<PAGE>
THE VALUE LINE TAX EXEMPT FUND, INC.
THE MONEY MARKET PORTFOLIO
THE NATIONAL BOND PORTFOLIO
--------------------------------
PROSPECTUS
JULY 3, 2000
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[LOGO]
#513722
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS, AND ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
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FUND SUMMARY
What are the Fund's goals? PAGE 2
What are the main investment strategies of the
Portfolios? PAGE 2
What are the main risks of investing in the
Portfolios? PAGE 2
How have the Portfolios performed? PAGE 4
What are the Fund's fees and expenses? PAGE 6
HOW WE MANAGE THE FUND
Our principal investment strategies PAGE 7
The type of securities in which we invest PAGE 7
The principal risks of investing in the Fund PAGE 8
WHO MANAGES THE FUND
Investment Adviser PAGE 10
Management fees PAGE 10
Portfolio management PAGE 10
ABOUT YOUR ACCOUNT
How to buy shares PAGE 11
How to sell shares PAGE 14
Special services PAGE 15
Dividends, distributions and taxes PAGE 16
FINANCIAL HIGHLIGHTS
Financial Highlights PAGE 17
<PAGE>
FUND SUMMARY
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WHAT ARE THE FUND'S GOALS?
The Fund's primary investment objective is to provide
investors with the maximum income exempt from federal income
taxes while avoiding undue risk to principal. The Fund offers
investors a choice of two portfolios: the MONEY MARKET
PORTFOLIO and the NATIONAL BOND PORTFOLIO. Capital
appreciation is a secondary objective of the NATIONAL BOND
PORTFOLIO. Although the Fund will strive to achieve its
goals, there is no assurance that it will succeed.
WHAT ARE THE MAIN INVESTMENT STRATEGIES OF THE PORTFOLIOS?
The basic difference between the two portfolios is the
quality and length of time until the maturities of their
holdings, the yield, the diversification of the portfolio and
the expected stability of the net asset values. The MONEY
MARKET PORTFOLIO invests only in high quality municipal
securities. The average maturity of its holdings will not
exceed 90 days and its yield will fluctuate with changes in
short-term interest rates. The MONEY MARKET PORTFOLIO does
not invest for the purpose of seeking capital appreciation or
gains. The higher quality, greater diversification and
shorter maturities of the MONEY MARKET PORTFOLIO should
result in its being more stable than the NATIONAL BOND
PORTFOLIO.
The NATIONAL BOND PORTFOLIO invests primarily in investment
grade municipal bonds and expects to maintain an average
maturity of between 10 and 30 years.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE PORTFOLIOS?
Investing in any mutual fund, including either Portfolio,
involves risk, including the risk that you may receive little
or no return on your investment, and the risk that you may
lose part or all of the money that you invest. When you
invest in either Portfolio, you assume a number of risks.
Among them, is INTEREST RATE RISK, the risk that as interest
rates rise the value of some fixed income securities may
decrease, MARKET RISK, the risk that securities in a certain
market will decline in value because of factors such as
economic conditions or government actions, CREDIT RISK, the
risk that any of the holdings in either Portfolio will have
its credit downgraded or will default, INCOME RISK, the risk
that a Portfolio's income may decline because of falling
interest rates and other market conditions and LIQUIDITY
RISK, the risk that at times it may be difficult to value a
security or sell it at a fair price. These risks may impact
the Money Market Portfolio to a lesser extent than the
National Bond Portfolio.
2
<PAGE>
The price of the National Bond Portfolio's shares will
increase and decrease according to changes in the value of
the Portfolio's investments. The market values of municipal
securities will vary inversely in relation to their yields.
The National Bond Portfolio has a high portfolio turnover
rate which may negatively affect the Fund's performance.
An investment in either Portfolio is not a complete
investment program and you should consider it just one part
of your total investment program. The Fund is not appropriate
for IRAs or other tax-advantaged retirement plans.
AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE MONEY MARKET
PORTFOLIO SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE FUND.
3
<PAGE>
HOW HAVE THE PORTFOLIOS PERFORMED?
The following information can help you evaluate the potential
risks of investing in the Portfolios. We show how returns for
the Portfolios' shares have varied over the past ten calendar
years, as well as the average annual returns of these shares
for one, five, and ten years compared to a broad measure of
market performance. You should remember that unlike the
Portfolios, the indexes are unmanaged and do not include the
costs of buying, selling and holding the securities. The past
performance of the Portfolios is not necessarily an
indication of how they will perform in the future.
MONEY MARKET PORTFOLIO: TOTAL RETURNS AS OF 12/31 EACH YEAR
(%)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 5.42%
1991 4.05%
1992 2.53%
1993 1.61%
1994 2.00%
1995 2.91%
1996 2.65%
1997 2.65%
1998 2.47%
1999 2.27%
</TABLE>
<TABLE>
<S> <C> <C>
BEST QUARTER: Q4 1990 +1.39%
WORST QUARTER: Q1 1994 +0.38%
</TABLE>
The Money Market Portfolio's 7-day yield as of March 31,
2000, was 2.70%. The current 7-day yield may be obtained by
calling 800-243-2739.
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/99
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
--------------------------------------------------------------
MONEY MARKET PORTFOLIO 2.27% 2.59% 2.85%
--------------------------------------------------------------
LIPPER TAX-EXEMPT MONEY MARKET
FUNDS AVERAGE INDEX 2.67% 3.02% 3.17%
--------------------------------------------------------------
</TABLE>
4
<PAGE>
NATIONAL BOND PORTFOLIO: TOTAL RETURNS AS OF 12/31 EACH YEAR
(%)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 6.55%
1991 12.23%
1992 7.85%
1993 11.48%
1994 -6.91%
1995 16.68%
1996 3.55%
1997 8.79%
1998 5.46%
1999 -4.81%
</TABLE>
<TABLE>
<S> <C> <C>
BEST QUARTER: Q4 1995 +4.41%
WORST QUARTER: Q1 1994 (6.57%)
</TABLE>
The National Bond Portfolio's year-to-date return for the
three months ended March 31, 2000, was 3.16%.
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/99
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
----------------------------------------------------------------------
NATIONAL BOND PORTFOLIO -4.81% 5.70% 5.85%
----------------------------------------------------------------------
LEHMAN BROTHERS MUNICIPAL BOND
INDEX -2.06% 6.91% 6.89%
----------------------------------------------------------------------
</TABLE>
5
<PAGE>
WHAT ARE THE FUND'S FEES AND EXPENSES?
These tables describe the fees and expenses you pay in
connection with an investment in either of the Fund's
Portfolios.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
<S> <C>
-----------------------------------------------------------------------
MAXIMUM SALES CHARGES (LOAD) IMPOSED ON PURCHASES AS A PERCENTAGE NONE
OF OFFERING PRICE
-----------------------------------------------------------------------
MAXIMUM DEFERRED SALES CHARGES (LOAD) AS A PERCENTAGE OF ORIGINAL NONE
PURCHASE PRICE OR REDEMPTION PRICE, WHICHEVER IS LOWER
-----------------------------------------------------------------------
MAXIMUM SALES CHARGES (LOAD) IMPOSED ON REINVESTED DIVIDENDS NONE
-----------------------------------------------------------------------
REDEMPTION FEE NONE
-----------------------------------------------------------------------
EXCHANGE FEE NONE
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</TABLE>
ANNUAL FUND OPERATING EXPENSES(EXPENSES THAT ARE DEDUCTED
FROM THE FUND'S ASSETS)
<TABLE>
<CAPTION>
MONEY MARKET NATIONAL BOND
PORTFOLIO PORTFOLIO
<S> <C> <C>
---------------------------------------------------------------------
MANAGEMENT FEES 0.50% 0.50%
---------------------------------------------------------------------
DISTRIBUTION AND SERVICE (12b-1) FEES* 0.25% 0.25%
---------------------------------------------------------------------
OTHER EXPENSES 0.65% 0.14%
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TOTAL ANNUAL FUND OPERATING EXPENSES 1.40% 0.89%
---------------------------------------------------------------------
</TABLE>
* Effective July 1, 2000. Because these fees are paid out of
the Fund's assets on an ongoing basis, over time these fees
will increase the cost of your investment and may cost you
more than if you paid other types of sales charges.
EXAMPLE
This example is intended to help you compare the cost of
investing in the Fund to the cost of investing in other
mutual funds. We show the cumulative amount of Fund expenses
on a hypothetical investment of $10,000 with an annual 5%
return over the time shown, assuming that the Fund's
operating expenses remain the same. The expenses indicated
for each period would be the same whether you sold your
shares at the end of each period or continued to hold them.
This is an example only, and your actual costs may be greater
or less than those shown here. Based on these assumptions,
your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
------------------------------------------------------------------
MONEY MARKET PORTFOLIO $143 $443 $766 $1,680
------------------------------------------------------------------
NATIONAL BOND PORTFOLIO $ 91 $284 $493 $1,096
------------------------------------------------------------------
</TABLE>
6
<PAGE>
HOW WE MANAGE THE FUND
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OUR PRINCIPAL INVESTMENT STRATEGIES
We analyze economic and market conditions, seeking to
identify the securities that we think make the best
investments. Under normal conditions, the Fund's assets will
be invested so that at least 80% of the annual income of the
Fund will be exempt from federal income taxation and is not
subject to the alternative minimum tax. This is a fundamental
policy of the Fund which will not be changed without
shareholder approval.
THE TYPE OF SECURITIES IN WHICH WE INVEST
/ / MONEY MARKET PORTFOLIO. This Portfolio invests in
short-term municipal obligations. As a money market fund,
this Portfolio must keep the average maturity of the
holdings to 90 days or less. This minimizes the effect of
changing interest rates on the net asset value of its
shares. This Portfolio invests only in those securities
which are rated in the highest two categories of a
nationally recognized rating organization as is required by
all money market funds and attempts to maintain a stable net
asset value of $1.00 per share.
/ / NATIONAL BOND PORTFOLIO. This Portfolio invests in
municipal bonds that are rated at the time of purchase
within the four highest categories of a nationally
recognized rating organization, or if not rated, deemed by
the Adviser to be of comparable quality. These bonds include
both secured and unsecured debt obligations. Capital
appreciation is a secondary objective. If a bond's rating
drops, the Adviser will review the desirability of
continuing to hold the bond.
Municipal bonds are debt securities issued by or on behalf of
states, territories and possessions of the United States and
their political subdivisions, agencies and instrumentalities
which provide income free from federal, state or local
personal income taxes. Municipal bonds are generally one of
the following: General Obligation Bonds which are secured by
the full faith and credit of the issuer and its taxing power
or Revenue Bonds which are payable from revenue derived from
a particular facility or service.
The two portfolios may also invest in variable rate demand
instruments, industrial development bonds and other
securities which pay interest from revenues of projects with
similar characteristics.
7
<PAGE>
Yields of municipal securities depend upon a number of
factors, including the financial condition of the issuer,
economic conditions, money and capital market conditions, the
volume of municipal securities available, conditions within
the municipal securities market, the slope of the yield
curve, changes in tax laws, regulations and rules, and the
maturity, rating and size of individual offerings.
TEMPORARY DEFENSIVE POSITION
From time to time in response to adverse market, economic,
political or other conditions, we may invest a portion of the
National Bond Portfolio's assets in cash, cash equivalents or
U.S. Government securities for temporary defensive purposes
that are inconsistent with the Portfolio's principal
investment strategies. This could help the Portfolio avoid
losses, but it may result in lost opportunities and lower
yields. If this becomes necessary, the Portfolio's assets may
not be invested in accordance with its strategy and the
Portfolio may not achieve its investment objectives.
PORTFOLIO TURNOVER
The National Bond Portfolio engages in active and frequent
trading of portfolio securities in order to take advantage of
better investment opportunities to achieve its investment
objectives. This strategy results in additional expenses and
may negatively affect the Fund's performance. Portfolio
turnover may also result in capital gain distributions that
could increase your income tax liability.
THE PRINCIPAL RISKS OF INVESTING IN THE FUND
Because of the nature of the National Bond Portfolio, you
should consider an investment in it to be a long-term
investment that will best meet its objectives when held for a
number of years. Lower rated securities have certain
speculative characteristics and involve greater investment
risk, including the possibility of default or bankruptcy,
than is the case with higher rated securities.
When investing in either Portfolio you will also assume an
INTEREST RATE RISK, the possibility that as interest rates
rise the value of some fixed income securities may decrease.
Other risks that you assume when investing in either
Portfolio are MARKET RISK, CREDIT RISK, INCOME RISK and
LIQUIDITY RISK. MARKET RISK is the risk that the securities
in a certain market will decline in value because of factors
such as economic conditions or government actions. CREDIT
8
<PAGE>
RISK is the risk that any of the holdings in either Portfolio
will have its credit rating downgraded or will default,
thereby reducing the Portfolio's income level and share
price. INCOME RISK is the risk that the Portfolio's income
may decline because of falling interest rates and other
market conditions. LIQUIDITY RISK is the risk that at times
it may be difficult to value a security or sell it at a fair
price. There is also the risk that government actions could
have an adverse effect on municipal bond prices.
An investment in either Portfolio is not insured or
guaranteed by the Federal Deposit Insurance Corporation or
any other governmental agency.
Please see the Statement of Additional Information for a
further discussion of risks. Information on the Fund's recent
holdings can be found in the Fund's current annual or
semi-annual report.
9
<PAGE>
WHO MANAGES THE FUND
--------------------------------------------------------------------------------
The business and affairs of the Fund are managed by the
Fund's officers under the direction of the Fund's Board of
Directors.
INVESTMENT ADVISER
Value Line, Inc., 220 East 42nd Street, New York, NY 10017,
serves as the Fund's investment adviser and manages the
Fund's business affairs. Value Line also acts as investment
adviser to the other Value Line mutual funds and furnishes
investment counseling services to private and institutional
clients resulting in combined assets under management of over
$5 billion.
The Adviser was organized in 1982 and is the successor to
substantially all of the operations of Arnold Bernhard & Co.,
Inc. which with its predecessor has been in business since
1931. Value Line Securities, Inc., the Fund's distributor, is
a subsidiary of the Adviser. Another subsidiary of the
Adviser publishes The Value Line Investment Survey and other
publications.
MANAGEMENT FEES
For managing the Fund and its investments, the Adviser is
paid a yearly fee of 0.50% of the Fund's average daily net
assets.
PORTFOLIO MANAGEMENT
A committee of employees of the Investment Adviser is jointly
and primarily responsible for the day-to-day management of
the Fund's two portfolios.
10
<PAGE>
ABOUT YOUR ACCOUNT
--------------------------------------------------------------------------------
HOW TO BUY SHARES
/ / BY TELEPHONE
Once you have opened an account, you can buy additional
shares in the National Bond Portfolio by calling 800-243-2729
between 9:00 a.m. and 4:00 p.m. New York time. You must pay
for these shares within three business days of placing your
order.
/ / BY WIRE
If you are making an initial purchase by wire, you must call
us at 800-243-2729 so we can assign you an account number.
Request your bank to wire the amount you want to invest to
State Street Bank and Trust Company, ABA #011000028,
attention DDA # 99049868. Include your name, account number,
tax identification number and the name of the fund in which
you want to invest.
/ / THROUGH A BROKER-DEALER
You can open an account and buy shares through a
broker-dealer, who may charge a fee for this service.
/ / BY MAIL
Complete the Account Application and mail it with your check
payable to NFDS, Agent, to Value Line Funds, c/o National
Financial Data Services, Inc., P.O. Box 219729, Kansas City,
MO 64121-9729. If you are making an initial purchase by mail,
you must include a completed Account Application with your
check. Third party checks will not be accepted for either the
initial or any subsequent purchase. All purchases must be
made in U.S. dollars and checks must be drawn on U.S. banks.
/ / MINIMUM/ADDITIONAL INVESTMENTS
Once you have completed an application, you can open an
account with an initial investment of $1,000, and make
additional investments at any time for as little as $250. The
price you pay for shares in the National Bond Portfolio will
depend on when we receive your purchase order.
/ / TIME OF PURCHASE
Your price for shares in the National Bond Portfolio is the
Fund's net asset value per share (NAV), which is generally
calculated as of the close of regular trading on the New York
Stock Exchange (currently 4:00 p.m., Eastern time) every day
the Exchange is open for business. The Exchange is currently
closed on New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and
11
<PAGE>
Christmas Day and on the preceding Friday or subsequent
Monday if any of those days falls on a Saturday or Sunday,
respectively. Your order will be priced at the next NAV
calculated after your order is accepted by the Fund.
Newly-purchased shares in the Money Market Portfolio will
begin to accrue dividends on the business day after the Fund
receives Federal Funds from your purchase payment. A payment
by check is normally converted to Federal Funds within one
business day following receipt by the Fund. A business day is
any day that the New York Stock Exchange is open for
business. The Money Market Portfolio's net asset value per
share will normally remain fixed at $1.00 per share. We
reserve the right to reject any purchase order and to waive
the initial and subsequent investment minimums at any time.
Fund shares may be purchased through various third-party
intermediaries including banks, brokers, financial advisers
and financial supermarkets. When the intermediary is
authorized by the Fund, orders will be priced at the NAV next
computed after receipt by the intermediary.
/ / DISTRIBUTION CHARGES
The Fund has adopted a plan, effective July 1, 2000, under
rule 12b-1 of the Investment Company Act of 1940. Under the
plan, the Fund is charged a fee at the annual rate of 0.25%
of the Fund's average daily net assets with the proceeds used
to finance the activities of Value Line Securities, Inc., the
Fund's distributor. The plan provides that the distributor
may make payments to securities dealers, banks, financial
institutions and other organizations which provide
distribution and administrative services with respect to the
distribution of the Fund's shares. Such services may include,
among other things, answering investor inquiries regarding
the Fund; processing new shareholder account applications and
redemption transactions; responding to shareholder inquiries;
and such other services as the Fund may request to the extent
permitted by applicable statute, rule or regulation. The plan
also provides that the Adviser may make such payments out of
its advisory fee, its past profits or any other source
available to it. The fees payable to the distributor under
the plan are payable without regard to actual expenses
incurred.
12
<PAGE>
/ / NET ASSET VALUE
We calculate NAV by adding the market value of all the
securities and assets in the Portfolio, deducting all
liabilities, and dividing the resulting number by the number
of shares outstanding. The result is the net asset value per
share. Securities held by the Money Market Portfolio are
valued on the basis of amortized cost which does not take
into account unrealized capital gains and losses. This
involves valuing an instrument at cost and thereafter
assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. Bonds and other
fixed-income securities of the National Bond Portfolio are
valued on the basis of prices provided by an independent
pricing service.
13
<PAGE>
HOW TO SELL SHARES
/ / BY MAIL
You can redeem your shares (sell them back to the Fund) by
mail by writing to: Value Line Funds, c/o National Financial
Data Services, Inc., P.O. Box 219729, Kansas City, MO
64121-9729. The request must be signed by all owners of the
account, and you must include a signature guarantee for each
owner. Signature guarantees are also required when redemption
proceeds are going to anyone other than the account holder(s)
of record. If you hold your shares in certificates, you must
submit the certificates properly endorsed with signature
guaranteed with your request to sell the shares. A signature
guarantee can be obtained from most banks or securities
dealers, but not from a notary public. A signature guarantee
helps protect against fraud.
/ / BY TELEPHONE OR WIRE (MONEY MARKET PORTFOLIO ONLY)
You can sell $1,000 or more of your shares by telephone or
wire, with the proceeds sent to your bank the next business
day after we receive your request.
/ / BY CHECK (MONEY MARKET PORTFOLIO ONLY)
You can sell $500 or more of your shares by writing a check
payable to the order of any person.
/ / THROUGH A BROKER-DEALER
You may sell your shares through a broker-dealer, who may
charge a fee for this service.
The Fund has authorized certain brokers to accept purchase
and redemption orders on behalf of the Fund. The Fund has
also authorized these brokers to designate others to accept
purchase and redemption orders on behalf of the Fund.
We treat any order to buy or sell shares that you place with
one of these brokers, or anyone they have designated, as if
you had placed it directly with the Fund. The shares that you
buy or sell through brokers or anyone they have designated
are priced at the next net asset value that is computed after
they receive your order.
Among the brokers that have been authorized are Charles
Schwab & Co., Inc., National Investor Services Corp.,
Pershing and Fidelity Brokerage Services Corp. You should
consult with your broker to determine if it has been
authorized.
14
<PAGE>
/ / BY EXCHANGE
The shares of one portfolio may be exchanged for shares of
the other portfolio or for shares in other Value Line funds.
When you exchange shares, you are purchasing shares in
another fund so you should be sure to get a copy of that
fund's prospectus and read it carefully before buying shares
through an exchange. To execute an exchange, call
800-243-2729.
When you send us a request to sell or exchange shares, you
will receive the net asset value that is next determined
after we receive your request. For each account involved, you
should provide the account name, number, name of fund and
exchange or redemption amount. Call 800-243-2729 for
additional documentation that may be required. You may have
to pay taxes on the gain from your sale of shares.
We will pay you promptly, normally the next business day, but
no later than seven days after we receive your request to
sell your shares. If you purchased your shares by check, we
will wait until your check has cleared, which can take up to
15 days from the day of purchase, before we send the proceeds
to you.
Exchanges among Value Line funds are a shareholder privilege
and not a right. We may reject any exchange order,
particularly when there appears to be frequent purchases and
sales.
ACCOUNT MINIMUM
If as a result of redemptions your account balance falls
below $500, the Fund may ask you to increase your balance
within 30 days. If your account is not at the minimum by the
required time, the Fund may redeem your account, after first
notifying you in writing.
SPECIAL SERVICES
To help make investing with us as easy as possible, and to
help you build your investments, we offer the following
special services. You can get further information about these
programs by calling Shareholder Services at 800-223-0818.
/ / Valu-Matic-Registered Trademark- allows you to make regular
monthly investments of $25 or more automatically from your
checking account.
15
<PAGE>
/ / Through our Systematic Cash Withdrawal Plan you can arrange
a regular monthly or quarterly payment from your account
payable to you or someone you designate. If your account is
$5,000 or more, you can have monthly or quarterly
withdrawals of $25 or more.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund declares dividends daily from its net investment
income. In the Money Market Portfolio, dividends are
automatically reinvested each day in additional shares.
Dividends credited to a shareholder's account in the National
Bond Portfolio are distributed monthly. The Fund distributes
any capital gains that it has realized annually.
Tax laws are subject to change, so we urge you to consult
your tax adviser about your particular tax situation and how
it might be affected by current tax law. The tax status of
your dividends from the Fund is not affected by whether you
reinvest your dividends or receive them in cash. Because the
Fund invests in municipal bonds, certain dividends you
receive will be exempt from regular federal income tax. All
or a portion of these dividends, however, may be subject to
state and local taxes or to the federal alternative minimum
tax. Distributions from a fund's long-term capital gains, if
any, are taxable as capital gains, while dividends from
short-term capital gains, if any, and net investment income
from non-tax-exempt securities are taxable as ordinary
income. In addition, you may be subject to state and local
taxes on distributions.
We will send you a statement by January 31 each year
detailing the amount and nature of all dividends and capital
gains that you were paid during the prior year.
16
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table is intended to help you
understand the Fund's financial performance for the past five
years. Certain information reflects financial results for a
single Fund share. The total returns in the table represent
the rate that an investor would have earned or lost on an
investment in the Fund assuming reinvestment of all dividends
and distributions. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the
Fund's financial statements, is included in the Fund's annual
report, which is available upon request by calling
800-223-0818. Until July 1, 1999, the National Bond Portfolio
was known as the High-Yield Portfolio.
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------
<TABLE>
<CAPTION>
NATIONAL BOND PORTFOLIO
YEARS ENDED ON LAST DAY OF FEBRUARY,
--------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF $10.80 $11.04 $10.78 $10.82 $10.40
YEAR
--------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .49 .52 .54 .55 .55
Net gains or losses on
securities (both realized
and unrealized) (.95) .03 .36 (.04) .42
--------------------------------------------------------------------------------------------------------
Total from investment
operations (.46) .55 .90 .51 .97
--------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.49) (.52) (.54) (.55) (.55)
Distributions from capital
gains (.06) (.27) (.10) -- --
--------------------------------------------------------------------------------------------------------
Total distributions (.55) (.79) (.64) (.55) (.55)
--------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $9.79 $10.80 $11.04 $10.78 $10.82
--------------------------------------------------------------------------------------------------------
TOTAL RETURN (4.30)% 4.88% 8.56% 4.86% 9.55%
--------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands) $ 150,514 $ 182,017 $ 188,109 $ 193,641 $ 222,760
Ratio of expenses to average
net assets .64%(2) .63%(2) .63%(1) .60%(1) .62%
Ratio of net income to average
net assets 4.77% 4.71% 4.98% 5.13% 5.22%
Portfolio turnover rate 163% 192% 119% 73% 95%
--------------------------------------------------------------------------------------------------------
</TABLE>
(1) Before offset of custody credits.
(2) Ratio reflects expenses grossed up for custody credit
arrangement. The ratio of expenses net of custody
credits would have been .62% and .63% for the year ended
February 28, 1999 and February 29, 2000, respectively.
--------------------------------------------------------------------------------
17
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
YEARS ENDED ON LAST DAY OF FEBRUARY,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .02 .02 .03 .03 .03
-----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.02) (.02) (.03) (.03) (.03)
-----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------------------------------------------------------------------------
TOTAL RETURN 2.38% 2.39% 2.65% 2.56% 2.92%
-----------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands) $ 13,456 $ 15,526 $ 16,758 $ 19,668 $ 21,777
Ratio of expenses to average net
assets 1.15%(2) 1.18%(2) 1.03%(1) 1.00%(1) 1.01%
Ratio of net income to average
net assets 2.33% 2.38% 2.63% 2.54% 2.89%
-----------------------------------------------------------------------------------------------------
</TABLE>
(1) Before offset of custody credits.
(2) Ratio reflects expenses grossed up for custody credit
arrangement. The ratio of expenses net of custody
credits would have been 1.16% and 1.14% for the year
ended February 28, 1999 and February 29, 2000,
respectively.
--------------------------------------------------------------------------------
18
<PAGE>
FOR MORE INFORMATION
Additional information about the Fund's investments is
available in the Fund's annual and semi-annual reports to
shareholders. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies
that significantly affected the Fund's performance during its
last fiscal year. You can find more detailed information
about the Fund in the current Statement of Additional
Information dated July 3, 2000, which we have filed
electronically with the Securities and Exchange Commission
(SEC) and which is legally a part of this prospectus. If you
want a free copy of the Statement of Additional Information,
the annual or semi-annual report, or if you have any
questions about investing in this Fund, you can write to us
at 220 East 42nd Street, New York, NY 10017-5891 or call
toll-free 800-223-0818. You may also obtain the prospectus
from our Internet site at http://www.valueline.com.
Reports and other information about the Fund are available on
the Edgar Database on the SEC Internet site
(http://www.sec.gov), or you can get copies of this
information, after payment of a duplicating fee, by
electronic request at the following E-mail address:
[email protected], or by writing to the Public Reference
Section of the SEC, Washington, D.C. 20549-0102. Information
about the Fund, including its Statement of Additional
Information, can be reviewed and copied at the Securities and
Exchange Commission's Public Reference Room in Washington,
D.C. You can get information on operation of the public
reference room by calling the SEC at 1-202-942-8090.
<TABLE>
<S> <C>
INVESTMENT ADVISER SERVICE AGENT
Value Line, Inc. State Street Bank and Trust Company
220 East 42nd Street c/o NFDS
New York, NY 10017-5891 P.O. Box 219729
Kansas City, MO 64121-9729
CUSTODIAN DISTRIBUTOR
State Street Bank and Trust Company Value Line Securities, Inc.
225 Franklin Street 220 East 42nd Street
Boston, MA 02110 New York, NY 10017-5891
</TABLE>
<TABLE>
<S> <C>
Value Line Securities, Inc.
220 East 42nd Street, New York, NY 10017-5891 File no. 811-3904
</TABLE>
<PAGE>
THE VALUE LINE TAX EXEMPT FUND, INC.
220 East 42nd Street, New York, New York 10017-5891
1-800-223-0818 or 1-800-243-2729
www.valueline.com
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
JULY 3, 2000
-------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of The Value Line Tax Exempt Fund, Inc.
dated July 3, 2000, a copy of which may be obtained without charge by writing or
telephoning the Fund. The financial statements, accompanying notes and report of
independent accountants appearing in the Fund's 2000 Annual Report to
Shareholders are incorporated by reference in this Statement. A copy of the
Annual Report is available from the Fund upon request and without charge by
calling 800-223-0818.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of the Fund and Its Investments and Risks....... B-2
Management of the Fund...................................... B-7
Investment Advisory and Other Services...................... B-9
Service and Distribution Plan............................... B-11
Portfolio Transactions...................................... B-11
Capital Stock............................................... B-12
Purchase, Redemption and Pricing of Shares.................. B-12
Taxes....................................................... B-15
Performance Data............................................ B-17
Financial Statements........................................ B-18
Security Ratings............................................ B-18
</TABLE>
B-1
<PAGE>
DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
CLASSIFICATION. The Fund is an open-end, diversified management investment
company incorporated in Maryland in 1983. The Fund's investment adviser is Value
Line, Inc. (the "Adviser").
INVESTMENT OBJECTIVE. The Fund's primary investment objective is to provide
investors with the maximum income exempt from federal income taxes while
avoiding undue risk to principal.
INVESTMENT STRATEGY. The Fund seeks to achieve its objective by offering
two separate and distinct portfolios. Each portfolio will invest substantially
all of its assets in investment-grade municipal securities, the interest on
which is deemed exempt from federal income tax. Under normal conditions, the
Fund's assets will be invested so that at least 80% of the annual income of the
Fund will be exempt from federal income taxes and will not be subject to the
alternative minimum tax. This is a fundamental policy of the Fund which will not
be changed without shareholders' approval. The Fund reserves the right to create
additional portfolios although there are no present plans to do so. No assurance
can be made that the objectives of any portfolio will be attained.
The basic differences between the two portfolios will be the length of time
until the maturities of their holdings, the yield and the expected stability of
the Net Asset Value as set forth below:
MONEY MARKET PORTFOLIO: Expected weighted average maturity is 90 days or
less. Generally, maturities will be no more than 397 days at time of purchase.
The Fund will attempt to maintain the net asset value at $1.00 per share but
attainment of such is not assured. Investments will consist of short-term
municipal or United States Government obligations and notes and will be limited
to those obligations which are backed by the full faith and credit of the United
States or are rated Aa3 or better, MIG-2 or better or Prime-1 by Moody's
Investors Service, Inc. ("Moody's") and AA or better, A-1 or better or SP-2 or
better by Standard & Poor's Ratings Services ("S&P"). If the municipal
obligations are not rated, then the issuer's long-term bond rating must be at
least Aa3 as determined by Moody's or AA as determined by S&P. In the case of
industrial revenue bonds, the corporation responsible for the debt must carry a
Value Line Financial Strength rating of A+ or better (the second highest of nine
rating groups).
The Fund will limit its portfolio investments to U.S. dollar denominated
instruments that its Board of Directors determines present minimal credit risks
and which are "Eligible Securities" at the time of acquisition. The term
Eligible Securities includes securities rated by the Requisite NRSROs in one of
the two highest short-term rating categories, securities of issuers that have
received such rating with respect to other short-term debt securities and
comparable unrated securities. "Requisite NRSROs" means (a) any two nationally
recognized statistical rating organizations ("NRSROs") that have issued a rating
with respect to a security or class of debt obligations of an issuer, or
(b) one NRSRO, if only one NRSRO has issued a rating with respect to such
security or issuer at the time the Fund purchases the security.
NATIONAL BOND PORTFOLIO (FORMERLY KNOWN AS HIGH-YIELD PORTFOLIO): Expected
weighted average maturity is between 10 and 30 years. Typically, the municipal
bonds in the National Bond Portfolio will be rated at the time of purchase
within the four highest grades assigned by Moody's (Aaa, Aa, A and Baa) or S&P
(AAA, AA, A and BBB) or will be obligations of issuers of equivalent
creditworthiness, in the opinion of the Adviser. Those bonds rated "BBB" or
"Baa" may have more speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case for
B-2
<PAGE>
higher grade bonds. These bonds include both secured and unsecured debt
obligations and, as a group, possess a fairly high degree of dependability of
interest payments although certain of these bonds may have speculative
characteristics. Portfolio securities may be sold without regard to the length
of time that they have been held in order to take advantage of new investment
opportunities or yield differentials, or because the Adviser desires to preserve
gains or limit losses due to changing economic conditions. Capital appreciation
is a secondary objective of the National Bond Portfolio. Portfolio turnover for
the National Bond Portfolio in recent periods is shown under "Financial
Highlights", above. High portfolio turnover may result in correspondingly
greater transaction costs. Until July 1, 1999, the National Bond Portfolio was
known as the High-Yield Portfolio.
The two Portfolios may also invest in variable rate demand instruments and
industrial development bonds and other securities, which pay interest from
revenues of projects with similar characteristics. The Portfolios may also
contain commercial paper (considered Eligible Securities as defined above), U.S.
government securities, repurchase agreements or other taxable short-term money
market instruments when the Adviser deems such action appropriate.
Yields of municipal securities depend upon a number of factors, including
the financial condition of the issuer, economic conditions, money and capital
market conditions, the volume of municipal securities available, conditions
within the municipal securities market, the slope of the yield curve, proposed
and actual changes in tax laws, regulations and rules, and the maturity, rating,
and size of individual offerings. Market values of municipal securities will
vary inversely in relation to their yields. The magnitude of changes in market
values in response to changes in market rates of interest typically varies in
proportion to maturity of the obligations.
VARIABLE RATE DEMAND INSTRUMENTS. Variable rate demand instruments are
tax-exempt municipal obligations that provide for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments permit the Fund to demand payment of the unpaid
principal balance plus accrued interest upon a specified number of days' notice
to the issuer or its agent. The demand feature may be backed by a bank letter of
credit or guarantee issued with respect to such instrument. The Fund intends to
exercise the demand only (1) upon a default under the terms of the municipal
obligation, (2) as needed to provide liquidity to the Fund, or (3) to maintain a
high quality investment portfolio. The issuer of a variable rate demand
instrument may have a corresponding right to prepay at its discretion the
outstanding principal of the instrument plus accrued interest upon notice
comparable to that required for the holder to demand payment. The variable rate
demand instruments that the Fund may purchase are payable on demand on not more
than seven calendar days' notice. The terms of the instruments provide that
interest rates are adjustable at intervals ranging from daily up to six months,
and the adjustments are based upon the prime rate of a bank or other appropriate
interest rate adjustment index as provided in the respective instruments.
WHEN-ISSUED SECURITIES. Municipal securities may be purchased or sold on a
delayed-delivery basis or on a when-issued basis. These transactions arise when
the Fund buys or sells securities with payment and delivery taking place in the
future, to secure what is considered to be an advantageous price and yield to
the Fund. No payment is made until delivery is due, often a month or more after
the purchase. When the Fund engages in when-issued and delayed-delivery
transactions, certain risks are involved. The Fund relies on the buyer or
seller, as the case may be, to consummate the transaction. Failure of the buyer
or seller to do so may result in the Fund failing to obtain a price considered
to be advantageous. The securities are subject to market fluctuations and
B-3
<PAGE>
no interest accrues to the purchaser during this period. At the time the Fund
commits to purchase municipal securities on a delayed-delivery basis or a
when-issued basis, it will record the transaction and reflect the value of the
municipal securities in determining the net asset value of the appropriate
portfolio. A separate account for the Fund consisting of cash or liquid
securities equal to the amount of the when-issued commitments will be
established at the Fund's custodian bank. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market. If the market value of the deposited securities declines,
additional cash or securities will be placed in the account on a daily basis so
that the market value of the account will equal the amount of such commitments
by the Fund.
STANDBY COMMITMENTS. When municipal securities are purchased for the Money
Market Portfolio, the Fund may obtain a "standby commitment"--that is, the right
to resell the security to the seller at an agreed-upon price on certain dates or
within a specific period. The Fund's right to exercise a standby commitment will
be unconditional and unqualified. A standby commitment is not transferable by
the Fund, and therefore terminates if the Fund sells the security to a third
party. The Fund may pay for certain standby commitments either in cash or by
paying a higher price for portfolio securities which are acquired subject to
such a commitment, thereby reducing the yield to maturity otherwise available
for the same securities. The Fund will enter into standby commitments only with
banks and securities dealers which, in the opinion of the Adviser, present
minimal credit risks. The Fund's ability to exercise a standby commitment will
depend on the ability of the broker-dealer or bank to pay for the securities if
the standby commitment is exercised. In the event that a broker-dealer or bank
should default on its obligation to repurchase the security, the Fund might be
unable to recover all or a portion of any loss sustained from having to sell the
security elsewhere.
LENDING SECURITIES. The Fund may lend limited amounts of its portfolio
securities to broker-dealers or institutional investors which the Adviser deems
qualified, but only when the borrower agrees to maintain cash collateral with
the Fund equal at all times to at least 100% of the value of the loaned
securities and accrued interest. The Fund will continue to receive interest on
the lent securities and will invest the cash collateral in readily marketable
short-term obligations of high quality, thereby earning additional interest.
Interest on loaned municipal securities received by the borrower and paid over
to the Fund will not be exempt from federal income taxes in the hands of the
Fund. The Fund will not lend securities if, as a result, the aggregate of such
loans in each Portfolio would exceed 10% of the value of that Portfolio's total
assets. The Fund may terminate such loans at any time.
REPURCHASE AGREEMENTS. The Fund may invest temporary cash balances in
repurchase agreements. A repurchase agreement involves a sale of securities to
the Fund, with the concurrent agreement of the seller (a member bank of the
Federal Reserve System or a securities dealer which the Adviser believes to be
financially sound) to repurchase the securities at the same price plus an amount
equal to an agreed-upon interest rate, within a specified time, usually less
than one week, but, on occasion, at a later time. The value of the underlying
securities will always be at least equal to the repurchase price, including any
accrued interest earned on the repurchase agreement. The Fund will make payment
for such securities only upon physical delivery or evidence of book-entry
transfer to the account of the custodian or a bank acting as agent for the Fund.
Repurchase agreements may also be viewed as loans made by the Fund which are
collateralized by the securities subject to repurchase. The value of the
underlying securities will be at least equal at all times to the total amount of
the repurchase obligation, including the interest factor. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both
B-4
<PAGE>
delays in liquidating the underlying securities and losses, including: (a)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c) expenses of
enforcing its rights. It is expected that repurchase agreements will give rise
to income which will not qualify as tax-exempt income when distributed by the
Fund.
While the Fund has no plans to do so during the current year, it may enter
into reverse repurchase agreements, which involve the sale of securities held by
the Fund with an agreement to repurchase the securities at an agreed-upon price,
date and interest payment.
MUNICIPAL SECURITIES
Municipal securities are debt issues of governmental bodies, other than the
U.S. government, within the United States, including securities issued by or on
behalf of states, territories, and possessions of the United States, by the
District of Columbia, and by political subdivisions and their duly constituted
agencies and instrumentalities. The interest on these issues generally is not
includable in "gross income" for federal income tax purposes, subject, however,
to many exceptions and limitations. The purpose of these issues is to obtain
funds for various public uses, including the construction, repair, or
improvement of various public facilities, such as airports, bridges, highways,
housing, hospitals, mass transit, schools, streets, waterworks and sewage
systems.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. GENERAL OBLIGATION bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
interest and principal. REVENUE bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
revenues from a special excise tax or other specific source, but not from
general tax revenues. Revenue bonds include tax-exempt industrial revenue bonds
that generally do not have the pledge of the credit of the issuer but are
supported by revenues from a taxable corporation that operates a facility that
was financed by the funds from the bond issue, and the pledge, if any, of real
and personal property so financed as security for such payment. There are also a
variety of hybrid and special types of municipal securities that have
characteristics of both general obligation and revenue bonds.
Municipal notes are short-term obligations issued to obtain temporary funds
for states, cities, municipalities and municipal agencies. These notes include
tax, revenue and bond anticipation notes that provide temporary funds until the
anticipated taxes, revenues, or bond proceeds, respectively, are received by the
issuer. Other municipal notes include construction loan notes and short-term
discount notes. Certain project notes, issued by a state or local housing
authority, are secured by the full faith and credit of the United States.
Municipal commercial paper consists of very short-term negotiable notes, which
provide seasonal working capital needs or interim construction financing. The
commercial paper and tax and revenue anticipation notes are paid from general
revenues or may be refinanced with long-term debt.
Legislation to restrict or eliminate the federal income tax exemption for
interest on municipal securities has, from time to time, been introduced before
Congress. If such a proposal were enacted, the availability of municipal
securities for investment by the Fund could be adversely affected. In such
event, the Fund would re-evaluate its investment objective and submit possible
changes in the structure of the Fund for the consideration of the shareholders.
B-5
<PAGE>
FUND POLICIES.
(i) The Fund may not borrow money in either Portfolio, except from
banks on a temporary basis or via entering into reverse repurchase
agreements for extraordinary or emergency purposes or to facilitate
redemptions and in amounts not exceeding 10% of the total assets of that
Portfolio, or mortgage, pledge or hypothecate the assets of any Portfolio
except as may be necessary in connection with such borrowings. Securities
will not be purchased while borrowings are outstanding.
(ii) The Fund may not engage in the underwriting of securities except to
the extent that the Fund may be deemed an underwriter as to restricted
securities under the Securities Act of 1933 in selling portfolio securities.
(iii) The Fund may not invest 25% or more of its assets in securities of
issuers conducting their principal business activities in any one industry.
(iv) The Fund may not purchase equity securities, securities convertible
into equity securities or invest in real estate, although the Fund may
invest in municipal securities secured by real estate or interests therein.
(v) The Fund may not lend money except as provided under "Lending
Securities" or in connection with the purchase of debt obligations or by
investment in repurchase agreements, provided that repurchase agreements
maturing in more than seven days when taken together with other illiquid
investments do not exceed 10% of the Fund's assets.
(vi) The Fund may not engage in short sales, purchases on margin or
participate on a joint or a joint and several basis in any trading account
in securities.
(vii) The Fund may not write, purchase or sell puts (except for standby
commitments), calls or combinations thereof or purchase interests in oil,
gas or other mineral exploration or development programs or leases.
(viii) The Fund may not invest more than 5% of its total assets in the
securities of any one issuer or purchase more than 10% of the outstanding
publicly issued debt obligations of any issuer or invest in companies for
the purpose of exercising control. This restriction does not apply to
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
(ix) The Fund may not invest more than 5% of its total assets in
securities of issuers having a record, together with its predecessors, of
less than three years of continuous operation. This restriction does not
apply to any obligation issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
(x) The Fund may not invest more than 2% of the value of its total
assets in warrants (valued at the lower of cost or market), except that
warrants attached to other securities are not subject to these limitations.
(xi) The Fund may not invest in commodities or commodity contracts.
(xii) The Fund may not purchase the securities of any issuer if, to the
knowledge of the Fund, those officers and directors of the Fund and of the
Adviser, who each owns more than 0.5% of the outstanding securities of such
issuer, together own more than 5% of such securities.
B-6
<PAGE>
(xiii) The Fund may not purchase or invest in restricted securities or
securities which at the time of investment are not readily marketable or
invest in repurchase agreements maturing in more than seven days if, as a
result of such investment, more than 15% of the Fund's assets would then be
invested in such securities.
If a percentage restriction is adhered to at the time of investment, a later
change in percentage resulting from changes in values or assets will not be
considered a violation of the restriction except for restrictions (i) and
(xiii). For purposes of industry classifications, the Fund follows the industry
classifications in The Value Line Investment Survey.
The policies set forth above may not be changed without the affirmative vote
of the majority of the outstanding voting securities of the Fund which means the
lesser of (1) the holders of more than 50% of the outstanding shares of capital
stock of the Fund or (2) 67% of the shares present if more than 50% of the
shares are present at a meeting in person or by proxy.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed by the Fund's officers
under the direction of the Board of Directors. Set forth below is certain
information regarding the Directors and Officers of the Fund.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH FUND PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
--------------------- ------------------ -----------------------------------------
<S> <C> <C>
*Jean Bernhard Buttner Chairman of the Chairman, President and Chief Executive
Age 65 Board of Directors Officer of the Adviser and Value Line
and President Publishing, Inc. Chairman and President
of the Value Line Funds and Value Line
Securities, Inc. (the "Distributor");
Chairman and President of each of the 15
Value Line Funds.
John W. Chandler Director Consultant, Academic Search Consulta-
2801 New Mexico Ave., N.W. tion Service, Inc. Trustee Emeritus and
Washington, DC 20007 Chairman (1993-1994) of the Board of
Age 76 Trustees of Duke University; President
Emeritus, Williams College.
Frances T. Newton Director Computer Programming Professional, Duke
4921 Buckingham Drive Power Company.
Charlotte, NC 28209
Age 59
</TABLE>
--------------
* "Interested" director as defined in the Investment Company Act of 1940 (the
"1940 Act").
B-7
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH FUND PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
--------------------- ------------------ -----------------------------------------
<S> <C> <C>
Francis C. Oakley Director Professor of History, Williams College,
54 Scott Hill Road 1961 to present, President Emeritus since
Williamstown, MA 01267 1994 and President, 1985-1993; Director,
Age 68 Berkshire Life Insurance Company.
David H. Porter Director Visiting Professor of Classics, Williams
5 Birch Run Drive College, since 1999; President Emeri-
Saratoga Springs, NY 12866 tus, Skidmore College since 1999 and
Age 64 President, 1987-1998; Director of
Adirondack Trust Company.
Paul Craig Roberts Director Chairman, Institute for Political Econo-
169 Pompano St. my; Director, A. Schulman Inc. (plas-
Panama City Beach, FL tics).
32413
Age 61
Marion N. Ruth Director Real Estate Executive; President, Ruth
5 Outrider Road Realty (real estate broker).
Rolling Hills, CA 90274
Age 65
Nancy-Beth Sheerr Director Former Chairman, Radcliffe College Board
1409 Beaumont Drive of Trustees.
Gladwyne, PA 19035
Age 51
Charles Heebner Vice President Senior Portfolio Manager with the Advis-
Age 64 er.
Raymond S. Cowen Vice President Assistant Research Director with the Ad-
Age 78 viser.
David T. Henigson Vice President, Director, Vice President and Compliance
Age 42 Secretary and Officer of the Adviser. Director and Vice
Treasurer President of the Distributor. Vice Presi-
dent, Secretary and Treasurer of each of
the 15 Value Line Funds.
</TABLE>
--------------
Unless otherwise indicated, the address for each of the above is 220 East 42nd
Street, New York, NY.
Directors of the Fund are also directors/trustees of 14 other Value Line
Funds.
The following table sets forth information regarding compensation of
Directors by the Fund and by the Fund and the other Value Line Funds of which
each of the Directors is a director or trustee for the fiscal year ended
February 29, 2000. Directors who are officers or employees of the Adviser do not
receive any compensation from the Fund or any of the Value Line Funds.
B-8
<PAGE>
COMPENSATION TABLE
FISCAL YEAR ENDED FEBRUARY 29, 2000
<TABLE>
<CAPTION>
TOTAL
PENSION OR ESTIMATED COMPENSATION
RETIREMENT ANNUAL FROM FUND
AGGREGATE BENEFITS BENEFITS AND FUND
COMPENSATION ACCRUED AS PART UPON COMPLEX
NAME OF PERSONS FROM FUND OF FUND EXPENSES RETIREMENT (15 FUNDS)
--------------- ------------ ---------------- ---------- ------------
<S> <C> <C> <C> <C>
Jean B. Buttner $ -0- N/A N/A $ -0-
John W. Chandler 2,968 N/A N/A 35,620
Frances T. Newton* 0 N/A N/A 20,000
Francis C. Oakley* 0 N/A N/A 20,000
David H. Porter 2,968 N/A N/A 35,620
Paul Craig Roberts 2,968 N/A N/A 35,620
Marion N. Ruth* 0 N/A N/A 20,000
Nancy-Beth Sheerr 2,968 N/A N/A 35,620
</TABLE>
--------------
* Became a Director of the Fund on June 15, 2000.
As of March 31, 2000, no person owned of record or, to the knowledge of the
Fund, owned beneficially, 5% or more of the outstanding shares of either the
National Bond Portfolio or the Money Market Portfolio except William E. Dorion
and Elaine H. Dorion, 8363 Creedmore South Dr., Warrenton, VA 20187, who owned
1,021,726 shares of the Money Market Portfolio representing 7.62% of the
outstanding shares. At March 31, 2000, the Adviser and/or affiliated companies
owned 127,571 shares of the National Bond Portfolio common shares, and 1,001
shares of the Money Market Portfolio, representing in each case less than 1% of
the outstanding shares. At that date officers and directors of the Fund as a
group owned 1,304 shares of the National Bond Portfolio and 2,642 shares of the
Money Market Portfolio, representing in each case less than 1% of the
outstanding shares.
INVESTMENT ADVISORY AND OTHER SERVICES
The Fund's investment adviser is Value Line, Inc. (the "Adviser").
Arnold Bernhard & Co., Inc., 220 East 42nd Street, New York, NY 10017, a holding
company, owns approximately 84% of the outstanding shares of the Adviser's
common stock. Jean Bernhard Buttner, Chairman, President and Chief Executive
Officer of the Adviser and Chairman and President of the Fund, owns all of the
voting stock of Arnold Bernhard & Co., Inc.
The investment advisory agreement between the Fund and the Adviser, dated
August 10, 1988, provides for a monthly advisory fee at an annual rate of 0.50%
of the Fund's average daily net assets during the year. During its fiscal years
ended on the last day of February 1998, 1999 and 2000, the Fund paid or accrued
to the Adviser advisory fees of $1,044,179, $1,006,500 and $906,446,
respectively.
B-9
<PAGE>
The investment advisory agreement provides that the Adviser shall render
investment advisory and other services to the Fund including, at its expense,
all administrative services, office space and the services of all officers and
employees of the Fund. The Fund pays all other expenses not assumed by the
Adviser including taxes, interest, brokerage commissions, insurance premiums,
fees and expenses of the custodian and shareholder servicing agents, legal and
accounting fees, fees and expenses in connection with qualification under
federal and state securities laws and costs of shareholder reports and proxy
materials. The Fund has agreed that it will use the words "Value Line" in its
name only so long as Value Line, Inc. serves as investment adviser to the Fund.
The agreement will terminate upon its assignment.
The Adviser acts as investment adviser to 14 other investment companies
constituting The Value Line Family of Funds and furnishes investment counseling
services to private and institutional accounts resulting in combined assets
under management in excess of $5 billion.
Certain of the Adviser's clients may have investment objectives similar to
the Fund and certain investments may be appropriate for the Fund and for other
clients advised by the Adviser. From time to time, a particular security may be
bought or sold for only one client or in different amounts and at different
times for more than one but less than all such clients. In addition, a
particular security may be bought for one or more clients when one or more other
clients are selling such security, or purchases or sales of the same security
may be made for two or more clients at the same time. In such event, such
transactions, to the extent practicable, will be averaged as to price and
allocated as to amount in proportion to the amount of each order. In some cases,
this procedure could have a detrimental effect on the price or amount of the
securities purchased or sold by the Fund. In other cases, however, it is
believed that the ability of the Fund to participate, to the extent permitted by
law, in volume transactions will produce better results for the Fund.
The Adviser and/or its affiliates, officers, directors and employees may
from time to time own securities which are also held in the portfolio of the
Fund. The Fund, the Adviser and the Distributor have adopted a Code of Ethics
under Rule 17j-1 of the Investment Company Act which permits personnel subject
to the Code to invest in securities, including securities that may be purchased
or held by the Fund. The Code requires that such personnel submit reports of
security transactions for their respective accounts and restricts trading in
various situations in order to avoid possible conflicts of interest.
The Fund has entered into a distribution agreement with Value Line
Securities, Inc. (the "Distributor") whose address is 220 East 42nd Street, New
York, NY 10017, pursuant to which the Distributor acts as principal underwriter
and distributor of the Fund for the sale and distribution of its shares. The
Distributor is a wholly-owned subsidiary of the Adviser. For its services under
the agreement, the Distributor is not entitled to receive any compensation
although it is entitled to receive fees under the Service and Distribution Plan
which became effective July 1, 2000. The Distributor also serves as distributor
to the other Value Line funds. Jean Bernhard Buttner is Chairman and President
of the Distributor.
The Adviser has retained State Street Bank and Trust Company ("State
Street") to provide certain bookkeeping and accounting services for the Fund.
The Adviser pays State Street $32,400 per annum for each Value Line fund for
which State Street provides these services. State Street, whose address is
225 Franklin Street, Boston, MA 02110, also acts as the Fund's custodian,
transfer agent and dividend-paying agent. As custodian, State Street is
responsible for safeguarding the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and
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<PAGE>
dividends on the Fund's investments. As transfer agent and dividend-paying
agent, State Street effects transfers of Fund shares by the registered owners
and transmits payments for dividends and distributions declared by the Fund.
National Financial Data Services, Inc., a State Street affiliate, whose address
is 330 W. 9th Street, Kansas City, MO 64105, provides certain transfer agency
functions to the Fund as an agent for State Street. PricewaterhouseCoopers LLP,
whose address is 1177 Avenue of the Americas, New York, NY 10036, acts as the
Fund's independent accountants and also performs certain tax preparation
services.
SERVICE AND DISTRIBUTION PLAN
The Service and Distribution Plan (12b-1 Plan), which became effective
July 1, 2000, is designed to finance the activities of Value Line Securities,
Inc. (the "Distributor") in advertising, marketing and distributing Fund shares
and for servicing Fund shareholders at an annual rate of .25% of the Fund's
average daily net assets. The fees payable to the Distributor under the Plan are
payable without regard to actual expenses incurred.
PORTFOLIO TRANSACTIONS
Portfolio securities are purchased from and sold to parties acting as either
principal or agent. Newly-issued securities ordinarily are purchased directly
from the issuer or from an underwriter; other purchases and sales usually are
placed with those dealers from whom it appears that the best price and execution
will be obtained. Usually no brokerage commissions, as such, are paid by the
Fund for such purchases and sales, although the price paid usually includes an
undisclosed compensation to the dealer acting as principal. The prices paid to
underwriters of newly-issued securities usually include a concession paid by the
issuer to the underwriter, and purchases of after-market securities from dealers
ordinarily are executed at a price between the bid and asked price. The Fund
paid no brokerage commissions in fiscal 1998, 1999 or 2000.
Transactions are allocated to various dealers by the Adviser in its best
judgment. The primary consideration is prompt and effective execution of orders
at the most favorable price. Subject to that primary consideration, dealers may
be selected for research, statistical or other services to enable the Adviser to
supplement its own research and analysis with the views and information of other
securities firms.
Research services furnished by brokers through which the Fund effects
securities transactions may be used by the Adviser in advising other funds and
accounts it manages and, conversely, research services furnished to the Adviser
by brokers in connection with the other funds and accounts it manages may be
used by the Adviser in advising the Fund. Since such research services are
supplementary to the research efforts of the Adviser and must be analyzed and
reviewed by it, the receipt of such information is not expected to materially
reduce its overall expenses.
PORTFOLIO TURNOVER. The National Bond Portfolio's annual portfolio turnover
rate has exceeded 100% for the last three fiscal years. A rate of portfolio
turnover of 100% would occur if all of the portfolio were replaced in a period
of one year. To the extent that the National Bond Portfolio engages in
short-term trading in attempting to achieve its objective, it may increase
portfolio turnover and incur additional expenses than might otherwise be the
case. The portfolio turnover rate for recent fiscal years is shown under
"Financial Highlights" in the Fund's Prospectus.
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<PAGE>
CAPITAL STOCK
Each share of the Fund's common stock, $.01 par value, has one vote with
fractional shares voting proportionately. Shares of each Portfolio have equal
voting rights and preferences as to conversion, exchange, retirement or any
other feature. Shares have no preemptive rights, are freely transferable, are
entitled to dividends as declared by the Directors and, if the Fund were
liquidated, would receive the net assets of the Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
PURCHASES: Shares of the Fund are purchased at net asset value next calculated
after receipt of a purchase order. Minimum orders are $1,000 for an initial
purchase and $250 for each subsequent purchase. The Fund reserves the right to
reduce or waive the minimum purchase requirements in certain cases such as
pursuant to payroll deduction plans, etc., where subsequent and continuing
purchases are contemplated.
AUTOMATIC PURCHASES: The Fund offers a free service to its shareholders,
Valu-Matic, through which monthly investments of $25 or more may be made
automatically into the shareholder's Fund account. The required form to enroll
in this program is available upon request from the Distributor.
REDEMPTION: The right of redemption may be suspended, or the date of payment
postponed beyond the normal seven-day period, by the Fund under the following
conditions authorized by the 1940 Act: (1) For any period (a) during which the
New York Stock Exchange is closed, other than customary weekend and holiday
closing, or (b) during which trading on the New York Stock Exchange is
restricted; (2) For any period during which an emergency exists as a result of
which (a) disposal by the Fund of securities owned by it is not reasonably
practical, or (b) it is not reasonably practical for the Fund to determine the
fair value of its net assets; (3) For such other periods as the Securities and
Exchange Commission may by order permit for the protection of the Fund's
shareholders.
The value of shares of the National Bond Portfolio on redemption may be more
or less than the shareholder's cost, depending upon the market value of the
Fund's assets at the time. Shareholders should note that if a loss has been
realized on the sale of shares of the Fund, the loss may be disallowed for tax
purposes if shares of the same Fund are purchased within (before or after) 30
days of the sale.
If the Board of Directors determines that it is in the best interests of the
Fund, the Fund may redeem, upon prior written notice at net asset value, all
shareholder accounts which due to redemptions fall below $500 in net asset
value. In such event, an investor will have 30 days to increase the shares in
his account to the minimum level.
BY TELEPHONE OR WIRE (MONEY MARKET PORTFOLIO ONLY). You may redeem shares by
telephone or wire instructions to NFDS by so indicating on the initial
application. Payment will normally be transmitted on the business day following
receipt of your instructions to the bank account at a member bank of the Federal
Reserve System you have designated on your initial purchase application. The
Fund employs reasonable procedures to confirm that instructions communicated by
telephone are genuine. These procedures include requiring some form of personal
identification prior to acting upon instructions received by telephone. The Fund
will not be liable for following instructions communicated by telephone that it
reasonably believes to be genuine. Any loss will be borne by the investor. Heavy
wire traffic may delay the arrival of a wire until after public hours at your
bank. Telephone or wire redemptions must be in amounts of $1,000 or more and
your instructions
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<PAGE>
must include your name and account number. The number to call before the close
of business on the New York Stock Exchange is 1-800-243-2729. Procedures for
redeeming Fund shares by telephone may be modified or terminated without notice
at any time by the Fund.
BY CHECK (MONEY MARKET PORTFOLIO ONLY). You may elect this method of redemption
by so indicating on the initial application and you will be provided a supply of
checks by NFDS. These checks may be made payable to the order of any person in
any amount of $500 or more. When your check is presented for payment, the Fund
will redeem a sufficient number of full and fractional shares in your account to
cover the amount of the check. Dividends will be earned by the shareholder on
the check proceeds until it clears. Checks will be returned unpaid if there are
insufficient shares to meet the withdrawal amount.
This method of redemption requires that your shares must remain in an open
account and that no share certificates are issued and outstanding. You cannot
close your account through the issuance of a check because the exact balance at
the time your check clears will not be known when you write the check.
If you use this privilege you will be required to sign a signature card
which will subject you to State Street Bank and Trust Company's rules and
regulations governing checking accounts. The authorization form which you must
sign also contains a provision relieving the bank, NFDS, the Fund, Value Line
Securities and the Adviser from liability for loss, if any, which you may
sustain arising out of a non-genuine instruction pursuant to this redemption
feature. Any additional documentation required to assure a genuine redemption
must be maintained on file with NFDS in such a current status as NFDS may deem
necessary. A new form properly signed and with the signature guaranteed must be
received and accepted by NFDS before authorized redemption instructions already
on file with NFDS can be changed.
An additional supply of checks will be furnished upon request. There
presently is no charge to the shareholder for these checks or their clearance.
However, the Fund and NFDS reserve the right to make reasonable charges and to
terminate or modify any or all of the services in connection with this privilege
at any time and without prior notice. NFDS will impose a $5 fee for stopping
payment of a check upon your request or if NFDS cannot honor the check due to
insufficient funds or for other valid reasons.
IMPORTANT: Shares purchased by check may not be redeemed until the Fund is
reasonably assured of the final collection of the purchase check which may take
up to 15 days.
CALCULATION OF NET ASSET VALUE: The net asset value per share of each Portfolio
for purposes of both purchases and redemptions is determined once daily as of
the close of regular trading on the New York Stock Exchange (generally 4:00
p.m., New York time) on each day that the New York Stock Exchange is open for
trading except on days on which no orders to purchase, sell or redeem Fund
shares have been received. The New York Stock Exchange is currently closed on
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day
and on the preceding Friday or subsequent Monday if one of those days falls on a
Saturday or Sunday, respectively.
NATIONAL BOND PORTFOLIO. Bonds and other fixed-income securities of the
National Bond Portfolio are valued on the basis of prices provided by an
independent pricing service approved by the Board of Directors. Because of the
large number of outstanding issues of municipal bonds, the majority of issues do
not trade each day; therefore, recent last sale prices are not always available.
In valuing such securities, the pricing service generally takes into account
institutional-size trading in similar
B-13
<PAGE>
groups of securities and any developments related to specific securities.
Securities are valued by the pricing service at the most recent available bid
prices provided by investment dealers when such prices are readily available and
are representative of the bid side of the market. (The municipal bond market is
typically a "dealer" market, meaning that investment dealers buy and sell bonds
for their own accounts rather than for customers. As a result, the "spreads" or
differences between bid and asked prices for certain municipal bonds may differ
substantially among dealers.)
The methods used by the pricing service and the valuations so established
are periodically reviewed by the officers of the Fund under the general
supervision of the Board of Directors. There are a number of pricing services
available and the Directors, on the basis of ongoing evaluation of these
services, may use other pricing services or discontinue the use of any pricing
service in whole or in part. Short-term instruments maturing within 60 days of
the date of purchase will be valued at amortized cost, unless this does not
represent fair value. Other assets and securities for which no quotations are
readily available will be valued at their fair value as the Board of Directors
or persons acting at their direction may determine.
MONEY MARKET PORTFOLIO. It is the policy of the Money Market Portfolio to
attempt to maintain a net asset value of $1.00 per share for purposes of sales
and redemptions. The instruments held by the Money Market Portfolio are valued
on the basis of amortized cost which does not take into account unrealized
capital gains or losses. This involves valuing an instrument at cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Portfolio would receive if it sold the
instrument. Thus, if the use of amortized cost by the Portfolio resulted in a
lower aggregate portfolio value on a particular day, a prospective investor in
the Portfolio would be able to obtain a somewhat higher yield than would result
from investment in a fund utilizing solely market values, and existing investors
in the Portfolio would receive less investment income. The converse would apply
in a period of rising interest rates.
The valuation of securities based upon their amortized cost and the
commitment to maintain the Portfolio's per share net asset value of $1.00 is
permitted by Rule 2a-7 under the Investment Company Act of 1940 (the "1940
Act"). The rule requires that the Fund maintain a dollar-weighted average
portfolio maturity for the Money Market Portfolio of 90 days or less, purchase
instruments which have remaining maturities of 397 days or less only (except
those which have a maturity in excess of 397 days but which permit the holder to
demand payment at any time or at a specified time within 397 days), and invest
only in securities determined by the Adviser (or where appropriate by the Board
of Directors) to present minimal credit risks and that are, at the time of
acquisition, eligible securities. The Directors have established procedures
designed to achieve this objective including a review of the portfolio's
holdings by the Directors, at such intervals as they may deem appropriate, to
determine whether the portfolio's net asset value calculated by using available
market quotations deviates from $1.00 per share based on amortized cost. The
extent of any deviation will be examined by the Directors and if such deviation
exceeds 1/2 of 1%, the Directors will promptly consider what action, if any,
will be initiated. In the event the Directors determine that a deviation exists
which may result in material dilution or other unfair results to investors or
existing shareholders, they have agreed to take such corrective action as they
regard as necessary and appropriate, including selling portfolio instruments
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturity, withholding dividends, making a special capital
distribution, redeeming shares in kind, or establishing a net asset value per
share by using available market quotations.
B-14
<PAGE>
TAXES
The Fund intends to pay federally tax-exempt distributions derived from
qualifying municipal securities. The Fund intends to continue to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). The Fund so qualified during the Fund's last fiscal year. By so
qualifying, the Fund is not subject to Federal income tax on its net investment
income or net realized capital gains which are distributed to shareholders
(whether or not reinvested in additional Fund shares). If the Fund fails to
qualify as a regulated investment company, its earnings will be subject to tax
at a minimum corporate tax rate of 35%.
To qualify for taxation as a regulated investment company, the Fund must,
among other things: (i) distribute to its shareholders at least the sum of 90%
of its taxable net investment income (for this purpose consisting of taxable net
investment income and net realized short-term capital gains) plus 90% of its net
tax-exempt interest income; (ii) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of securities, gains from
the sale or other disposition of securities, or other income (including, but not
limited to, gains from options, futures, and forward contracts) derived with
respect to the Fund's business of investing in securities; and (iii) diversify
its holdings so that, at the end of each fiscal quarter of the Fund (a) at least
50% of the market value of the Fund's assets is represented by cash,
U.S. government securities and other securities, with those other securities
limited, with respect to any one issuer, to an amount no greater in value than
5% of the Fund's total assets and to not more than 10% of the outstanding voting
securities of the issuer, and (b) not more than 25% of the market value of the
Fund's assets is invested in the securities of any one issuer (other than
U.S. government securities or securities of other regulated investment
companies) or of two or more issuers that the Fund controls and that are
determined to be in the same or similar trades or businesses or related trades
or businesses.
The Code requires each regulated investment company to pay a nondeductible
4% excise tax to the extent the company does not distribute, during each
calendar year, 98% of its ordinary income, determined on a calendar year basis,
and 98% of its capital gains, determined, in general, on an October 31 year end,
plus certain undistributed amounts from previous years. The Fund anticipates
that it will make sufficient timely distributions to avoid imposition of the
excise tax.
Distributions of net tax-exempt income, in the form of "exempt-interest
dividends", are excludable from the shareholder's income for federal income tax
purposes (except as provided below) if the Fund qualifies to pay exempt-interest
dividends. Distributions of other investment income and any realized short-term
capital gains are taxable to shareholders as ordinary income. The Fund does not
anticipate that any distributions will be eligible for the dividends-received
deduction for corporate shareholders.
Distributions of realized long-term capital gains are taxable to
shareholders as long-term capital gain, regardless of the length of time the
shares of the Fund have been held by such shareholders and regardless of whether
the distribution is received in cash or is reinvested in additional Fund shares.
The computation of net capital gains takes into account any capital loss
carryforward of the Fund. For federal income tax purposes, the National Bond
Portfolio had a capital loss carryover at February 29, 2000 of $4,285,227 which
will expire in 2008; the Money Market Portfolio had a capital loss carryover at
February 29, 2000, of $10,140 of which $998 will expire in 2004, $1,285 in 2005,
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<PAGE>
$2,067 in 2006, $5,267 in 2007 and $523 in 2008. To the extent future capital
gains are offset by such capital losses, the Money Market Portfolio does not
anticipate distributing any such gains to its shareholders.
Investments in the Fund generally would not be suitable for non-taxable
entities, such as tax-exempt institutions, qualified retirement plans, H.R. 10
plans and individual retirement accounts since such investors would not gain any
additional federal tax benefit from receiving tax-exempt income.
The Code may require a shareholder who receives exempt-interest dividends to
treat as taxable income a portion of certain otherwise non-taxable social
security and railroad retirement benefit payments. Futhermore, that portion of
any dividend paid by the Fund which represents income derived from private
activity bonds held by the Fund may not retain its tax-exempt status in the
hands of a shareholder who is a "substantial user" of a facility financed by
such bonds, or a "related person". Moreover, some or all of the Fund's dividends
may be a specific preference item or a component of an adjustment item, for
purposes of determining federal alternative minimum taxes. Interest on
indebtedness incurred by a shareholder to purchase or carry the Fund's shares
generally is not deductible for federal income tax purposes. In addition, if a
shareholder holds shares for six months or less, any loss on the sale or
exchange of those shares will be disallowed to the extent of the amount of
exempt-interest dividends received with respect to the shares. In addition, the
receipt of Fund dividends and distributions may affect a foreign corporate
shareholder's federal "branch profits" tax liability and a Subchapter
S corporation shareholder's federal "excess net passive income" tax liability.
Shareholders should consult their own tax advisers as to whether they (i) may be
"substantial users" with respect to a facility or "related" to such users within
the meaning of the Code and (ii) are subject to a federal alternative minimum
tax, the federal "branch profits" tax, or the federal "excess net passive income
tax.
All distributions including distributions of exempt-interest dividends,
whether received in Fund shares or cash, must be reported by each shareholder on
his federal income tax return. Although exempt-interest dividends are reportable
on one's tax return, those dividends are excludable from the investor's taxable
income for federal income tax purposes. Under the Code, dividends declared by
the Fund in October, November and December of any calendar year, and payable to
shareholders of record in such month, shall be deemed to have been received by
the shareholder on December 31 of such calendar year if such dividend is
actually paid in January of the following calendar year.
A distribution by the Fund reduces the Fund's net asset value per share.
Such a distribution may be taxable to the shareholder as ordinary income or
capital gain as described above, even though, from an investment standpoint, it
may constitute a return of capital. In particular, investors should be careful
to consider the tax implications of buying shares just prior to a distribution.
The price of shares purchased at the time at the net asset value per share
includes the amount of the forthcoming distribution. Those purchasing just prior
to a distribution will then receive a return of capital upon the distribution
which may nevertheless be taxable to them.
For shareholders who fail to furnish to the Fund their social security or
taxpayer identification numbers and certain related information or who fail to
certify that they are not subject to back-up withholding, dividends,
distributions of capital gains and redemption proceeds paid by the Fund will be
subject to a 31% Federal income tax withholding requirement. If the withholding
provisions are
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<PAGE>
applicable, any such dividends or capital-gains distributions to these
shareholders, whether taken in cash or reinvested in additional shares, and any
redemption proceeds will be reduced by the amounts required to be withheld.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents, domestic
corporations and partnerships, and certain trusts and estates) and is not
intended to be a complete discussion of all Federal tax consequences.
Shareholders are advised to consult with their tax advisers concerning the
application of Federal, state and local taxes to an investment in the Fund.
PERFORMANCE DATA
From time to time, the Fund may state its total return in advertisements and
investor communications. Total return may be stated for any relevant period as
specified in the advertisement or communication. Any statements of total return
or other performance data on the Fund will be accompanied by information on the
Fund's average annual compounded rate of return for the periods of one year,
five years and ten years, all ended on the last day of a recent calendar
quarter. The Fund may also advertise aggregate total return information for
different periods of time.
A portfolio's average annual compounded rate of return is determined by
reference to a hypothetical $1,000 investment that includes capital appreciation
and depreciation for the stated period, according to the following formula:
P(1+T) to the power of n= ERV
Where: P = a hypothetical initial purchase order of
$1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of the
hypothetical $1,000 purchase at the end
of the period.
The National Bond Portfolio's average annual total returns for the one, five
and ten year periods ending February 29, 2000 were -4.30%, 4.63% and 5.88%,
respectively.
The Fund's total return may be compared to relevant indices and data from
Lipper Analytical Services, Inc. or Morningstar.
From time to time, evaluations of the Fund's performance by independent
sources may also be used in advertisements and in information furnished to
present or prospective investors in the Fund.
The yield computation for the National Bond Portfolio is determined by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period and annualizing
the resulting figure, according to the following formula:
a - b 6
Yield = 2 [( +1) -1]
---
cd
where: a = dividends and interest earned during the
period (calculated as required by the
Securities and Exchange Commission);
b = expenses accrued for the period (net of
reimbursements);
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<PAGE>
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends;
d = the maximum offering price per share on
the last day of the period.
The above formula will be used in calculating quotations of yield, based on
specified 30-day periods identified in advertising by the Fund.
The Fund may also, from time to time, include a reference to its current
quarterly or annual distribution rate in investor communications and sales
literature preceded or accompanied by a Prospectus, reflecting the amounts
actually distributed to shareholders which could include capital gains and other
items of income not reflected in the Fund's yield, as well as interest and
dividend income received by the Fund and distributed to shareholders (which is
reflected in the Fund's yield).
All calculations of the Fund's distribution rate are based on the
distributions per share which are declared, but not necessarily paid, during the
fiscal year. The distribution rate is determined by dividing the distributions
declared during the period by the maximum offering price per share on the last
day of the period and annualizing the resulting figure. In calculating its
distribution rate, the Fund uses the same assumptions that apply to its
calculation of yield. The distribution rate does not reflect capital
appreciation or depreciation in the price of the Fund's shares and should not be
considered to be a complete indicator of the return to the investor on his
investment.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's current yield, total return or
distribution rate for any period should not be considered as a representation of
what an investment may earn or what an investor's total return, yield or
distribution rate may be in any future period.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended February 29, 2000,
including the financial highlights for each of the five fiscal years in the
period ended February 29, 2000, appearing in the 2000 Annual Report to
Shareholders and the report thereon of PricewaterhouseCoopers LLP, independent
accountants, appearing therein, are incorporated by reference in this Statement
of Additional Information.
SECURITY RATINGS
RATINGS OF MUNICIPAL SECURITIES
MOODY'S INVESTORS SERVICE, INC. Aaa--the "best quality". Aa--"high quality
by all standards", but margins of protection or other elements make long-term
risks appear somewhat larger than Aaa rated municipal bonds. A--"upper medium
grade obligations". Security for principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
sometime in the future. Baa--"medium grade"; neither highly protected nor poorly
secured; interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time; lack outstanding
investment characteristics and in fact may have speculative characteristics as
well.
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<PAGE>
STANDARD & POOR'S RATINGS SERVICES. AAA--"obligations of the highest
quality". AA--issues with investment characteristics "only slightly less marked
than those of the prime quality issues." A--"the third strongest capacity for
payment of debt service". Principal and interest payments on bonds in this
category are regarded as safe. It differs from the two higher ratings because,
with respect to general obligations bonds, there is some weakness which, under
certain adverse circumstances, might impair the ability of the issuer to meet
debt obligations at some future date. With respect to revenue bonds, debt
service coverage is good, but not exceptional, and stability of the pledged
revenues could show some variations because of increased competition or economic
influences in revenues. BBB--the lowest "investment grade" security rating. The
difference between A and BBB ratings is that the latter shows more than one
fundamental weakness, or one very substantial fundamental weakness. With respect
to revenue bonds, debt coverage is only fair. Stability of the pledged revenues
could show substantial variations, with the revenue flow possibly being subject
to erosion over time.
RATINGS OF MUNICIPAL NOTES
MOODY'S INVESTORS SERVICE, INC. MIG-1: the best quality. MIG-2: high
quality, with margins for protection ample although not so large as in the
preceding group. MIG-3: favorable quality, with all security elements accounted
for, but lacking the undeniable strength of the preceding grades. Market access
for refinancing, in particular, is likely to be less well established.
STANDARD & POOR'S CORPORATION. SP-1: Very strong capacity to pay principal
and interest. SP-2: Satisfactory capacity to pay principal and interest.
RATINGS OF COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC. PRIME-1: highest quality; PRIME-2: higher
quality.
STANDARD & POOR'S CORPORATION. A-1: A very strong degree of safety. A-2:
Strong degree of safety.
RATINGS OF CORPORATIONS
The Value Line financial strength rating of A++, A+, A or B++ indicates that
the company is within the financially strongest one-half of the approximately
3,500 companies followed by the Standard and Expanded Editions of The Value Line
Investment Survey.
The Value Line ratings are based upon computer analysis of a number of key
variables that measure (a) financial leverage, (b) business risk and (c) company
size plus, in the Standard Edition of The Value Line Investment Survey, the
judgment of senior analysts regarding factors that cannot be quantified
across-the-board for all stocks. The primary variables that are indexed and
studied include equity coverage of debt, equity coverage of intangibles, "quick
ratio," accounting methods, variability of return, quality of fixed charge
coverage, stock price stability, and company size.
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