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VALUE LINE CONVERTIBLE FUND, INC.
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PROSPECTUS
SEPTEMBER 1, 1999
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[LOGO]
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.
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TABLE OF CONTENTS
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FUND SUMMARY
What is the Fund's goal? PAGE 2
What are the Fund's main investment strategies? PAGE 2
What are the main risks of investing in the Fund? PAGE 2
How has the Fund performed? PAGE 4
What are the Fund's fees and expenses? PAGE 5
HOW WE MANAGE THE FUND
Our principal investment strategies PAGE 6
The principal risks of investing in the Fund PAGE 9
WHO MANAGES THE FUND
Investment Adviser PAGE 11
Management fees PAGE 11
Portfolio management PAGE 11
ABOUT YOUR ACCOUNT
How to buy shares PAGE 12
How to sell shares PAGE 14
Special services PAGE 16
Dividends, distributions and taxes PAGE 16
FINANCIAL HIGHLIGHTS
Financial Highlights PAGE 17
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FUND SUMMARY
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WHAT IS THE FUND'S GOAL?
The Fund's investment objective is to seek high current
income together with capital appreciation. Although the Fund
will strive to achieve its goal, there is no assurance that
it will.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
To achieve the Fund's goals, we invest, under normal
conditions, at least 70% of the Fund's net assets in
"convertible securities"--that is bonds, debentures,
corporate notes, preferred stocks or other securities which
are convertible into common stock. These may include Rule
144A securities and high yielding bonds (known as "junk
bonds").
In selecting securities for purchase or sale, we may rely on
the Value Line Ranking System for convertible securities. The
return provided by a convertible security depends largely on
the performance of the common stock for which it can be
exchanged. Thus, Value Line's evaluation of the convertible
security begins with its ranking of the underlying common
stock, using the Value Line Timeliness-TM- Ranking System or
the Value Line Performance-TM- Ranking System. The rank for
the common stock is then combined with the Adviser's
evaluation of the convertible. The Fund will usually invest
in convertible securities ranked 1, 2 or 3 by the Value Line
Ranking System. The Fund's portfolio will be actively traded.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
Investing in any mutual fund 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 you invest. Therefore, before you invest in this Fund
you should carefully evaluate the risks.
Convertible securities are often lower-quality debt
securities and have less potential for gain or loss than
common stock. High-yielding, lower rated securities (junk
bonds) have certain speculative characteristics and involve
greater investment risk, including the possibility of default
or bankruptcy, greater price volatility and possible lack of
liquidity, than is the case with higher rated securities.
2
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One of the risks that you assume when investing in the Fund
is market risk, the possibility that the securities in a
certain market will decline in value because of factors such
as economic conditions. Market risk may affect a single
issuer, industry, sector of the economy or the market as a
whole. There is also the risk that any of the Fund's holdings
could have its credit rating downgraded or the issuer could
default, or there could be a sharp rise in interest rates
causing the value of certain of the Fund's securities to
fall.
The price of Fund shares will increase and decrease according
to changes in the value of the Fund's investments. The Fund
will be affected by changes in stock prices which tend to
fluctuate more than bond prices and by changes in interest
rates.
The Fund has a high portfolio turnover rate which may
negatively affect the Fund's performance.
Because the Fund may use the Value Line Ranking System, there
is the risk that securities not covered by the Ranking System
or lower rated securities will appreciate to a greater extent
than those securities in the Fund's portfolio.
An investment in the Fund is not a complete investment
program and you should consider it just one part of your
total investment program. For a more complete discussion of
risk, please turn to page 9.
3
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HOW HAS THE FUND PERFORMED?
This bar chart and table can help you evaluate the potential
risks of investing in the Fund. We show how returns for the
Fund's 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 all compared to the performance of
the S&P 500-Registered Trademark- Index, which is a broad
based market index. You should remember that unlike the Fund,
the index is unmanaged and does not include the costs of
buying, selling, and holding the securities. The Fund's past
performance is not necessarily an indication of how it will
perform in the future.
TOTAL RETURNS AS OF 12/31 EACH YEAR (%)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989 10.72%
1990 -3.72%
1991 28.71%
1992 13.83%
1993 14.83%
1994 -5.28%
1995 22.75%
1996 20.20%
1997 17.03%
1998 0.54%
</TABLE>
<TABLE>
<S> <C> <C>
BEST QUARTER: Q1 1991 +10.15%
WORST QUARTER: Q3 1998 (11.78%)
</TABLE>
As of June 30, 1999, the Fund had a year-to-date total return
of 4.51%.
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
10
1 YEAR 5 YEARS YEARS
<S> <C> <C> <C>
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VALUE LINE CONVERTIBLE FUND 0.54% 10.46% 11.42%
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S&P 500-REGISTERED TRADEMARK- INDEX 28.58% 24.06% 19.21%
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</TABLE>
4
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WHAT ARE THE FUND'S FEES AND EXPENSES?
These tables describe the fees and expenses you pay in
connection with an investment in the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
<S> <C>
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MAXIMUM SALES CHARGES (LOAD) IMPOSED ON PURCHASES NONE
AS A PERCENTAGE OF OFFERING PRICE
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MAXIMUM DEFERRED SALES CHARGES (LOAD) AS A NONE
PERCENTAGE OF ORIGINAL PURCHASE PRICE OR
REDEMPTION PRICE, WHICHEVER IS LOWER
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MAXIMUM SALES CHARGES (LOAD) IMPOSED ON REINVESTED
DIVIDENDS NONE
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REDEMPTION FEE NONE
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EXCHANGE FEE NONE
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</TABLE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS)
<TABLE>
<CAPTION>
<S> <C>
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MANAGEMENT FEES 0.75%
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DISTRIBUTION AND SERVICE (12b-1) Fees None
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Other Expenses 0.25%
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Total Annual Fund Operating Expenses 1.00%
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</TABLE>
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 would be the
same whether you sold your shares at the end of each period
or continue 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>
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VALUE LINE CONVERTIBLE FUND $102 $318 $552 $1,225
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</TABLE>
5
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HOW WE MANAGE THE FUND
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OUR PRINCIPAL INVESTMENT STRATEGIES
Because of the nature of the Fund, 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. The
following is a description of how the Adviser pursues the
Fund's objectives.
Under normal conditions, the Fund will invest at least 70% of
its net assets in convertible securities. The balance of the
Fund's portfolio may include non-convertible debt or equity
securities, U.S. government securities, warrants, repurchase
agreements or other money market instruments. Securities
received upon conversion or exercise of warrants and
securities remaining upon the breakup of units or detachments
of warrants may also be retained in the Fund's portfolio to
permit orderly disposition or for federal income tax
purposes. The Fund is not required to sell securities for the
purpose of assuring that 70% of its assets are invested in
convertible securities.
Convertible securities are often lower-quality debt
securities and have less potential for gain or loss than
common stock. The Fund may invest in high yielding, lower
rated bonds known as "junk bonds". These are rated below
investment grade by independent rating agencies or are not
rated but which the Adviser considers to be of comparable
credit.
In selecting securities for purchase or sale, the Adviser may
rely on the Value Line Ranking System for convertible
securities which has evolved over many years of research. The
return provided by a convertible security depends largely on
the performance of the common stock for which it can be
exchanged. Thus, the Value Line Ranking System's evaluation
of the convertible begins with its ranking of the underlying
common stock, using the Value Line Timeliness-TM- Ranking
System or the Value Line Performance-TM- Ranking System.
The Value Line Timeliness Ranking System has evolved after
many years of research and has been used in substantially its
present form since 1965. It is based upon historical prices
and reported earnings, recent earnings and price momentum and
the degree to which the latest reported earnings deviated
from estimated earnings, among other factors. The Timeliness
Rankings are published weekly in the Standard Edition of The
Value Line Investment Survey for approximately 1,700 of the
most actively traded stocks in U.S. markets, including stocks
with large, mid and small market capitalizations.
6
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There are only a few stocks of foreign issuers that are
included and stocks that have traded for less than two years
are not ranked. On a scale of 1 (highest) to 5 (lowest), the
rankings compare the Adviser's estimate of the probable
market performance of each stock during the coming six to
twelve months relative to all 1,700 stocks under review. The
Rankings are updated weekly to reflect the most recent
information.
The Value Line Performance Ranking System for common stocks
was introduced in 1995. It is a variation of the Value Line
Small-Capitalization Ranking System, which has been employed
by the Adviser in managing private accounts since 1981, and
in managing the Value Line Small-Cap Growth Fund, Inc. since
1993.
The Performance Ranking System evaluates the approximately
1,800 stocks in the Expanded Edition of The Value Line
Investment Survey which consists of stocks with mostly
smaller market capitalizations (under $1 billion) and only a
few stocks of foreign issuers. This stock ranking system
relies on factors similar to those found in the Value Line
Timeliness Ranking System except that it does not utilize
earnings estimates. The Performance Ranks use a scale of 1
(highest) to 5 (lowest) to compare the Adviser's estimate of
the probable market performance of each Expanded Edition
stock during the coming six to twelve months relative to all
1,800 stocks under review in the Expanded Edition.
The rank for the common stock is then combined with the
Adviser's evaluation of the convertible. Using a statistical
evaluation model, a rank is assigned to the approximately 375
convertibles and more than 18 warrants in The Value Line
Convertibles Survey issued by companies that are ranked in
The Value Line Investment Survey. An additional 225
convertibles and 102 warrants are evaluated but not ranked
because the underlying stocks are not ranked by The Value
Line Investment Survey. The Value Line Convertible Ranking
System, which has been published in essentially its present
form since 1973, makes a comparison of the historic price
relationship of the convertible to its underlying stock (or
to other issues of a similar nature) making adjustments for
any changes in conditions that have occurred, to estimate the
degree to which the convertible may be underpriced or
overpriced. Convertibles issued by companies that are ranked
by The Value Line Investment Survey are then ranked on a
scale of 1 (highest) to 5 (lowest) based on the total return
(from income or dividends plus
7
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appreciation) the Adviser estimates it will provide relative
to its risk during the coming year. The Value Line
Convertible Rankings are published four times a month in The
Value Line Convertibles Survey.
The Value Line Rankings do not eliminate market risk, but the
Adviser believes that they provide objective standards for
determining expected relative performance over the next six
to twelve months. Under normal conditions, the Fund will
purchase convertible securities ranked 1 or 2 although it may
also purchase securities ranked 3; those convertible
securities that fall in rank below 3 will be sold as soon as
practical, although those ranked 1, 2 or 3 may also be sold
if the Adviser deems a sale advisable. The number of
convertible securities ranked 1 and 2 will change from week
to week. As of June 21, 1999, there were 77 convertible
securities ranked 1 and 90 ranked 2, not all of which will be
purchased by the Fund. The utilization of these Rankings is
no assurance that the Fund will perform more favorably than
the market in general over any particular period.
The Fund also may purchase certain restricted securities
("Rule 144A securities") for which there is a secondary
market of qualified institutional buyers, as contemplated by
Rule 144A under the Securities Act of 1933. Rule 144A
provides an exemption from the registration requirements of
the Securities Act for the resale of certain restricted
securities to qualified institutional buyers.
TEMPORARY DEFENSIVE POSITION
From time to time in response to adverse market, economic,
political or other conditions, we may invest a portion of the
Fund's assets in cash, cash equivalents or U.S. Government
securities for temporary defensive purposes. This could help
the Fund avoid losses, but it may result in lost
opportunities. If this becomes necessary, the Fund's assets
may not be invested in accordance with its strategy and may
not achieve its investment objectives.
PORTFOLIO TURNOVER
The Fund engages in active and frequent trading of portfolio
securities in order to take advantage of better investment
opportunities to achieve its investment objectives which
results in higher brokerage commissions and other expenses.
High portfolio turnover may negatively affect the Fund's
performance. Portfolio turnover may also result in capital
gain distributions that could raise your income tax
liability.
8
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THE PRINCIPAL RISKS OF INVESTING IN THE FUND
/ / Because the Fund may invest a substantial portion of its
assets in convertible securities, the value of the
securities in its portfolio might decrease in response
to the activities of an individual company or in
response to general market or economic conditions. If
this occurs, the Fund's share price may decrease.
/ / Debt securities represent the contractual obligation of
an issuer to pay interest and to repay the principal
upon maturity and are subject to interest rate and
credit risks. Interest rate risk is the decline in debt
securities that usually accompanies a rise in interest
rates. Credit risk refers to the possibility that a debt
security could have its credit downgraded or that the
issuer will fail to pay the principal or interest when
due.
/ / High yielding, lower rated securities (junk bonds) have
certain speculative characteristics, are subject to
greater market fluctuations and involve greater
investment risk, including the possibility of default or
bankuptcy, and risk of loss of income and principal,
than is the case with lower yielding, higher-rated
securities.
/ / Issuers of lower-rated securities are more likely to
experience financial stress in periods of economic
downturn or rising interest rates. In addition, the
issuer's ability to service its debt may be adversely
affected by poor management, inability to meet business
forecasts or unavailability of additional financing.
/ / The Fund's use of the Value Line Ranking Systems
involves the risk that over certain periods of time the
price of securities not covered by the Ranking Systems,
or lower ranked securities, may appreciate to a greater
extent than those securities in the Fund's portfolio.
/ / Certain securities may be difficult or impossible to
sell at the time and price that the Fund would like. The
Fund may have to lower the price, sell other securities
instead or forego an investment opportunity. This could
have a negative effect on the Fund's performance.
/ / 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
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YEAR 2000 RISKS
Like other mutual funds, the Fund could be adversely affected
if the computer systems used by the Adviser and the Fund's
service providers do not properly process and calculate
date-related information and data from and after January 1,
2000. This is commonly known as the "Year 2000 Problem." The
Adviser is taking steps that it believes are reasonably
designed to address the Year 2000 Problem with respect to the
computer systems that it uses and to obtain satisfactory
assurances that comparable steps are being taken by the
Fund's other major service providers. At this time, however,
there can be no assurance that these steps will be sufficient
to avoid any adverse impact to the Fund.
The Year 2000 Problem is expected to impact corporations,
which may include issuers of portfolio securities held by the
Fund, to varying degrees based upon various factors,
including, but not limited to, the corporation's industry
sector and degree of technological sophistication. The Fund
is unable to predict what impact, if any, the Year 2000
Problem will have on issuers of the portfolio securities held
by the Fund.
10
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WHO MANAGES THE FUND
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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, The Value
Line Convertibles Survey and other publications.
MANAGEMENT FEES
For managing the Fund and its investments, the Adviser is
paid a yearly fee of 0.75% 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 portfolio.
11
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ABOUT YOUR ACCOUNT
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HOW TO BUY SHARES
/ / By telephone
Once you have opened an account, you can buy additional
shares 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 419729, Kansas City,
MO 64141-6729. If you are making an initial purchase by mail,
you must include a completed Account Application or an
appropriate retirement plan application if you are opening a
retirement account, with your check. 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 $250. The price you
pay for shares will depend on when we receive your purchase
order.
/ / Time of purchase
Your price for Fund shares is the Fund's net asset value per
share (NAV), which is generally calculated as of the close of
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,
12
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Independence Day, Labor Day, Thanksgiving Day and 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 received by the Fund. 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.
/ / Net asset value
We calculate NAV by adding the market value of all the
securities and assets in the Fund's portfolio, deducting all
liabilities, and dividing the resulting number by the number
of shares outstanding. The result is the net asset value per
share. The Fund's convertible securities are valued on the
basis of prices provided by an independent pricing service.
Securities for which quotations are not available from the
pricing service, and all other assets of the Fund, are valued
at fair value as the Board of Directors or persons acting at
their direction may determine in good faith. Any investments
which have a maturity of less than 60 days we price at
amortized cost. The amortized cost method of valuation
involves valuing a security at its cost and accruing any
discount or premium over the period until maturity,
regardless of the impact of fluctuating interest rates on the
market value of the security.
13
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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
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
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.
14
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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.
/ / By exchange
You can exchange all or part of your investment in the Fund
for shares in other Value Line funds. You may have to pay
taxes on your exchange. 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 1-800-243-2729 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 date of purchase, before we send the
proceeds to you.
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.
REDEMPTION IN KIND
The Fund reserves the right to make a redemption in
kind--payment in portfolio securities rather than cash--if
the amount being redeemed is large enough to affect Fund
operations.
15
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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.
/ / 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.
/ / You may buy shares in the Fund for your individual or
group retirement plan, including your Regular or Roth
IRA. You may establish your IRA account even if you
already are a member of an employer-sponsored retirement
plan. Not all contributions to an IRA account are tax
deductible; consult your tax advisor about the tax
consequences of your contribution.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to pay dividends from its net investment
income quarterly and to distribute any capital gains that it
has realized annually. We automatically reinvest all
dividends and any capital gains, unless you instruct us
otherwise in your application to purchase shares.
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.
Distributions from a fund's long-term capital gains are
taxable as capital gains, while dividends from short-term
capital gains and net investment income are generally 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.
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FINANCIAL HIGHLIGHTS
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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.
FINANCIAL HIGHLIGHTS
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<TABLE>
<S> <C> <C> <C> <C> <C>
YEARS ENDED APRIL 30,
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1999 1998 1997 1996 1995
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NET ASSET VALUE, BEGINNING OF YEAR $14.80 $13.07 $14.10 $11.79 $12.26
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INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income .57 .65 .70 .66 .74
Net gains or losses on securities (both
realized and unrealized) (1.33) 2.50 .50 2.33 (.02)
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Total from investment operations (.76) 3.15 1.20 2.99 .72
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LESS DISTRIBUTIONS:
Dividends from net investment income (.60) (.67) (.65) (.68) (.76)
Distributions from realized capital gains (.67) (.75) (1.58) -- (.43)
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Total distributions (1.27) (1.42) (2.23) (.68) (1.19)
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NET ASSET VALUE, END OF YEAR $12.77 $14.80 $13.07 $14.10 $11.79
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TOTAL RETURN (4.64)% 25.04% 8.80% 26.07% 6.53%
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RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands) $ 69,277 $ 97,679 $ 68,684 $ 72,620 $ 50,523
Ratio of expenses to average
net assets 1.00%(1) .98%(1) 1.01%(1) 1.08% 1.08%
Ratio of net investment income to
average net assets 3.98% 4.63% 4.94% 5.14% 6.13%
Portfolio turnover rate 123% 111% 164% 129% 87%
</TABLE>
------------------------------------------------------------
(1) Before offset of custody credits. Including the custody
credits would not have changed the expense ratio. The
ratio of expenses to average net assets would not have
changed net of custody credits.
17
<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 September 1, 1999, 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.
You can find reports and other information about the Fund on
the SEC Web site (http://www.sec.gov), or you can get copies
of this information, after payment of a duplicating fee, by
writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. 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 1-800-SEC-0330.
INVESTMENT ADVISER SERVICE AGENT
Value Line, Inc. State Street Bank and Trust
220 East 42nd Street Company
New York, NY 10017-5891 c/o NFDS
P.O. Box 219729
Kansas City, MO 64121-9729
CUSTODIAN DISTRIBUTOR
State Street Bank and Trust Value Line Securities, Inc.
Company 220 East 42nd Street
225 Franklin Street New York, NY 10017-5891
Boston, MA 02110
Value Line Securities, Inc.
220 East 42nd Street, New
York, NY 10017-5891 File no. 811-4258
<PAGE>
VALUE LINE CONVERTIBLE 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
SEPTEMBER 1, 1999
- -------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of Value Line Convertible Fund, Inc.
dated September 1, 1999, 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 1999 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-6
Investment Advisory and Other Services.............................................. B-8
Brokerage Allocation and Other Practices............................................ B-9
Capital Stock....................................................................... B-10
Purchase, Redemption and Pricing of Shares.......................................... B-10
Taxes............................................................................... B-12
Performance Data.................................................................... B-13
Financial Statements................................................................ B-14
</TABLE>
B-1
<PAGE>
DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
HISTORY AND CLASSIFICATION. The Fund is an open-end, diversified management
investment company incorporated in Maryland in 1985. The Fund's investment
adviser is Value Line, Inc. (the "Adviser").
PRINCIPAL INVESTMENT STRATEGIES.
- RULE 144A SECURITIES. The Fund may purchase certain restricted securities
("Rule 144A securities") for which there is a secondary market of qualified
institutional buyers, as contemplated by Rule 144A under the Securities Act of
1933. Rule 144A provides an exemption from the registration requirements of the
Securities Act for the resale of certain restricted securities to qualified
institutional buyers. The Adviser, under the supervision of the Board of
Directors, will consider whether securities purchased under Rule 144A are liquid
or illiquid for purposes of the Fund's limitation on investment in securities
which are not readily marketable or are illiquid. Among the factors to be
considered are the frequency of trades and quotes, the number of dealers and
potential purchasers, dealer undertakings to make a market and the nature of the
security and the time needed to dispose of it. To the extent that the liquid
Rule 144A securities that the Fund holds become illiquid, due to lack of
sufficient qualified institutional buyers or market or other conditions, the
percentage of the Fund's assets invested in illiquid assets would increase. The
Adviser, under the supervision of the Board of Directors, will monitor the
Fund's investments in Rule 144A securities and will consider appropriate
measures to enable the Fund to maintain sufficient liquidity for operating
purposes and to meet redemption requests.
NON-PRINCIPAL INVESTMENT STRATEGIES AND ASSOCIATED RISKS.
- RESTRICTED OR ILLIQUID SECURITIES. On occasion, the Fund may purchase
securities which would have to be registered under the Securities Act of 1933 if
they were to be publicly distributed. However, it will not do so if the value of
such securities and other securities which are not readily marketable (including
repurchase agreements maturing in more than seven days) would exceed 10% of the
market value of its total assets. It is management's policy to permit the
occasional acquisition of such restricted securities only if (except in the case
of short-term, non-convertible debt securities) there is an agreement by the
issuer to register such securities, ordinarily at the issuer's expense, when
requested to do so by the Fund. The acquisition in limited amounts of restricted
securities is believed to be helpful toward the attainment of the Fund's
investment objective without unduly restricting its liquidity or freedom in the
management of its portfolio. However, because restricted securities may only be
sold privately or in an offering registered under the Securities Act of 1933, or
pursuant to an exemption from such registration, substantial time may be
required to sell such securities, and there is greater than usual risk of price
decline prior to sale. The Fund will not invest more than 10% of its assets in
illiquid securities. If more than 10% of the Fund's assets are determined to be
in illiquid securities, the Fund will take appropriate steps to protect
liquidity.
- COVERED CALL OPTIONS. The Fund may write covered call options on
securities held in its portfolio ("covered options") in an attempt to earn
additional income on its portfolio or to partially offset an expected decline in
the price of a security. When the Fund writes a covered call option, it gives
the purchaser of the option the right to buy the underlying common stock at the
price specified in the option (the "exercise price") at any time during the
option period. If the option expires unexercised, the Fund will realize income
to the extent of the amount received for the option (the "premium"). If the
option is exercised, a decision over which the Fund has no control, the Fund
must
B-2
<PAGE>
sell the underlying security to the option holder at the exercise price. By
writing a covered option, the Fund foregoes, in exchange for the premium less
the commission ("net premium"), the opportunity to profit during the option
period from an increase in the market value of the underlying security above the
exercise price. The Fund will not write call options in an aggregate amount
greater than 25% of its net assets and will only write call options which are
traded on a national securities exchange.
The Fund will purchase call options only to close out a position. When an
option is written on securities in the Fund's portfolio and it appears that the
purchaser of that option is likely to exercise the option and purchase the
underlying security, it may be considered appropriate to avoid liquidating the
Fund's position, or the Fund may wish to extinguish a call option sold by it so
as to be free to sell the underlying security. In such instances the Fund may
purchase a call option on the same security with the same exercise price and
expiration date which had been previously written. Such a purchase would have
the effect of closing out the option which the Fund has written. The Fund
realizes a gain if the amount paid to purchase the call option is less than the
premium received for writing a similar option and a loss if the amount paid to
purchase a call option is greater than the premium received for writing a
similar option. Generally, the Fund realizes a short-term capital loss if the
amount paid to purchase the call option with respect to a stock is greater than
the premium received for writing the option. If the underlying security has
substantially risen in value, it may be difficult or expensive to purchase the
call option for the closing transaction.
- LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
to broker-dealers or institutional investors if, as a result thereof, the
aggregate value of all securities loaned does not exceed 33 1/3% of the total
assets of the Fund (including the loan collateral). The loans will be made in
conformity with applicable regulatory policies and will be 100% collateralized
by cash, or liquid securities on a daily basis in an amount equal to the market
value of the securities loaned and interest earned. The Fund retains the right
to call the loaned securities upon notice and intends to call loaned voting
securities in anticipation of any important or material matter to be voted on by
stockholders. While there may be delays in recovery or even loss of rights in
the collateral should the borrower fail financially, the loans will be made only
to firms deemed by the Adviser to be of good standing and will not be made
unless, in the judgment of the Adviser, the consideration which can be earned
from such loans justifies the risk. The Fund may pay reasonable custodian and
administrative fees in connection with the loans.
- SHORT SALES. The Fund may from time to time make short sales of
securities in order to protect a profit or attempt to minimize a loss with
respect to convertible securities. The Fund will only make a short sale of a
security if it owns other securities convertible into an equivalent amount of
such securities. No more than 10% of the value of the Fund's net assets taken at
market may at any one time be held as collateral for such sales.
- 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 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.
B-3
<PAGE>
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both 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. The Board of
Directors monitors the creditworthiness of parties with which the Fund enters
into repurchase agreements.
- FOREIGN SECURITIES. The Fund may purchase U.S. dollar denominated
securities of foreign issuers which are publicly traded in the United States.
Foreign securities involve additional risks and may be affected by the strength
of foreign currencies relative to the U.S. dollar, or by political or economic
developments in foreign countries. Foreign companies may not be subject to
accounting standards or government supervision comparable to U.S. companies, and
there may be less public information about their operations. These risks are
typically greater for investments in less-developed countries whose governments
and financial markets may be more susceptible to adverse political and economic
developments. The Adviser considers these factors in making investments for the
Fund. There is no limitation on the amount of the Fund's assets that may be
invested in these types of foreign securities.
FUND POLICIES.
(i) The Fund may not issue senior securities except evidences of
indebtedness permitted under clause (ii) below.
(ii) The Fund may not borrow money in excess of 10% of the value of its
assets and then only as a temporary measure to meet unusually heavy
redemption requests or for other extraordinary or emergency purposes.
Securities will not be purchased while borrowings are outstanding. No assets
of the Fund may be pledged, mortgaged or otherwise encumbered, transferred
or assigned to secure a debt.
(iii) 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.
(iv) The Fund may not invest 25% or more of its assets in securities of
issuers in any one industry.
(v) The Fund may not purchase securities of other investment companies
or invest in real estate, mortgages or illiquid securities of real estate
investment trusts although the Fund may purchase securities of issuers which
engage in real estate operations.
(vi) The Fund may not lend money except 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 net assets.
The Fund may lend its portfolio securities to broker-dealers and
institutional investors if as a result thereof the aggregate value of all
securities loaned does not exceed 33 1/3% of the total assets of the Fund.
(vii) The Fund may not engage in short sales, except to the extent that
it owns other securities convertible into an equivalent amount of such
securities. Such transactions may only
B-4
<PAGE>
occur for the purpose of protecting a profit or in attempting to minimize a
loss with respect to convertible securities. No more than 10% of the value
of the Fund's net assets taken at market may at any one time be held as
collateral for such sales.
(viii) The Fund may not purchase or sell any put or call options or any
combination thereof, except that the Fund may write and sell covered call
option contracts on securities owned by the Fund. The Fund may also purchase
call options for the purpose of terminating its outstanding obligations with
respect to securities upon which covered call option contracts have been
written (i.e., "closing purchase transactions").
(ix) 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
voting securities, or any other class of securities, of any one issuer. For
purposes of this restriction, all outstanding debt securities of an issuer
are considered as one class, and all preferred stock of an issuer is
considered as one class. This restriction does not apply to obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
(x) 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.
(xi) The Fund may not purchase securities for the purpose of exercising
control over another company.
(xii) 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.
(xiii) The Fund may not invest in commodities or commodity contracts.
(xiv) 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.
(xv) The Fund may not purchase securities on margin or participate on a
joint or a joint and several basis in any trading account in securities.
(xvi) The Fund may not purchase oil, gas or other mineral type
development programs or leases, except that the Fund may invest in the
securities of companies which invest in or sponsor such programs.
(xvii) The investment objective of the Fund is to seek high current income
together with capital appreciation.
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. For purposes of industry
classifications, the Fund follows the industry classifications in The Value Line
Investment Survey.
B-5
<PAGE>
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 Board Chairman, President and Chief Executive
Age 64 of Directors and Officer of the Adviser and Value Line Pub-
President lishing, 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 Consultation
2801 New Mexico Ave., N.W. Service, Inc. Trustee Emeritus and Chairman
Washington, DC 20007 (1993-1994) of Duke University; President
Age 75 Emeritus, Williams College.
David H. Porter Director President Emeritus, Skidmore College since
5 Birch Run Drive January 1, 1999; Visiting Professor of
Saratoga Springs, NY 12866 Classics, Williams College, since July 1,
Age 63 1999; President, Skidmore College, 1987-1998;
Director of Adirondack Trust Company.
Paul Craig Roberts Director Chairman, Institute for Political Economy;
505 S. Fairfax Street Director, A. Schulman Inc. (plastics).
Alexandria, VA 22320
Age 60
Nancy-Beth Sheerr Director Chairman, Radcliffe College Board of
1409 Beaumont Drive Trustees.
Gladwyne, PA 19035
Age 50
Bruce Alston Vice President Portfolio Manager with the Adviser since
Age 53 1997; Portfolio Manager with Dreyfus
Management, Inc. 1994-1996, and Prudential
Capital Markets Group, 1981-1994.
</TABLE>
B-6
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH FUND PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- ---------------------------------- --------------------- ---------------------------------------------
<S> <C> <C>
Nathan N.J. Grant Vice President Portfolio Manager with the Adviser since
Age 29 1996; Trader, Fixed Income Securities,
Blaylock & Partner, 1994-1996.
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>
- --------------
* "Interested" director as defined in the Investment Company Act of 1940 (the
"1940 Act").
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 11 other Value Line
Funds.
The following table sets forth information regarding compensation of
Directors by the Fund and by the Fund and the eleven other Value Line Funds of
which each of the Directors is a director or trustee for the fiscal year ended
April 30, 1999. Directors who are officers or employees of the Adviser do not
receive any compensation from the Fund or any of the Value Line Funds.
COMPENSATION TABLE
FISCAL YEAR ENDED APRIL 30, 1999
<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 (12 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
David H. Porter 2,968 N/A N/A 35,620
Paul Craig Roberts 2,718 N/A N/A 32,620
Nancy-Beth Sheerr 2,968 N/A N/A 35,620
</TABLE>
B-7
<PAGE>
As of May 31, 1999, no person owned of record or, to the knowledge of the
Fund, owned beneficially, 5% or more of the outstanding stock of the Fund other
than Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco, CA 94104
which owned 528,939 shares or approximately 10.2% of the shares outstanding. The
Adviser and its affiliates owned 226,752 shares of record or approximately 4.4%
of the outstanding shares. Officers and directors of the Fund as a group owned
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 81% 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 Adviser was organized in 1982
and is the successor to substantially all of the operations of Arnold Bernhard &
Co., Inc. which with its predecessor had been in business since 1931.
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 3/4 of
1% of the Fund's average daily net assets during the year. During the fiscal
years ended April 30, 1997, 1998 and 1999, the Fund paid or accrued to the
Adviser advisory fees of $517,810, $638,379 and $592,362, respectively.
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 agent, 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.
B-8
<PAGE>
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 Adviser has imposed rules upon itself and such persons requiring
monthly reports of security transactions for their respective accounts and
restricting trading in various types of securities in order to avoid possible
conflicts of interest. The Adviser may from time to time, directly or through
affiliates, enter into agreements to furnish for compensation special research
or financial services to companies, including services in connection with
acquisitions, mergers or financings. In the event that such agreements are in
effect with respect to issuers of securities held in the portfolio of the Fund,
specific reference to such agreements will be made in the "Schedule of
Investments" in shareholder reports of the Fund. As of the date of this
Statement of Additional Information no such agreements exist.
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. 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 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.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Orders for the purchase and sale of portfolio securities are placed with
brokers and dealers who, in the judgment of the Adviser, are able to execute
them as expeditiously as possible and at the best obtainable price. Debt
securities are traded principally in the over-the-counter market on a net basis
through dealers acting for their own account and not as brokers. Purchases and
sales of securities which are not listed or traded on a securities exchange will
ordinarily be executed with primary market makers acting as principal, except
when it is determined that better prices and executions may otherwise be
obtained. The Adviser is also authorized to place purchase or sale orders with
brokers or dealers who may charge a commission in excess of that charged by
other brokers or dealers if the amount of the commission charged is reasonable
in relation to the value of the brokerage and research services provided. Such
allocation will be in such amounts and in such proportions as the Adviser may
determine. Orders may also be placed with brokers or dealers who sell shares of
the Fund or other funds for which the Adviser acts as investment adviser, but
this fact,
B-9
<PAGE>
or the volume of such sales, is not a consideration in their selection. During
the fiscal year ended April 30, 1997, 1998 and 1999, the Fund paid brokerage
commissions of $33,824, $22,709 and $28,811, respectively.
The Board of Directors has adopted procedures incorporating the standards of
Rule 17e-1 under the 1940 Act which requires that the commissions paid to Value
Line Securities or any other "affiliated person" be "reasonable and fair"
compared to the commissions paid to other brokers in connection with comparable
transactions. The procedures require that the Adviser furnish reports to the
Directors with respect to the payment of commissions to affiliated brokers and
maintain records with respect thereto. During the fiscal year ended April 30,
1999, $21,791 (76%) of the Fund's brokerage commissions were paid to brokers or
dealers solely for their services in obtaining the best prices and executions;
the balance, or $7,021 (24%), went to brokers or dealers who provided
information or services to the Adviser and, therefore, indirectly to the Fund
and to shareholders of the Value Line funds. The information and services
furnished to the Adviser include the furnishing of research reports and
statistical compilations and computations and the providing of current
quotations for securities. The services and information were furnished to the
Adviser at no cost to it; no such services or information were furnished
directly to the Fund, but certain of these services might have relieved the Fund
of expenses which it would otherwise have had to pay. Such information and
services are considered by the Adviser, and brokerage commissions are allocated
in accordance with its assessment of such information and services, but only in
a manner consistent with the placing of purchase and sale orders with brokers
and/or dealers, which, in the judgment of the Adviser, are able to execute such
orders as expeditiously as possible and at the best obtainable price. The Fund
is advised that the receipt of such information and services has not reduced in
any determinable amount the overall expenses of the Adviser.
PORTFOLIO TURNOVER. The Fund's annual portfolio turnover rate has exceeded
100% in each of the last four years. A rate of portfolio turnover of 100% would
occur if all of the Fund's portfolio were replaced in a period of one year. To
the extent that the Fund engages in short-term trading in attempting to achieve
its objective, it may increase portfolio turnover and incur higher brokerage
commissions and other expenses than might otherwise be the case. The Fund's
portfolio turnover rate for recent fiscal years is shown under "Financial
Highlights" in the Fund's Prospectus.
CAPITAL STOCK
Each share of beneficial interest of the Fund, $1 par value, has one vote
with fractional shares voting proportionately. Shares have no preemptive rights,
are freely transferable, are entitled to dividends as declared by the Trustees
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.
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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.
RETIREMENT PLANS: Shares of the Fund may be purchased as the investment medium
for various tax-sheltered retirement plans. Upon request, the Distributor will
provide information regarding eligibility and permissible contributions. Because
a retirement plan is designed to provide benefits in future years, it is
important that the investment objectives of the Fund be consistent with the
participant's retirement objectives. Premature withdrawals from a retirement
plan may result in adverse tax consequences. For more complete information,
contact Shareholder Services at 1-800-223-0818.
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 Fund 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.
It is possible that conditions may exist in the future which would, in the
opinion of the Board of Directors, make it undesirable for the Fund to pay for
redemptions in cash. In such cases the Board may authorize payment to be made in
portfolio securities or other property of the Fund. However, the Fund has
obligated itself under the 1940 Act to redeem for cash all shares presented for
redemption by any one shareholder up to $250,000 (or 1% of the Fund's net assets
if that is less) in any 90-day period. Securities delivered in payment of
redemptions are valued at the same value assigned to them in computing the net
asset value per share. Shareholders receiving such securities may incur
brokerage costs on their sales.
CALCULATION OF NET ASSET VALUE: The net asset value of the Fund's shares 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. The net asset value per share is determined by dividing
the total value of the investments and other assets of the Fund, less any
liabilities, by the total outstanding shares. Fixed-income corporate securities
are valued on the basis of prices provided by an independent pricing service
approved by the Trustees. In valuing such securities, the pricing service
generally takes into account appropriate factors such as institutional size
trading characteristics and other market data. Securities not priced in this
manner are valued at
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the midpoint between the latest available bid and asked prices in the principal
market (last sales price if the principal market is an exchange) in which such
securities are normally traded. Other assets and securities for which market
valuations are not readily available are valued at their fair value as the
Trustees or persons acting at their direction may determine. Short-term
instruments with maturities of 60 days or less at the date of purchase are
valued at amortized cost, which approximates market.
TAXES
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).
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.
Realized losses incurred after October 31, if so elected by the Fund, are
deemed to arise on the first day of the following fiscal year. In the year ended
April 30, 1999, the Fund did not incur such losses.
Distributions of net investment income and of the excess of net short-term
capital gain over net long-term capital loss are taxable to shareholders as
ordinary income. Distributions of the excess of net long-term capital gain over
net short-term capital loss (net capital gains) are taxable to the 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 in additional shares of the Fund. Because a
portion of the Fund's income will consist of dividends paid by U.S.
corporations, a portion of the dividends paid by the Fund will be eligible for
the corporate dividends-received deduction. The Fund will inform shareholders of
the amounts of qualifying dividends.
A distribution by the Fund will reduce the Fund's net asset value per share.
Such a distribution is 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 that time (at the net asset value per share) may
include the amount of the forthcoming distribution. Those purchasing just prior
to a distribution will then receive a return of capital upon the distribution
which will nevertheless be taxable to them. All distributions, whether received
in shares or cash, must be reported by each shareholder on his Federal income
tax return. Furthermore, under the Code, dividends declared by the Fund in
October, November or December of any calendar year, and payable to shareholders
of record in such a 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.
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<PAGE>
A shareholder may realize a capital gain or capital loss on the sale or
redemption of shares of the Fund. The tax consequences of a sale or redemption
depend upon several factors, including the shareholder's tax basis in the shares
sold or redeemed and the length of time the shares have been held. Basis in the
shares may be the actual cost of those shares (net asset value of Fund shares on
purchase or reinvestment date). Under certain circumstances, a loss on the sale
or redemption of shares held for twelve months or less may be treated as a
long-term capital loss to the extent that the Fund has distributed long-term
capital gain dividends on such shares. Moreover, a loss on sale or redemption of
Fund shares will be disallowed if shares of the Fund are purchased within 30
days before or after the shares are sold or redeemed.
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 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.
The Fund'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 Fund's average annual total returns for the one, five and ten year
periods ending December 31, 1998 were 0.54%, 10.46% and 11.42%, respectively.
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The Fund's total return may be compared to relevant indices and data from
Lipper Analytical Services, Inc., Morningstar or Standard & Poor's Indices.
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.
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 April 30, 1999, including
the financial highlights for each of the five fiscal years in the period ended
April 30, 1999, appearing in the 1999 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.
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