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VALUE LINE NEW YORK TAX EXEMPT TRUST
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PROSPECTUS
July 3, 2000
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[LOGO]
#513723
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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TRUST SUMMARY
What is the Trust's goal? PAGE 2
What are the Trust's main investment strategies?
PAGE 2
What are the main risks of investing in the Trust?
PAGE 2
How has the Trust performed? PAGE 4
What are the Trust's fees and expenses? PAGE 5
HOW WE MANAGE THE TRUST
Our principal investment strategies PAGE 6
The type of securities in which we invest PAGE 6
The principal risks of investing in the Trust PAGE 7
WHO MANAGES THE TRUST
Investment Adviser PAGE 8
Management fees PAGE 8
Portfolio management PAGE 8
ABOUT YOUR ACCOUNT
How to buy shares PAGE 9
How to sell shares PAGE 11
Special services PAGE 12
Dividends, distributions and taxes PAGE 13
FINANCIAL HIGHLIGHTS
Financial Highlights PAGE 14
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TRUST SUMMARY
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WHAT IS THE TRUST'S GOAL?
The Trust's primary investment objective is to provide New
York taxpayers with the maximum income exempt from New York
State, New York City and federal income taxes while avoiding
undue risk to principal. Although the Trust will strive to
achieve its goal, there is no assurance that it will succeed.
WHAT ARE THE TRUST'S MAIN INVESTMENT STRATEGIES?
To achieve the Trust's goal, we invest the Trust's assets so
that, under normal conditions, at least 80% of the annual
income of the Trust will be exempt from both federal income
tax and New York State and City personal income taxes and
will not be subject to the alternative minimum tax. The Trust
invests primarily in investment grade New York municipal
securities having a maturity of more than one year.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE TRUST?
Investing in any mutual fund, including the Trust, 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
the Trust, 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 Trust's holdings will have its credit downgraded
or will default, INCOME RISK, the risk that the Trust'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.
Because the Trust invests primarily in the securities issued
by New York State and its municipalities, its performance may
be affected by local, state, and regional factors. These may
include tax, legislation or policy changes, political and
economic factors, natural disasters, and the possibility of
credit problems. Although New York State has recorded
balanced budgets for the past several fiscal years, gaps
between actual revenues and expenditures may arise in the
current and future fiscal years. New York City and certain
localities outside New York City have experienced financial
problems in the past. Recurrence of these problems may affect
the fiscal health of the State.
2
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The price of Trust shares will increase and decrease
according to changes in the value of the Trust's investments.
The market values of municipal securities will vary inversely
in relation to their yields.
The Trust's ability to achieve its investment objective is
dependent upon the ability of the issuers of New York
municipal securities to meet their continuing obligations for
the payment of principal and interest.
The Trust is nondiversified which means that it may invest a
greater portion of its assets in a single issuer than a
diversified fund. Thus, it may be exposed to greater risk.
An investment in the Trust is not a complete investment
program and you should consider it just one part of your
total investment program. The Trust is not appropriate for
IRAs or other tax-advantaged retirement plans. For a more
complete discussion of risk, please turn to page 7.
3
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HOW HAS THE TRUST PERFORMED?
This bar chart and table can help you evaluate the potential
risks of investing in the Trust. We show how returns for the
Trust'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 Lehman Brothers Municipal Bond Index, which is a broad
based market index. You should remember that unlike the
Trust, the index is unmanaged and does not include the costs
of buying, selling, and holding the securities. The Trust'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>
1990 4.13
1991 14.36
1992 9.54
1993 13.87
1994 -7.73
1995 17.30
1996 2.35
1997 9.34
1998 6.12
1999 -4.21
</TABLE>
<TABLE>
<S> <C> <C>
BEST QUARTER: Q1 1995 +17.06%
WORST QUARTER: Q1 1994 (5.97%)
</TABLE>
The Trust's year-to-date return for the three months ended
March 31, 2000, was 3.09%.
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/99
<TABLE>
<CAPTION>
1 year 5 years 10 years
<S> <C> <C> <C>
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VALUE LINE NEW YORK TAX EXEMPT
TRUST -4.21% 5.94% 6.22%
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LEHMAN BROS. MUNICIPAL BOND INDEX -2.06% 6.91% 6.89%
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</TABLE>
4
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WHAT ARE THE TRUST'S FEES AND EXPENSES?
These tables describe the fees and expenses you pay in
connection with an investment in the Trust.
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 TRUST OPERATING EXPENSES(EXPENSES THAT ARE DEDUCTED
FROM THE TRUST'S ASSETS)
<TABLE>
<CAPTION>
<S> <C>
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MANAGEMENT FEES 0.60%
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DISTRIBUTION AND SERVICE (12B-1) FEES .25%*
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OTHER EXPENSES 0.45%
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TOTAL ANNUAL TRUST OPERATING EXPENSES 1.30%
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</TABLE>
* Effective July 1, 2000. Because these fees are paid out of
the Trust'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 Trust to the cost of investing in other
mutual funds. We show the cumulative amount of Trust expenses
on a hypothetical investment of $10,000 with an annual 5%
return over the time shown, assuming that the Trust's
operating expenses remain the same. The expenses indicated
for each period would be the same whether you sold 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>
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NEW YORK TAX EXEMPT TRUST $132 $412 $713 $1,568
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</TABLE>
5
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HOW WE MANAGE THE TRUST
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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 Trust's assets will
be invested so that at least 80% of the annual income of the
Trust will be exempt from both federal income tax and New
York State and City personal income taxes and will not be
subject to the alternative minimum tax. This is a fundamental
policy of the Trust which will not be changed without
shareholder approval.
THE TYPE OF SECURITIES IN WHICH WE INVEST
We invest primarily in New York State municipal and public
authority debt obligations having a maturity of more than one
year and which 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.
The investments 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.
TEMPORARY DEFENSIVE POSITION
From time to time in response to adverse market, economic,
political or other conditions, we may invest a portion of the
Trust's assets in cash, cash equivalents, U.S. Government
securities or non-New York tax-exempt securities for
temporary defensive purposes. This could help the Trust avoid
losses, but it may result in lost opportunities and lower
yields. If this becomes necessary, the Trust's assets may not
be invested in accordance with its strategy and the Trust may
not achieve its investment objectives.
PORTFOLIO TURNOVER
The Trust may engage in active and frequent trading of
portfolio securities in order to take advantage of better
investment opportunities to achieve its investment objectives
which would result in additional expenses. This strategy may
negatively affect the Trust's performance and may also result
in capital gain distributions that could increase your income
tax liability.
6
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THE PRINCIPAL RISKS OF INVESTING IN THE TRUST
Because of the nature of the Trust, 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
Trust's ability to achieve its investment objective is
dependent upon the ability of issuers of New York municipal
securities to meet their continuing obligations for the
payment of principal and interest. New York State and New
York City have at times faced serious economic problems that
have adversely affected New York municipal issuers. The
default or credit-rating downgrade of one of these issuers
could affect the market values and marketability of all New
York municipal securities and hurt the Trust's yield or share
price. As a result, this Trust could be more risky than a
fund that is more geographically diversified.
Yields of municipal securities depend upon a number of
factors, including the financial condition of the issuer,
economic and money and capital market conditions, the volume
of municipal securities available, the slope of the yield
curve, conditions within the municipal securities market,
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.
When investing in the Trust 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 the Trust are MARKET
RISK, CREDIT RISK, INCOME RISK and LIQUIDITY RISK. MARKET
RISK is the risk that securities in a certain market will
decline in value because of factors such as economic
conditions or government actions. CREDIT RISK is the risk
that any of the Trust's holdings will have its credit rating
downgraded or will default, thereby reducing the Trust's
income level and share price. INCOME RISK is the risk that
the Trust'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.
An investment in the Trust 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 Trust's
recent holdings can be found in the Trust's current annual or
semi-annual report.
7
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WHO MANAGES THE TRUST
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The business and affairs of the Trust are managed by the
Trust's officers under the direction of the Trust's Board of
Trustees.
INVESTMENT ADVISER
Value Line, Inc., 220 East 42nd Street, New York, NY 10017,
serves as the Trust's investment adviser and manages the
Trust'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 Trust'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 Trust and its investments, the Adviser is
paid a yearly fee of 0.60% of the Trust'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 Trust's portfolio.
8
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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 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 $250. The price you
pay for shares will depend on when we receive your purchase
order.
/ / TIME OF PURCHASE
Your price for Trust shares is the Trust'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 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 Trust.
9
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Trust shares may be purchased through various third-party
intermediaries including banks, brokers, financial advisers
and financial supermarkets. When the intermediary is
authorized by the Trust, orders will be priced at the NAV
next computed after receipt by the intermediary.
/ / DISTRIBUTION CHARGES
The Trust has adopted a plan, effective July 1, 2000, under
rule 12b-1 of the Investment Company Act of 1940. Under the
plan, the Trust is charged a fee at the annual rate of 0.25%
of the Trust's average daily net assets with the proceeds
used to finance the activities of Value Line Securities,
Inc., the Trust'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 Trust's shares. Such services may
include, among other things, answering investor inquiries
regarding the Trust; processing new shareholder account
applications and redemption transactions; responding to
shareholder inquiries; and such other services as the Trust
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.
/ / NET ASSET VALUE
We calculate NAV by adding the market value of all the
securities and assets in the Trust'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. We price securities for which market prices or
quotations are available at their market value. We price
securities for which market valuations are not available at
their fair market value as determined by the Board of
Trustees. Fixed-income municipal securities are valued on the
basis of prices provided by an independent pricing service.
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.
10
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HOW TO SELL SHARES
/ / BY MAIL
You can redeem your shares (sell them back to the Trust) 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 Trust has authorized certain brokers to accept purchase
and redemption orders on behalf of the Trust. The Trust has
also authorized these brokers to designate others to accept
purchase and redemption orders on behalf of the Trust.
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 Trust. 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
11
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Services, Inc. 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 Trust
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 Trust may ask you to increase your balance
within 30 days. If your account is not at the minimum by the
required time, the Trust 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
12
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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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Trust declares dividends from its net investment income
daily, and distributes the accrued dividends to you each
month. Capital gains, if any, are distributed 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 Trust is not affected by whether you
reinvest your dividends or receive them in cash.
Distributions from the Trust's long-term capital gains, if
any, are taxable as capital gains, while dividends from
short-term capital gains, if any, are taxable as ordinary
income. The Trust intends to pay federally tax-exempt
distributions derived from interest income paid on qualifying
municipal securities. To the extent the Trust's dividend
distributions are derived from interest income paid on state
tax-free investments, they will be free from New York State
and City personal income taxes. Corporate taxpayers should
note that the Trust's distributions are not exempt from New
York State and City franchise or corporate income taxes.
However, you may be subject to state and local taxes on
distributions. The Trust may also make distributions that are
a preference item for purposes of the alternative minimum tax
applicable to individuals, but such distributions are
expected to be less than 20% of the Trust's total
distributions under normal conditions.
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.
13
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FINANCIAL HIGHLIGHTS
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The financial highlights table is intended to help you
understand the Trust's financial performance for the past
five years. Certain information reflects financial results
for a single Trust share. The total returns in the table
represent the rate that an investor would have earned or lost
on an investment in the Trust assuming reinvestment of all
dividends and distributions. This information has been
audited by PricewaterhouseCoopers LLP, whose report, along
with the Trust's financial statements, is included in the
Trust'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 ON LAST DAY OF FEBRUARY,
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2000 1999 1998 1997 1996
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NET ASSET VALUE, BEGINNING OF
YEAR $10.33 $10.51 $10.04 $10.28 $9.81
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INCOME (LOSS) FROM
INVESTMENT
OPERATIONS:
Net investment income .42 .43 .44 .48 .49
Net gains or losses on
securities (both realized
and unrealized) (.82) .14 .47 (.11) .47
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Total from investment
operations (.40) .57 .91 .37 .96
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LESS DISTRIBUTIONS:
Dividends from net
investment income (.42) (.42) (.44) (.48) (.49)
Distributions from capital
gains (.14) (.33) -- (.13) --
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Total distributions (.56) (.75) (.44) (.61) (.49)
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NET ASSET VALUE, END OF YEAR $9.37 $10.33 $10.51 $10.04 $10.28
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TOTAL RETURN (3.97)% 5.56% 9.31% 3.73% 10.00%
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RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands) $28,409 $33,403 $34,597 $32,745 $ 40,169
Ratio of expenses to average
net assets 1.05%(2) .98%(2) .92%(1) .92%(1) .92%
Ratio of net income to average
net assets 4.21% 4.05% 4.35% 4.79% 4.87%
Portfolio turnover rate 100% 56% 116% 86% 119%
</TABLE>
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(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 .97% AND 1.04% FOR THE YEAR
ENDED FEBRUARY 28, 1999 AND FEBRUARY 29, 2000,
RESPECTIVELY.
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14
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FOR MORE INFORMATION
Additional information about the Trust's investments is
available in the Trust's annual and semi-annual reports to
shareholders. In the Trust's annual report, you will find a
discussion of the market conditions and investment strategies
that significantly affected the Trust's performance during
its last fiscal year. You can find more detailed information
about the Trust 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 Trust, 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 Trust 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 Trust, 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. 811-5052
</TABLE>
<PAGE>
VALUE LINE NEW YORK TAX EXEMPT TRUST
220 East 42nd Street, New York, New York 10017-5891
1-800-223-0818 or 1-800-243-2729
www.valueline.com
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STATEMENT OF ADDITIONAL INFORMATION
JULY 3, 2000
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This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of Value Line New York Tax Exempt Trust
dated July 3, 2000, a copy of which may be obtained without charge by writing or
telephoning the Trust. The financial statements, accompanying notes and report
of independent accountants appearing in the Trust's 2000 Annual Report to
Shareholders are incorporated by reference in this Statement. A copy of the
Annual Report is available from the Trust upon request and without charge by
calling 800-223-0818.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Description of the Trust and Its Investments and Risks...... B-2
Special Considerations Relating to New York Municipal
Securities................................................. B-9
Management of the Trust..................................... B-17
Investment Advisory and Other Services...................... B-19
Service and Distribution Plan............................... B-21
Portfolio Transactions...................................... B-21
Capital Stock............................................... B-21
Purchase, Redemption and Pricing of Shares.................. B-22
Taxes....................................................... B-22
Performance Data............................................ B-24
Financial Statements........................................ B-25
Security Ratings............................................ B-25
</TABLE>
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DESCRIPTION OF THE TRUST AND ITS INVESTMENTS AND RISKS
CLASSIFICATION. The Trust is an open-end, nondiversified management
investment company established as a Massachusetts business trust in 1987. The
Trust's investment adviser is Value Line, Inc. (the "Adviser").
INVESTMENT OBJECTIVE. The Trust's investment objective is to provide New
York taxpayers with the maximum income exempt from New York State, New York City
and federal personal income taxes while avoiding undue risk to principal. Under
normal conditions,the Trust's assets will be invested so that at least 80% of
the annual income of the Trust will be exempt from both federal income tax and
New York State and City personal income taxes, and will not be subject to the
alternative minimum tax, except during times of adverse market conditions. This
is a fundamental policy of the Trust which will not be changed without
shareholders' approval. No assurance can be made that the Trust's investment
objective will be achieved. A portion of the Trust's income may be subject to
federal, state and local taxes.
The Trust's investment objective cannot be changed without shareholder
approval.
INVESTMENT STRATEGY AND RISKS. The Trust will invest primarily in New York
State municipal and public authority debt obligations having a maturity of more
than one year which are rated at the time of purchase within the four highest
grades assigned by Moody's Investors Service, Inc. (Aaa, Aa, A and Baa) or
Standard & Poor's Ratings Services (AAA, AA, A and BBB). The Trust may also
invest up to 30% of its assets in bonds rated Ba or B by Moody's or BB or B by
Standard & Poor's. As of February 29, 2000, the Trust had no securities rated
below investment grade (Aaa through Baa). Investments rated Baa or BBB or lower
have speculative characteristics; lower rated investments normally provide
higher yields but are speculative and involve greater risk including the
possibility of default or bankruptcy than is the case with higher rated
securities. These securities may also be subject to greater market fluctuations.
The Trust may also invest up to 100% of its assets in unrated securities which
the Adviser determines are of comparable quality to the rated securities in
which the Trust may invest. The amount of information about the financial
condition of an issuer of New York tax-exempt bonds may not be as extensive as
that which is made available by corporations whose securities are publicly
traded. See "Special Considerations," below. The Trust may also purchase
obligations of municipal issuers located in Puerto Rico, the U.S. Virgin Islands
and Guam since dividends paid by the Trust, to the extent attributable to such
sources, are exempt from federal, New York State and New York City income taxes.
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. High portfolio turnover may result
in correspondingly greater transaction costs.
Up to 20% of the Trust's total assets may be invested in taxable money
market instruments, non-New York tax-exempt securities, futures and options. The
Trust may temporarily invest more than 20% of its total assets in taxable money
market instruments and non-New York tax-exempt securities when the Adviser deems
a "defensive" posture to be advisable because of market conditions. The Trust
may only purchase those non-New York tax-exempt securities which satisfy the
standards for New York tax-exempt securities set forth in the preceding
paragraph. The types of
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taxable money market instruments in which the Trust may invest are the
following: commercial paper (rated A-2 or better by Standard & Poor's or Prime-2
or better by Moody's), U.S. government securities, repurchase agreements or
other short-term money market instruments.
Yields of municipal securities depend upon a number of factors, including
the financial condition of the issuer, economic and money and capital market
conditions, the volume of municipal securities available, the slope of the yield
curve, conditions within the municipal securities market, 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 the maturity of the obligations.
SPECIAL CONSIDERATIONS AFFECTING THE TRUST. The Trust's ability to achieve
its investment objective is dependent upon the ability of the issuers of New
York municipal securities to meet their continuing obligations for the payment
of principal and interest. New York State and New York City face long-term
economic problems that could seriously affect their ability and that of other
issuers of New York municipal securities to meet their financial obligations.
Certain substantial issuers of New York municipal securities (including
issuers whose obligations may be acquired by the Trust) have experienced serious
financial difficulties in recent years. These difficulties have at times
jeopardized the credit standing and impaired the borrowing abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowings and fewer markets for their outstanding debt obligations. Although
several different issues of municipal securities of New York State and its
agencies and instrumentalities and of New York City have been downgraded by
Standard & Poor's and Moody's in recent years, Standard & Poor's and Moody's
have recently placed the debt obligations of New York State on Credit Watch with
positive implications and upgraded the debt obligations of New York City,
respectively. Strong demand for New York municipal securities has at times had
the effect of permitting New York municipal securities to be issued with yields
relatively lower, and after issuance, to trade in the market at prices
relatively higher, than comparably rated municipal securities issued by other
jurisdictions. A recurrence of the financial difficulties previously experienced
by certain issuers of New York municipal securities could result in defaults or
declines in the market values of those issuers' existing obligations and,
possibly, in the obligations of other issuers of New York municipal securities.
Although as of the date of this Statement of Additional Information, no issuers
of New York municipal securities are in default with respect to the payment of
their municipal securities, the occurrence of any such default could affect
adversely the market values and marketability of all New York municipal
securities and, consequently, the net asset value of the Trust's portfolio.
The Trust's classification as a "non-diversified" investment company allows
it to have a larger position in the securities of a single issuer than would be
the case if it were diversified. Because a relatively high percentage of the
Trust's assets may be invested in the obligations of a limited number of
issuers, the portfolio securities of the Trust may be more susceptible to any
single economic, political or regulatory occurrence than the portfolio
securities of a diversified investment company. To qualify for taxation as a
regulated investment company, the Trust 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
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disposition of securities, or other income (including, but not limited to, gains
from options, futures, and forward contracts) derived with respect to the
Trust's business of investing in securities; and (iii) diversify its holdings so
that, at the end of each fiscal quarter of the Trust (a) at least 50% of the
market value of the Trust'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
Trust'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
Trust'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 Trust controls and that are
determined to be in the same or similar trades or businesses or related trades
or businesses.
MISCELLANEOUS PRINCIPAL AND NON-PRINCIPAL INVESTMENT PRACTICES
WHEN-ISSUED SECURITIES. Tax-exempt securities may be purchased or sold on a
delayed-delivery basis or on a when-issued basis. These transactions arise when
securities are purchased or sold by the Trust with payment and delivery taking
place in the future, in order to secure what is considered to be an advantageous
price and yield to the Trust. No payment is made until delivery is due, often a
month or more after the purchase. When the Trust engages in when-issued and
delayed-delivery transactions, certain risks are involved. The Trust 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 Trust missing the opportunity
of obtaining a price considered to be advantageous. The securities are subject
to market fluctuations and no interest accrues to the purchaser during this
period. At the time the Trust makes the commitment 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
its net asset value. A separate account for the Trust consisting of cash or
liquid securities equal to the amount of the when-issued commitments will be
established at the Trust'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 such 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
Trust.
PRIVATE PLACEMENT. The Trust may acquire privately negotiated loans to
tax-exempt borrowers as such securities are expected to provide the Trust with a
higher rate of interest than is generally available from marketable securities.
To the extent that these private placements are not readily marketable, the
Trust will limit its investment in such securities (and in other illiquid
securities) to no more than 10% of the value of its total assets. Because an
active trading market may not exist for such securities, the price that the
Trust may pay for these securities or receive on their resale may be lower than
that for similar securities with a more liquid market.
VARIABLE RATE DEMAND INSTRUMENTS. The Trust may also invest in variable
rate demand instruments which are tax-exempt 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 Trust 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 Trust 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 Trust, or (3) to maintain a high quality investment portfolio.
The issuer of a variable rate demand instrument may have a corresponding right
to prepay in its
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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 Trust 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.
LENDING SECURITIES. The Trust 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 Trust equal at all times to at least 100% of the value of the lent
securities and accrued interest. The Trust 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 lent municipal securities received by the borrower and paid over to
the Trust will not be exempt from federal income taxes in the hands of the
Trust. No loans of securities will be made if, as a result, the aggregate of
such loans would exceed 10% of the value of the Trust's total assets. The Trust
may terminate such loans at any time.
FINANCIAL FUTURES CONTRACTS. The Trust may invest in financial futures
contracts ("futures contracts") and related options thereon limited to 30% of
the Trust's net assets. If the Adviser anticipates that interest rates will
rise, the Trust may sell a futures contract or write a call option thereon or
purchase a put option on such futures contract to attempt to hedge against a
decrease in the value of the Trust's securities. If the Adviser anticipates that
interest rates will decline, the Trust may purchase a futures contract or a call
option thereon to protect against an increase in the prices of the securities
the Trust intends to purchase. These futures contracts and related options
thereon will be used only as a hedge against anticipated interest rate changes.
A futures contract sale creates an obligation on the part of the Trust, as
seller, to deliver the specific type of instrument called for in the contract at
a specified future time at a specified price. A futures contract purchase
creates an obligation by the Trust, as purchaser, to take delivery of the
specific type of financial instrument at a specified future time at a specified
price.
Although the terms of futures contracts specify actual delivery or receipt
of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out a futures contract is effected by entering into an offsetting
purchase or sale transaction. An offsetting transaction for a futures contract
sale is effected by the Trust entering into a futures contract purchase for the
same aggregate amount of the specific type of financial instrument and same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Trust is immediately paid the difference and thus realizes a gain.
If the purchase price of the offsetting transaction exceeds the sale price, the
Trust pays the difference and realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the Trust entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
Trust realizes a gain, and if the offsetting sale price is less than the
purchase price, the Trust realizes a loss.
The Trust is required to maintain margin deposits with brokerage firms
through which it effects futures contracts and options thereon. The initial
margin requirements vary according to the type of the underlying security. In
addition, due to current industry practice, daily variations in gains and losses
on open contracts are required to be reflected in cash in the form of variation
margin payments. The Trust may be required to make additional margin payments
during the term of the contract.
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Currently, futures contracts can be purchased on debt securities such as
U.S. Treasury bills, bonds, and notes, certificates of the Government National
Mortgage Association and bank certificates of deposit. The Trust may invest in
futures contracts covering these types of financial instruments as well as in
new types of such contracts that become available in the future.
The Trust will only enter into financial contracts which are traded on
national futures exchanges, principally the Chicago Board of Trade and the
Chicago Mercantile Exchange.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the price of a futures contract may
move more or less than the price of the securities being hedged. There is also a
risk of imperfect correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. Another
risk is that the Trust's Adviser could be incorrect in its expectations as to
the direction or extent of various interest rate movements or the time span
within which the movements take place. For example, if the Trust sold futures
contracts for the sale of securities in anticipation of an increase in interest
rates, and then interest rates declined instead, causing bond prices to rise,
the Trust would lose money on the sale. The risk of imperfect correlation may be
increased if the futures contracts being used are on taxable securities rather
than on tax-exempt securities since there is no guarantee that the prices of
taxable securities will move in a manner similar to the prices of tax-exempt
securities.
Unlike a futures contract, which requires the parties to buy and sell a
security on a set date, an option on a futures contract entitles its holder to
decide on or before a future date whether to enter into such a contract. If the
holder decides not to enter into the contract, the premium paid for the option
is lost. Since the price of the option is fixed at the point of sale, there are
no daily payments of cash in the nature of "variation" or "maintenance" margin
payments to reflect the change in the value of the underlying contract as there
are in a purchase or sale of a futures contract. The value of the option does
change and is reflected in the net asset value of the Trust.
Put and call options on financial futures have characteristics similar to
those of other options. In addition to the risks associated with investing in
options on securities, there are particular risks associated with investing in
options on futures. In particular, the ability to establish and close out
positions on such options will be subject to the development and maintenance of
a liquid secondary market. The Trust will enter into an option on futures
position only if there appears to be a liquid secondary market therefor,
although there can be no assurance that such a market will actually develop or
be maintained.
The Trust may also utilize municipal bond index futures contracts and
options thereon for hedging purposes. The Trust's strategies in employing such
contracts will be similar to those discussed above with respect to financial
futures and related options. A municipal bond index is a method of reflecting in
a single number the market value of many different municipal bonds and is
designed to be representative of the municipal bond market generally. The index
fluctuates in response to changes in the market values of the bonds included
within the index. Unlike futures contracts on particular financial instruments,
transactions in futures on a municipal bond index will be settled in cash, if
held until the close of trading in the contract. However, like any other futures
contract, a position in the contract may be closed out by purchase or sale of an
offsetting contract for the same delivery month prior to expiration of the
contract. Trading in the municipal bond index futures contract takes place on
the Chicago Board of Trade.
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The Trust may not enter into futures contracts or related options thereon if
immediately thereafter the amount committed to margin plus the amount paid for
option premiums exceeds 5% of the value of the Trust's total assets. In
instances involving the purchase of futures contracts by the Trust, an amount
equal to the market value of the futures contract will be deposited in a
segregated account of cash and cash equivalents to collateralize the position
and thereby insure that the use of such futures contract is unleveraged.
REPURCHASE AGREEMENTS. The Trust may invest temporary cash balances in
repurchase agreements in an amount not to exceed 5% of its total assets. A
repurchase agreement involves a sale of securities to the Trust, 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 Trust 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 Trust. Repurchase
agreements may also be viewed as loans made by the Trust 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 Trust
could experience both delays in liquidating the underlying security and losses,
including: (a) possible decline in the value of the underlying security during
the period while the Trust 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 Trust has a fundamental policy that it
will not enter into repurchase agreements which will not mature within seven
days if any such investment, together with all other assets held by the Trust
which are not readily marketable (including private placements), amounts to more
than 10% of its total assets. It is expected that repurchase agreements will
give rise to income which will not qualify as tax-exempt income when distributed
by the Trust.
While the Trust 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 Trust with an agreement to repurchase the securities at an agreed-upon
price, date and interest payment.
OPTIONS. The Trust may purchase or sell (write) options on debt securities
as a means of achieving additional return or hedging the value of the Trust's
portfolio. The Trust will only buy options listed on national securities
exchanges. The Trust will not purchase options if, as a result, the aggregate
cost of all outstanding options exceeds 5% of the Trust's total assets.
Presently there are no options on New York tax-exempt securities traded on
national securities exchanges and until such time as they become available, the
Trust will not invest in options on debt securities.
A call option is a contract that gives the holder of the option the right to
buy from the writer of the call option, in return for a premium paid by the
holder to the writer, the security underlying the option at a specified exercise
price at any time during the term of the option. The writer of the call option
has the obligation upon exercise of the option to deliver the underlying
security upon payment of the exercise price during the option period. A put
option is a contract that gives the holder of the option the right to sell to
the writer, in return for a premium paid by the holder to the writer, the
underlying security at a specified price during the term of the option. The
writer of the put has the obligation to
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buy the underlying security upon exercise, at the exercise price during the
option period. The Trust generally would write call options only in
circumstances where the Adviser does not anticipate significant appreciation of
the underlying security in the near future or has otherwise determined to
dispose of the security.
The Trust will only write covered call or covered put options listed on
national securities exchanges. The Trust may not write covered options in an
amount exceeding 20% of the value of its total assets. A call option is
"covered" if the Trust owns the underlying security subject to the call option
or has an absolute and immediate right to acquire that security or futures
contract without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Trust holds a call on the same security or futures contract as
the call written where the exercise price of the call held is (i) equal to or
less than the exercise price of the call written or (ii) greater than the
exercise price of the call written if the difference is maintained by the Trust
in cash, Treasury bills or other high grade short-term obligations in a
segregated account with its custodian. A put option is "covered" if the Trust
maintains cash, Treasury bills or other high-grade, short-term obligations with
a value equal to the exercise price in a segregated account with its custodian,
or else holds a put on the same security or futures contract as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written.
If the Trust has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. However, once the
Trust has been assigned an exercise notice, the Trust will be unable to effect a
closing purchase transaction. Similarly, if the Trust is the holder of an option
it may liquidate its position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the option previously
purchased. There can be no assurance that either a closing purchase or sale
transaction can be effected when the Trust so desires.
The Trust will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Trust will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Since call option prices generally reflect increases in the
price of the underlying security, any loss resulting from the repurchase of a
call option may also be wholly or partially offset by unrealized appreciation of
the underlying security. Other principal factors affecting the market value of a
put or a call option include supply and demand, interest rates, the current
market price and price volatility of the underlying security and the time
remaining until the expiration date.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Trust will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market on
an exchange will exist for any particular option. In such event it might not be
possible to effect closing transactions in particular options, so that the Trust
would have to exercise its options in order to realize any profit and would
incur brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities for the exercise of put options.
If the Trust as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the underlying
security upon exercise.
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INVESTMENT RISKS OF HIGH YIELDING SECURITIES. The Trust may invest up to
30% of its assets in bonds rated Ba or B by Moody's Investors Service, Inc. or
BB or B by Standard & Poor's Ratings Services. These high-yielding, 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.
Since investors generally perceive that there are greater risks associated
with the lower-rated securities of the type in which the Trust may invest, the
yields and prices of such securities may tend to fluctuate more than those of
higher-rated securities. In the lower quality segments of the fixed-income
securities market, changes in perceptions of issuers' creditworthiness tend to
occur more frequently and in a more pronounced manner than do changes in higher
quality segments of the fixed-income securities market, resulting in greater
yield and price volatility. Another factor which causes fluctuations in the
prices of fixed-income securities is the supply and demand for similarly rated
securities. In addition, though prices of fixed-income securities fluctuate in
response to the general level of interest rates, the prices of below investment
grade bonds have been found to be less sensitive to interest rate changes than
higher-rated instruments, but more sensitive to adverse economic changes or
individual developments. Fluctuations in the prices of portfolio securities
subsequent to their acquisition will not affect cash income from such securities
but will be reflected in the Trust's net asset value. Lower-rated and comparable
non-rated securities tend to offer higher yields than higher-rated securities
with the same maturities because the historical financial conditions of the
issuers of such securities may not have been as strong as that of other issuers.
Since lower-rated securities generally involve greater risks of loss of income
and principal than higher-rated securities, investors should consider carefully
the relative risks associated with investments in securities which carry lower
ratings and in comparable non-rated securities.
An additional risk of high yield securities is the limited liquidity and
secondary market support and thus the absence of readily available market
quotations. As a result, the responsibility of the Trust's Trustees to value the
securities becomes more difficult and judgment plays a greater role in valuation
because there is less reliable, objective data available.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES
Some of the significant financial considerations relating to the Trust's
investments in New York Municipal Securities are summarized below. This summary
information is not intended to be a complete description and is principally
derived from the Annual Information Statement of the State of New York as
supplemented and contained in official statements relating to issues of New York
Municipal Securities that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements has not been independently verified.
STATE ECONOMY. New York is the third most populous state in the nation and
has a relatively high level of personal wealth. The State's economy is diverse,
with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
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In the calendar years 1987 through 1998, the State's rate of economic growth
was somewhat slower than that of the nation. In particular, during the 1990-91
recession and post-recession period, the economy of the State, and that of the
rest of the Northeast, was more heavily damaged than that of the nation as a
whole and has been slower to recover.
State per capita personal income has historically been significantly higher
than the national average, although the ratio has varied substantially. Because
New York City (the "City") is a regional employment center for a multi-state
region, State personal income measured on a residence basis understates the
relative importance of the State to the national economy and the size of the
base to which State taxation applies.
STATE BUDGET. The State Constitution requires the governor (the "Governor")
to submit to the State legislature (the "Legislature") a balanced executive
budget which contains a complete plan of expenditures for the ensuing fiscal
year and all moneys and revenues estimated to be available therefor, accompanied
by bills containing all proposed appropriations or reappropriations and any new
or modified revenue measures to be enacted in connection with the executive
budget. The entire plan constitutes the proposed State financial plan for that
fiscal year. The Governor is required to submit to the Legislature quarterly
budget updates which include a revised cash-basis state financial plan, and an
explanation of any changes from the previous state financial plan.
State law requires the Governor to propose a balanced budget each year. In
recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State's 1999-2000 fiscal year began on April 1, 1999 and
ended on March 31, 2000. On March 31, 1999, the State adopted the debt service
portion of the State budget for the 1999-2000 fiscal year; four months later, on
August 4, 1999, it enacted the remainder of the budget. The Governor approved
the budget as passed by the Legislature. Prior to passing the budget in its
entirety for the current fiscal year, the State enacted appropriations that
permitted the State to continue its operations.
The 1999-2000 Financial Plan projected a closing balance of $2.85 billion in
the General Fund. The balance is comprised of the $1.82 billion surplus from
1998-1999 that has been set aside to finance already-enacted tax cuts, $473
million in the Tax Stabilization Reserve Fund (TSRF), $250 million in the Debt
Reduction Reserve Fund (DRRF), $107 million in the Contingency Reserve Fund
(CRF), and $200 million in the Community Projects Fund (CPF), which finances
legislative initiatives. The State expects to close 1999-2000 with cash balances
in these funds at their highest level ever.
The Third Quarterly Update of the 1999-2000 Financial Plan projected a
year-end available cash surplus of $758 million in the General Fund, an increase
of $733 million over the surplus estimate in the Mid-Year Update. The larger
projected surplus derives from $499 million in net higher projected receipts and
$259 million in net lower estimated disbursements. The State plans to use the
entire $758 million surplus to make additional deposits to reserve funds.
The Governor presented his 2000-01 Executive Budget to the Legislature on
January 10, 2000. The 2000-01 Financial Plan projects General Fund disbursements
of $37.93 billion on 2000-01, an increase of $869 million (2.3 percent) over the
current year. The growth in spending is spread throughout the Financial Plan,
with the largest increase for State Operations ($449 million), followed by
Grants to Local Governments ($203 million), General State Charges ($149
million), and Transfers to Other Funds ($69 million).
B-10
<PAGE>
The State projects a closing balance of $1.61 billion in the General Fund at
the end of 2000-01. This balance is comprised of a $433 million reserve set
aside from the 1999-2000 surplus to finance the estimated costs of the
Governor's proposed tax reduction package in the 2001-02 and 2002-03, $475
million in cumulative reserves for collective bargaining ($425 million from
2000-01 plus $50 million from 1999-2000), $548 million in the Tax Stabilization
Reserve Fund, and $150 million in the Contingency Reserve Fund after a proposed
$43 million deposit in 2000-01.
The State currently projects spending to grow by $2.34 billion (6.2 percent)
in 2001-02 and $1.80 billion (4.5 percent) in 2002-03. General Fund spending
increases at a higher rate in 2001-02 than in 2002-03 primarily because of the
loss or assumed decline in certain funding sources (including federal funds)
that offset General Fund spending.
Over the long-term, uncertainties with regard to the economy present the
largest potential risk to future budget balance in New York State. For example,
a downturn in the financial markets or the wider economy is possible, a risk
that is heightened by the lengthy expansion currently underway. The securities
industry is more important to the New York economy than the national economy,
potentially amplifying the impact of an economic downturn. A large change in
stock market performance during the forecast horizon could result in wage and
unemployment levels that are significantly different from those embodied in the
forecast. Merging and downsizing by firms, as a consequence of deregulation or
continued foreign competition, may also have more significant adverse effects on
employment than expected. Finally, a "forecast error" of one percentage point in
the estimated growth of receipts could cumulatively raise or lower results by
over $1 billion by 2002.
Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State's Financial Plan. These
forces may affect the State unpredictably from fiscal year to fiscal year and
are influenced by governments, institutions, and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the state economies. The projections assume no changes in
federal tax law, which could substantially alter the current receipts forecast.
The Division of Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. The Financial Plan projections include
reserves of $50 million in 1999-2000 growing to $715 million by 2002-03 for
potential costs of new collective bargaining agreements. These reserve amounts
are based upon providing all State employees with a salary package comparable to
the agreement ratified by the UUP in 1999. It also includes reserves of $1.5
billion to help offset the costs of tax reductions currently scheduled for
implementation over the next three years. Actual results, however, could differ
materially and adversely from their projections, and those projections may be
changed materially and adversely from time to time.
DEBT LIMITS AND OUTSTANDING DEBT. There are a number of methods by which
the State of New York may incur debt. Under the State Constitution, the State
may not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (I.E., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
B-11
<PAGE>
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes, and (ii) in anticipation of the receipt of proceeds from the
sale of duly authorized but unissued general obligation bonds, by issuing bond
anticipation notes. The State may also, pursuant to specific constitutional
authorization, directly guarantee certain obligations of the State of New York's
authorities and public benefit corporations ("Authorities"). Payments of debt
service on New York State general obligation and New York State-guaranteed bonds
and notes are legally enforceable obligations of the State of New York.
The State employs additional long-term financing mechanisms, lease-purchase
and contractual-obligation financings, which involve obligations of public
authorities or municipalities that are State-supported but are not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a financing
arrangement with the Local Government Assistance Corporation to restructure the
way the State makes certain local aid payments.
The proposed 1999-2000 through 2004-05 Capital Program and Financing Plan
was released with the Executive Budget on January 11, 2000. The recommended
five-year Capital Program and Financing Plan reflects debt reduction initiatives
that would reduce State-supported debt and reform the State's borrowing
practices. The Executive Budget, as amended, proposes to triple the size of the
Debt Reduction Reserve Fund to $750 million. Two-thirds, or $500 million, of the
moneys will be used in 2000-01 to retire the State's existing high cost debt and
increase pay-as-you-go spending for previously bond-financed programs. The
balance, $250 million, will remain in the Debt Reduction Reserve Fund in
2000-01, and will be used to further reduce debt in 2001-02. The Executive
Budget, as amended, also includes constitutional and statutory debt reform
proposals that, if enacted, would ban "back door" borrowing, impose caps on new
debt outstanding and debt service costs, and restrict the use of debt to capital
purposes only. The statutory proposal would apply to new debt issued after
April 1, 2000. The earliest the constitutional proposal can take effect, after
passage by two separately elected Legislatures and approval by the voters, is
January 1, 2002.
As described therein, efforts to reduce debt, unanticipated delays in the
advancement of certain projects and revisions to estimated proceeds needs will
modestly reduce projected borrowings in 1999-2000. The State's 1999-2000
borrowing plan now projects issuances of $390 million in general obligation
bonds (including $140 million for purposes of redeeming outstanding bond
anticipation notes). The State issued $107 million in Certificates of
Participation to finance equipment purchases (including costs of issuance)
during the 1999-2000 fiscal year.
Borrowings by public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total approximately $2.61 billion, including costs of issuance,
reserve funds, and other costs, net of anticipated refundings and other
adjustments in 1999-2000.
B-12
<PAGE>
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
AUTHORITIES. The fiscal stability of New York State is related, in part, to
the fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public facilities.
Authorities are not subject to the constitutional restrictions on the incurrence
of debt which apply to the State itself, and may issue bonds and notes within
the amounts of, and as otherwise restricted by, their legislative authorization.
The State's access to the public credit markets could be impaired, and the
market price of its outstanding debt may be materially and adversely affected,
if any of the Authorities were to default on their respective obligations,
particularly with respect to debt that is State-supported or State-related. As
of December 31, 1998, there were 17 public authorities that had outstanding debt
of $100 million or more, and the aggregate outstanding debt of these State
public authorities was $94 billion, only a portion of which constitutes State-
supported or State-related debt.
Authorities generally pay their operating expenses and debt service costs
from revenues generated by the projects they finance or operate, such as tolls
charged for the use of highways, bridges or tunnels, charges for public power,
electric and gas utility services, rentals charged for housing units, and
charges for occupancy at medical care facilities. In recent years, however, New
York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the Authorities for operating and
other expenses. The Metropolitan Transportation Authority, which oversees the
operation of subway, commuter rail and bus services in the New York metropolitan
area, receives the bulk of these appropriations. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State funds.
NEW YORK CITY AND OTHER LOCALITIES. The fiscal health of the State may also
be affected by the fiscal health of New York City, which continues to receive
significant financial assistance from the State. State aid contributes to the
City's ability to balance its budget and meet its cash requirements. The State
may also be affected by the ability of the City and certain entities issuing
debt for the benefit of the City to market their securities successfully in the
public credit markets.
The City has achieved balanced operating results for each of its fiscal
years since 1981 as measured by the GAAP standards in force at that time. The
City prepares a four-year financial plan annually and updates it periodically,
and prepares a comprehensive annual financial report each October describing its
most recent fiscal year.
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among those actions, the State
established the Municipal Assistance Corporation for the City of New York to
provide financing assistance to the City; the New York State Financial Control
Board (the "Control Board") to oversee the City's financial affairs; and the
Office of the State Deputy Comptroller for the City of New York to assist the
Control Board in exercising its powers and responsibilities. A "control period"
existed from 1975 to 1986, during which the City was subject to
B-13
<PAGE>
certain statutorily-prescribed fiscal controls. The Control Board terminated the
control period in 1986 when certain statutory conditions were met. State law
requires the Control Board to reimpose a control period upon the occurrence, or
"substantial likelihood and imminence" of the occurrence, of certain events,
including (but not limited to) a City operating budget deficit of more than $100
million or impaired access to the public credit markets.
Currently, the City and its Covered Organizations (I.E., those organizations
which receive or may receive moneys from the City directly, indirectly or
contingently) operate under the City's Financial Plan. The City's Financial Plan
summarizes its capital, revenue and expense projections and outlines proposed
gap-closing programs for years with projected budget gaps. The City's
projections set forth in its Financial Plan are based on various assumptions and
contingencies, some of which are uncertain and may not materialize. Unforeseen
developments and changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements.
To successfully implement its Financial Plan, the City and certain entities
issuing debt for the benefit of the City must market their securities
successfully. The City issues securities to finance the rehabilitation of its
infrastructure and other capital needs and to refinance existing debt, as well
as for seasonal financing needs. In fiscal year 1998 and again in fiscal year
2000, the State constitutional debt limit would have prevented the City from
entering into new capital contracts. To prevent these disruptions in the capital
program, two entities were created to issue debt to increase the City's capital
financing capacity: (i) the State Legislature created the Transitional Finance
Authority in 1997, and (ii) the City created the Tobacco Settlement Asset
Securitization Corporation in 1999. Despite these actions, the City, in order to
continue its capital program, will need additional financing capacity in fiscal
year 2002, which could be provided through increasing the borrowing authority of
the Transitional Finance Authority or amending the State constitutional debt
limit.
Certain localities outside New York City have experienced financial problems
and have requested and received additional State assistance during the last
several State fiscal years. The State has provided extraordinary financial
assistance to select municipalities, primarily cities, since the 1996-97 fiscal
year. Funding has essentially been continued or increased in each subsequent
fiscal year. Such funding in 1999-2000 totals $113.9 million. In 1997-98, the
State increased General Purpose State Aid for local governments by $27 million
to $550 million, and has continued funding at this new level since that date.
While the distribution of General Purpose State Aid for local governments was
originally based on a statutory formula, in recent years both the total amount
appropriated and the shares appropriated to specific localities have been
determined by the Legislature.
Counties, cities, towns, villages and school districts have engaged in
substantial short-term and long-term borrowings. In 1997, the total indebtedness
of all localities in the State, other than New York City, was approximately
$21.0 billion. A small portion (approximately $80 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
(other than New York City) authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Twenty-two localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1997.
B-14
<PAGE>
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.
LITIGATION. Certain litigation pending against New York State or its
officers or employees could have a substantial or long-term adverse effect on
New York State finances. Among the more significant of these cases are those
that involve (1) the validity of agreements and treaties by which various Indian
tribes transferred title to New York State of certain land in central and
upstate New York; (2) certain aspects of New York State's Medicaid policies,
including its rates, regulations and procedures; (3) action against New York
State and New York City officials alleging inadequate shelter allowances to
maintain proper housing; (4) an action commenced in 1980 contending that Yonkers
and its public schools were intentionally segregated; (5) action seeking
enforcement of certain sales and excise taxes and tobacco products and motor
fuel sold to non-Indian consumers on Indian reservations; and (6) a challenge to
the Governor's application of his constitutional line item veto authority.
The legal proceedings noted above involve State finances and programs and
miscellaneous civil rights, real property, contract and other tort claims in
which the State is a defendant and the potential monetary claims against the
State are substantial, generally in excess of $100 million. These proceedings
could adversely affect the financial condition of the State in the 1999-2000
fiscal year or thereafter. Adverse developments or an adverse decision in these
proceedings, other proceedings for which there are unanticipated, unfavorable
and material judgments, or the initiation of new proceedings could affect the
ability of the State to maintain a balanced 1999-2000 Financial Plan.
Although other litigation is pending against New York State, except as noted
above, no current litigation involves New York State's authority, as a matter of
law, to contract indebtedness, issue its obligations, or pay such indebtedness
when due, or affects New York State's power or ability, as a matter of law, to
impose or collect significant amounts of taxes and revenues.
YEAR 2000 COMPLIANCE. To date, the State has experienced no significant
Year 2000 computer disruptions. Monitoring will continue over the next few
months to identify and correct any problems that may arise. However, there can
be no assurance that outside parties who provide goods and services to the State
will not experience computer problems related to Year 2000 programming in the
future, or that such disruptions, if they occur, will not have an adverse impact
on State operations or finances.
B-15
<PAGE>
TRUST POLICIES.
(i) The Trust may not issue senior securities except evidences of
indebtedness permitted under clause (ii) below.
(ii) The Trust 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 Trust may be pledged, mortgaged or otherwise encumbered, transferred
or assigned to secure a debt except in connection with the Trust's entering
into interest rate futures contracts.
(iii) The Trust may not engage in the underwriting of securities except
to the extent that the purchase of municipal securities, or other permitted
investments, directly from the issuer thereof (or from an underwriter for an
issuer) and the later disposition of such securities in accordance with the
Trust's investment program, may be deemed to be an underwriting.
(iv) The Trust may not purchase securities of other investment companies
or invest in real estate, mortgages or illiquid securities of real estate
investment trusts, although the Trust may invest in municipal securities
secured by real estate or interests therein.
(v) The Trust 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 Trust's assets. The
Trust 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 Trust.
(vi) The Fund may not engage in short sales or participate on a joint or
a joint and several basis in any trading account in securities.
(vii) The Trust may not purchase or sell any put or call options or any
combination thereof, except options on financial futures or municipal bond
index contracts or options on debt securities as described in the Statement
of Additional Information.
(viii) The Trust may not purchase more than 10% of the outstanding voting
securities of any one issuer. For purposes of this restriction, all
outstanding debt securities of an issuer are considered as one class. This
restriction does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
(ix) The Trust 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 Trust may not purchase equity securities or securities
convertible into equity securities.
(xi) The Trust may not invest in commodities or commodity contracts
except that the Trust may purchase financial futures contracts and related
options.
(xii) The Trust may not purchase the securities of any issuer if, to the
knowledge of the Trust, those officers and directors of the Trust 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-16
<PAGE>
(xiii) The Trust may not purchase oil, gas or other mineral type
development programs or leases.
(xiv) The Trust may not invest 25% or more of its assets in securities of
issuers in any one industry; provided that there shall be no such limitation
on the purchase of municipal securities and, for temporary defensive
purposes, obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
(xv) The Trust 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 10% of the Trust's assets would then be
invested in such securities.
(xvi) The primary investment objective of the Trust is to provide New
York taxpayers with the maximum income exempt from New York State, New York
City, and federal income taxes while avoiding undue risk to principal.
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 (ii) and
(xv).
The policies set forth above may not be changed without the affirmative vote
of the majority of the outstanding voting securities of the Trust which means
the lesser of (1) the holders of more than 50% of the outstanding shares of
capital stock of the Trust 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 TRUST
The business and affairs of the Trust are managed by the Trust's officers
under the direction of the Board of Trustees. Set forth below is certain
information regarding the Trustees and Officers of the Trust.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
--------------------- ------------------- -----------------------------------------
<S> <C> <C>
*Jean Bernhard Buttner Chairman of the Chairman, President and Chief Executive
Age 65 Board of Trustees 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 Trustee 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 Trustee Computer Programming Professional, Duke
4921 Buckingham Drive Power Company
Charlotte, NC 28209
Age 59
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
--------------------- ------------------- -----------------------------------------
<S> <C> <C>
Francis C. Oakley Trustee 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 Trustee Visiting Professor of Classics, Williams
5 Birch Run Drive College, since 1999; President Emeritus,
Saratoga Springs, NY 12866 Skidmore College since 1999 and Presi-
Age 64 dent, 1987-1998; Director of Adirondack
Trust Company.
Paul Craig Roberts Trustee Chairman, Institute for Political Econo-
169 Pompano St. my; Director, A. Schulman Inc. (plas-
Panama City, FL 32413 tics).
Age 61
Marion N. Ruth Trustee Real Estate Executive; President, Ruth
5 Outrider Road Realty (real estate broker).
Rolling Hills, CA 90274
Age 65
Nancy-Beth Sheerr Trustee 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>
--------------
* "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.
Trustees of the Trust are also directors/trustees of 14 other Value Line
Funds.
The following table sets forth information regarding compensation of
Trustees by the Trust and by the Trust and the other Value Line Funds of which
each of the Trustees is a director or trustee for the fiscal year ended February
29, 2000. Trustees who are officers or employees of the Adviser do not receive
any compensation from the Trust or any of the Value Line Funds.
B-18
<PAGE>
COMPENSATION TABLE
FISCAL YEAR ENDED FEBRUARY 29, 2000
<TABLE>
<CAPTION>
TOTAL
PENSION OR ESTIMATED COMPENSATION
RETIREMENT ANNUAL FROM TRUST
AGGREGATE BENEFITS BENEFITS AND FUND
COMPENSATION ACCRUED AS PART UPON COMPLEX
NAME OF PERSONS FROM TRUST OF TRUST 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 Trustee on June 15, 2000.
As of March 31, 2000, no person owned of record or, to the knowledge of the
Trust, owned beneficially, 5% or more of the outstanding stock of the Trust. The
Adviser and its affiliates owned 125,268 shares of record or approximately 4.1%
of the outstanding shares. Officers and Trustees of the Trust as a group owned
less than 1% of the outstanding shares.
INVESTMENT ADVISORY AND OTHER SERVICES
The Trust'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 Trust, owns all of the
voting stock of Arnold Bernhard & Co., Inc.
The investment advisory agreement between the Trust and the Adviser, dated
August 10, 1988, provides for a monthly advisory fee at an annual rate of 0.60%
of the Trust's average daily net assets during the year. During the fiscal years
ended on the last day of February, 1998, 1999 and 2000, the Trust paid or
accrued to the Adviser advisory fees of $200,703, $204,231 and $187,252,
respectively.
The investment advisory agreement provides that the Adviser shall render
investment advisory and other services to the Trust including, at its expense,
all administrative services, office space and the services of all officers and
employees of the Trust. The Trust 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 Trust 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 Trust.
The agreement will terminate upon its assignment.
B-19
<PAGE>
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 Trust and certain investments may be appropriate for the Trust 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 Trust. In other cases, however, it is
believed that the ability of the Trust to participate, to the extent permitted
by law, in volume transactions will produce better results for the Trust.
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
Trust. The Trust, 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 Trust. 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 Trust 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 Trust 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 Trust.
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 Trust's custodian,
transfer agent and dividend-paying agent. As custodian, State Street is
responsible for safeguarding the Trust's cash and securities, handling the
receipt and delivery of securities and collecting interest and dividends on the
Trust's investments. As transfer agent and dividend-paying agent, State Street
effects transfers of Trust shares by the registered owners and transmits
payments for dividends and distributions declared by the Trust. 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 Trust as an agent for State Street. PricewaterhouseCoopers LLP, whose
address is 1177 Avenue of the Americas, New York, NY 10036, acts as the Trust's
independent accountants and also performs certain tax preparation services.
B-20
<PAGE>
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 Trust shares
and for servicing Trust shareholders at an annual rate of .25% of the Trust'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
Trust 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 Trust
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 Trust 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 Trust. 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 Fund's annual portfolio turnover rate may exceed
100%. A rate of portfolio turnover of 100% would occur if all of the Trust'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 additional expenses than might otherwise
be the case. The Trust's portfolio turnover rate for recent fiscal years is
shown under "Financial Highlights" in the Trust's Prospectus.
CAPITAL STOCK
Each share of beneficial interest of the Trust, $.01 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 Trust were liquidated, would receive the net assets of the Trust.
B-21
<PAGE>
PURCHASE, REDEMPTION AND PRICING OF SHARES
PURCHASES: Shares of the Trust 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 Trust 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 Trust 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 Trust 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 Trust 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 Trust of securities owned by it is not reasonably
practical, or (b) it is not reasonably practical for the Trust 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 Trust's
shareholders.
The value of shares of the Trust on redemption may be more or less than the
shareholder's cost, depending upon the market value of the Trust's assets at the
time. Shareholders should note that if a loss has been realized on the sale of
shares of the Trust, the loss may be disallowed for tax purposes if shares of
the same Trust are purchased within (before or after) 30 days of the sale.
TAXES
The Trust intends to continue to qualify as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code"). The Trust so
qualified during the Trust's last fiscal year. By so qualifying, the Trust 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 Trust shares). If the Trust fails to qualify as a regulated
investment company, its earnings will be subject to tax at a maximum corporate
tax rate of 35%.
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 Trust anticipates
that it will make sufficient timely distributions to avoid imposition of the
excise tax.
Certain realized losses incurred after October 31, if so elected by the
Trust, are deemed to arise on the first day of the following fiscal year. In the
year ended February 29, 2000, the Trust did not incur such losses.
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 Trust qualifies to pay
exempt-interest dividends. Distributions of other investment income and any
B-22
<PAGE>
realized short-term capital gains are taxable to shareholders as ordinary
income. The Trust does not anticipate that any distributions will be eligible
for the dividends-received deductions 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 Trust have been held by such shareholders and regardless of
whether the distribution is received in cash or is reinvested in additional
Trust shares. The computation of net capital gains takes into account any
capital loss carryforward of the Trust. For Federal income tax purposes, the
Trust had a capital loss carryover at February 29, 2000 of approximately
$401,764 which will expire in 2008. To the extent future capital gains are
offset by such capital losses, the Trust does not anticipate distributing any
such gains to the shareholders.
Investments in the Trust 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 cause 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. Furthermore, that portion of
any dividend paid by the Trust which represents income derived from private
activity bonds held by the Trust 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 of the Trust'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 Trust's shares generally is
not deductible for federal income tax purposes and New York State and New York
City personal 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 Trust 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.
A distribution by the Trust will reduce the Trust'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 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 may 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 Trust
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.
B-23
<PAGE>
A shareholder may realize a capital gain or capital loss on the sale or
redemption of shares of the Trust. 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 Trust shares
on purchase or reinvestment date).
For shareholders who fail to furnish to the Trust 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 Trust 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 Trust.
PERFORMANCE DATA
From time to time, the Trust 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 Trust will be accompanied by information
on the Trust'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 Trust may also advertise aggregate total return information for
different periods of time.
The Trust'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
<TABLE>
<S> <C> <C> <C>
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.
</TABLE>
The Trust's average annual total returns for the one, five and ten year
periods ending February 29, 2000 were -3.97%, 4.80% and 6.32%, respectively.
The Trust'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 Trust's performance by independent
sources may also be used in advertisements and in information furnished to
present or prospective investors in the Trust.
B-24
<PAGE>
Investors should note that the investment results of the Trust will
fluctuate over time, and any presentation of the Trust'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 Trust'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. Ba--judged to have speculative elements; their future cannot be considered
as well assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class.
B--generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
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. BB and B--regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation. While debt rated BB or B will likely have some
quality and protective characteristics, these are outweighted by large
uncertainties or major risk exposures to adverse conditions.
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<PAGE>
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.
B-26
