-------------------------------
ANNUAL REPORT
-------------------------------
December 31, 1997
-------------------------------
The Value Line
Special
Situations
Fund, Inc.
[LOGO]
----------
VALUE LINE
No-Load
Mutual
Funds
<PAGE>
The Value Line Special Situations Fund, Inc.
To Our Value Line
- --------------------------------------------------------------------------------
To Our Shareholders:
The Value Line Special Situations Fund enjoyed an excellent year in 1997. This
accomplishment was particularly gratifying for two reasons. First, it followed
immediately upon introducing a new strategy and a new management team for the
Fund at the end of 1996. Second, 1997 was a difficult year for the stocks of
fast-growing small companies, relative to other stocks. This segment of the
market is a primary emphasis of the Fund, and a number of funds concentrating in
this area actually suffered losses for the full year. Yet your Fund gained
32.10% in 1997, well ahead of the 22.36% total return of the Russell 2000, an
unmanaged index of small-capitalization stocks, and close behind the 33.36%
total return of the Standard & Poor's 500, an unmanaged index of
larger-capitalization stocks. The total return figures of these indexes include
reinvested dividends and, unlike the Fund's returns, are not affected by any
fees, administrative expenses, or holdings of cash. A comparison with its peers
shows that the Fund ranked in the top 10% in its fund category for the year,
according to Lipper Analytical Services.
The new strategy referred to includes an emphasis on stockholdings with strong
earnings momentum and strong stock price momentum. We invest in a wide variety
of special situations, but only those that are already responding positively to
favorable corporate developments. At the same time, indications of near-term
difficulties at a company are a danger sign that cause us to sell. Weakness in
the stock price can itself be a warning of trouble around the corner. In last
year's treacherous market for small growth stocks, our keen sell discipline was
crucial to preserving the Fund's gains.
Because investing in small, fast-growing companies can be risky, our new
strategy also includes the reduction of risk exposure, where possible. Our main
tool here is diversification. The Fund is widely diversified in approximately
400 stocks across many different industries. The greatest concentration is in
technology, which makes up only about 20% of the portfolio, and even within this
sector the holdings are well diversified among computer hardware, industrial
software, telecommunications, and other subsectors. We also seek some
diversification in the size of the companies in which the Fund invests.
Small-capitalization stocks have been 55%-60% of the portfolio; mid-cap, about
30%; and large-cap, 10%-15%. Your Fund has also become a more active investor in
newly public companies (IPOs) and those that have been public for less than two
years.
We will continue to seek out the best U.S. equity opportunities, while keeping
the portfolio's level of risk exposure down to a reasonable level. Thank you for
investing with us.
Sincerely,
/s/ Jean Bernhard Buttner
Jean Bernhard Buttner
Chairman and President
February 2, 1998
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2
<PAGE>
The Value Line Special Situations Fund, Inc.
Special Situations Fund Shareholders
- --------------------------------------------------------------------------------
Economic Observations
It has now been a number of months since the crisis in Asia first made the
headlines in this country, and about that long since the pessimists began to
predict that there would be serious repercussions over here. During that time,
however, there has been little in the economic reports to suggest that this
feared sharp falloff in business activity was taking place on a wide scale.
True, a number of companies are now noting some Asia-related weakness, with
cautionary statements accompanying certain profit reports. In fact, the Asian
problems do raise concerns regarding earnings prospects through the first half
of this year--at least. For the most part, however, economic activity is
sufficiently strong to suggest that corporate earnings will continue to rise,
albeit at a modest pace.
Encouragingly, this long-running business expansion looks as though it will
persist. Overall, the current tenor of the economic data would seem to be
consistent with a growth rate of 2.0%-2.5% for the next several quarters, versus
perhaps 3% had the difficulties in Asia not evolved. We add, however, that even
our reduced expectations assume that the problems in that region will begin to
ease selectively over the next several months, as efforts by the world's leading
banking authorities gradually produce the desired stability.
Meantime, there continues to be limited pressure on the inflation front, with
prices for industrial goods, energy products, and precious metals continuing in
a flat to lower trend. Our sense, for now, is that these favorable pricing
trends will stay intact for the balance of the year. Overall, with the economy
likely to remain on a modest, yet sustainable, growth track, and with inflation
expected to hold at low levels, interest rates should continue to be relatively
stable, thus lending some support to the financial markets during the months
ahead.
*Performance Data:
Growth of
Average an Assumed
Annual Investment of
Total Return $10,000
------------ -------------
1 year ended 12/31/97 ...................... 32.10% $13,210
5 years ended 12/31/97 ..................... 15.84% $20,856
10 years ended 12/31/97 ..................... 12.70% $33,063
* 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.
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3
<PAGE>
The Value Line Special Situations Fund, Inc.
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
IN THE VALUE LINE SPECIAL SITUATIONS FUND
AND THE S&P 500 STOCK INDEX*
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Value Line Special Situations Fund S & P 500
---------------------------------- ---------
1/1/88 10,000 10,000
3/31/88 10,822 10,571
6/30/88 11,128 11,273
9/30/88 10,382 11,308
12/31/88 10,316 11,655
3/31/89 11,444 12,479
6/30/89 12,407 13,579
9/30/89 13,306 15,031
12/31/89 12,578 15,339
3/31/90 12,579 14,879
6/30/90 13,402 15,813
9/30/90 11,329 13,642
12/31/90 12,019 14,871
3/31/91 14,758 17,031
6/30/91 14,050 16,992
9/30/91 15,534 17,901
12/31/91 16,410 19,402
3/31/92 15,859 18,912
6/30/92 13,648 19,271
9/30/92 13,568 19,879
12/31/92 15,852 20,880
3/31/93 14,953 21,791
6/30/93 15,984 21,897
9/30/93 17,711 22,463
12/31/93 17,911 22,984
3/31/94 17,077 22,112
6/30/94 15,280 22,205
9/30/94 17,954 23,291
12/31/94 18,096 23,288
3/31/95 19,320 25,555
6/30/95 21,111 27,995
9/30/95 24,080 30,219
12/31/95 23,337 32,039
3/31/96 24,113 33,758
6/30/96 24,415 35,273
9/30/96 24,387 36,363
12/31/96 25,028 39,395
3/31/97 23,884 40,446
6/30/97 28,040 47,507
9/30/97 34,203 51,069
12/31/97 33,062 52,535
(Period covered is 1/1/88 to 12/31/97)
- --------------------------------------------------------------------------------
* 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.
- --------------------------------------------------------------------------------
4
<PAGE>
The Value Line Special Situations Fund, Inc.
Portfolio Highlights at December 31, 1997 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Ten Largest Holdings
Value Percentage of
Issue Shares (in thousands) Net Assets
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Suiza Foods Corp. ............................................ 16,150 $ 962 0.8%
AES Corp. .................................................... 17,000 793 0.7
Superior Energy Services, Inc. ............................... 77,000 780 0.7
Jackson Hewitt, Inc. ......................................... 10,000 680 0.6
AT&T Corp. ................................................... 10,000 613 0.5
Genentech, Inc. .............................................. 10,000 606 0.5
El Paso Natural Gas Co. ...................................... 9,000 599 0.5
Mail-Well, Inc. .............................................. 14,000 567 0.5
Terex Corp. .................................................. 24,000 564 0.5
Chancellor Media Corp. ....................................... 7,272 543 0.5
<CAPTION>
Five Largest Industry Categories
Value Percentage of
Industry (in thousands) Net Assets
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Computer Software & Services ................................. $ 11,040 9.5%
Retail-Special Lines ......................................... 6,940 6.0
Industrial Services .......................................... 5,039 4.3
Retail Store ................................................. 4,221 3.6
Food Processing .............................................. 4,148 3.6
<CAPTION>
Five Largest Net Security Purchases*
Cost
Issue (in thousands)
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Superior Energy Services, Inc. ............................... $ 545
Terex Corp. .................................................. 471
Federated Department Stores, Inc. ............................ 447
Eaton Corp. .................................................. 444
Triumph Group, Inc. .......................................... 439
<CAPTION>
Five Largest Net Security Sales*
Proceeds
Issue (in thousands)
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Genentech, Inc. .............................................. $ 1,456
Paul Harris Stores, Inc. ..................................... 1,195
United Technologies Corp. .................................... 855
Carbiner International Inc. .................................. 819
Jabil Circuit, Inc. .......................................... 799
</TABLE>
* For the six month period ended 12/31/97
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5
<PAGE>
The Value Line Special Situations Fund, Inc.
Schedule of Investments
- --------------------------------------------------------------------------------
Value
Shares (in thousands)
- --------------------------------------------------------------------------------
COMMON STOCKS (93.1%)
ADVERTISING (0.4%)
12,000 Omnicom Group, Inc............................. $ 509
AEROSPACE/
DEFENSE (1.5%)
6,000 AAR Corp....................................... 233
4,000 BE Aerospace, Inc.*............................ 107
6,000 Ducommun Inc.*................................. 210
15,000 Kellstrom Industries, Inc.*.................... 371
10,000 Special Devices, Inc.*......................... 292
2,000 Sundstrand Corp................................ 101
5,000 Thiokol Corp................................... 406
--------
1,720
AIR TRANSPORT (1.9%)
6,000 Airborne Freight Corp.......................... 373
6,000 Alaska Air Group, Inc.*........................ 233
12,000 Comair Holdings, Inc........................... 289
9,000 Expeditors International of
Washington, Inc............................ 346
16,000 Kitty Hawk Inc.*............................... 308
12,000 Mesaba Holdings, Inc.*......................... 312
14,000 U.S. Xpress Enterprises, Inc.
Class "A"*................................. 310
--------
2,171
APPAREL (1.4%)
9,000 Abercrombie & Fitch Co.
Class "A"*................................. 281
16,000 DM Management Company*......................... 250
5,500 Jones Apparel Group, Inc.*..................... 237
10,000 Nautica Enterprises, Inc,*..................... 232
10,000 Polo Ralph Lauren Corp.
Class "A"*................................. 243
8,000 V.F. Corp...................................... 368
--------
1,611
AUTO & TRUCK (0.5%)
17,000 Brilliance China Automotive
Holdings, Ltd.............................. 128
20,000 Navistar International Corp.*.................. 496
--------
624
AUTO PARTS--ORIGINAL
EQUIPMENT (1.1%)
8,000 Arvin Industries, Inc.......................... 267
5,000 Eaton Corp..................................... 446
6,000 Lear Corp.*.................................... 285
9,000 Strattec Security Corp.*....................... 229
--------
1,227
AUTO PARTS--
REPLACEMENT (0.6%)
6,000 Federal-Mogul Corp............................. 243
4,000 SPX Corp....................................... 276
7,000 Wynn's International, Inc...................... 223
--------
742
BANK--MIDWEST (0.5%)
5,000 Northern Trust Corp............................ 349
7,400 Norwest Corp................................... 286
--------
635
BEVERAGE--
ALCOHOLIC (0.5%)
7,000 Canandaigua Brands, Inc.
Class "A"*................................. 388
15,000 Quilmes Industrial Quinsa
Societe (ADR).............................. 205
--------
593
BEVERAGE--
SOFT DRINK (0.3%)
9,500 Coca-Cola Enterprises Inc...................... 338
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6
<PAGE>
The Value Line Special Situations Fund, Inc.
December 31, 1997
- --------------------------------------------------------------------------------
Value
Shares (in thousands)
- --------------------------------------------------------------------------------
BUILDING
MATERIALS (1.0%)
7,000 Encore Wire Corp.*............................. $ 215
8,000 Martin Marietta Materials, Inc................. 292
7,500 Masco Corp..................................... 382
12,000 Thomas Industries, Inc......................... 237
--------
1,126
CABLE TV (0.7%)
10,000 Comcast Corp. Class "A"........................ 316
7,000 General Cable Corp............................. 253
9,000 Tele-Communications, Inc.-
TCI Group Series "A"*...................... 251
--------
820
CEMENT &
AGGREGATES (1.4%)
9,000 CalMat Co...................................... 251
8,000 Centex Construction
Products, Inc.............................. 241
6,000 Lone Star Industries, Inc...................... 319
6,000 Southdown, Inc................................. 354
5,000 Vulcan Materials Co............................ 510
--------
1,675
CHEMICAL--
DIVERSIFIED (0.5%)
10,000 Albemarle Corp................................. 239
8,000 Dexter Corp.................................... 345
--------
584
CHEMICAL--
SPECIALTY (0.5%)
8,000 Tredegar Industries, Inc....................... 527
COAL/ALTERNATE
ENERGY (0.7%)
17,000 AES Corp.*..................................... 793
COMPUTER &
PERIPHERALS (2.6%)
9,000 DAOU Systems, Inc.*............................ 281
13,000 Digi International Inc.*....................... 221
12,000 EMC Corp.*..................................... 329
18,000 Genicom Corp.*................................. 207
12,000 Inter-Tel, Inc................................. 232
3,400 International Business
Machines Corp.............................. 356
20,000 MTI Technology Corp.*.......................... 265
12,000 Pinnacle Systems, Inc,*........................ 292
6,000 Rainbow Technologies, Inc.*.................... 174
5,000 SanDisk Corp.*................................. 102
5,000 Storage Technology Corp.*...................... 310
18,000 Unisys Corp.*.................................. 250
--------
3,019
COMPUTER SOFTWARE &
SERVICES (9.5%)
18,000 Adept Technology, Inc.*........................ 189
9,000 Analysts International Corp.................... 310
10,000 Analytical Surveys, Inc.*...................... 343
6,000 Aspect Development, Inc.*...................... 312
14,000 AXENT Technologies, Inc.*...................... 241
5,000 BEA Systems, Inc.*............................. 87
3,500 CBT Group PLC (ADR)*........................... 287
4,000 CHS Electronics, Inc.*......................... 69
6,000 Cambridge Technology
Partners, Inc.*............................ 250
9,000 Check Point Software
Technologies, Ltd.*........................ 367
10,000 CheckFree Holdings Corp.*...................... 270
5,500 CIBER, Inc.*................................... 319
6,500 Complete Business
Solutions Inc.*............................ 283
6,000 Computer Associates
International, Inc......................... 317
3,000 Computer Horizons Corp.*....................... 135
9,000 Compuware Corp.*............................... 288
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7
<PAGE>
The Value Line Special Situations Fund, Inc.
Schedule of Investments
- --------------------------------------------------------------------------------
Value
Shares (in thousands)
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE &
SERVICES (9.5%)(Continued)
5,000 Comverse Technology, Inc.*..................... $ 195
15,000 Creative Computers, Inc........................ 149
21,000 Data Systems Network Corp.*.................... 244
14,000 ECsoft Group PLC (ADR)*........................ 252
5,000 Engineering Animation, Inc.*................... 230
13,000 Equinox Systems, Inc.*......................... 221
11,000 IDT Corp.*..................................... 223
9,000 Industri-Matematik
International Corp.*....................... 266
19,000 International Microcomputer
Software, Inc.*............................ 268
12,000 Intersolv, Inc.*............................... 243
8,000 Level 8 Systems, Inc.*......................... 109
10,000 Mastech Corp.*................................. 317
8,000 Metro Information
Services, Inc.*............................ 222
8,000 Micro Focus Group
PLC (ADR)*................................. 323
13,000 New Dimension Software,
Ltd........................................ 250
3,000 Paychex, Inc................................... 152
12,000 PeopleSoft, Inc.*.............................. 468
4,800 Policy Management
Systems Corp.*............................. 334
4,000 Pomeroy Computer
Resources, Inc.*........................... 71
15,000 QuadraMed Corp.*............................... 413
11,000 Sanchez Computer
Associates, Inc............................ 320
8,000 Saville Systems Ireland
PLC (ADR)*................................. 332
7,000 ScanSource, Inc................................ 140
13,000 Symantec Corp.*................................ 285
8,000 Systems & Computer
Technology Corp.*.......................... 397
5,500 Veritas Software Corp.*........................ 280
7,000 Visio Corp.*................................... 269
--------
11,040
DIVERSIFIED
COMPANIES (2.3%)
12,000 Consolidated Capital Corp.*.................... 244
8,000 Crane Co....................................... 347
7,000 Danaher Corp................................... 442
4,500 Sequa Corp. Class "A"*......................... 293
7,000 Teleflex, Inc.................................. 264
12,000 Tyco International, Ltd........................ 541
10,500 Varlen Corp.................................... 257
15,000 Walter Industries, Inc.*....................... 309
--------
2,697
DRUG (2.7%)
5,000 Biovail Corporation
International*............................. 195
10,000 COR Therapeutics, Inc.*........................ 225
10,000 Genentech, Inc.*............................... 606
7,000 ICN Pharmaceuticals, Inc....................... 342
20,000 ICOS Corp.*.................................... 366
18,000 Medco Research, Inc.*.......................... 252
7,500 MedImmune, Inc.*............................... 322
7,000 SangStat Medical Corp.*........................ 278
5,000 Schering-Plough Corp........................... 311
6,000 Sepracor, Inc.*................................ 240
--------
3,137
DRUGSTORE (0.6%)
4,000 CVS Corp....................................... 256
7,000 Rite Aid Corp.................................. 411
--------
667
ELECTRICAL
EQUIPMENT (1.6%)
6,000 C & D Technologies, Inc........................ 290
5,500 General Electric Co............................ 404
8,000 Kuhlman Corp................................... 313
10,000 Reliability Inc.*.............................. 137
4,500 Semtech Corp.*................................. 176
7,000 Technitrol, Inc................................ 210
14,000 Transcrypt International, Inc.*................ 348
--------
1,878
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8
<PAGE>
The Value Line Special Situations Fund, Inc.
December 31, 1997
- --------------------------------------------------------------------------------
Value
Shares (in thousands)
- --------------------------------------------------------------------------------
ELECTRONICS (1.6%)
6,000 Alpha Industries, Inc.*........................ $ 97
6,000 Alpine Group, Inc. (The)*...................... 112
9,000 Benchmark Electronics, Inc.*................... 201
10,000 CMC Industries, Inc............................ 59
6,500 Cable Design
Technologies, Corp.*....................... 253
6,000 General Scanning Inc.*......................... 103
7,000 Harmon Industries, Inc......................... 194
14,000 IEC Electronics Corp.*......................... 191
8,000 SBS Technologies, Inc.*........................ 217
10,000 Telxon Corp.................................... 239
10,800 Three-Five Systems, Inc.*...................... 178
--------
1,844
ENTERTAINMENT (1.8%)
3,000 Boston Acoustics, Inc.......................... 79
8,000 CBS Corp....................................... 235
7,272 Chancellor Media Corp.*........................ 543
3,500 Clear Channel
Communications, Inc..*..................... 278
5,500 King World Productions, Inc.*.................. 318
8,000 Sinclair Broadcast Group, Inc.
Class "A".................................. 373
5,000 Time Warner Inc................................ 310
--------
2,136
ENVIRONMENTAL (0.4%)
7,000 American Disposal Services, Inc.*.............. 256
22,000 Neogen Corp.*.................................. 250
--------
506
FINANCIAL SERVICES (2.0%)
7,000 AmeriCredit Corp.*............................. 194
8,000 AMRESCO, Inc.*................................. 242
8,000 HealthCare Financial
Partners, Inc.*............................ 284
2,251 Household International, Inc................... 287
10,000 Jackson Hewitt, Inc.*.......................... 680
9,000 Mutual Risk Management Ltd..................... 269
5,600 SEI Investments Company........................ 235
5,000 Trammell Crow Co.*............................. 129
--------
2,320
FOOD PROCESSING (3.6%)
30,000 AgriBioTech, Inc.*............................. 512
8,000 Dean Foods Co.................................. 476
12,000 International Home Foods, Inc.*................ 336
11,800 Interstate Bakeries Corp....................... 441
13,000 Michael Foods, Inc............................. 317
17,000 Pilgrim's Pride Corp........................... 264
5,000 Quaker Oats Co................................. 264
8,000 Smithfield Foods, Inc.*........................ 264
16,150 Suiza Foods Corp.*............................. 962
5,000 Unilever N.V. (N.Y. Shares).................... 312
--------
4,148
FURNITURE/HOME
FURNISHINGS (1.8%)
7,000 Chicago Miniature Lamp, Inc.*.................. 236
6,500 Cort Business Services Corp.*.................. 259
9,500 Department 56, Inc.*........................... 273
10,000 Ethan Allen Interiors, Inc..................... 386
6,000 La-Z-Boy, Inc.................................. 259
5,000 Miller (Herman), Inc........................... 273
10,500 Mohawk Industries, Inc.*....................... 230
14,000 Winsloew Furniture, Inc.*...................... 203
--------
2,119
GROCERY (0.9%)
8,000 Kroger Co.*.................................... 296
5,900 Quality Food Centers, Inc,*.................... 395
6,500 Whole Foods Market, Inc,*...................... 332
--------
1,023
HEALTHCARE INFORMATION
SYSTEMS (0.6%)
5,000 Alternative Living
Services, Inc.*............................ 148
7,000 HBO & Co....................................... 336
20,000 Mediware Information
Systems, Inc.*............................. 240
--------
724
- --------------------------------------------------------------------------------
9
<PAGE>
The Value Line Special Situations Fund, Inc.
Schedule of Investments
- --------------------------------------------------------------------------------
Value
Shares (in thousands)
- --------------------------------------------------------------------------------
HOME APPLIANCE (0.4%)
7,000 Maytag Corp.................................... $ 261
10,000 Rent-Way, Inc.*................................ 185
--------
446
HOMEBUILDING (1.1%)
4,000 Centex Corp.................................... 252
9,500 Crossmann Communities, Inc.*................... 262
8,505 Fairfield Communities, Inc.*................... 375
3,000 Modtech, Inc.*................................. 59
10,000 Toll Brothers, Inc.*........................... 267
--------
1,215
HOTEL/GAMING (0.4%)
3,000 Four Seasons Hotels, Inc....................... 95
3,700 Promus Hotel Corp.*............................ 155
12,000 Rio Hotel & Casino, Inc.*...................... 252
--------
502
HOUSEHOLD
PRODUCTS (0.3%)
1,000 Benckiser N.V. Class "B"*...................... 41
9,000 Blyth Industries, Inc.*........................ 269
--------
310
INDUSTRIAL
SERVICES (4.3%)
6,000 Abacus Direct Corp.*........................... 246
3,000 Actrade International, Ltd.*................... 80
10,000 Automobile Protection Corp.*................... 67
8,000 Computer Learning
Centers, Inc.*............................. 490
7,000 Information Resources, Inc.*................... 94
14,000 Interim Services, Inc.*........................ 362
9,000 Interstate National Dealer
Services, Inc.*............................ 90
12,000 Labor Ready, Inc.*............................. 231
6,000 Mathews International Corp.
Class "A"*................................. 264
16,000 RCM Technologies, Inc.*........................ 272
7,500 Robert Half International, Inc.*............... 300
13,000 Romac International, Inc.*..................... 317
12,000 Select Appointments Holdings
PLC (ADR).................................. 219
18,000 Source Services Corp.*......................... 389
8,000 StaffMark, Inc.*............................... 253
77,000 Superior Energy Services, Inc.*................ 780
9,000 Vitro Sociedad Anonima
(ADR)...................................... 118
3,700 Volt Information Sciences, Inc.*............... 199
12,750 World Fuel Services
Corporation................................ 268
--------
5,039
INSURANCE--
DIVERSIFIED (1.3%)
8,000 Blanch (E.W.) Holdings, Inc.................... 275
4,000 Exel, Ltd...................................... 254
16,500 Fidelity National Financial, Inc............... 514
9,000 Horace Mann Educators Corp..................... 256
8,000 Triad Guaranty, Inc.*.......................... 232
--------
1,531
INSURANCE-LIFE (0.2%)
8,000 John Alden Financial Corp...................... 192
INSURANCE-PROPERTY/
CASUALTY (1.0%)
4,900 Executive Risk Inc............................. 342
8,000 Highlands Insurance
Group, Inc.*............................... 227
7,200 Old Republic International
Corp....................................... 268
6,000 State Auto Financial Corp...................... 193
3,000 Vesta Insurance Group, Inc..................... 178
--------
1,208
MACHINERY (3.1%)
5,000 Applied Power, Inc. Class "A".................. 345
12,000 Chart Industries, Inc.......................... 274
10,000 Commercial Intertech Corp...................... 208
- --------------------------------------------------------------------------------
10
<PAGE>
The Value Line Special Situations Fund, Inc.
December 31, 1997
- --------------------------------------------------------------------------------
Value
Shares (in thousands)
- --------------------------------------------------------------------------------
MACHINERY (3.1%)(Continued)
10,000 Dover Corp..................................... $ 361
21,000 Gardner Denver
Machinery Inc.*............................ 532
12,000 Gehl Co.*...................................... 252
8,000 Graco Inc...................................... 298
30,000 International Comfort
Products Corp.*............................ 251
11,000 MotivePower Industries, Inc.*.................. 256
6,000 Parker-Hannifin Corp........................... 275
24,000 Terex Corp.*................................... 564
--------
3,616
MANUFACTURED HOUSING/RECREATIONAL
VEHICLES (0.6%)
7,000 Fleetwood Enterprises, Inc..................... 297
11,000 National R.V. Holdings, Inc.*.................. 362
--------
659
MEDICAL SERVICES (3.2%)
8,000 Advance Paradigm, Inc.*........................ 254
17,000 Cyberonics, Inc.*.............................. 259
22,000 Excel Technology, Inc.*........................ 245
20,000 Hanger Orthopedic Group, Inc.*................. 258
7,000 Lincare Holdings, Inc.*........................ 399
13,000 Osteotech, Inc.*............................... 354
10,000 Physician Sales & Service, Inc.*............... 215
5,000 Renal Care Group, Inc.*........................ 160
9,000 Res-Care, Inc.*................................ 261
10,000 Total Renal Care Holdings, Inc.*............... 275
8,000 Universal Health Services, Inc.
Class "B"*................................. 403
10,000 Wesley Jessen VisionCare, Inc.*................ 390
20,000 Zomax Optical Media, Inc.*..................... 185
--------
3,658
MEDICAL SUPPLIES (2.3%)
8,000 Bindley Western Industries, Inc................ 247
12,000 Cooper Companies, Inc. (The)*.................. 491
6,000 Guidant Corp................................... 373
11,000 Gulf South Medical
Supply, Inc.*.............................. 410
17,000 International Murex
Technologies Corp.*........................ 171
4,000 McKesson Corp.................................. 433
6,000 Safeskin Corp.*................................ 340
3,000 STERIS Corp.*.................................. 145
--------
2,610
METAL FABRICATING (0.7%)
10,000 Maverick Tube Corp*............................ 253
6,000 SPS Technologies, Inc.*........................ 262
7,000 Trinity Industries, Inc........................ 312
--------
827
NATURAL GAS--
DIVERSIFIED (0.5%)
9,000 El Paso Natural Gas Co......................... 599
NEWSPAPER (0.6%)
7,000 New York Times Co. (The)
Class "A".................................. 463
4,000 Tribune Co..................................... 249
--------
712
OFFICE EQUIPMENT &
SUPPLIES (1.1%)
9,000 Day Runner, Inc.*.............................. 365
9,000 Knoll, Inc.*................................... 289
13,000 Office Depot, Inc.*............................ 311
6,500 United Stationers, Inc.*....................... 313
--------
1,278
OILFIELD SERVICES/
EQUIPMENT (1.2%)
6,000 Coflexip S.A. (ADR)............................ 333
42,000 Grey Wolf, Inc.*............................... 226
4,000 IRI International Corp.*....................... 56
3,000 McDermott International, Inc................... 110
2,000 Pride International, Inc.*..................... 51
- --------------------------------------------------------------------------------
11
<PAGE>
The Value Line Special Situations Fund, Inc.
Schedule of Investments
- --------------------------------------------------------------------------------
Value
Shares (in thousands)
- --------------------------------------------------------------------------------
OILFIELD SERVICES/
EQUIPMENT (1.2%)
(Continued)
2,000 Seacor Smit, Inc.*............................. $ 120
14,000 Tuboscope Inc.*................................ 337
3,000 Veritas DGC Inc.*.............................. 118
--------
1,351
PACKAGING &
CONTAINER (0.3%)
6,000 Sealed Air Corp.*.............................. 371
PAPER & FOREST
PRODUCTS (0.5%)
14,000 Mail-Well, Inc.*............................... 567
PETROLEUM--
INTEGRATED (0.2%)
10,000 Core Laboratories N.V.*........................ 181
PETROLEUM
PRODUCING (0.3%)
11,000 Basin Exploration, Inc.*....................... 195
30,000 PANACO, Inc.................................... 120
--------
315
PRECISION INSTRUMENTS
(1.5%)
3,500 CyberOptics Corp.*............................. 80
7,500 IFR Systems, Inc............................... 116
5,000 Orbotech Ltd................................... 159
19,000 Scan-Optics, Inc.*............................. 162
14,000 Thermo Optek Corp.*............................ 215
1,960 Thermo Vision Corp.*........................... 16
13,000 Triumph Group, Inc.*........................... 432
8,000 VWR Scientific
Products Corp.*............................ 226
8,000 Waters Corp.*.................................. 301
--------
1,707
PUBLISHING (1.1%)
8,000 CMG Information
Services, Inc.*............................ 242
7,000 Consolidated Graphics, Inc.*................... 326
4,700 McGraw-Hill Companies, Inc.*................... 348
10,000 Meredith Corp.................................. 357
--------
1,273
R.E.I.T. (0.3%)
2,000 AMB Property Corp.............................. 50
9,000 General Growth Properties, Inc................. 325
--------
375
RECREATION (2.3%)
6,000 Action Performance
Companies, Inc.*........................... 227
21,000 Bally Total Fitness
Holding Corp.*............................. 459
6,000 Carnival Corp. Class "A"....................... 332
11,000 Harley-Davidson, Inc........................... 301
8,000 Hasbro, Inc.................................... 252
5,000 Royal Caribbean Cruises Ltd.................... 267
8,000 Steiner Leisure Ltd.*.......................... 247
10,000 Steinway Musical
Instruments Inc.*.......................... 231
17,000 THQ, Inc.*..................................... 391
--------
2,707
RESTAURANT (1.4%)
12,000 Bob Evans Farms, Inc........................... 266
6,300 CKE Restaurants, Inc........................... 265
9,000 Cheesecake Factory,
Inc. (The)*................................ 274
5,000 O'Charley's, Inc.*............................. 88
7,000 Rainforest Cafe, Inc.*......................... 231
18,000 WSMP, Inc.*.................................... 522
--------
1,646
RETAIL BUILDING
SUPPLY (0.2%)
5,000 Lowe's Companies, Inc.......................... 238
- --------------------------------------------------------------------------------
12
<PAGE>
The Value Line Special Situations Fund, Inc.
December 31, 1997
- --------------------------------------------------------------------------------
Value
Shares (in thousands)
- --------------------------------------------------------------------------------
RETAIL--
SPECIAL LINES (6.1%)
6,400 American Eagle
Outfitters, Inc.*.......................... $ 223
10,000 Barnes & Noble, Inc.*.......................... 334
13,000 Best Buy Co., Inc.*............................ 479
8,000 Borders Group, Inc.*........................... 250
7,000 Brylane, Inc.*................................. 345
10,000 CompUSA, Inc.*................................. 310
17,000 Dress Barn, Inc. (The)*........................ 482
15,000 Fingerhut Companies, Inc....................... 321
10,000 Footstar, Inc.*................................ 269
7,500 Gap, Inc....................................... 266
8,000 General Nutrition
Companies, Inc.*........................... 272
9,000 Goody's Family
Clothing, Inc.*............................ 245
9,000 Insight Enterprises, Inc.*..................... 331
4,000 Lands' End, Inc.*.............................. 140
3,500 Linens' N Things, Inc.*........................ 153
4,000 Media Arts Group, Inc.*........................ 60
10,000 Michaels Stores, Inc.*......................... 292
6,000 Nature's Sunshine
Products, Inc.............................. 156
5,000 Payless ShoeSource, Inc.*...................... 336
18,000 Pier 1 Imports, Inc............................ 407
7,000 Ross Stores, Inc............................... 255
8,000 Russ Berrie & Co., Inc......................... 210
12,000 TJX Companies, Inc............................. 412
8,000 Tandy Corp..................................... 309
8,000 Wet Seal, Inc.*................................ 236
--------
7,093
RETAIL STORE (3.6%)
8,000 Bon-Ton Stores, Inc.*.......................... 120
7,000 Buckle, Inc. (The)*............................ 240
9,000 Costco Companies, Inc.*........................ 402
6,000 Dayton-Hudson Corp............................. 405
14,000 Family Dollar Stores, Inc...................... 410
6,000 Federated Department
Stores, Inc.*.............................. 258
4,000 Kohl's Corp.*.................................. 272
6,000 Mac Frugal's Bargains
Close-Outs, Inc.*.......................... 247
8,750 99 Cents Only Stores*.......................... 258
8,000 Pacific Sunwear of
California, Inc.*.......................... 237
8,500 Party City Corp.*.............................. 274
9,300 Paul Harris Stores, Inc.*...................... 94
8,000 Proffitt's, Inc.*.............................. 227
8,000 Stage Stores, Inc.*............................ 299
7,000 Stein Mart, Inc.*.............................. 187
15,000 Trans World
Entertainment Corp.*....................... 291
--------
4,221
SEMICONDUCTOR (0.5%)
15,000 Applied Science &
Technology, Inc.*.......................... 169
6,000 Plasma-Therm, Inc.*............................ 41
3,000 Siliconix, Inc.*............................... 129
12,000 3Dfx Interactive, Inc.*........................ 270
--------
609
SHOE (0.4%)
13,000 Rocky Shoes & Boots, Inc.*..................... 198
9,500 Wolverine World Wide, Inc...................... 215
--------
413
TELECOMMUNICATIONS
EQUIPMENT (1.7%)
10,000 AFC Cable Systems, Inc.*....................... 297
20,000 Applied Signal
Technology, Inc.*.......................... 275
11,000 Applied Voice
Technology, Inc.*.......................... 311
6,000 Boston Technology, Inc.*....................... 151
5,000 CIENA Corp.*................................... 306
8,000 DSP Group, Inc.*............................... 160
9,300 Superior TeleCom Inc.*......................... 321
4,000 Tollgrade
Communications, Inc.*...................... 95
--------
1,916
- --------------------------------------------------------------------------------
13
<PAGE>
The Value Line Special Situations Fund, Inc.
Schedule of Investments December 31, 1997
- --------------------------------------------------------------------------------
Value
Shares (in thousands)
- --------------------------------------------------------------------------------
TELECOMMUNICATION
SERVICES (3.4%)
10,000 AT&T Corp...................................... $ 613
3,000 Bell Atlantic Corp............................. 273
15,600 Dycom Industries, Inc.*........................ 336
19,000 GST Telecommunications, Inc.*.................. 226
15,000 GeoTel Communications Corp.*................... 234
16,000 Mobile Telecommunications
Technologies Corp.*........................ 352
17,500 Nact Telecommunications, Inc.*................. 311
8,000 Pacific Gateway Exchange, Inc.*................ 431
4,000 Teledata Communications Ltd.*.................. 73
5,000 Teleport Communications
Group Class "A"*........................... 274
9,500 United Video Satellite
Group, Inc. Class "A"*..................... 273
10,000 WinStar Communications, Inc.*.................. 249
13,000 World Access, Inc.*............................ 310
--------
3,955
TEXTILE (0.1%)
4,000 Interface Inc. Class "A"....................... 116
TOBACCO (0.6%)
7,000 Consolidated Cigar
Holdings Inc. Class "A"*................... 193
9,000 General Cigar
Holdings, Inc. Class "A"*.................. 192
6,500 Universal Corp................................. 267
--------
652
TRUCKING/
TRANSPORTATION
LEASING (0.8%)
20,000 Arkansas Best Corp.*........................... 195
8,000 CNF Transportation Inc......................... 307
9,000 USFreightways Corp............................. 292
6,000 Yellow Corporation*............................ 151
--------
945
--------
TOTAL COMMON
STOCKS (93.1%)
(Cost $90,385,000) .......................... 108,006
--------
Shares and Value
Principal (in thousands)
Amounts except per share
(in thousands) amount)
- --------------------------------------------------------------------------------
WARRANTS (0.0%)
2,666 Nam Tai Electronics, Inc.*
warrants expire 11/24/00................... $ 8
--------
TOTAL WARRANTS
(Cost $7,000) ............................. 8
--------
TOTAL INVESTMENT
SECURITIES (93.1%)
(Cost $90,392,000) ........................ $108,014
--------
REPURCHASE AGREEMENT (5.7%)
(including accrued interest)
$ 6,600 Collateralized by $6,445,000
U.S. Treasury Notes 6 1/2%,
due 8/31/01 with a value
of $6,743,000 (with
Morgan Stanley & Co., Inc.,
6.20%, dated 12/31/97,
due 1/2/98, delivery value
of $6,602,000) ............................ $ 6,601
CASH AND RECEIVABLES OVER
LIABILITIES (1.2%) ........................................ 1,425
--------
NET ASSETS (100%) ......................................... $116,040
========
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER
OUTSTANDING SHARE
($116,040,000 / 8,012,600 shares
outstanding) $ 14.48
========
* Non-income producing
(ADR) American Depositary Receipts.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14
<PAGE>
The Value Line Special Situations Fund, Inc.
Statement of Assets
and Liabilities at December 31, 1997
- --------------------------------------------------------------------------------
Dollars
(in thousands
except per share
amount)
----------------
Assets:
Investment securities, at value
(Cost--$90,392) ............................................ $108,014
Repurchase agreement (Cost--$6,601) .......................... 6,601
Cash ......................................................... 50
Receivable for securities sold ............................... 2,945
Receivable for capital shares sold ........................... 140
Dividends receivable ......................................... 37
--------
Total Assets ........................................... 117,787
--------
Liabilities:
Payable for securities purchased ............................. 1,004
Payable for capital shares repurchased ....................... 571
Accrued expenses:
Advisory fee ............................................... 73
Other ...................................................... 99
--------
Total Liabilities ...................................... 1,747
--------
Net Assets ................................................... $116,040
========
Net Assets consist of:
Capital stock, at $1.00 par value
(authorized 100,000,000,
outstanding 8,012,600 shares) .............................. $ 8,013
Additional paid-in capital ................................... 88,368
Undistributed net realized gain on
investments ................................................ 2,037
Unrealized net appreciation of
investments ................................................ 17,622
--------
Net Assets ................................................... $116,040
========
Net Asset Value, Offering and
Redemption Price per
Outstanding Share
($116,040,000/8,012,600 shares
outstanding) ............................................... $ 14.48
========
Statement of Operations
for the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
Dollars
(in thousands)
--------------
Investment Income:
Interest .................................................. $ 547
Dividends (Net of foreign
withholding taxes of $1) ................................ 410
--------
Total Income ........................................ 957
--------
Expenses:
Advisory fee .............................................. 771
Transfer agent ............................................ 106
Custodian fees ............................................ 68
Auditing and legal fees ................................... 38
Printing and stationery ................................... 26
Postage ................................................... 26
Telephone and wire charges ................................ 25
Registration fees ......................................... 23
Directors' fees and expenses .............................. 15
Insurance, dues and other ................................. 8
--------
Total Expenses Before
Custody Credits ................................... 1,106
Less: Custody Credits ............................... (7)
--------
Net Expenses ........................................ 1,099
--------
Investment Loss--Net ...................................... (142)
--------
Realized and Unrealized Gain on
Investments--Net:
Realized Gain--Net .................................... 18,163
Change in Unrealized
Appreciation ........................................ 9,607
--------
Net Realized Gain and Change in
Unrealized Appreciation on
Investments ............................................. 27,770
--------
Net Increase in Net Assets from
Operations .............................................. $ 27,628
========
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
15
<PAGE>
The Value Line Special Situations Fund, Inc.
Statement of Changes in Net Assets
for the Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
-------------------------
(Dollars in thousands)
<S> <C> <C>
Operations:
Investment (loss) income--net .......................................... $ (142) $ 1,391
Realized gain on investments--net ...................................... 18,163 20,138
Change in unrealized appreciation ...................................... 9,607 (14,834)
-------------------------
Net increase in net assets from operations ............................. 27,628 6,695
-------------------------
Distributions to Shareholders:
Investment income--net ................................................. (4) (1,389)
Realized gain from investment transactions--net ........................ (19,857) (19,846)
-------------------------
Total distributions .................................................... (19,861) (21,235)
-------------------------
Capital Share Transactions:
Proceeds from sale of shares ........................................... 50,634 17,465
Proceeds from reinvestment of distributions to shareholders ............ 17,814 18,857
Cost of shares repurchased ............................................. (49,769) (30,596)
-------------------------
Increase from capital share transactions ............................... 18,679 5,726
-------------------------
Total Increase (Decrease) ................................................ 26,446 (8,814)
Net Assets:
Beginning of year ...................................................... 89,594 98,408
-------------------------
End of year ............................................................ $ 116,040 $ 89,594
=========================
Undistributed Investment Income--net,
at end of year ......................................................... $ -- $ 3
=========================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16
<PAGE>
The Value Line Special Situations Fund, Inc.
Notes to Financial Statements December 31, 1997
- --------------------------------------------------------------------------------
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 and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
(A) Security Valuation. Securities listed on a securities exchange and
over-the-counter securities traded on the NASDAQ national market are valued at
the closing sales price on the date as of which the net asset value is being
determined. In the absence of closing sales prices for such securities and for
securities traded in the over-the-counter market, the security is valued at the
midpoint between the latest available and representative asked and bid prices.
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.
- --------------------------------------------------------------------------------
17
<PAGE>
The Value Line Special Situations Fund, Inc.
Notes to Financial Statements December 31, 1997
- --------------------------------------------------------------------------------
2. Capital Share Transactions, Dividends and Distributions to Shareholders
Transactions in capital stock were as follows (in thousands except per share
amounts):
1997 1996
-----------------------
Shares sold ...................................... 3,023 1,039
Shares issued to shareholders
in reinvestment of dividends
and distributions .............................. 1,293 1,436
-----------------------
4,316 2,475
Shares repurchased ............................... 3,018 1,820
-----------------------
Net increase ..................................... 1,298 655
=======================
Dividends per share from
net investment income .......................... $ .00061 $ .2625
=======================
Distributions per share from
net realized gains ............................. $2.98500 $3.7500
=======================
3. Purchases and Sales of Securities
Purchases and sales of investment securities, excluding short-term securities,
were as follows:
1997
(in thousands)
--------------
Purchases:
Investment Securities ................................... $225,902
========
Sales:
Investment Securities ................................... $220,854
========
At December 31, 1997, the aggregate cost of investment securities and repurchase
agreements for federal income tax purposes was $97,028,000. The aggregate
appreciation and depreciation of investments at December 31, 1997, based on a
comparison of investment values and their costs for federal income tax purposes,
was $20,199,000 and $2,612,000 respectively, resulting in a net appreciation of
$17,587,000.
Permanent book-tax differences relating to shareholder distributions are
reclassified within the composition of net asset accounts. In the current year
the Fund reclassified $142,000 from accumulated net investment loss to
undistributed net realized gain on investments. Net investment loss, net
realized gain, and net assets were not affected by this reclassification.
4. Investment Advisory Contract, Management Fees, and Transactions With
Affiliates
An advisory fee of $771,000 was paid or payable to Value Line, Inc., the Fund's
investment adviser (the "Adviser"), for the year ended December 31, 1997. 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.
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, 1997, the Fund paid brokerage commissions totalling $157,960
to the distributor, which clears its transactions through unaffiliated brokers.
The Adviser and/or affiliated companies owned 638,195 shares of the Fund's
capital stock, representing 8% of the outstanding shares at December 31, 1997.
- --------------------------------------------------------------------------------
18
<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,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........... $ 13.34 $ 16.24 $ 16.15 $ 16.95 $ 15.69
-------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) ............. (.02) .26 .06 (.07) (.13)
Net gains on securities
(both realized and unrealized) ......... 4.15 .85 4.58 .23 2.14
-------------------------------------------------------------------
Total from investment operations ......... 4.13 1.11 4.64 .16 2.01
-------------------------------------------------------------------
Less distributions:
Dividends from net investment income ..... # (.26) (.06) -- --
Distributions from capital gains ......... (2.99) (3.75) (4.49) (.96) (.75)
-------------------------------------------------------------------
Total distributions ...................... (2.99) (4.01) (4.55) (.96) (.75)
-------------------------------------------------------------------
Net asset value, end of year ................. $ 14.48 $ 13.34 $ 16.24 $ 16.15 $ 16.95
===================================================================
Total return ................................. 32.10% 7.24% 28.96% 1.03% 12.99%
===================================================================
Ratios/Supplemental Data:
Net assets, end of year (in thousands) ....... $116,040 $89,594 $98,408 $90,180 $91,388
Ratio of expenses to average net assets ...... 1.08%(1) 1.08%(1) 1.06% 1.10% 1.06%
Ratio of net investment income (loss)
to average net assets ...................... (.14)% 1.44% 0.32% (0.46) % (.79)%
Portfolio turnover rate ...................... 240% 146% 10% 37% 39%
Average commissions paid per share of
common stock investment puchased/sold ...... $ .0493 $ .0490(2)
</TABLE>
# Dividend paid was less than one cent per share
(1) Before offset of custody credits.
(2) Disclosure effective for fiscal years beginning on or after 9/1/95.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
19
<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, 1997, 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, 1997, 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 20, 1998
- --------------------------------------------------------------------------------
SHAREHOLDERS MEETING RESULTS (unaudited)
A special meeting of shareholders of The Value Line Special Situations Fund,
Inc. was held on October 30, 1997. The matters voted upon by the shareholders
and the resulting votes for each matter are presented below.
1. The election of six Directors to serve until their successors are duly
elected and qualified.
Number of Votes:
Broker
Directors For Withheld Non-Votes*
--------- --------- -------- ----------
Jean Bernhard Buttner 3,822,026 104,508 0
John W. Chandler 3,819,622 106,912 0
Leo R. Futia 3,813,809 112,725 0
David H. Porter 3,818,496 108,038 0
Paul Craig Roberts 3,816,588 109,946 0
Nancy-Beth Sheerr 3,812,304 105,230 0
2. Ratification of the selection of Price Waterhouse LLP as independent
accountants for the fiscal year ending December 31, 1997.
Number of Votes:
Broker
For Against Abstain Non-Votes*
--------- ------- ------- ----------
3,813,316 27,716 67,501 0
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
- --------------------------------------------------------------------------------
20
<PAGE>
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
David H. Porter
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
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).
VLF712443
