<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT ADVISER Value Line, Inc.
220 East 42nd Street
New York, NY 10017-5891
DISTRIBUTOR Value Line Securities, Inc.
220 East 42nd Street
New York, NY 10017-5891
CUSTODIAN BANK State Street Bank and Trust Co.
225 Franklin Street
Boston, MA 02110
SHAREHOLDER State Street Bank and Trust Co.
SERVICING AGENT c/o NFDS
P.O. Box 419729
Kansas City, MO 64141-6729
INDEPENDENT Price Waterhouse LLP
ACCOUNTANTS 1177 Avenue of the Americas
New York, NY 10036
LEGAL COUNSEL Peter D. Lowenstein, Esq.
Two Greenwich Plaza, Suite 100
Greenwich, CT 06830
DIRECTORS Jean Bernhard Buttner
John W. Chandler
Leo R. Futia
Charles E. Reed
Paul Craig Roberts
Nancy-Beth Sheerr
OFFICERS Jean Bernhard Buttner
CHAIRMAN AND PRESIDENT
Stephen E. Grant
VICE PRESIDENT
Philip Orlando
VICE PRESIDENT
David T. Henigson
VICE PRESIDENT and
SECRETARY/TREASURER
Jack M. Houston
ASSISTANT SECRETARY/TREASURER
Stephen La Rosa
ASSISTANT SECRETARY/TREASURER
</TABLE>
THIS REPORT IS ISSUED FOR INFORMATION OF SHAREHOLDERS. IT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR
ACCOMPANIED BY A CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND (OBTAINABLE
FROM THE DISTRIBUTOR).
VLF612154
------------------------------------
ANNUAL REPORT
------------------------------------
DECEMBER 31, 1996
----------------------------------------
THE VALUE LINE
SPECIAL
SITUATIONS
FUND, INC.
[LOGO]
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
To Our Value Line Special
- -------------------------------------------
To Our Shareholders
Value Line Special Situations Fund earned a total return of 7.24% in 1996,
versus a total return of 22.96% for the unmanaged Standard & Poor's 500 Index
and a total return of 16.49% for the unmanaged Russell 2000 Index, a measure of
small-company stock performance. A number of poorly performing stocks and a
large holding of cash, hurt the Fund's returns.
In the final quarter of the year, we instituted changes aimed at improving the
Fund's future performance.
First, a new management team was installed.
Second, the Fund will now place top priority on strong earnings momentum and
strong price momentum in its stock selection. Any holding not meeting these
criteria will be quickly eliminated from the portfolio. This is the discipline
that underpins the success of Value Line's other equity funds and that lies at
the core of the superb 32-year track record of the renowned Value Line
Timeliness Ranking System, which is one of the tools used by your Fund.
Performance Data:*
<TABLE>
<CAPTION>
Growth of
an Assumed
Average Annual Investment of
Total Return $10,000
--------------- -------------
<S> <C> <C>
1 year ended 12/31/96..... 7.24% $ 10,724
5 years ended 12/31/96.... 8.80% $ 15,243
10 years ended 12/31/96.... 8.57% $ 22,754
</TABLE>
*THE PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF
FUTURE PERFORMANCE. THE AVERAGE ANNUAL TOTAL RETURNS AND GROWTH OF AN ASSUMED
INVESTMENT OF $10,000 INCLUDE DIVIDENDS REINVESTED AND CAPITAL-GAINS
DISTRIBUTIONS ACCEPTED IN SHARES. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF
AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTMENT, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN ITS ORIGINAL COST.
Third, we have addressed the issue of risk. In the past, higher-risk science and
technology stocks have dominated the portfolio, and have been concentrated among
relatively few stockholdings. The Fund will now be diversified across a wide
variety of industries, and will usually hold over 100 stocks. Few individual
holdings will exceed 1% of total assets. Risk is unavoidable in the stock
market, but we expect these guidelines to significantly reduce volatility.
At the same time, we will continue to invest in special situations. Corporate
restructurings, key acquistions, management changes, spinoffs, and breakthrough
product advances are among the catalysts that can produce strong stock
performance. In accordance with the discipline described earlier, however, we
will invest in stocks that are already responding positively to such
developments. As before, a large proportion of the Fund's holdings will be
relatively young companies. Such stocks receive little notice on Wall Street,
but get "discovered" over time. We have also become more active in initial
public offerings, although these new stock issues will remain a minor part of
our holdings.
We are confident that the recent changes will make a positive impact on
performance. Thank you for investing with us.
Sincerely,
/s/ Jean Bernhard Buttner
Jean Bernhard Buttner
CHAIRMAN and PRESIDENT
February 26, 1997
- --------------------------------------------------------------------------------
2
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
Economic Observations
The signs continue to point toward a moderation in the rate of economic growth.
For example, not only are the nation's factories a little less busy these days,
but improvements in the auto, housing, and retail markets all appear to be
leveling off. To be sure, there are still isolated instances in which selected
sectors are gaining in strength. On the whole, though, the next few quarters
should see a somewhat slower rate of economic expansion, with real,
inflation-adjusted gross domestic product increasing on an average of 2.0%-2.5%.
Inflation, meanwhile, continues to be practically nonexistent, with prices at
both the producer (or wholesale) and consumer levels either falling or going up
marginally. This healthy inflation trend, moreover, is unlikely to be reversed
anytime soon given the lack of serious shortages on either the labor or the raw
materials fronts.
Interest rates, meanwhile, reflecting the very modest rate of economic growth
and the benign nature of inflation, are unlikely to change all that much over
the next year. Nevertheless, we caution that recent remarks by Federal Reserve
Chairman Alan Greenspan, in which he noted that the Fed has, in the past,
occasionally raised rates before higher inflation actually took hold would seem
to suggest that whatever changes in borrowing costs may evolve over the next few
quarters will probably involve a move toward higher rather than lower rates.
Finally, we believe that these basic themes, in which moderation prevails on the
economic growth, inflation, and interest-rate fronts, will remain in place over
the course of the current year. In fact, barring an unsettling series of
currency, political, or military shocks in the international markets, overall
stability should persist into 1998.
- --------------------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COMPARISON OF CHANGE IN VALUE
OF $10,000 INVESTMENT IN THE
VALUE LINE SPECIAL SITUATIONS
AND THE S&P 500 INDEX*
Value Line Special Situations
Fund S&P 500
<S> <C> <C>
01/01/1987 10000 10000
12/31/1987 9091 10527
12/31/1988 9379 12269
12/31/1989 11436 16148
12/31/1990 10927 15655
12/31/1991 14927 20425
12/31/1992 14412 21981
12/31/1993 16284 24197
12/31/1994 16452 24517
12/31/1995 21217 33730
12/31/1996 22754 41474
</TABLE>
(Period covered is 1/1/87 to 12/31/96)
THE STANDARD & POOR'S INDEX (S&P 500 INDEX) IS AN UNMANAGED INDEX THAT IS
REPRESENTATIVE OF THE LARGER-CAPITALIZATION STOCKS TRADED IN THE UNITED STATES.
- --------------------------------------------------------------------------------
3
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
- -------------------------------------------
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS*
<S> <C> <C> <C>
Value Percentage of
Issue Shares (in thousands) Net Assets
- ---------------------------------------------------------------------------------------------------
Genentech, Inc.................................. 35,000 $ 1,877 2.1%
Steris Corp..................................... 25,000 1,088 1.2
Firearms Training Systems Inc. Class "A"........ 82,000 963 1.1
Coachmen Industries, Inc........................ 32,200 914 1.0
Larscom Inc. Class "A".......................... 77,000 876 1.0
AlliedSignal, Inc............................... 13,000 871 1.0
Herbalife International, Inc.................... 24,000 783 0.9
Catalina Marketing Corp......................... 14,000 772 0.9
BMC Software, Inc............................... 18,000 745 0.8
Safeway, Inc.................................... 16,000 684 0.8
<CAPTION>
FIVE LARGEST INDUSTRY CATEGORIES*
Value Percentage of
Industry (in thousands) Net Assets
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Computer Software & Services.................... $ 9,661 10.8%
Retail-Special Lines............................ 4,161 4.6
Drug............................................ 3,679 4.1
Diversified Companies........................... 3,520 3.9
Industrial Services............................. 3,480 3.9
<CAPTION>
FIVE LARGEST NET SECURITY PURCHASES*+
Cost
Issue (in thousands)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Firearms Training Systems Inc. Class "A"........ $ 1,148
Larscom Inc. Class "A".......................... 924
AlliedSignal, Inc............................... 855
Coachmen Industries, Inc........................ 789
Eagle Hardware & Garden, Inc.................... 720
<CAPTION>
FIVE LARGEST NET SECURITY SALES*+
Proceeds
Issue (in thousands)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Columbia/HCA Healthcare Corp.................... $ 1,421
Penn Treaty American Corp....................... 1,392
MedPartners Inc................................. 1,366
Elan Corporation, Plc (ADR)..................... 1,289
Genetics Institute, Inc......................... 1,273
</TABLE>
* EXCLUSIVE OF FIXED INCOME SECURITIES
+ FOR THE SIX MONTH PERIOD ENDED 12/31/96
- --------------------------------------------------------------------------------
4
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
Schedule of Investments December 31, 1996
- -------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (in thousands)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
COMMON STOCKS (83.9%)
ADVERTISING (0.9%)
5,000 *HA-LO Industries, Inc...................................... $ 137
8,000 Omnicom Group, Inc.......................................... 366
25,000 *TMP Worldwide, Inc......................................... 319
-------
822
AEROSPACE/DEFENSE (2.6%)
21,000 *BE Aerospace, Inc.......................................... 570
7,000 Engineered Support Systems, Inc............................. 103
82,000 *Firearms Training Systems, Inc. Class "A".................. 963
4,000 Northrop Grumman Corp....................................... 331
8,000 Precision Castparts Corp.................................... 397
-------
2,364
AIR TRANSPORT (0.6%)
22,000 Expeditors International of Washington, Inc................. 506
APPAREL (2.3%)
11,000 *Fruit of the Loom, Inc. Class "A".......................... 417
8,000 *Jones Apparel Group, Inc................................... 299
17,000 Liz Claiborne, Inc.......................................... 657
4,000 *Tommy Hilfiger Corp........................................ 192
7,000 V.F. Corp................................................... 472
-------
2,037
BUILDING MATERIALS (0.7%)
9,000 Apogee Enterprises, Inc..................................... 358
11,000 TJ International, Inc....................................... 256
-------
614
CEMENT &
AGGREGATES (0.3%)
9,000 Southdown, Inc.............................................. 280
<CAPTION>
Value
Shares (in thousands)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
CHEMICAL-
DIVERSIFIED (0.7%)
9,000 *Cytec Industries, Inc...................................... $ 366
2,800 Potash Corp. of Saskatchewan, Inc........................... 238
-------
604
CHEMICAL-
SPECIALTY (2.7%)
8,000 Avery Dennison Corp......................................... 283
3,000 BetzDearborn, Inc........................................... 175
9,000 Ecolab, Inc................................................. 339
6,000 Fuller (H.B.) Co............................................ 282
7,000 Rohm & Haas Co.............................................. 571
11,000 *SpecTran Corp.............................................. 239
8,000 Tredegar Industries, Inc.................................... 321
4,000 Valspar Corp................................................ 227
-------
2,437
COAL/ALTERNATE
ENERGY (0.7%)
14,000 *AES Corp................................................... 651
COMPUTER &
PERIPHERALS (2.8%)
18,000 *Advanced Logic Research, Inc............................... 223
18,000 *American Power Conversion Corp............................. 490
9,000 *Brooktrout Technology, Inc................................. 252
5,000 *Documentum, Inc............................................ 169
10,000 *MicroTouch Systems, Inc.................................... 240
8,000 *QLogic Corp................................................ 206
19,000 *Southern Electronics Corp.................................. 237
5,000 *3Com Corp.................................................. 367
16,000 *Tracor, Inc................................................ 340
-------
2,524
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
Schedule of Investments
- -------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (in thousands)
- -----------------------------------------------------------------------------------------------
<C> <S> <C>
COMPUTER SOFTWARE &
SERVICES (10.8%)
22,000 *Acxiom Corp................................................ $ 528
8,000 *American Business Information, Inc......................... 178
6,000 *BA Merchants Services Inc. Class "A"....................... 107
5,000 Baan Company NVF............................................ 174
18,000 *BMC Software, Inc.......................................... 745
19,000 *BTG, Inc................................................... 503
8,000 Computer Data Systems, Inc.................................. 242
12,000 *Computer Management Sciences, Inc.......................... 279
4,000 Computer Task Group, Inc.................................... 172
10,000 *Compuware Corp............................................. 501
10,000 *Comverse Technology, Inc................................... 378
30,000 *Credit Management Solutions, Inc........................... 435
12,500 *DataWorks Corp............................................. 316
4,000 *Electronics For Imaging, Inc............................... 329
13,000 *Interlink Computer Sciences, Inc........................... 218
77,000 *Larscom, Inc. Class "A".................................... 876
11,000 National Data Corp.......................................... 479
6,000 *National Instruments Corp.................................. 192
5,000 *Netscape Communications Corp............................... 284
5,000 Paychex, Inc................................................ 257
8,000 *Peoplesoft, Inc............................................ 384
10,000 *Pomeroy Computer Resources, Inc............................ 368
27,000 *Ross Systems, Inc.......................................... 260
8,000 *SPSS, Inc.................................................. 223
10,000 Scopus Technology, Inc...................................... 465
5,000 *Visio Corp................................................. 247
11,000 *Wind River Systems, Inc.................................... 521
-------
9,661
<CAPTION>
Value
Shares (in thousands)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
DIVERSIFIED
COMPANIES (3.9%)
13,000 AlliedSignal, Inc........................................... $ 871
10,000 Danaher Corp................................................ 466
8,000 Raychem Corp................................................ 641
12,000 Tyco International, Ltd..................................... 635
10,000 United Technologies Corp.................................... 660
6,000 Valmont Industries, Inc..................................... 247
-------
3,520
DRUG (4.1%)
17,000 *Bio-Technology General Corp................................ 223
9,000 *CYTYC Corp................................................. 243
6,000 *Dura Pharmaceuticals, Inc.................................. 287
35,000 *Genentech, Inc............................................. 1,877
4,000 Merck & Co., Inc............................................ 317
18,000 *NBTY, Inc.................................................. 342
15,000 *Synthetech, Inc............................................ 189
4,000 Teva Pharmaceutical Industries, Ltd. (ADR).................. 201
-------
3,679
DRUGSTORE (0.2%)
5,891 *Eckerd Corp................................................ 189
ELECTRICAL
EQUIPMENT (1.0%)
17,000 *Acres Gaming, Inc.......................................... 187
17,000 *Jabil Circuit, Inc......................................... 680
-------
867
ELECTRONICS (3.1%)
8,000 *ACT Manufacturing, Inc..................................... 211
10,000 CMC Industries, Inc......................................... 96
12,000 *Dynatech Corp.............................................. 531
7,000 *Imation Corp............................................... 197
5,000 *LeCroy Corporation......................................... 188
12,000 *Lexmark International Group, Inc. Class "A"................ 332
4,000 *Micrel, Inc................................................ 126
18,000 *Quickturn Design Systems, Inc.............................. 369
5,000 *Sanmina Corp............................................... 282
14,000 *Ultrak, Inc................................................ 427
-------
2,759
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
December 31, 1996
- -------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (in thousands)
- -----------------------------------------------------------------------------------------------
<C> <S> <C>
ENVIRONMENTAL (1.4%)
26,000 *Philip Environmental, Inc.................................. $ 377
5,000 *Tetra Technologies, Inc.................................... 126
13,000 *USA Waste Services, Inc.................................... 414
10,000 *U.S. Filter Corp........................................... 318
-------
1,235
FINANCIAL SERVICES (1.2%)
17,000 *Americredit Corp........................................... 349
18,000 *Consumer Portfolio Services, Inc........................... 202
20,000 *Imperial Credit Industries, Inc............................ 420
6,000 *RAC Financial Group, Inc................................... 127
-------
1,098
FOOD PROCESSING (1.4%)
5,000 General Mills, Inc.......................................... 317
10,000 Interstate Bakeries Corp.................................... 491
23,000 *Morningstar Group, Inc. (The).............................. 451
-------
1,259
FOOD WHOLESALERS (0.4%)
10,000 Riser Foods, Inc............................................ 317
FURNITURE/
HOME FURNISHINGS (1.2%)
11,000 American Woodmark Corp...................................... 155
15,000 Ethan Allen Interiors, Inc.................................. 578
6,000 Miller (Herman), Inc........................................ 340
-------
1,073
GROCERY (2.1%)
5,000 American Stores Co.......................................... 204
60,000 Food Lion Inc. Class "A".................................... 587
13,000 *Quality Food Centers, Inc.................................. 439
16,000 *Safeway, Inc............................................... 684
-------
1,914
HOME APPLIANCE (0.2%)
12,000 *Detection Systems, Inc..................................... 214
HOMEBUILDING (0.3%)
18,000 *Host Marriott Corp......................................... 288
<CAPTION>
Value
Shares (in thousands)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
HOTEL/GAMING (0.9%)
10,000 Hilton Hotels Corp.......................................... $ 261
28,000 International Game Technology............................... 511
-------
772
HOUSEHOLD
PRODUCTS (0.3%)
3,000 Ralston Purina Group........................................ 220
INDUSTRIAL SERVICES (3.9%)
14,000 *Catalina Marketing Corp.................................... 772
16,000 *Employee Solutions, Inc.................................... 328
15,000 Equifax, Inc................................................ 459
16,000 *Fairchild Corp. Class "A".................................. 236
4,000 G & K Services, Inc. Class "A".............................. 151
29,500 *O'Sullivan Industries Holdings, Inc........................ 413
9,000 Personnel Group of America, Inc............................. 217
5,000 *Robert Half International, Inc............................. 172
8,000 *Service Experts, Inc....................................... 208
8,000 *U.S. Industries, Inc....................................... 275
10,000 *Warrantech Corp............................................ 115
6,000 World Fuel Services Corp.................................... 134
-------
3,480
INSURANCE-
DIVERSIFIED (0.6%)
10,000 American Bankers Insurance Group, Inc....................... 511
INSURANCE-LIFE (0.8%)
6,000 Conseco, Inc................................................ 383
11,000 *Penn Treaty American Corp.................................. 286
-------
669
INSURANCE-PROPERTY/
CASUALTY (1.0%)
11,000 Allstate Corp. (The)........................................ 637
4,000 Progressive Corp............................................ 269
-------
906
</TABLE>
- --------------------------------------------------------------------------------
7
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
Schedule of Investments
- -------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (in thousands)
- -----------------------------------------------------------------------------------------------
<C> <S> <C>
MACHINERY (2.4%)
16,000 DT Industries, Inc.......................................... $ 560
4,000 Dover Corp.................................................. 201
9,000 *Dreco Energy Services, Ltd. Class "A"...................... 330
10,000 *Farr Co.................................................... 166
7,000 *Gardner Denver Machinery Inc............................... 240
7,000 Lindsay Manufacturing Co.................................... 327
8,000 *Zoltek Companies, Inc...................................... 291
-------
2,115
MACHINERY-CONSTRUCTION
& MINING (0.2%)
5,000 Manitowoc Co., Inc.......................................... 202
MANUFACTURED
HOUSING/RECREATIONAL
VEHICLES (1.0%)
32,200 Coachmen Industries, Inc.................................... 914
MEDICAL SERVICES (0.2%)
12,000 Health Images, Inc.......................................... 200
MEDICAL SUPPLIES (2.1%)
9,000 Cardinal Health, Inc........................................ 524
12,000 *INBRAND Corp............................................... 252
25,000 *Steris Corp................................................ 1,088
-------
1,864
METAL FABRICATING (0.4%)
16,000 *Shaw Group, Inc. (The)..................................... 374
OILFIELD SERVICES/
EQUIPMENT (1.6%)
10,000 Camco International, Inc.................................... 461
15,000 *Marine Drilling Co., Inc................................... 295
13,000 *Offshore Logistics, Inc.................................... 252
15,000 *Titan Exploration, Inc..................................... 180
16,000 *Tubos De Acero De Mexico, S.A. (ADR)....................... 254
-------
1,442
<CAPTION>
Value
Shares (in thousands)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
PAPER & FOREST
PRODUCTS (0.6%)
8,000 Caraustar Industries, Inc................................... $ 266
4,000 *Fibreboard Corp............................................ 135
4,000 Mosinee Paper Corp.......................................... 142
-------
543
PETROLEUM-
PRODUCING (0.9%)
10,000 *Chesapeake Energy Corp..................................... 556
5,000 Noble Affiliates, Inc....................................... 239
-------
795
PRECISION
INSTRUMENTS (1.3%)
16,000 Innovex, Inc................................................ 432
6,000 *Molecular Dynamics, Inc.................................... 65
10,000 *Perceptron, Inc............................................ 342
12,000 *II-VI, Inc................................................. 315
-------
1,154
PUBLISHING (0.6%)
5,000 *Applied Graphics Technologies, Inc......................... 146
3,000 *Consolidated Graphics, Inc................................. 168
16,000 *Mail-Well, Inc............................................. 262
-------
576
RECREATION (1.0%)
10,000 *Fountain Powerboat Industries, Inc......................... 182
25,000 *Handleman Co............................................... 213
10,000 Harley-Davidson, Inc........................................ 470
-------
865
RESTAURANT (0.6%)
16,000 CKE Restaurants, Inc........................................ 576
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
December 31, 1996
- -------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (in thousands)
- -----------------------------------------------------------------------------------------------
<C> <S> <C>
RETAIL-
SPECIAL LINES (4.6%)
13,000 Claire's Stores, Inc........................................ $ 169
8,000 *Cole National Corp. Class "A".............................. 210
14,000 *Goody's Family Clothing, Inc............................... 250
24,000 Herbalife International, Inc................................ 783
9,000 *InaCom Corp................................................ 360
12,000 *Lands' End, Inc............................................ 318
26,000 *Microage, Inc.............................................. 520
11,000 Ross Stores, Inc............................................ 550
13,000 TJX Companies, Inc.......................................... 616
18,000 Tuesday Morning Corp........................................ 385
-------
4,161
RETAIL BUILDING
SUPPLY (1.3%)
28,000 *Eagle Hardware & Garden, Inc............................... 581
13,000 Hughes Supply, Inc.......................................... 561
-------
1,142
RETAIL STORE (2.4%)
8,000 Dayton-Hudson Corp.......................................... 314
6,000 *Dress Barn, Inc............................................ 90
14,000 *Meyer (Fred), Inc.......................................... 497
14,000 *Pacific Sunwear of California, Inc......................... 360
14,500 *Paul Harris Stores, Inc.................................... 257
10,000 *Proffitt's, Inc............................................ 369
14,000 *Stein Mart, Inc............................................ 284
-------
2,171
SEMICONDUCTOR (0.7%)
4,000 *ASM Lithography Holding NV................................. 199
6,000 *ESS Technology, Inc........................................ 169
10,000 *GenRad, Inc................................................ 233
-------
601
SHOE (1.2%)
20,000 *Genesco, Inc............................................... 185
10,000 NIKE, Inc. Class "B"........................................ 597
11,000 Wolverine World Wide, Inc................................... 319
-------
1,101
<CAPTION>
Value
Shares (in thousands)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
TELECOMMUNICATIONS
EQUIPMENT (3.9%)
11,000 *AFC Cable Systems, Inc..................................... $ 263
18,000 *Able Telcom Holding Corp................................... 135
7,000 *Black Box Corp............................................. 289
9,000 *Brightpoint, Inc........................................... 268
9,000 *Digital Microwave Corp..................................... 251
6,000 *Leasing Solutions, Inc..................................... 154
14,000 *Natural MicroSystems Corp.................................. 441
5,000 Nokia Corp. (ADR)........................................... 288
18,000 *Olicom A/S................................................. 339
10,000 *Periphonics Corp........................................... 292
5,000 Tadiran Telecommunications Ltd.............................. 112
13,000 *Tellabs, Inc............................................... 489
5,000 *Wandel & Goltermann Technologies, Inc...................... 146
-------
3,467
TELECOMMUNICATION
SERVICES (1.7%)
5,000 *Ascend Communications, Inc................................. 311
10,000 Cincinnati Bell, Inc........................................ 616
14,000 *Teledata Communications, Ltd............................... 322
10,000 *Tollgrade Communications, Inc.............................. 310
-------
1,559
TEXTILE (1.0%)
29,000 *Linens N Things, Inc....................................... 569
10,000 *Westpoint Stevens, Inc. Class "A".......................... 299
-------
868
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
Schedule of Investments December 31, 1996
- -------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (in thousands)
<C> <S> <C>
- -----------------------------------------------------------------------------------------------
TOILETRIES/
COSMETICS (0.3%)
10,000 *Paragon Trade Brands, Inc.................................. $ 300
TOYS (0.2%)
15,000 *Galoob Toys, Inc........................................... 210
TRUCKING/TRANSPORTATION
LEASING (0.1%)
3,000 *Heartland Express, Inc..................................... 73
OTHER (0.5%)
15,000 Equity Marketing, Inc....................................... 278
15,000 Tripos, Inc................................................. 176
-------
454
-------
TOTAL COMMON STOCKS AND TOTAL INVESTMENT SECURITIES (83.9%)
(COST $67,182,000)........................................ 75,197
-------
Value
Principal (in thousands
Amount except per
(in thousands) share amount)
- -----------------------------------------------------------------------------------------------
REPURCHASE
AGREEMENT (16.5%)
(INCLUDING ACCRUED INTEREST)
$ 14,800 Collateralized by $12,325,000 U.S. Treasury Notes 6%, due
9/30/98 and $2,510,000 U.S. Treasury Notes 6 3/4%, due
6/30/99, with an aggregate value of $15,122,000 (with
First Chicago Capital Markets, Inc., 6%, dated 12/31/96,
due 1/2/97, delivery value of $14,805,000)................ $ 14,802
EXCESS OF LIABILITIES OVER CASH AND RECEIVABLES (-0.4%).......................
(405 )
-------
NET ASSETS (100%)............................................................. $ 89,594
-------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER OUTSTANDING SHARE
($89,594,000 DIVIDED BY 6,714,634 SHARES OUTSTANDING)........................
$ 13.34
-------
</TABLE>
* NON-INCOME PRODUCING
ADR -- AMERICAN DEPOSITARY RECEIPTS
SEE NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
10
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
Statement of Assets and Liabilities
Statement of Operations
at December 31, 1996
for the year ended December 31, 1996
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dollars
(in thousands
except per
share amount)
-------
<S> <C>
Assets:
Investment securities, at value
(Cost--$67,182)..................................................... $ 75,197
Repurchase agreement (Cost--$14,802).................................. 14,802
Cash.................................................................. 28
Receivable for securities sold........................................ 2,023
Receivable for capital shares sold.................................... 80
Dividends receivable.................................................. 12
-------
Total Assets...................................................... 92,142
-------
Liabilities:
Payable for securities purchased...................................... 2,373
Payable for capital shares repurchased................................ 31
Accrued expenses:
Advisory fee........................................................ 57
Other............................................................... 87
-------
Total Liabilities................................................. 2,548
-------
Net Assets............................................................ $ 89,594
-------
Net Assets consist of:
Capital stock, at $1.00 par value (authorized 100,000,000, outstanding
6,714,634 shares)................................................... $ 6,715
Additional paid-in capital............................................ 70,988
Undistributed investment income--net.................................. 3
Undistributed net realized gain on investments........................ 3,873
Unrealized net appreciation of investments............................ 8,015
-------
Net Assets............................................................ $ 89,594
-------
Net Asset Value, Offering and Redemption Price per Outstanding Share
($89,594,000 DIVIDED BY 6,714,634 shares outstanding).............. $ 13.34
-------
</TABLE>
<TABLE>
<CAPTION>
Dollars
(in thousands)
---------------
<S> <C>
Investment Income:
Interest.............................................................. $ 2,368
Dividends (Net of foreign withholding taxes of $1).................... 62
---------------
Total Income...................................................... 2,430
---------------
Expenses:
Advisory fee.......................................................... 723
Transfer agent........................................................ 100
Printing and stationery............................................... 50
Auditing and legal fees............................................... 45
Custodian fees........................................................ 30
Telephone and wire charges............................................ 28
Postage............................................................... 25
Registration fees..................................................... 23
Directors' fees and expenses.......................................... 13
Insurance, dues and other............................................. 6
---------------
Total Expenses Before Custody Credits............................. 1,043
Less: Custody Credits............................................. (4)
---------------
Net Expenses...................................................... 1,039
---------------
Investment Income--Net................................................ 1,391
---------------
Realized and Unrealized Gain (Loss) on Investments--Net:
Realized Gain--Net.................................................. 20,138
Change in Unrealized Appreciation................................... (14,834)
---------------
Net Realized Gain and Change in Unrealized Appreciation on
Investments......................................................... 5,304
---------------
Net Increase in Net Assets from Operations............................ $ 6,695
---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
11
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
Statement of Changes in Net Assets
for the years ended December 31, 1996 and 1995
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
--------------------
(Dollars in
thousands)
<S> <C> <C>
Operations:
Investment income--net............................................................ $ 1,391 $ 309
Realized gain on investments--net................................................. 20,138 25,437
Change in unrealized appreciation................................................. (14,834) (1,797)
--------------------
Net increase in net assets from operations........................................ 6,695 23,949
--------------------
Distributions to Shareholders:
Investment income--net............................................................ (1,389) (308)
Realized gain from investment transactions--net................................... (19,846) (21,803)
--------------------
Total distributions............................................................... (21,235) (22,111)
--------------------
Capital Share Transactions:
Proceeds from sale of shares...................................................... 17,465 20,359
Proceeds from reinvestment of distributions to shareholders....................... 18,857 19,378
Cost of shares repurchased........................................................ (30,596) (33,347)
--------------------
Increase from capital share transactions.......................................... 5,726 6,390
--------------------
Total (Decrease) Increase........................................................... (8,814) 8,228
Net Assets:
Beginning of year................................................................. 98,408 90,180
--------------------
End of year....................................................................... $ 89,594 $ 98,408
--------------------
Undistributed Investment Income--net, at end of year................................ $ 3 $ 1
--------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
12
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
Notes to Financial Statements
- -------------------------------------------
1.Significant Accounting Policies
The Value Line Special Situations Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company whose primary investment objective is long-term
growth of capital. The Fund invests primarily in a broadly diversified list of
"special situations."
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates of certain reported
amounts in the financial statements. Actual results may differ from those
estimates. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
(A) Security Valuation. Securities listed on a securities exchange and
over-the-counter securities traded on the NASDAQ national market system are
valued at the closing sales price on the date as of which the net asset value is
being determined. In the absence of closing sales prices for such securities and
for securities traded in the over-the- counter market, the security is valued at
the midpoint between the latest available and representative asked and bid
prices. Securities for which market quotations are not readily available or
which are not readily marketable and all other assets of the Fund are valued at
fair value as the Board of Directors may determine in good faith. Short-term
instruments with maturities of 60 days or less are valued at amortized cost,
which approximates market value.
(B) Repurchase Agreements. In connection with transactions in repurchase
agreements, the Fund's custodian takes possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. In
the event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral or proceeds may be subject to legal proceedings.
(C) Federal Income Taxes. It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies, including the distribution requirements of the Tax Reform Act of
1986, and to distribute all of its taxable income to its shareholders.
Therefore, no Federal income tax or excise tax provision is required.
(D) Security Transactions and Distributions. Security transactions are accounted
for on the date the securities are purchased or sold. Interest income is accrued
as earned. Realized gains and losses on sales of securities are calculated for
financial accounting and Federal income tax purposes on the identified cost
basis. Dividend income and distributions to shareholders are recorded on the ex-
dividend date. Distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
(E) Amortization. Discounts on debt securities are amortized to interest income
over the life of the security with a corresponding increase to the security's
cost basis; premiums on debt securities are not amortized.
- --------------------------------------------------------------------------------
13
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
Notes to Financial Statements
- -------------------------------------------
2.Capital Share Transactions, Dividends and Distributions
to Shareholders
Transactions in capital stock were as follows (in thousands except per share
amounts):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
--------------------
Shares sold....................................... 1,039 1,081
Shares issued to shareholders in reinvestment of
dividends and distributions..................... 1,436 1,202
--------------------
2,475 2,283
Shares repurchased................................ 1,820 1,805
--------------------
Net increase...................................... 655 478
--------------------
Dividends per share from net investment income.... $ .2625 $ .0633
--------------------
Distributions per share from net realized gains... $ 3.7500 $ 4.4900
--------------------
</TABLE>
3.Purchases and Sales of Securities
Purchases and sales of investment securities, excluding short-term securities,
were as follows:
<TABLE>
<CAPTION>
1996
<S> <C>
---------------
<CAPTION>
(IN THOUSANDS)
<S> <C>
Purchases:
Investment Securities............................. $ 95,475
---------------
Sales:
Investment Securities............................. $ 78,141
---------------
</TABLE>
At December 31, 1996, the aggregate cost of investment securities and repurchase
agreements for federal income tax purposes was $82,008,000. The aggregate
appreciation and depreciation of investments at December 31, 1996, based on a
comparison of investment values and their costs for federal income tax purposes,
was $10,282,000 and $2,291,000 respectively, resulting in a net appreciation of
$7,991,000.
4.Investment Advisory Contract, Management Fees, and
Transactions With Affiliates
An advisory fee of $723,000 was paid or payable to Value Line, Inc., the Fund's
investment adviser (the "Adviser"), for the year ended December 31, 1996. This
was computed at an annual rate of 3/4 of 1% of the average daily net assets
during the year and paid monthly. The Adviser provides research, investment
programs, supervision of the investment portfolio and pays costs of
administrative services, office space, equipment and compensation of
administrative, bookkeeping and clerical personnel necessary for managing the
affairs of the Fund. The Adviser also provides persons, satisfactory to the
Fund's Board of Directors, to act as officers and employees of the Fund and pays
their salaries and wages. The Fund bears all other costs and expenses.
A fee of $2,880 for printing services was paid to the Adviser for the year ended
December 31, 1996.
Certain officers and directors of the Adviser and its wholly owned subsidiary,
Value Line Securities, Inc. (the Fund's distributor and a registered
broker/dealer), are also officers and a director of the Fund. During the year
ended December 31, 1996, the Fund paid brokerage commissions totalling $55,000
to the distributor, which clears its transactions through unaffiliated brokers.
The Adviser and/or affiliated companies owned 254,000 shares of the Fund's
capital stock, representing 3.8% of the outstanding shares at December 31, 1996.
- --------------------------------------------------------------------------------
14
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
Financial Highlights
- -------------------------------------------
Selected data for a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR................ $ 16.24 $ 16.15 $ 16.95 $ 15.69 $ 16.41
----------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ .26 .06 (.07) (.13) ( .05)
Net gains or losses on securities
(both realized and unrealized)............ .85 4.58 .23 2.14 (.52)
----------------------------------------------------------------------
Total from investment operations............ 1.11 4.64 .16 2.01 (.57)
----------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income................................... (.26) (.06) -- -- #
Distributions from capital gains............ (3.75) (4.49) (.96) (.75) (.15)
----------------------------------------------------------------------
Total distributions......................... (4.01) (4.55) (.96) (.75) ( .15)
----------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR...................... $ 13.34 $ 16.24 $ 16.15 $ 16.95 $ 15.69
----------------------------------------------------------------------
TOTAL RETURN...................................... +7.24% +28.96% +1.03% +12.99% -3.45%
----------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands)............ $ 89,594 $ 98,408 $ 90,180 $ 91,388 $ 101,094
Ratio of expenses to average net assets........... 1.08%(1) 1.06% 1.10% 1.06% 1.09%
Ratio of net investment income (loss) to average
net assets...................................... 1.44% 0.32% (0.46)% (.79)% (.33)%
Portfolio turnover rate........................... 146% 10% 37% 39% 43%
Average commissions paid per share of common stock
investment puchased/sold........................ $ .049(2)
</TABLE>
# DIVIDEND PAID WAS LESS THAN ONE CENT PER SHARE
(1)BEFORE OFFSET FOR CUSTODY CREDITS.
(2)DISCLOSURE EFFECTIVE FOR FISCAL YEARS BEGINNING ON OR AFTER 9/1/95.
SEE NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
15
<PAGE>
THE VALUE LINE SPECIAL SITUATIONS FUND, INC.
Report of Independent Accountants
- -------------------------------------------
To the Shareholders and Board of Directors
of The Value Line Special Situations Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Value Line Special Situations
Fund, Inc. (the "Fund") at December 31, 1996, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 AVENUE OF THE AMERICAS
NEW YORK, NY 10036
February 18, 1997
- --------------------------------------------------------------------------------
16
