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VALUE LINE
STRATEGIC ASSET MANAGEMENT TRUST
--------------------------------
PROSPECTUS
MAY 1, 1999
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[LOGO]
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS, AND ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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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 3
What are the Trust's fees and expenses? PAGE 4
HOW WE MANAGE THE TRUST
Our principal investment strategies PAGE 5
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 and sell shares PAGE 9
Dividends, distributions and taxes PAGE 10
FINANCIAL HIGHLIGHTS
Financial Highlights PAGE 11
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TRUST SUMMARY
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WHAT IS THE TRUST'S GOAL?
The Trust's investment objective is to achieve a high
investment return consistent with reasonable risk. Although
the Trust will strive to achieve this goal, there is no
assurance that it will. Shares of the Trust are available to
the public only through the purchase of certain variable
annuity and variable life insurance contracts issued by The
Guardian Insurance & Annuity Company, Inc. ("GIAC").
WHAT ARE THE TRUST'S MAIN INVESTMENT STRATEGIES?
To achieve the Trust's goals, we invest in a broad range of
common stocks, bonds and money market instruments in
accordance with our asset allocation strategy. In selecting
securities for purchase or sale, we rely on the Value Line
Timeliness-TM- Ranking System or the Value Line
Performance-TM- Ranking System. These Ranking Systems compare
the Adviser's estimate of the probable market performance of
each stock during the next six to twelve months relative to
all of the stocks under review and rank stocks on a scale of
1 (highest) to 5 (lowest). The common stocks in which the
Trust will usually invest are those U.S. Securities ranked 1
or 2 by either Ranking System but it may also invest in
common stocks ranked 3. There are no set limitations of
investments in any category or according to the company's
size, although the Trust generally invests in U.S. securities
issued by larger, more established companies.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE TRUST?
Investing in any mutual fund involves risk, including the
risk that you may receive little or no return on your
investment, and the risk that you may lose part or all of the
money you invest. The risks vary depending upon a fund's mix
of stocks, bonds and money market securities. Therefore,
before you invest in this fund you should carefully evaluate
the risks. The chief risk that you assume when investing in
the Trust is market risk, the possibility that the securities
in a certain market will decline in value because of factors
such as economic conditions. Market risk may affect a single
issuer, industry, sector of the economy or the market as a
whole. You also assume an interest rate risk, the possibility
that as interest rates rise the value of some fixed income
securities, especially those securities with longer
maturities, may decrease. The price of Trust shares will
increase and decrease according to changes in the value of
the Trust's investments. The Trust will be affected by
changes in stock prices which tend to fluctuate more than
bond prices. An investment in the Trust is not a complete
investment program and you should consider it just one part
of your total investment program. For a more complete
discussion of risk, please turn to page 7.
2
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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 S&P 500-Registered Trademark-, and the Lehman Brothers
Government/Corporate Bond Index, which are broad based market
indexes. You should remember that unlike the Trust, these
indexes are unmanaged and do not include the costs of buying,
selling, and holding the securities. This performance
information does not reflect separate account or variable
insurance contract fees or charges. If such fees and charges
were reflected, the Trust's returns would be less than those
shown. 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>
<CAPTION>
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1989 25.55%
1990 -0.15%
1991 43.34%
1992 15.05%
1993 11.86%
1994 -4.88%
1995 28.54%
1996 15.87%
1997 15.66%
1998 27.45%
</TABLE>
<TABLE>
<S> <C> <C>
BEST QUARTER: Q4 1998 +23.39%
WORST QUARTER: Q3 1990 (12.11%)
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
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VALUE LINE STRATEGIC ASSET
MANAGEMENT TRUST 27.45% 15.87% 17.05%
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S&P 500-REGISTERED TRADEMARK- INDEX 28.58% 24.06% 19.21%
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LEHMAN BROTHERS GOVERNMENT/
CORPORATE BOND INDEX 9.47% 7.31% 9.33%
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</TABLE>
3
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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)
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<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 TRUST ASSETS)
<TABLE>
<CAPTION>
<S> <C>
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MANAGEMENT FEES 0.50%
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DISTRIBUTION AND SERVICE (12b-1) FEES NONE
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OTHER EXPENSES 0.08%
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TOTAL ANNUAL TRUST OPERATING EXPENSES 0.58%
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</TABLE>
EXAMPLE
This example is intended to help you compare the cost of p,t
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. This is an example only, and your
actual costs may be greater or less than those shown here.
Based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
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VALUE LINE STRATEGIC ASSET
MANAGEMENT TRUST $59 $186 $324 $726
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</TABLE>
4
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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 market sector or securities that we think make
the best investments. 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 following is a description of how the
Adviser pursues the Trust's objectives.
The Trust attempts to achieve its objective by following an
asset allocation strategy that enables the Adviser to
periodically shift the assets of the Trust among three types
of securities: (a) equity securities, (b) debt securities
with maturities of more than one year and (c) money market
instruments (debt securities with maturities of less than one
year). Allocation of the Trust's assets among these types of
securities will be determined by the Adviser and will be
based primarily on data derived from computer models for the
stock and bond markets which the Adviser has developed and
which the Adviser deems appropriate. There are no limits on
the percentage of the Trust's assets that can be invested in
equity, debt or money market securities. When the asset
allocation model indicates a preference for equity
securities, the percentage of the Trust's total assets
invested in equity securities will be increased. Similarly,
if the expected total return from equity securities is poor,
then a greater percentage of the Trust's assets will be
invested in debt or money market securities. The central
tendency is for 55% of the Trust's assets to be invested in
equity securities, 35% in debt securities and 10% in money
market instruments.
INVESTMENT IN EQUITY SECURITIES. In selecting securities for
purchase or sale, the Adviser relies on the Value Line
Timeliness-TM- Ranking System or the Value Line
Performance-TM- Ranking System. The Value Line Timeliness
Ranking System has evolved after many years of research and
has been used in substantially its present form since 1965.
It is based upon historical prices and reported earnings,
recent earnings and price momentum and the degree to which
the last reported earnings deviated from estimated earnings,
among other factors. The Timeliness Rankings are published
weekly in the Standard Edition of The Value Line Investment
Survey for approximately 1,700 of the most actively traded
stocks in U.S. markets, including stocks with large, mid and
small market capitalizations. There are only a few stocks of
foreign issuers that are included and stocks that have traded
for less than two years
5
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are not ranked. On a scale of 1 (highest) to 5 (lowest), the
rankings compare an estimate of the probable market
performance of each stock during the coming six to twelve
months relative to all 1,700 stocks under review. The
Rankings are updated weekly to reflect the most recent
information.
The Value Line Performance Ranking System for common stocks
was introduced in 1995. It is a variation of the Value Line
Small-Capitalization Ranking System, which has been employed
in managing pension client assets since 1981, and in managing
the Value Line Small-Cap Growth Fund, Inc. since 1993. The
Performance Ranking System evaluates the approximately 1,800
stocks in the Expanded Edition of The Value Line Investment
Survey which consists of stocks with mostly smaller market
capitalizations (under 1 billion) and only a few stock of
foreign issuers. This stock ranking system relies on factors
similar to those found in the Value Line Timeliness Ranking
System except that it does not utilize earnings estimates.
The Performance Ranks use a scale of 1 (highest) to 5
(lowest) to compare the Adviser's estimate of the probable
market performance of each Expanded Edition stock during the
coming twelve months relative to all 1,800 stocks under
review in the Expanded Edition.
Neither the Value Line Timeliness Ranking System nor the
Value Line Performance Ranking System eliminates market risk,
but the Adviser believes that they provide objective
standards for determining expected relative performance for
the next six to twelve months. The Trust will usually invest
in common stocks ranked 1 or 2 but it may also invest in
common stocks ranked 3. Reliance upon the rankings, whenever
feasible, is a fundamental policy of the Trust which may not
be changed without shareholder approval. The utilization of
these Rankings is no assurance that the Trust will perform
more favorably than the market in general over any particular
period.
INVESTMENT IN DEBT SECURITIES. The Trust invests primarily
in investment grade debt securities issued by U.S.
corporations rated within one of the four highest categories
of a nationally recognized rating organization and in debt
securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities.
INVESTMENT IN MONEY MARKET SECURITIES. The short-term
instruments in which the Trust invests are primarily U.S.
Government obligations and repurchase agreements.
6
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TEMPORARY DEFENSIVE POSITION
From time to time in response to adverse market, economic,
political or other conditions, the Trust may invest without
limitation in cash or cash equivalents, debt securities,
bonds, or preferred stocks for temporary defensive purposes.
This could help the Trust avoid losses, but it may result in
lost opportunities. If this becomes necessary, 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 higher brokerage commissions and other
expenses. High portfolio turnover may negatively affect the
Trust's performance.
THE PRINCIPAL RISKS OF INVESTING IN THE TRUST
Investing in any mutual fund involves risk, including the
risk that you may receive little or no return on your
investment, and the risk that you may lose part or all of the
money you invest. The risks of investing in the Trust may
vary depending on the mix of equity securities, debt
securities and money market instruments. Therefore, before
you invest in this Trust you should carefully evaluate the
risks.
Equity securities represent ownership in a corporation and
their prices fluctuate for a number of reasons. Debt
securities represent the contractual obligation of an issuer
to repay the principal upon maturity and are subject to
interest rate and credit risks. Interest rate risk is the
decline in debt securities that usually accompanies a rise in
interest rates. Credit risk refers to the possibility that a
debt security could have its credit downgraded or that the
issuer will fail to pay the principal or interest when due.
The Trust's use of the Value Line Ranking Systems involves
the risk that over certain periods of time the price of
securities not covered by the Ranking Systems, or lower
ranked securities, may appreciate to a greater extent than
those securities in the Trust's portfolio. 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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YEAR 2000 RISKS
Like other mutual funds, the Trust could be adversely
affected if the computer systems used by the Adviser and
other service providers do not properly process and calculate
date-related information and data from and after January 1,
2000. This is commonly known as the "Year 2000 Problem." The
Adviser is taking steps that it believes are reasonably
designed to address the Year 2000 Problem with respect to the
computer systems that it uses and to obtain satisfactory
assurances that comparable steps are being taken by the
Trust's other major service providers. At this time, however,
there can be no assurance that these steps will be sufficient
to avoid any adverse impact to the Trust.
The Year 2000 Problem is expected to impact corporations,
which may include issuers of portfolio securities held by the
Trust, to varying degrees based upon various factors,
including, but not limited to, the corporation's industry
sector and degree of technological sophistication. The Trust
is unable to predict what impact, if any, the Year 2000
Problem will have on issuers of the portfolio securities held
by the Trust.
8
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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. A 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 0.50% 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.
9
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ABOUT YOUR ACCOUNT
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HOW TO BUY AND SELL SHARES
You may invest in the Trust only by purchasing certain
variable annuity and variable insurance contracts
("Contracts") issued by GIAC. The Trust continuously offers
its shares to GIAC's separate accounts at the net asset value
per share next determined after a proper purchase request has
been received by GIAC. GIAC then offers to owners of the
Contracts ("Contractowners") units in its separate accounts
which directly correspond to shares in the Trust. GIAC
submits purchase and redemption orders to the Trust based on
allocation instructions for premium payments, transfer
instructions and surrender or partial withdrawal requests
which are furnished to GIAC by such Contractowners.
Contractowners can send such instructions and requests to
GIAC at P.O. Box 26210, Lehigh Valley, Pennsylvania 18002 by
first class mail or 3900 Burgess Place, Bethlehem,
Pennsylvania 18017 by overnight or express mail. The Trust
redeems shares from GIAC's separate accounts at the net asset
value per share next determined after receipt of a redemption
order from GIAC.
THE ACCOMPANYING PROSPECTUS FOR A GIAC VARIABLE ANNUITY OR
VARIABLE LIFE INSURANCE POLICY DESCRIBES THE ALLOCATION,
TRANSFER AND WITHDRAWAL PROVISIONS OF SUCH ANNUITY OR POLICY.
/ / NET ASSET VALUE
We determine the Trust's net asset value (NAV) per share as
of the close of regular trading on the New York Stock
Exchange each day that 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. 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. 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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DIVIDENDS, DISTRIBUTIONS AND TAXES
The Trust intends to pay dividends from its net investment
income and distribute any capital gains that it has realized
annually. All dividends and capital gains distributions will
be automatically reinvested, at net asset value, by GIAC's
separate accounts in additional shares of the Trust.
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 prospectus for
GIAC's variable annuities and variable life insurance
policies describe the federal income tax treatment of
distributions from such contracts to Contractowners.
11
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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 800-221-3253.
FINANCIAL HIGHLIGHTS
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<TABLE>
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
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1998 1997 1996 1995 1994
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NET ASSET VALUE,
BEGINNING OF YEAR $22.13 $21.90 $20.27 $16.13 $17.01
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INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income .30 .65 .53 .39 .26
Net gains or losses
on securities (both
realized and
unrealized) 5.43 2.65 2.56 4.17 (1.09)
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Total income (loss)
from investment
operations 5.73 3.30 3.09 4.56 (.83)
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LESS DISTRIBUTIONS:
Dividends from net
investment income (.68) (.53) (.37) (.26) (.01)
Distributions from
capital gains (1.96) (2.52) (1.09) (.16) (.04)
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Total distributions (2.64) (3.07) (1.46) (.42) (.05)
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NET ASSET VALUE, END OF
YEAR $25.22 $22.13 $21.90 $20.27 $16.13
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TOTAL RETURN* 27.45% 15.66% 15.87% 28.54% (4.88)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands) $1,414,254 $1,196,589 $1,072,785 $876,509 $662,721
Ratio of expenses to
average net assets .58%(1) .59%(1) .58%(1) .60% .60%
Ratio of net income to
average net assets 1.25% 3.08% 2.70% 2.18% 1.65%
Portfolio turnover rate 106% 58% 71% 63% 100%
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</TABLE>
(1) Before offset of custody credits. Including the custody
credits would not have changed the expense ratio.
* Total returns do not reflect the effect of charges,
deducted under the terms of GIAC's variable contracts.
Including such charges would reduce the total returns for
all periods shown.
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12
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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 May 1, 1999, which we have filed
electronically with the Securities and Exchange Commission
(SEC) and which is legally a part of this prospectus. If you
want a free copy of the Statement of Additional Information,
the annual or semi-annual report, or if you have any
questions about investing in this Trust, you can write to the
Fund, c/o GIAC, 201 Park Avenue South, New York, NY 10003 or
call toll-free 800-221-3253.
You can find reports and other information about the Trust on
the SEC Web site (http://www.sec.gov), or you can get copies
of this information, after payment of a duplicating fee, by
writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the 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 1-800-SEC-0330.
<TABLE>
<S> <C>
INVESTMENT ADVISER CUSTODIAN
Value Line, Inc. State Street Bank and Trust Company
220 East 42nd Street 225 Franklin Street
New York, NY 10017-5891 Boston, MA 02110
</TABLE>
File no. 811-5276
<PAGE>
VALUE LINE STRATEGIC
ASSET MANAGEMENT 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
MAY 1, 1999
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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 Strategic Asset Management
Trust dated May 1, 1999, a copy of which may be obtained without charge by
writing or telephoning the Trust. The financial statements, accompanying notes
and report of independent auditors appearing in the Trust's 1998 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>
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PAGE
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<S> <C>
Description of the Trust and Its Investments and Risks.............................. B-2
Management of the Trust............................................................. B-13
Investment Advisory and Other Services.............................................. B-15
Brokerage Allocation and Other Practices............................................ B-16
Capital Stock....................................................................... B-17
Purchase, Redemption and Pricing of Shares.......................................... B-17
Taxes............................................................................... B-18
Performance Data.................................................................... B-19
Financial Statements................................................................ B-19
</TABLE>
B-1
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DESCRIPTION OF THE TRUST AND ITS INVESTMENTS AND RISKS
CLASSIFICATION. The Trust is a Massachusetts business trust organized in
1987. The Trust's investment adviser is Value Line, Inc. (the "Adviser").
INVESTMENT STRATEGIES AND RISKS. The primary investment objective of the
Trust is to achieve a high total investment return consistent with reasonable
risk. The Trust's investment objective cannot be changed without shareholder
approval. There can be no assurance that the Trust will achieve its investment
objective. There are risks in all investments, including any stock investment,
and in all mutual funds that invest in stocks.
Under normal conditions, the Trust will attempt to achieve its objective by
following an asset allocation strategy that enables the Adviser to periodically
shift the assets of the Trust among three types of securities: (a) equity
securities, (b) debt securities with maturities of more than one year, and (c)
money market instruments (debt securities with maturities of less than one
year). Allocation of the Trust's assets among these types of securities will be
determined by the Adviser and will be based primarily on data derived from
computer models for the stock and bond markets which the Adviser has developed
and other factors which the Adviser deems appropriate.
There are no limits on the percentage of the Trust's assets that can be
invested in equity, debt or money market securities. Thus, at any given time,
the Trust may invest entirely in equity, debt or money market securities or any
combination thereof.
When the stock market model indicates a preference for equity securities,
the percentage of the Trust's total assets invested in equity securities will be
increased. Similarly, if the expected total return from equity securities is
poor, then a greater percentage of the Trust's assets will be invested in debt
or money market securities as indicated by the Adviser's bond market model. The
central tendency is for 55% of the Trust's assets to be invested in equity
securities, 35% in debt securities and 10% in money market instruments
(including cash). The Trust is typically weighted towards equity securities over
debt and money market securities. The Trust may also write covered call options
on its portfolio securities, invest in repurchase agreements and in financial
futures contracts and related options. See "Miscellaneous Investment Practices"
below.
INVESTMENT IN DEBT SECURITIES. The Trust may invest in a broad variety of
debt securities, including debt securities issued by U.S. companies rated within
one of the four highest grades assigned by Standard & Poor's Corporation ("S&P")
or Moody's Investors Service, Inc. ("Moody's") or, if unrated, judged by the
Adviser to be of comparable quality, and debt securities issued or guaranteed by
the U.S. Government, its agencies and instrumentalities ("U.S. Government
Securities"). It is the Trust's current intention to limit its investments in
debt securities to those rated within the three highest grades.
U.S. Government Securities include direct obligations of the U.S. Treasury
(such as Treasury bills, Treasury notes and Treasury bonds) or securities issued
or guaranteed by U.S. Government agencies or instrumentalities. These
obligations, including those which are guaranteed by Federal agencies or
instrumentalities, may or may not be backed by the "full faith and credit" of
the United States. Agencies and instrumentalities which issue or guarantee
securities include: the Federal Farm Credit System and the Federal Home Loan
Banks, the Tennessee Valley Authority, the Federal
B-2
<PAGE>
National Mortgage Association, the Federal Home Loan Mortgage Corporation, the
United States Postal Service, the Government National Mortgage Association,
Farmers Home Administration, and the Export-Import Bank.
INVESTMENT IN MONEY MARKET SECURITIES. The Trust may invest in short-term
instruments (maturing in one year or less), including the following:
(1) U.S. Government obligations such as U.S. Treasury bills, notes or
bonds, and obligations of agencies or instrumentalities of the Federal
Government such as the Federal Home Loan Banks, the Federal Land Banks, or
the Federal National Mortgage Association.
(2) Obligations (including certificates of deposit and bankers
acceptances) of: (a) banks or savings and loan associations subject to
regulation by the U.S. Government (including foreign branches of such
banks), generally limited to institutions with a net worth of at least
$100,000,000 and to banks where the bank or its holding company carries a
Value Line financial strength rating of at least "A" (the third highest of
nine rating groups) of (b) U.S. branches of foreign banks, limited to
institutions having total assets of not less than $1 billion or its
equivalent.
(3) Instruments fully secured or collateralized by the type of
obligation described in the preceding paragraphs.
(4) Commercial paper issued by corporations maturing within one year
from the day of purchase and rated Prime-2 or better by Moody's or A-2 or
better by S&P, or issued by corporations having unsecured debt outstanding
which is rated at least Aa by Moody's or AA by S&P.
(5) Other debt instruments issued by corporations maturing within one
year from the day of purchase and rated at least Aa by Moody's or AA by S&P.
Investments in obligations of a foreign branch of a U.S. bank and in U.S.
branches of a foreign bank may subject the Trust to additional investment risks.
These risks may include international and political developments, foreign
government restrictions, foreign withholding taxes or possible seizure or
nationalization of foreign deposits. In addition, foreign branches of domestic
banks and foreign banks are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting and record keeping.
The Adviser uses its best judgment in selecting money market investments,
taking into consideration rates, terms and marketability of obligations as well
as the capitalization, earnings, liquidity and other indicators of the financial
condition of their issuers in arriving at investment decisions.
MISCELLANEOUS INVESTMENT PRACTICES
RESTRICTED SECURITIES. On occasion, the Trust may purchase securities which
would have to be registered under the Securities Act of 1933 if they were to be
publicly distributed. However, it will not do so if the value of such securities
and other securities which are not readily marketable (including repurchase
agreements maturing in more than seven days) would exceed 10% of the market
value of its net assets. It is management's policy to permit the occasional
acquisition of such restricted securities only if (except in the case of
short-term non-convertible debt securities) there is
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an agreement by the issuer to register such securities, ordinarily at the
issuer's expense, when requested to do so by the Trust. The acquisition in
limited amounts of restricted securities is believed to be helpful toward the
attainment of the Trust's investment objective without unduly restricting its
liquidity or freedom in the management of its portfolio. However, because
restricted securities may only be sold privately or in an offering registered
under the Securities Act of 1933, or pursuant to an exemption from such
registration, substantial time may be required to sell such securities, and
there is greater than usual risk of price decline prior to sale.
In addition, the Trust may purchase certain restricted securities ("Rule
144A securities") for which there is a secondary market of qualified
institutional buyers, as contemplated by Rule 144A under the Securities Act of
1933. Rule 144A provides an exemption from the registration requirements of the
Securities Act for the resale of certain restricted securities to qualified
institutional buyers.
The Adviser, under the supervision of the Board of Directors, will consider
whether securities purchased under Rule 144A are liquid or illiquid for purposes
of the Trust's limitation on investment in securities which are not readily
marketable or are illiquid. Among the factors to be considered are the frequency
of trades and quotes, the number of dealers and potential purchasers, dealer
undertakings to make a market and the nature of the security and the time needed
to dispose of it.
To the extent that the liquid Rule 144A securities that the Trust holds
become illiquid, due to lack of sufficient qualified institutional buyers or
market or other conditions, the percentage of the Trust's assets invested in
illiquid assets would increase. The Adviser, under the supervision of the Board
of Directors, will monitor the Trust's investments in Rule 144A securities and
will consider appropriate measures to enable the Trust to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
COVERED CALL OPTIONS. The Trust may write covered call options on stocks
held in its portfolio ("covered options") in an attempt to earn additional
income on its portfolio or to partially offset an expected decline in the price
of a security. When the Trust writes a covered call option, it gives the
purchaser of the option the right to buy the underlying security at the price
specified in the option (the "exercise price") at any time during the option
period. If the option expires unexercised, the Trust will realize income to the
extent of the amount received for the option (the "premium"). If the option is
exercised, a decision over which the Trust has no control, the Trust must sell
the underlying security to the option holder at the exercise price. By writing a
covered option, the Trust foregoes, in exchange for the premium less the
commission ("net premium"), the opportunity to profit during the option period
from an increase in the market value of the underlying security above the
exercise price. The Trust will not write call options in an aggregate amount
greater than 25% of its net assets.
The Trust will purchase call options only to close out a position. When an
option is written on securities in the Trust's portfolio and it appears that the
purchaser of that option is likely to exercise the option and purchase the
underlying security, it may be considered appropriate to avoid liquidating the
Trust's position, or the Trust may wish to extinguish a call option sold by it
so as to be free to sell the underlying security. In such instances the Trust
may purchase a call option on the same security with the same exercise price and
expiration date which had been previously written. Such a purchase would have
the effect of closing out the option which the Trust has written. The Trust
realizes a gain if the amount paid to purchase the call option is less than the
premium received for writing a similar option and a loss if the amount paid to
purchase a call option is greater than the
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premium received for writing a similar option. Generally, the Trust realizes a
short-term capital loss if the amount paid to purchase the call option with
respect to a stock is greater than the premium received for writing the option.
If the underlying security has substantially risen in value, it may be difficult
or expensive to purchase the call option for the closing transaction.
STOCK INDEX FUTURES CONTRACTS AND OPTIONS THEREON. The Trust may trade in
stock index futures contracts and in options on such contracts. Such contracts
will be entered into on exchanges designated by the Commodity Futures Trading
Commission ("CFTC").
The Trust's futures and options on futures transactions must constitute bona
fide hedging or other risk management purposes pursuant to regulations
promulgated by the CFTC. In addition, the Trust may not engage in such
activities generally if the sum of the amount of initial margin deposits and
premiums paid for unexpired commodity options would exceed 5% of the fair market
value of the Trust's net assets, after taking into account unrealized profits
and unrealized losses on such contracts it has entered into; provided, however,
that in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in calculating the 5%. In instances
involving entering into long futures or options contracts by the Trust, an
amount equal to the market value of the futures contract will be deposited in a
segregated account with the Trust's custodian of cash and liquid debt securities
to collateralize the position and thereby insure that the use of such futures
contract is unleveraged. No more than 25% of the Trust's net assets may be
deposited in such segregated account.
There can be no assurance of the Trust's successful use of stock index
futures as a hedging device. Hedging transactions involve certain risks. One
risk arises because of the imperfect correlation between movements in the price
of the stock index future and movements in the price of the securities which are
the subject of the hedge. The risk of imperfect correlation increases as the
composition of the Trust's securities portfolio diverges from the securities
included in the applicable stock index. In addition to the possibility that
there may be an imperfect correlation, or no correlation at all, between
movements in the stock index future and the portion of the portfolio being
hedged, the price of stock index futures may not correlate perfectly with the
movement in the stock index due to certain market distortions. Increased
participation by speculators in the futures market also may cause temporary
price distortions. Due to the possibility of price distortions in the futures
market and because of the imperfect correlation between movements in the stock
index and movements in the price of stock index futures, a correct forecast of
general market trends by the Adviser still may not result in a successful
hedging transaction.
For example, should the Trust anticipate a decrease in the value of its
portfolio securities, it could enter into futures contracts to sell stock
indexes thereby partially hedging its portfolio against the anticipated losses.
Losses in the portfolio, if realized, should be partially offset by gains on the
futures contracts. Conversely, if the Trust anticipated purchasing additional
portfolio securities in a rising market, it could enter into futures contracts
to purchase stock indexes thereby locking in a price. The implementation of
these strategies by the Trust should be less expensive and more efficient than
buying and selling the individual securities at inopportune times.
A stock index future obligates the seller to deliver (and the purchaser to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the contract is entered into. There can
be no assurance of the Trust's successful use of stock index futures as a
hedging device.
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The contractual obligation is satisfied by either a cash settlement or by
entering into an opposite and offsetting transaction on the same exchange prior
to the delivery date. Entering into a futures contract to deliver the index
underlying the contract is referred to as entering into a short futures
contract. Entering into a futures contract to take delivery of the index is
referred to as entering into a long futures contract. An offsetting transaction
for a short futures contract is effected by the Trust entering into a long
futures contract for the same date, time and place. If the price of the short
contract exceeds the price in the offsetting long, the Trust is immediately paid
the difference and thus realizes a gain. If the price of the long transaction
exceeds the short price, the Trust pays the difference and realizes a loss.
Similarly, the closing out of a long futures contract is effected by the Trust
entering into a short futures contract. If the offsetting short price exceeds
the long price, the Trust realizes as a gain, and if the offsetting short price
is less than the long price, the Trust realizes a loss.
No consideration will be paid or received by the Trust upon entering into a
futures contract. Initially, the Trust will be required to deposit with the
broker an amount of cash or cash equivalents equal to approximately 1% to 10% of
the contract amount. This amount is subject to change by the board of trade on
which the contract is traded and members of such board of trade may charge a
higher amount. This amount is known as "initial margin" and is in the nature of
a performance bond or good faith deposit on the contract which is returned to
the Trust upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Subsequent payments, known as "variation
margin," to and from the broker will be made daily as the price of the index
underlying the futures contract fluctuates, making the long and short positions
in the futures contract more or less valuable, a process known as
"marking-to-market."
The Trust may also purchase put and call options on stock index futures
contracts on commodity exchanges or write covered options on such contracts. A
call option gives the purchaser the right to buy, and the writer the obligation
to sell, while a put option gives the purchaser the right to sell and the writer
the obligation to buy. Unlike a stock index futures contract, which requires the
parties to buy and sell the stock index on a set date, an option on a stock
index futures contract entitles its holder to decide on or before a future date
whether to enter into such a futures contract. If the holder decides not to
enter into the contract, the premium paid for the option is lost. Since the
value of the option is fixed at the point of sale, the purchase of an option
does not require daily payments of cash in the nature of "variation" or
"maintenance" margin payments to reflect the change in the value of the
underlying contract. The value of the option purchased by the Trust does change
and is reflected in the net asset value of the Trust. The writer of an option,
however, must make margin payments on the underlying futures contract. Exchanges
provide trading mechanisms so that an option once purchased can later be sold
and an option once written can later be liquidated by an offsetting purchase.
Successful use of stock index futures by the Trust also is subject to the
Adviser's ability to predict correctly movements in the direction of the market.
If the Adviser's judgment about the several directions of the market is wrong,
the Trust's overall performance may be worse than if no such contracts had been
entered into. For example, if the Trust has hedged against the possibility of a
decline in the market adversely affecting stocks held in its portfolio and stock
prices increase instead, the Trust will lose part or all of the benefit of the
increased value of its stock which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if
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the Trust has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Trust
may have to sell securities at a time when it may be disadvantageous to do so.
When stock index futures are purchased to hedge against a possible increase in
the price of stocks before the Trust is able to invest its cash (or cash
equivalents) in stocks in an orderly fashion, it is possible that the market may
decline instead; if the Trust then concludes not to invest in stocks at that
time because of concern as to possible further market decline or for other
reasons, the Trust will realize a loss on the futures contract that is not
offset by a reduction in the price of securities purchased.
Use of options on stock index futures entails the risk that trading in the
options may be interrupted if trading in certain securities included in the
index is interrupted. The Trust will not purchase these options unless its
investment adviser is satisfied with the development, depth and liquidity of the
market and the investment adviser believes the options can be closed out.
Options and futures contracts entered into by the Trust will be subject to
special tax rules. These rules may accelerate income to the Trust, defer Trust
losses, cause adjustments in the holding periods of Trust securities, convert
capital gain into ordinary income and convert short-term capital losses into
long-term capital losses. As a result, these rules could affect the amount,
timing and character of Trust distributions. However, the Trust anticipates that
these investment activities will not prevent the Trust from qualifying as a
regulated investment company.
REPURCHASE AGREEMENTS. The Trust may invest temporary cash balances in
repurchase agreements. 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 securities 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 Board of Trustees monitors
the creditworthiness of parties with which the Trust enters into repurchase
agreements.
LENDING PORTFOLIO SECURITIES. The Trust may lend its portfolio securities
to broker-dealers or institutional investors if as a result thereof the
aggregate value of all securities loaned does not exceed 33 1/3% of the total
assets of the Trust. The loans will be made in conformity with applicable
regulatory policies and will be 100% collateralized by cash, cash equivalents or
U.S. Treasury bills on a daily basis in an amount equal to the market value of
the securities loaned and interest earned. The Trust will retain the right to
call, upon notice, the loaned securities and intends to call loaned voting
securities in anticipation of any important or material matter to be voted on by
shareholders. While there may be delays in recovery or even loss of rights in
the collateral should the borrower fail financially, the loans will be made only
to firms deemed by the Adviser to be of good standing and
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will not be made unless, in the judgment of the Adviser, the consideration which
can be earned from such loan justifies the risk. The Trust may pay reasonable
custodian and administrative fees in connection with the loans.
WHEN-ISSUED SECURITIES. The Trust may from time to time purchase securities
on a "when-issued" basis. The price of such securities, which may be expressed
in yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for the when-issued securities take place at a later date.
Normally, the settlement date occurs within one month of the purchase. During
the period between purchase and settlement, no payment is made by the Trust to
the issuer and no interest accrues to the Trust. Forward commitments involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of
the Trust's other assets. While when-issued securities may be sold prior to the
settlement date, the Trust intends to purchase such securities with the purpose
of actually acquiring them unless a sale appears desirable for investment
reasons. At the time the commitment to purchase a security on a when-issued
basis is confirmed, the Trust will record the transaction and reflect the value
of the security in determining its net asset value. The Trust does not believe
that its net asset value or income will be adversely affected by its purchase of
securities on a when-issued basis. The Trust will maintain cash and high quality
marketable securities equal in value to commitments for when-issued securities
in a segregated account.
SHORT SALES. The Trust may from time to time make short sales of securities
or maintain a short position, provided that at all times when a short position
is open the Trust owns an equal amount of such securities or securities
convertible into or exchangeable for an equivalent amount of such securities. No
more than 10% of the value of the Trust's net assets taken at market may at any
one time be held as collateral for such sales.
FUTURES AND OPTIONS ON FUTURES. The Trust may trade in financial futures
contracts including stock index futures and in options on such financial futures
contracts. Currently, financial futures contracts can be entered into for
interest rate sensitive debt securities such as U.S. Treasury bills, bonds and
notes, certificates of the Government National Mortgage Association and bank
certificates of deposit ("interest rate futures"). These contracts are
principally traded on the Chicago Board of Trade and the Chicago Mercantile
Exchange. Futures on stock indexes are currently traded on the Chicago
Mercantile Exchange, the New York Futures Exchange and the Kansas City Board of
Trade. The Trust may enter into futures contracts on these instruments and
indexes as well as on new instruments and indexes as they become available on
national futures exchanges.
Financial futures contracts are contracts entered into on a commodity
exchange which provide for the future delivery of an underlying instrument or
index on a specified date, time and place. The contractual obligations may be
satisfied by either taking or making physical delivery of the underlying
commodity (or cash settlement in the case of stock index futures and certain
other financial futures contracts) or by entering into an opposite and
offsetting transaction on the same exchange prior to the delivery date. Entering
into a futures contract to deliver the instrument or index underlying the
contract is referred to as entering into a short futures contract. Entering into
a futures contract to take delivery of the instrument or index is referred to as
entering into a long futures contract. An offsetting transaction for a short
futures contract is effected by the Trust entering into a long futures contract
for the same date, time and place. If the price of the short contract exceeds
the price in the offsetting long, the Trust is immediately paid the difference
and thus realizes a gain. If the price of the long transaction exceeds the short
price, the Trust pays the difference and realizes a loss. Similarly,
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the closing out of a long futures contract is effected by the Trust entering
into a short futures contract. If the offsetting short price exceeds the long
price, the Trust realizes a gain, and if the offsetting short price is less than
the long price, the Trust realizes a loss.
No consideration will be paid or received by the Trust upon entering into a
futures contract. Initially, the Trust will be required to deposit with the
broker an amount of cash or cash equivalents equal to approximately 1 to 10% of
the contract amount. This amount is subject to change by the board of trade on
which the contract is traded and members of such board of trade may charge a
higher amount. This amount is known as "initial margin" and is in the nature of
a performance bond or good faith deposit on the contract which is returned to
the Trust upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Subsequent payments, known as "variation
margin," to and from the broker will be made daily as the price of the index or
securities underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market."
The Trust may also purchase put and call options on financial futures
contracts on commodity exchanges or write covered options on such contracts.
Unlike a futures contract, which requires the parties to buy and sell a
commodity 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 value of the option is fixed at the point of sale, the
purchase of an option does not require daily payments of cash in the nature of
"variation" or "maintenance" margin payments to reflect the change in the value
of the underlying contract. The value of the option purchased by the Trust does
change and is reflected in the net asset value of the Trust. The writer of an
option, however, must make margin payments on the underlying futures contract.
Exchanges provide trading mechanisms so that an option once purchased can later
be sold and an option once written can later be liquidated by an offsetting
purchase.
The Trust's commodities transactions must constitute bona fide hedging or
other non-speculative transactions pursuant to regulations promulgated by the
Commodity Futures Trading Commission. In addition, the Trust may not engage in
such activities generally if the sum of the amount of initial margin deposits
and premiums paid for unexpired commodity options would exceed 5% of the fair
market value of the Trust's net assets, after taking into account unrealized
profits and unrealized losses on such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%. In
instances involving entering into long futures or options contracts by the
Trust, an amount equal to the market value of the commodity 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 commodity contract is
unleveraged.
Interest rate futures contracts may be entered into in order to hedge the
Trust's portfolio of debt securities against anticipated interest rate changes.
If the Adviser anticipates that interest rates will rise, the Trust may enter
into a short interest rate futures contract or write a call option 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 enter into a long interest rate futures
contract or purchase a call option thereon to protect against an increase in the
prices of the securities the Trust intends to purchase.
The Trust may enter into stock index futures for the purpose of hedging
against changes in values of the Trust's portfolio securities or options on
stock indexes. A stock index future obligates
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the seller to deliver (and the purchaser to take) an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the price
at which the contract is entered into. There can be no assurance of the Trust's
successful use of stock index futures as a hedging device.
When futures are purchased to hedge against a possible increase in the price
of stocks before the Trust is able to invest its cash (or cash equivalents) in
stocks in an orderly fashion, it is possible that the market may decline
instead; if the Trust then concludes not to invest in stocks at that time
because of concern as to possible further market decline or for other reasons,
the Trust will realize a loss on the futures contract that is not offset by a
reduction in the price of securities purchased.
OPTIONS ON SECURITIES. The Trust may purchase and write listed put and call
options on equity and debt securities when deemed appropriate and consistent
with the Trust's investment objective. The Trust will engage in option
transactions to realize profits through the receipt of premiums, to protect
unrealized gains or to avoid realizing losses and to hedge securities positions
held by the Trust.
The Trust will write call options only if they are secured. A call option is
"secured" if the Trust owns the securities underlying the call, if the Trust
holds a call at the same exercise price for the same exercise period and on the
same securities as the call written, or if the Trust establishes with its
custodian at the time it writes the call, and maintains for the term of the
option, a segregated account consisting of cash, U.S. Government Securities or
other high-grade debt securities equal to the fluctuating market value of the
optioned securities. The segregated account will be adjusted at least daily to
reflect changes in the market value of the optioned securities.
The Trust will write put options only if they are secured. A put option is
"secured" if the Trust holds a put at the same exercise price, for the same
exercise period and on the same underlying security as the put written, or if
the Trust places cash, U.S. Government Securities or other high-grade debt
securities with a value equal to the exercise price of the put in a segregated
account with the Trust's custodian. The segregated account will be adjusted
daily to reflect the current value of the put.
The Trust may enter into "closing purchase transactions" or "closing sale
transactions" to terminate its obligations with respect to an option prior to
the expiration of the option. As the writer of an option, the Trust may effect a
closing purchase transaction by buying an option of the same series and exercise
price as the option previously written. As the purchaser of an option, the Trust
may liquidate its position by selling the option previously purchased.
The Trust may realize a profit or loss upon entering into a closing purchase
or sale transaction. The Trust will realize a profit if the cost of a closing
purchase transaction is less than the premium received upon writing the original
option and will incur a loss if the cost of a closing purchase transaction
exceeds the premium received upon writing the original option. Whether the Trust
realizes a profit or loss on a closing sale transaction will depend on whether
the amount received in the closing sale transaction is more or less than the
premium the Trust initially paid for the original option plus the related
transaction costs.
The Trust will not (1) sell listed put or call options to the extent that,
immediately after a sale, the aggregate value of the securities underlying the
calls or obligations securing the puts would exceed 25% of the Trust's net
assets or (2) purchase listed put or call options if, immediately after a
purchase, the premiums paid for all the options owned at that time would exceed
10% of the Trust's net assets.
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YEAR 2000. Like other mutual funds, the Trust could be adversely affected
if the computer systems used by the Adviser and other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Adviser
is taking steps that it believes are reasonably designed to address the Year
2000 Problem with respect to the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by the Trust's
other major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact to the Trust.
The Year 2000 Problem is expected to impact corporations, which may include
issuers of portfolio securities held by the Trust, to varying degrees based upon
various factors, including, but not limited to, the corporation's industry
sector and degree of technological sophistication. The Trust is unable to
predict what impact, if any, the Year 2000 Problem will have on issuers of the
portfolio securities held by the Trust.
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 stock index futures.
(iii)
The Trust may not engage in the underwriting of securities except to
the extent that the Trust may be deemed an underwriter as to
restricted securities under the Securities Act of 1933 in selling portfolio
securities.
(iv)
The Trust may not invest 25% or more of its assets in securities of
issuers in any one industry. For the purpose of this restriction,
gas, electric, water and telephone utilities will each be treated as a
separate industry.
(v)
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 purchase securities of
issuers which engage in real estate operations.
(vi)
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.
(vii)
The Trust may not engage in arbitrage transactions, short sales,
purchases on margin or participate on a joint or joint and several
basis in any trading account in securities except that these prohibitions
will not apply to futures contracts or options on futures contracts entered
into by the Trust for permissible purposes or to margin payments made in
connection with such contracts.
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(viii)
The Trust may not purchase or sell any put or call options or any
combination thereof, except that the Trust may write and sell
covered call option contracts on securities owned by the Trust. The Trust
may also purchase call options for the purpose of terminating its
outstanding obligations with respect to securities upon which covered call
option contracts have been written (i.e., "closing purchase transactions").
The Trust may also purchase and sell put and call options on stock index
futures contracts.
(ix)
The Trust may not invest more than 5% of its total assets in the
securities of any one issuer or purchase more than 10% of the
outstanding voting securities, or any other class of securities, of any one
issuer. For purposes of this restriction, all outstanding debt securities of
an issuer are considered as one class, and all preferred stock of an issuer
is considered as one class. This restriction does not apply to obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
(x)
The 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.
(xi)
The Trust may not purchase securities for the purpose of exercising
control over another company.
(xii)
The Trust may not invest in commodities or commodity contracts
except that the Trust may invest in stock index futures contracts
and options on stock index futures contracts.
(xiii)
The Trust may not purchase oil, gas or other mineral type
development programs or leases, except that the Trust may invest in
the securities of companies which invest in or sponsor such programs.
(xiv)
The Trust may not purchase the securities of any issuer if, to the
knowledge of the Trust, those officers and trustees 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.
(xv)
The primary investment objective of the Trust is to achieve a high
total investment return consistent with reasonable risk.
If a percentage restriction is adhered to at the time of investment, a later
change in percentage resulting from changes in values or assets will not be
considered a violation of the restriction. For purposes of industry
classifications, the Trust follows the industry classifications in The Value
Line Investment Survey.
The policies set forth above may not be changed without the affirmative vote
of the majority of the outstanding voting securities of the 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.
Since the Trust will be used as an investment vehicle for variable annuity
contracts and variable life insurance policies issued by The Guardian Insurance
& Annuity Company, Inc. ("GIAC") its investments may be subject in the future to
further restrictions under the insurance laws and regulations of the states in
which such contracts or policies are offered for sale.
B-12
<PAGE>
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 Board Chairman, President and Chief Executive
Age 64 of Directors and Officer of the Adviser and Value Line Pub-
President lishing, Inc. Chairman and President of the
Value Line Funds and Value Line Securities,
Inc. (the "Distributor"); Chairman and
President of each of the 15 Value Line Funds.
John W. Chandler Director Consultant, Academic Search Consultation
2801 New Mexico Ave., N.W. Service, Inc. Trustee Emeritus and Chairman
Washington, DC 20007 (1993-1994) of Duke University; President
Age 75 Emeritus, Williams College.
*Leo R. Futia Director Retired Chairman and Chief Executive Officer
201 Park Avenue South of The Guardian Life Insurance Company of
New York, NY 10003 America and Director since 1970. Director
Age 79 (Trustee) of The Guardian Insurance & Annuity
Company, Inc., Guardian Investor Services
Corporation and the Guardian-sponsored mutual
funds.
David H. Porter Director President Emeritus, Skidmore College since
5 Birch Run Drive January 1, 1999; President, Skidmore College,
Saratoga Springs, NY 12866 1987-1998; Director of Adirondack Trust
Age 63 Company.
Paul Craig Roberts Director Chairman, Institute for Political Economy;
505 S. Fairfax Street Director, A. Schulman Inc. (plastics).
Alexandria, VA 22320
Age 60
Nancy-Beth Sheerr Director Chairman, Radcliffe College Board of
1409 Beaumont Drive Trustees.
Gladwyne, PA 19035
Age 49
Stephen Grant Vice President Portfolio Manager with the Adviser.
Age 45
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- ---------------------------------- --------------------- ---------------------------------------------
<S> <C> <C>
Bruce Alston Vice President Portfolio Manager with the Adviser since
Age 53 1997; Portfolio Manager with Dreyfus
Management, Inc. 1994-1996, and Prudential
Capital Markets Group, 1981-1994.
David T. Henigson Vice President, Director, Vice President and Compliance
Age 41 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 11 other Value Line
Funds.
The following table sets forth information regarding compensation of
Trustees by the Trust and by the Trust and the eleven other Value Line Funds of
which each of the Trustees is a director or trustee for the fiscal year ended
December 31, 1998. Trustees who are officers or employees of the Adviser do not
receive any compensation from the Trust or any of the Value Line Funds.
COMPENSATION TABLE
FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TOTAL
PENSION OR ESTIMATED COMPENSATION
RETIREMENT ANNUAL FROM TRUST
AGGREGATE BENEFITS BENEFITS AND TRUST
COMPENSATION ACCRUED AS PART UPON COMPLEX
NAME OF PERSONS FROM TRUST OF FUND EXPENSES RETIREMENT (12 FUNDS)
- ------------------------------------------- --------------- ------------------ ----------- --------------
<S> <C> <C> <C> <C>
Jean B. Buttner $ -0- N/A N/A $ -0-
John W. Chandler 2,968 N/A N/A 35,620
Leo R. Futia 2,718 N/A N/A 32,620
David H. Porter 2,968 N/A N/A 35,620
Paul Craig Roberts 2,718 N/A N/A 32,620
Nancy-Beth Sheer 2,968 N/A N/A 35,620
</TABLE>
As of the date of this Statement of Additional Information, The Guardian
Insurance & Annuity Company, Inc., a Delaware corporation, owned all of the
outstanding shares of the Trust. Such shares are allocated to one or more
Guardian separate accounts, which are registered as unit investment trusts under
the 1940 Act. The address of The Guardian Insurance & Annuity Company, Inc. is
201 Park Avenue South, New York, New York 10003. It is a subsidiary of The
Guardian Life Insurance Company of America, a mutual life insurance company
organized under the laws of the State of New York.
B-14
<PAGE>
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 81% of the outstanding shares of the Adviser's
common stock. Jean Bernhard Buttner, Chairman, President and Chief Executive
Officer of the Adviser and Chairman and President of the 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 an advisory fee at an annual rate of 0.50% of the
Trust's average daily net assets during the year. During 1996, 1997 and 1998,
the Trust paid or accrued to the Adviser advisory fees of $4,947,837, $5,718,843
and $6,293,798, 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 agents, legal and
accounting fees, fees and expenses in connection with qualification under
federal and state securities laws and costs of shareholder reports and proxy
materials. In addition, the Trust has agreed to reimburse GIAC for certain
administrative and shareholder servicing expenses incurred by GIAC on behalf of
the Trust. See note 4 of the notes to the Trust's financial statements for the
year ended December 31, 1998. 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.
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 Adviser has imposed rules upon itself and such persons requiring
monthly reports of security transactions for their respective accounts and
restricting trading in various types of securities in order to avoid possible
conflicts of interest. The Adviser may from time to time, directly or through
affiliates, enter into agreements to furnish for compensation special research
or financial services to companies, including services in connection with
acquisitions, mergers or financings. In the event that such agreements are in
effect with respect
B-15
<PAGE>
to issuers of securities held in the portfolio of the Trust, specific reference
to such agreements will be made in the "Schedule of Investments" in shareholder
reports of the Trust. As of the date of this Statement of Additional Information
no such agreements exist.
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. The
Distributor also serves as distributor to the other Value Line funds. Jean
Bernhard Buttner is Chairman and President of the Distributor.
The Adviser has retained State Street Bank and Trust Company ("State
Street") to provide certain bookkeeping and accounting services for the Fund.
The Adviser pays State Street $32,400 per annum for each Value Line fund for
which State Street provides these services. State Street, whose address is 225
Franklin Street, Boston, MA 02110, also acts as the Fund's custodian, transfer
agent and dividend-paying agent. As custodian, State Street is responsible for
safeguarding the Fund's cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on the Fund's investments.
As transfer agent and dividend-paying agent, State Street effects transfers of
Fund shares by the registered owners and transmits payments for dividends and
distributions declared by the Fund. National Financial Data Services, Inc., a
State Street affiliate, whose address is 330 W. 9th Street, Kansas City, MO
64105, provides certain transfer agency functions to the Trust as an agent for
State Street. PricewaterhouseCoopers LLP, whose address is 1177 Avenue of the
Americas, New York, NY 10036, acts as the Fund's independent accountants and
also performs certain tax preparation services.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Orders for the purchase and sale of portfolio securities are placed with
brokers and dealers who, in the judgment of the Adviser, are able to execute
them as expeditiously as possible and at the best obtainable price. Debt
securities are traded principally in the over-the-counter market on a net basis
through dealers acting for their own account and not as brokers. Purchases and
sales of securities which are not listed or traded on a securities exchange will
ordinarily be executed with primary market makers acting as principal, except
when it is determined that better prices and executions may otherwise be
obtained. The Adviser is also authorized to place purchase or sale orders with
brokers or dealers who may charge a commission in excess of that charged by
other brokers or dealers if the amount of the commission charged is reasonable
in relation to the value of the brokerage and research services provided. Such
allocation will be in such amounts and in such proportions as the Adviser may
determine. Orders may also be placed with brokers or dealers who sell shares of
the Trust or other funds for which the Adviser acts as investment adviser, but
this fact, or the volume of such sales, is not a consideration in their
selection. During 1996, 1997 and 1998, the Trust paid brokerage commissions of
$743,211, $748,334 and $1,460,070, respectively, of which $461,211 (62%),
$427,025 (57%) and $859,104 (59%), respectively, was paid to Value Line
Securities, Inc., the Trust's distributor and a subsidiary of the Adviser. Value
Line Securities, Inc. clears transactions for the Trust through unaffiliated
broker-dealers.
The Board of Trustees has adopted procedures incorporating the standards of
Rule 17e-1 under the 1940 Act which requires that the commissions paid to Value
Line Securities or any other "affiliated person" be "reasonable and fair"
compared to the commissions paid to other brokers in
B-16
<PAGE>
connection with comparable transactions. The procedures require that the Adviser
furnish reports to the Trustees with respect to the payment of commissions to
affiliated brokers and maintain records with respect thereto. During 1998,
$1,151,988 (79%) of the Trust's brokerage commissions were paid to brokers or
dealers solely for their services in obtaining the best prices and executions;
the balance, or $308,082 (21%), went to brokers or dealers who provided
information or services to the Adviser and, therefore, indirectly to the Trust
and to shareholders of the Value Line funds. The information and services
furnished to the Adviser include the furnishing of research reports and
statistical compilations and computations and the providing of current
quotations for securities. The services and information were furnished to the
Adviser at no cost to it; no such services or information were furnished
directly to the Trust, but certain of these services might have relieved the
Trust of expenses which it would otherwise have had to pay. Such information and
services are considered by the Adviser, and brokerage commissions are allocated
in accordance with its assessment of such information and services, but only in
a manner consistent with the placing of purchase and sale orders with brokers
and/or dealers, which, in the judgment of the Adviser, are able to execute such
orders as expeditiously as possible and at the best obtainable price. The Trust
is advised that the receipt of such information and services has not reduced in
any determinable amount the overall expenses of the Adviser.
PORTFOLIO TURNOVER. The Trust'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 Trust
engages in short-term trading in attempting to achieve its objective, it may
increase portfolio turnover and incur higher brokerage commissions and other
expenses than might otherwise be the case. The 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.
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. Shares of the Trust are available to the
public only through the purchase of certain contracts issued by GIAC. There are
no minimum investment requirements.
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.
B-17
<PAGE>
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.
NET ASSET VALUE. The net asset value of the Trust's shares for purposes of
both purchases and redemptions is determined once daily as of the close of
regular trading on the New York Stock Exchange (generally 4:00 p.m., New York
time) on each day that the New York Stock Exchange is open for trading except on
days on which no orders to purchase, sell or redeem Trust shares have been
received. The net asset value per share is determined by dividing the total
value of the investments and other assets of the Trust, less any liabilities, by
the total outstanding shares. Securities listed on a securities exchange and
over-the-counter securities traded on the NASDAQ national market are valued at
the closing sales price on the date as of which the net asset value is being
determined. In the absence of closing sales prices for such securities and for
securities traded in the over-the-counter market, the security is valued at the
midpoint between the latest available and representative asked and bid prices.
Securities for which market quotations are not readily available or which are
not readily marketable and all other assets of the Trust are valued at fair
value as the Board of Trustees or persons acting at their direction may
determine in good faith. Short-term instruments with maturities of 60 days or
less at the date of purchase are valued at amortized cost, which approximates
market.
TAXES
The 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 GIAC's separate accounts. The Trust's net
investment income is made up of dividends and interest less expenses. The
computation of net capital gains takes into account any capital loss carry
forward of the Trust.
Federal tax regulations require that mutual funds that are offered through
insurance company separate accounts must meet certain diversification
requirements to preserve the tax-deferral benefits provided by the variable
contracts which are offered in connection with such separate accounts. The
Adviser intends to diversify the Trust's investments in accordance with those
requirements. The prospectuses for GIAC's variable annuities and variable life
insurance policies describe the federal income tax treatment of distributions
from such contracts to Contractowners.
B-18
<PAGE>
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
Where: P = a hypothetical initial purchase order of
$1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of the
hypothetical $1,000 purchase at the end
of the period.
The Trust's average annual total returns for the one, five and ten year
periods ending December 31, 1998 were 27.45%, 15.87% and 17.05%, respectively.
The Trust's total return may be compared to relevant indices and data from
Lipper Analytical Services, Inc., Morningstar or Standard & Poor's Indices.
From time to time, evaluations of the Trust's performance by independent
sources may also be used in advertisements and in information furnished to
present or prospective investors in the Trust.
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 December 31, 1998,
including the financial highlights for each of the five fiscal years in the
period ended December 31, 1998, appearing in the 1998 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.
B-19
