------------------------------- The Guardian Variable Contract Funds, The Guardian Bond Fund, The Guardian Cash Fund ------------------------------------------------ Combined Notes to Financial Statements December 31, 2001 (Continued) Name and Address and Age Title Business History -------------------------------------------------------------------------------- Sidney I. Lirtzman (71) Director Professor of Management since 9/67 and 38 West 26th Street Interim President 9/99 to present; and New York, New York Acting Dean of the Zicklin School of 10010 Business Management since 2/95, City University of New York -- Baruch College. President, Fairfield Consulting Associates, Inc. Director (Trustee) of all of the mutual funds within the Guardian Fund Complex. Carl W. Schafer (65) Director President, Atlantic Foundation (a 66 Witherspoon Street, #1100 private charitable foundation). Princeton, New Jersey Director of Roadway Express (trucking), 08542 Labor Ready, Inc. (provider of temporary manual labor), Evans Systems, Inc. (a motor fuels, convenience store and diversified company), Electronic Clearing House, Inc. (financial transactions processing), Frontier Oil Corporation and NutraCeutix, Inc. (biotechnology), Chairman of the Investment Advisory Committee of the Howard Hughes Medical Institute 1985 to 1992. Director (Trustee) of all of the mutual funds within the Guardian Fund Complex. Director (Trustee) of various mutual funds sponsored by Paine Webber, Inc. Robert G. Smith (69) Director President, Smith Affiliated Capital 132 East 72nd Street Corp. since 4/82. Director (Trustee) of New York, New York all of the mutual funds within the 10021 Guardian Fund Complex. Officers: Joseph A. Caruso (49) Senior Senior Vice President and Corporate Vice Secretary, The Guardian Life Insurance President Company of America since 1/01; Vice and President and Corporate Secretary prior Secretary thereto. Senior Vice President and Secretary, The Guardian Insurance & Annuity Company, Inc., Guardian Investor Services LLC, Park Avenue Life Insurance Company, Guardian Baillie Gifford Limited, and all of the mutual funds within the Guardian Fund Complex. Vice President and Corporate Secretary, Park Avenue Securities LLC. Howard W. Chin (49) Managing Managing Director, The Guardian Life Director Insurance Company of America since 9/97; Vice President and Senior Mortgage Strategist, Goldman, Sachs & Co. prior thereto. Officer of various mutual funds within the Guardian Fund Complex. Richard A. Goldman (39) Managing Managing Director, Equity Investments, Director The Guardian Life Insurance Company of America since 7/01. Director, Citigroup Asset Management prior thereto. Officer of various mutual funds within the Guardian Fund Complex. -------------------------------------------------------------------------------- 78 -------------------------------------------------------------------------------- Combined Notes to Financial Statements December 31, 2001 (Continued) Name and Address and Age Title Business History -------------------------------------------------------------------------------- Alexander M. Grant, Jr. (52) Managing Managing Director, The Guardian Life Director Insurance Company of America since and 3/99; Second Vice President, Treasurer Investments 1/97 to 3/99; Assistant Vice President, Investments prior thereto. Officer of various mutual funds within the Guardian Fund Complex. Jonathan C. Jankus (54) Managing Managing Director, Investments, The Director Guardian Life Insurance Company of America since 3/98; Second Vice President, Investments, prior thereto. Officer of various mutual funds within the Guardian Fund Complex. Frank J. Jones (63) President Executive Vice President and Chief Investment Officer, The Guardian Life Insurance Company of America. Executive Vice President and Chief Investment Officer and Director, The Guardian Insurance & Annuity Company, Inc. Manager, Park Avenue Securities LLC. Director, Guardian Investor Services LLC, and Guardian Baillie Gifford Limited. Officer of all of the mutual funds within the Guardian Fund Complex. Ann T. Kearney (50) Controller Second Vice President, Group Pensions, The Guardian Life Insurance Company of America. Second Vice President of The Guardian Insurance & Annuity Company, Inc. and Guardian Investor Services LLC. Controller of various mutual funds within the Guardian Fund Complex. Peter J. Liebst (45) Managing Managing Director, Investments, The Director Guardian Life Insurance Company of America, since 8/98; Vice President, Van Kampen American Capital Investment Advisory Corporation prior thereto. Officer of various mutual funds within the Guardian Fund Complex. John B. Murphy (54) Managing Managing Director, Equity Securities, Director The Guardian Life Insurance Company since 3/98; Second Vice President 3/97 to 3/98; Assistant Vice President prior thereto. Officer of various mutual funds within the Guardian Fund Complex. Frank L. Pepe (59) Vice Vice President and Equity Controller, President The Guardian Life Insurance Company of America. Vice President and Controller, The Guardian Insurance & Annuity Company, Inc. Senior Vice President and Controller, Guardian Investor Services LLC. Officer of all of the mutual funds within the Guardian Fund Complex. Richard T. Potter (47) Vice Vice President and Equity Counsel, The President Guardian Life Insurance Company of and America. Vice President and Counsel, Counsel The Guardian Insurance & Annuity Company, Inc., Guardian Investor Services LLC, Park Avenue Securities LLC and all of the mutual funds within the Guardian Fund Complex. -------------------------------------------------------------------------------- 79 -------------------------------------------------------------------------------- The Guardian Variable Contract Funds, The Guardian Bond Fund, The Guardian Cash Fund ------------------------------------------------ Combined Notes to Financial Statements December 31, 2001 (Continued) Name and Address and Age Title Business History -------------------------------------------------------------------------------- Robert A. Reale (41) Managing Managing Director, The Guardian Life Director Insurance Company of America, The Guardian Insurance & Annuity Company, Inc. and Guardian Investor Services LLC since 3/01. Assistant Vice President, Metropolitan Life prior thereto. Officer of all of the mutual funds within the Guardian Fund Complex. Thomas G. Sorell (46) Senior Senior Managing Director, Fixed Income Managing Securities, The Guardian Life Insurance Director Company of America since 3/00. Vice President, Fixed Income Securities prior thereto. Managing Director, Investments: Park Avenue Life Insurance Company. Officer of various mutual funds within the Guardian Fund Complex. Donald P. Sullivan, Jr. (47) Vice Vice President, Equity Administration, President The Guardian Life Insurance Company of America since 3/99; Second Vice President, Equity Administration prior thereto. Vice President, The Guardian Insurance & Annuity Company, Inc., Guardian Investor Services LLC and Park Avenue Securities LLC. Officer of various mutual funds within the Guardian Fund Complex. -------------------------------------------------------------------------------- 80 -------------------------------------------------------------------------------- REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders The Guardian Variable Contract Funds, 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 Variable Contract Funds, Inc. (comprising, respectively, The Guardian Stock Fund, The Guardian VC 500 Index Fund, The Guardian VC Asset Allocation Fund and The Guardian VC High Yield Bond Fund), The Guardian Bond Fund, Inc. and The Guardian Cash Fund, Inc. as of December 31, 2001, 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 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 auditing standards generally accepted in the United States. 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, 2001, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. 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 Guardian Variable Contract Funds, Inc., The Guardian Bond Fund, Inc. and The Guardian Cash Fund, Inc. at December 31, 2001, 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 periods indicated therein, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York February 8, 2002 -------------------------------------------------------------------------------- 81