<PAGE>
VALUE LINE
ASSET ALLOCATION FUND, INC.
--------------------------------
PROSPECTUS
AUGUST 1, 1999
- --------------------------------------------------------------------------------
[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.
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
FUND SUMMARY
What is the Fund's goal? PAGE 2
What are the Fund's main investment strategies? PAGE
2
What are the main risks of investing in the Fund?
PAGE 2
How has the Fund performed? PAGE 3
What are the Fund's fees and expenses? PAGE 4
HOW WE MANAGE THE FUND
Our principal investment strategies PAGE 5
The principal risks of investing in the Fund PAGE 7
WHO MANAGES THE FUND
Investment Adviser PAGE 9
Management fees PAGE 9
Portfolio management PAGE 9
ABOUT YOUR ACCOUNT
How to buy shares PAGE 10
How to sell shares PAGE 13
Special services PAGE 15
Dividends, distributions and taxes PAGE 16
FINANCIAL HIGHLIGHTS
Financial Highlights PAGE 17
<PAGE>
FUND SUMMARY
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S GOAL?
The Fund's investment objective is to achieve a high total
investment return (current income and capital appreciation)
consistent with reasonable risk. Although the Fund will
strive to achieve this goal, there is no assurance that it
will.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
To achieve the Fund's goal, we invest in a broad range of
common stocks, bonds and money market instruments in
accordance with our asset allocation strategy based primarily
on data derived from computer models for the stock and bond
markets which the Adviser has developed. 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
Fund 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.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
Investing in any mutual fund involves risk, including the
risk that you may receive little or no return on your
investment, and the risk that you may lose part or all of the
money you invest. 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 Fund is
market risk, the possibility that the securities in a certain
market will decline in value because of factors such as
economic conditions. Market risk may affect a single issuer,
industry, sector of the economy or the market as a whole. 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 Fund shares will increase and decrease according
to changes in the value of the Fund's investments. The Fund
will be affected by changes in stock prices which tend to
fluctuate more than bond prices.
The Fund has a high portfolio turnover rate, which may
negatively affect the Fund's performance.
An investment in the Fund is not a complete investment
program and you should consider it just one part of your
total investment program. For a more complete discussion of
risk, please turn to page 7.
2
<PAGE>
HOW HAS THE FUND PERFORMED?
This bar chart and table can help you evaluate the potential
risks of investing in the Fund. We show how returns for the
Fund's shares have varied over the life of the Fund, as well
as the average annual returns of these shares for one year,
five years, and since inception of the Fund, all compared to
the performance of the S&P 500-Registered Trademark- Index
and the Lehman Brothers Government/Corporate Bond Index,
which are broad based market indexes. You should remember
that unlike the Fund, these indexes are unmanaged and do not
include the costs of buying, selling, and holding the
securities. The Fund's past performance is not necessarily an
indication of how it will perform in the future.
TOTAL RETURNS AS OF 12/31 EACH YEAR (%)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
<S> <C>
1989
1990
1991
1992
1993
1994 3.44
1995 36.11
1996 26.60
1997 20.99
1998 25.80
</TABLE>
<TABLE>
<S> <C> <C>
BEST QUARTER: Q4 1998 +24.59%
WORST QUARTER: Q3 1998 (12.83%)
</TABLE>
As of June 30, 1999, the Fund had a year-to-date total return
of 7.55%.
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
SINCE INCEPTION
1 YEAR 5 YEARS (8/24/93)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
VALUE LINE ASSET ALLOCATION FUND 25.80% 22.09% 21.78%
- ---------------------------------------------------------------------------------
S&P 500-REGISTERED TRADEMARK- INDEX 28.58% 24.06% 22.90%
- ---------------------------------------------------------------------------------
LEHMAN BROTHERS GOVERNMENT/
CORPORATE BOND INDEX 9.47% 7.31% 6.83%
- ---------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
WHAT ARE THE FUND'S FEES AND EXPENSES?
These tables describe the fees and expenses you pay in
connection with an investment in the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
<S> <C>
- --------------------------------------------------------
MAXIMUM SALES CHARGES (LOAD) IMPOSED ON PURCHASES NONE
AS A PERCENTAGE OF OFFERING PRICE
- --------------------------------------------------------
MAXIMUM DEFERRED SALES CHARGES (LOAD) AS A NONE
PERCENTAGE OF ORIGINAL PURCHASE PRICE OR
REDEMPTION PRICE, WHICHEVER IS LOWER
- --------------------------------------------------------
MAXIMUM SALES CHARGES (LOAD) IMPOSED ON REINVESTED
DIVIDENDS NONE
- --------------------------------------------------------
REDEMPTION FEE NONE
- --------------------------------------------------------
EXCHANGE FEE NONE
- --------------------------------------------------------
</TABLE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS)
<TABLE>
<CAPTION>
<S> <C>
- ---------------------------------------------------------
MANAGEMENT FEES 0.65%
- ---------------------------------------------------------
DISTRIBUTION AND SERVICE (12b-1) FEES .25%
- ---------------------------------------------------------
OTHER EXPENSES .18%
- ---------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 1.08%
- ---------------------------------------------------------
</TABLE>
EXAMPLE
This example is intended to help you compare the cost of
investing in the Fund to the cost of investing in other
mutual funds. We show the cumulative amount of Fund expenses
on a hypothetical investment of $10,000 with an annual 5%
return over the time shown, assuming that the Fund's
operating expenses remain the same. The expenses would be the
same whether you sold your shares at the end of each period
or continue to hold them. This is an example only, and your
actual costs may be greater or less than those shown here.
Based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------
VALUE LINE ASSET ALLOCATION
FUND $110 $343 $595 $1,317
- -------------------------------------------------------------------------
</TABLE>
4
<PAGE>
HOW WE MANAGE THE FUND
- --------------------------------------------------------------------------------
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 Fund, you
should consider an investment in it to be a long-term
investment that will best meet its objectives when held for a
number of years. The following is a description of how the
Adviser pursues the Fund's objectives.
The Fund attempts to achieve its objective by following an
asset allocation strategy that enables the Adviser to
periodically shift the assets of the Fund 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 Fund'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 Fund'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 Fund'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 Fund's assets will be
invested in debt or money market securities. When the model
indicates no preference for any asset class, the Fund will
invest 55% of its assets 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
5
<PAGE>
that are included and stocks that have traded for less than
two years are not ranked. On a scale of 1 (highest) to 5
(lowest), the rankings compare 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
by the Adviser in managing private accounts since 1981, and
in managing the Value Line Small-Cap Growth Fund, Inc. since
1993.
The Performance Ranking System evaluates the approximately
1,800 stocks in the Expanded Edition of The Value Line
Investment Survey which consists of stocks with mostly
smaller market capitalizations (under $1 billion) and only a
few stocks of foreign issuers. This stock ranking system
relies on factors similar to those found in the Value Line
Timeliness Ranking System except that it does not utilize
earnings estimates. The Performance Ranks use a scale of 1
(highest) to 5 (lowest) to compare the Adviser's estimate of
the probable market performance of each Expanded Edition
stock during the coming six to twelve months relative to all
1,800 stocks under review in the Expanded Edition.
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 Fund will usually invest
in common stocks ranked 1 or 2 but it may also invest in
common stocks ranked 3. Although there are no set limitations
on investments in the portfolio, U.S. securities ranked 1, 2
or 3 of any size will usually constitute a substantial
portion of the Fund's portfolio. Reliance upon the rankings,
whenever feasible, is a fundamental policy of the Fund which
may not be changed without shareholder approval. The
utilization of these Rankings is no assurance that the Fund
will perform more favorably than the market in general over
any particular period.
INVESTMENT IN DEBT SECURITIES. The Fund 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
6
<PAGE>
securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. In selecting debt securities,
the Adviser evaluates the credit quality of the debt security
and its value relative to comparable securities as well as
its historic trading level.
INVESTMENT IN MONEY MARKET SECURITIES. The short-term
instruments in which the Fund invests are primarily U.S.
Government obligations and repurchase agreements.
TEMPORARY DEFENSIVE POSITION
From time to time in response to adverse market, economic,
political or other conditions, the Fund may invest without
limitation in cash or cash equivalents, debt securities,
bonds, or preferred stocks for temporary defensive purposes.
This could help the Fund avoid losses, but it may result in
lost opportunities. If this becomes necessary, the Fund may
not achieve its investment objectives.
PORTFOLIO TURNOVER
The Fund engages in active and frequent trading of portfolio
securities in order to take advantage of better investment
opportunities to achieve its investment objectives which
results in higher brokerage commissions and other expenses.
High portfolio turnover may negatively affect the Fund's
performance.
THE PRINCIPAL RISKS OF INVESTING IN THE FUND
/ / Because the Fund may invest certain of its assets in common
stocks, the value of the stocks in its portfolio might
decrease in response to the activities of an individual
company or in response to general market or economic
conditions. If this occurs, the Fund's share price may
decrease.
/ / Debt securities represent the contractual obligation of an
issuer to pay interest and to repay the principal upon
maturity and are subject to interest rate and credit risks.
Interest rate risk is the decline in debt securities that
usually accompanies a rise in interest rates. Credit risk
refers to the possibility that a debt security could have its
credit downgraded or that the issuer will fail to pay the
principal or interest when due.
7
<PAGE>
/ / The Fund may invest in BBB rated debt securities which may
have certain speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments
than is the case with higher grade securities. The Fund may
continue to hold a debt security if its rating drops.
/ / Certain securities may be difficult or impossible to sell at
the time and price that the Fund would like. The Fund may
have to lower the price, sell other securities instead or
forego an investment opportunity. This could have a negative
effect on the Fund's performance.
/ / The Fund's use of the Value Line Ranking Systems involves the
risk that over certain periods of time the price of
securities not covered by the Ranking Systems, or lower
ranked securities, may appreciate to a greater extent than
those securities in the Fund's portfolio.
/ / Please see the Statement of Additional Information for a
further discussion of risks. Information on the Fund's recent
holdings can be found in the Fund's current annual or
semi-annual report.
YEAR 2000 RISKS
Like other mutual funds, the Fund 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 Fund's other
major service providers. At this time, however, there can be
no assurance that these steps will be sufficient to avoid any
adverse impact to the Fund.
The Year 2000 Problem is expected to impact corporations,
which may include issuers of portfolio securities held by the
Fund, to varying degrees based upon various factors,
including, but not limited to, the corporation's industry
sector and degree of technological sophistication. The Fund
is unable to predict what impact, if any, the Year 2000
Problem will have on issuers of the portfolio securities held
by the Fund.
8
<PAGE>
WHO MANAGES THE FUND
- --------------------------------------------------------------------------------
The business and affairs of the Fund are managed by the
Fund's officers under the direction of the Fund's Board of
Directors.
INVESTMENT ADVISER
Value Line, Inc., 220 East 42nd Street, New York, NY 10017,
serves as the Fund's investment adviser and manages the
Fund's business affairs. Value Line also acts as investment
adviser to the other Value Line mutual funds and furnishes
investment counseling services to private and institutional
clients resulting in combined assets under management of over
$5 billion.
The Adviser was organized in 1982 and is the successor to
substantially all of the operations of Arnold Bernhard & Co.,
Inc. which with its predecessor has been in business since
1931. Value Line Securities, Inc., the Fund's distributor, is
a subsidiary of the Adviser. Another subsidiary of the
Adviser publishes The Value Line Investment Survey and other
publications.
MANAGEMENT FEES
For managing the Fund and its investments, the Adviser is
paid a yearly fee of 0.65% of the Fund's average daily net
assets.
PORTFOLIO MANAGEMENT
A committee of employees of the Investment Adviser is jointly
and primarily responsible for the day-to-day management of
the Fund's portfolio.
9
<PAGE>
ABOUT YOUR ACCOUNT
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
/ / BY TELEPHONE
Once you have opened an account, you can buy additional
shares by calling 800-243-2729 between 9:00 a.m. and
4:00 p.m. New York time. You must pay for these shares
within three business days of placing your order.
/ / BY WIRE
If you are making an initial purchase by wire, you must
call us at 800-243-2729 so we can assign you an account
number. Request your bank to wire the amount you want to
invest to State Street Bank and Trust Company, ABA
#011000028, attention DDA # 99049868. Include your name,
account number, tax identification number and the name
of the fund in which you want to invest.
/ / THROUGH A BROKER-DEALER
You can open an account and buy shares through a
broker-dealer, who may charge a fee for this service.
/ / BY MAIL
Complete the Account Application and mail it with your
check payable to NFDS, Agent, to Value Line Funds, c/o
National Financial Data Services, Inc., P.O. Box 419729,
Kansas City, MO 64141-6729. If you are making an initial
purchase by mail, you must include a completed Account
Application or an appropriate retirement plan
application if you are opening a retirement account,
with your check. All purchases must be made in U.S.
dollars and checks must be drawn on U.S. banks.
/ / MINIMUM/ADDITIONAL INVESTMENTS
Once you have completed an application, you can open an
account with an initial investment of $1,000, and make
additional investments at any time for as little as
$100. The price you pay for shares will depend on when
we receive your purchase order.
/ / TIME OF PURCHASE
Your price for Fund shares is the Fund's net asset value
per share (NAV), which is generally calculated as of the
close of trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern time) every day the
Exchange is open
10
<PAGE>
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 received by the Fund. We reserve the right
to reject any purchase order and to waive the initial
and subsequent investment minimums at any time.
Fund shares may be purchased through various third-party
intermediaries including banks, brokers, financial
advisers and financial supermarkets. When the
intermediary is authorized by the Fund, orders will be
priced at the NAV next computed after receipt by the
intermediary.
/ / DISTRIBUTION CHARGES
The Fund has adopted a plan under rule 12b-1 of the
Investment Company Act of 1940 for the payment of
certain expenses incurred by Value Line Securities,
Inc., the Fund's distributor, in advertising, marketing
and distributing the Fund's shares and for servicing the
Fund's shareholders at an annual rate of 0.25% of the
Fund's average daily net assets. Under the plan, the
distributor may make payments to securities dealers,
banks, financial institutions and other organizations
which render distribution and administrative services
with respect to the distribution of the Fund's shares.
Such services may include, among other things, answering
investor inquiries regarding the Fund; processing new
shareholder account applications and redemption
transactions; responding to shareholder inquiries; and
such other services as the Fund may request to the
extent permitted by applicable statute, rule or
regulation. The plan also provides that the Adviser may
make such payments out of its advisory fee, its past
profits or any other source available to it. The fees
payable to the distributor under the plan are payable
without regard to actual expenses incurred. Because
these fees are paid out of the Fund's assets on an
on-going basis, over time these fees will increase the
cost of your investment and may cost you more than
paying other types of sales charges.
11
<PAGE>
/ / NET ASSET VALUE
We determine the Fund'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. We
calculate NAV by adding the market value of all the
securities and assets in the Fund's portfolio, deducting
all liabilities, and dividing the resulting number by
the number of shares outstanding. The result is the net
asset value per share. 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 Directors. 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.
12
<PAGE>
HOW TO SELL SHARES
/ / BY MAIL
You can redeem your shares (sell them back to the Fund)
by mail by writing to: Value Line Funds, c/o National
Financial Data Services, Inc., P.O. Box 419729, Kansas
City, MO 64141-6729. 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.
/ / THROUGH A BROKER-DEALER
You may sell your shares through a broker-dealer, who
may charge a fee for this service.
The Fund has authorized certain brokers to accept
purchase and redemption orders on behalf of the Fund.
The Fund has also authorized these brokers to designate
others to accept purchase and redemption orders on
behalf of the Fund.
We treat any order to buy or sell shares that you place
with one of these brokers, or anyone they have
designated, as if you had placed it directly with the
Fund. The shares that you buy or sell through brokers or
anyone they have designated are priced at the next net
asset value that is computed after they receive your
order.
Among the brokers that have been authorized are Charles
Schwab & Co., Inc., National Investor Services Corp.,
Pershing, and Fidelity Brokerage Services, 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
Fund for shares in other Value Line funds. You may have
to pay taxes on your exchange. When you exchange shares,
you are purchasing shares in another fund so you should
be sure to get a copy of that fund's prospectus and read
it carefully before buying shares through an exchange.
To execute an exchange, call 800-243-2729.
13
<PAGE>
When you send us a request to sell or exchange shares, you
will receive the net asset value that is next determined
after we receive your request. For each account involved, you
should provide the account name, number, name of fund and
exchange or redemption amount. Call 1-800-243-2729 for
information on 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.
ACCOUNT MINIMUM
If as a result of redemptions your account balance falls
below $500, the Fund may ask you to increase your balance
within 30 days. If your account is not at the minimum by the
required time, the Fund may redeem your account, after first
notifying you in writing.
REDEMPTION IN KIND
The Fund reserves the right to make a redemption in
kind--payment in portfolio securities rather than cash--if
the amount being redeemed is large enough to affect Fund
operations.
14
<PAGE>
SPECIAL SERVICES
To help make investing with us as easy as possible, and
to help you build your investments, we offer the
following special services. You can get further
information about these programs by calling Shareholder
Services at 800-223-0818.
/ / Valu-Matic-Registered Trademark- allows you to make
regular monthly investments of $25 or more automatically
from your checking account.
/ / Through our Systematic Cash Withdrawal Plan you can
arrange a regular monthly or quarterly payment from your
account payable to you or someone you designate. If your
account is $5,000 or more, you can have monthly or
quarterly withdrawals of $25 or more.
/ / You may buy shares in the Fund for your individual or
group retirement plan, including your Regular or Roth
IRA. You may establish your IRA account even if you
already are a member of an employer-sponsored retirement
plan. Not all contributions to an IRA account are tax
deductible: consult your tax advisor about the tax
consequences of your contribution.
15
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to pay dividends from its net investment
income quarterly, and to distribute any capital gains that it
has realized annually. We automatically reinvest all
dividends and any capital gains, unless you instruct us
otherwise in your application to purchase shares.
You will generally be taxed on distributions you receive,
regardless of whether you them or receive them in cash.
Dividends from short-term capital gains and net investment
income will be taxable as ordinary income. Dividends
designated by the Fund as capital gains distributions will be
taxable at your long-term capital gains tax rate, no matter
how long you have owned your Fund shares. In addition, you
may be subject to state and local taxes on distributions.
We will send you a statement by January 31 each year
detailing the amount and nature of all dividends and capital
gains that you received during the prior year.
If you hold your Fund shares in a tax-deferred retirment
account, such as an IRA, you generally will not have to pay
tax on distributions until they are distributed from the
account. These accounts are subject to complex tax rules, and
you should consult your tax adviser about investment through
a tax-deferred account.
You will generally have a capital gain or loss if you dispose
of your Fund shares by redemption, exchange or sale. Your
gain or loss will be long-term or short-term, generally
depending upon how long you owned your shares.
As with all mutual funds, the Fund may be required to
withhold U.S. federal income tax at the rate of 31% of all
taxable distributions payable to you if you fail to provide
the Fund with your correct taxpayer identification number or
to make required certifications, or if you have been notified
by the IRS that you are subject to backup withholding. Backup
withholding is not an additional tax; rather, it is a way in
which the IRS ensures it will collect taxes otherwise due.
Any amounts withheld may be credited against your U.S.
federal income tax liability.
The above discussion is meant only as a summary, and we urge
you to consult your tax adviser about your particular tax
situation and how it might be affected by current tax law.
16
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is intended to help you
understand the Fund's financial performance for the past five
years. Certain information reflects financial results for a
single Fund share. The total returns in the table represent
the rate that an investor would have earned or lost on an
investment in the Fund assuming reinvestment of all dividends
and distributions. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the
Fund's financial statements, is included in the Fund's annual
report, which is available upon request by calling
800-223-0818.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $16.32 $13.64 $14.13 $11.58 $10.37
- -------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .04 .22 .30 .10 .08
Net gains on securities
(both realized and unrealized) 1.91 4.54 2.15 3.86 1.30
- -------------------------------------------------------------------------------------------------------------
Total from investment
operations 1.95 4.76 2.45 3.96 1.38
- -------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.02) (.26) (.25) (.12) (.06)
Distributions from capital
gains (.26) (1.82) (2.69) (1.29) (.11)
- -------------------------------------------------------------------------------------------------------------
Total distributions (.28) (2.08) (2.94) (1.41) (.17)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $17.99 $16.32 $13.64 $14.13 $11.58
- -------------------------------------------------------------------------------------------------------------
TOTAL RETURN 12.16% 37.36% 17.49% 35.13% 13.47%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands) $ 182,532 $ 123,488 $ 74,981 $ 55,803 $ 26,172
Ratio of expenses to average
net assets 1.08%(1) 1.15%(1) 1.23%(1) 1.38%(1) 1.76%
Ratio of net income to average
net assets .30% 1.46% 1.95% .99% .85%
Portfolio turnover rate 129% 139% 192% 244% 211%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Before offset of custody credits. The ratio of expenses
to average net assets would not have changed net of
custody credits.
------------------------------------------------------------
17
<PAGE>
FOR MORE INFORMATION
Additional information about the Fund's investments is
available in the Fund's annual and semi-annual reports to
shareholders. In the Fund's annual report, you will find a
discussion of the market conditions and investment strategies
that significantly affected the Fund's performance during its
last fiscal year. You can find more detailed information
about the Fund in the current Statement of Additional
Information dated August 1, 1999, which we have filed
electronically with the Securities and Exchange Commission
(SEC) and which is legally a part of this prospectus. If you
want a free copy of the Statement of Additional Information,
the annual or semi-annual report, or if you have any
questions about investing in this Fund, you can write to us
at 220 East 42nd Street, New York, NY 10017-5891 or call
toll-free 800-223-0818. You may also obtain the prospectus
from our Internet site at http:// www.valueline.com.
You can find reports and other information about the Fund on
the SEC Web site (http:// www.sec.gov), or you can get copies
of this information, after payment of a duplicating fee, by
writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the Fund,
including its Statement of Additional Information, can be
reviewed and copied at the Securities and Exchange
Commission's Public Reference Room in Washington, D.C. You
can get information on operation of the public reference room
by calling the SEC at 1-800-SEC-0330.
<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 419729
Kansas City, MO 64141-6729
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. 811-7702
</TABLE>
<PAGE>
VALUE LINE ASSET ALLOCATION FUND, INC.
220 East 42nd Street, New York, New York 10017-5891
1-800-223-0818 or 1-800-243-2729
www.valueline.com
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 1999
- -------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of Value Line Asset Allocation Fund,
Inc. dated August 1, 1999, a copy of which may be obtained without charge by
writing or telephoning the Fund. The financial statements, accompanying notes
and report of independent accountants appearing in the Fund's 1999 Annual Report
to Shareholders are incorporated by reference in this Statement. A copy of the
Annual Report is available from the Fund upon request and without charge by
calling 800-223-0818.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Description of the Fund and Its Investments and Risks............................... B-2
Management of the Fund.............................................................. B-9
Investment Advisory and Other Services.............................................. B-11
Service and Distribution Plan....................................................... B-12
Brokerage Allocation and Other Practices............................................ B-12
Capital Stock....................................................................... B-13
Purchase, Redemption and Pricing of Shares.......................................... B-13
Taxes............................................................................... B-15
Performance Data.................................................................... B-18
Financial Statements................................................................ B-19
</TABLE>
B-1
<PAGE>
DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
HISTORY AND CLASSIFICATION. The Fund is an open-end, diversified management
investment company incorporated in Maryland in 1993. The Fund's investment
adviser is Value Line, Inc. (the "Adviser").
NON-PRINCIPAL INVESTMENT STRATEGIES AND ASSOCIATED RISKS.
- RESTRICTED SECURITIES. On occasion, the Fund may purchase securities
which would have to be registered under the Securities Act of 1933 if they were
to be publicly distributed. However, it will not do so if the value of such
securities (other than in a Rule 144A transaction) would exceed 5% of the market
value of its net assets or 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 15% 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 an agreement by the issuer to register such securities,
ordinarily at the issuer's expense, when requested to do so by the Fund. The
acquisition in limited amounts of restricted securities is believed to be
helpful toward the attainment of the Fund's investment objective without unduly
restricting its liquidity or freedom in the management of its portfolio.
However, because restricted securities may only be sold privately or in an
offering registered under the Securities Act of 1933, or pursuant to an
exemption from such registration, substantial time may be required to sell such
securities, and there is greater than usual risk of price decline prior to sale.
In addition, the Fund may purchase certain restricted securities ("Rule 144A
securities") for which there is a secondary market of qualified institutional
buyers, as contemplated by Rule 144A under the Securities Act of 1933. Rule 144A
provides an exemption from the registration requirements of the Securities Act
for the resale of certain restricted securities to qualified institutional
buyers.
The Adviser, under the supervision of the Board of Directors, will consider
whether securities purchased under Rule 144A are liquid or illiquid for purposes
of the Fund's limitation on investment in securities which are not readily
marketable or are illiquid. Among the factors to be considered are the frequency
of trades and quotes, the number of dealers and potential purchasers, dealer
undertakings to make a market and the nature of the security and the time needed
to dispose of it.
To the extent that the liquid Rule 144A securities that the Fund holds
become illiquid, due to lack of sufficient qualified institutional buyers or
market or other conditions, the percentage of the Fund's assets invested in
illiquid assets would increase. The Adviser, under the supervision of the Board
of Directors, will monitor the Fund's investments in Rule 144A securities and
will consider appropriate measures to enable the Fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
- STOCK INDEX FUTURES CONTRACTS AND OPTIONS THEREON. The Fund 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 Fund'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 Fund may not engage in such activities
generally if the sum of the amount of initial margin deposits
B-2
<PAGE>
and premiums paid for unexpired commodity options would exceed 5% of the fair
market value of the Fund'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 Fund,
an amount equal to the market value of the futures contract will be deposited in
a segregated account with the Fund's custodian of cash and liquid securities to
collateralize the position and thereby insure that the use of such futures
contract is unleveraged. No more than 25% of the Fund's net assets may be
deposited in such segregated account.
There can be no assurance of the Fund'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 Fund'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 Fund 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 Fund 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 Fund 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 Fund's successful use of stock index futures as a hedging
device.
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 Fund 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 Fund is immediately paid
the difference and thus realizes a gain. If the price of the long transaction
exceeds the short price, the Fund pays the difference and realizes a loss.
Similarly, the closing out of a long futures contract is effected by the
B-3
<PAGE>
Fund entering into a short futures contract. If the offsetting short price
exceeds the long price, the Fund realizes a gain, and if the offsetting short
price is less than the long price, the Fund realizes a loss.
No consideration will be paid or received by the Fund upon entering into a
futures contract. Initially, the Fund 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 Fund 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 Fund 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 Fund does change
and is reflected in the net asset value of the Fund. 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 Fund 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 Fund's overall performance may be worse than if no such contracts had been
entered into. For example, if the Fund has hedged against the possibility of a
decline in the market adversely affecting stocks held in its portfolio and stock
prices increase instead, the Fund 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 the Fund
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 Fund 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 Fund 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 Fund then concludes not to invest in stocks at that time because
of concern as to possible further market decline or for other reasons, the Fund
will realize a loss on the futures contract that is not offset by a reduction in
the price of securities purchased.
B-4
<PAGE>
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 Fund 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 Fund will be subject to
special tax rules. These rules may accelerate income to the Fund, defer Fund
losses, cause adjustments in the holding periods of Fund 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 Fund distributions. However, the Fund anticipates that
these investment activities will not prevent the Fund from qualifying as a
regulated investment company.
- REPURCHASE AGREEMENTS. The Fund may invest temporary cash balances in
repurchase agreements. A repurchase agreement involves a sale of securities to
the Fund, with the concurrent agreement of the seller (a member bank of the
Federal Reserve System or a securities dealer which the Adviser believes to be
financially sound) to repurchase the securities at the same price plus an amount
equal to an agreed-upon interest rate, within a specified time, usually less
than one week, but, on occasion, at a later time. The Fund will make payment for
such securities only upon physical delivery or evidence of book-entry transfer
to the account of the custodian or a bank acting as agent for the Fund.
Repurchase agreements may also be viewed as loans made by the Fund which are
collateralized by the securities subject to repurchase. The value of the
underlying securities will be at least equal at all times to the total amount of
the repurchase obligation, including the interest factor. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and
losses, including: (a) possible decline in the value of the underlying security
during the period while the Fund seeks to enforce its rights thereto; (b)
possible subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights. The Board of Directors
monitors the creditworthiness of parties with which the Fund enters into
repurchase agreements.
- LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
to broker-dealers or institutional investors if as a result thereof the
aggregate value of all securities loaned does not exceed 33 1/3% of the total
assets of the Fund (including the loan collateral). The loans will be made in
conformity with applicable regulatory policies and will be 100% collateralized
by cash or liquid securities on a daily basis in an amount equal to the market
value of the securities loaned and interest earned. The Fund 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 will not be
made unless, in the judgment of the Adviser, the consideration which can be
earned from such loan justifies the risk. The Fund may pay reasonable custodian
and administrative fees in connection with the loans.
- WHEN-ISSUED SECURITIES. The Fund 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 Fund to the issuer and no interest accrues to the Fund. Forward
commitments involve a risk of loss if the value of the
B-5
<PAGE>
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in value of the Fund's other assets. While
when-issued securities may be sold prior to the settlement date, the Fund
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 Fund
will record the transaction and reflect the value of the security in determining
its net asset value. The Fund 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 Fund will maintain cash or liquid securities equal in value to
commitments for when-issued securities in a segregated account.
- SHORT SALES. The Fund 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 Fund 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 Fund's net assets taken at market may at any
one time be held as collateral for such sales.
- OPTIONS ON SECURITIES. The Fund may purchase and write listed put and
call options on equity and debt securities when deemed appropriate and
consistent with the Fund's investment objective. The Fund 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 Fund.
The Fund will write call options only if they are secured. A call option is
"secured" if the Fund owns the securities underlying the call, if the Fund 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 Fund 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 Fund will write put options only if they are secured. A put option is
"secured" if the Fund 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 Fund 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 Fund's custodian. The segregated account will be adjusted daily
to reflect the current value of the put.
The Fund 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 Fund 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 Fund
may liquidate its position by selling the option previously purchased.
The Fund may realize a profit or loss upon entering into a closing purchase
or sale transaction. The Fund 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 Fund
B-6
<PAGE>
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 Fund initially paid for the original option plus the related
transaction costs.
The Fund 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 Fund'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
Fund's net assets.
FUND POLICIES.
(i)
The Fund may not issue senior securities or borrow money in excess
of 10% of the value of its net assets and then only as a temporary
measure to meet unusually heavy redemption requests or for other
extraordinary or emergency purposes. Securities will not be purchased while
borrowings are outstanding. No assets of the Fund may be pledged, mortgaged
or otherwise encumbered, transferred or assigned to secure a debt.
(ii)
The Fund may not engage in the underwriting of securities except to
the extent that the Fund may be deemed an underwriter as to
restricted securities under the Securities Act of 1933 in selling portfolio
securities.
(iii)
The Fund may not invest 25% or more of its assets in securities of
issuers in any one industry.
(iv)
The Fund may not purchase securities of other investment companies
except in mergers or other business combinations or invest in real
estate, mortgages, illiquid securities of real estate investment trusts,
real estate limited partnerships or interests in oil, gas or mineral leases,
although the Fund may purchase securities of issuers which engage in real
estate operations.
(v)
The Fund may not lend money except in connection with the purchase
of debt obligations or by investment in repurchase agreements,
provided that repurchase agreements maturing in more than seven days,
over-the-counter options held by the Fund and the portion of the assets used
to cover such options when taken together with other securities that are
illiquid or restricted do not exceed 15% of the Fund's net assets. The Fund
may lend its portfolio securities to broker-dealers and institutional
investors if as a result thereof the aggregate value of all securities
loaned does not exceed 33 1/3% of the total assets of the Fund.
(vi)
The Fund may not engage in arbitrage transactions, short sales
except as set forth herein, purchases on margin or participate on a
joint or joint and several basis in any trading account in securities except
in connection with the purchase or sale of futures transactions and to
deposit or pay initial or variation margin in connection with financial
futures contracts or related options transactions.
(vii)
The Fund may not invest more than 5% of its total assets in the
securities of any one issuer or purchase more than 10% of the
outstanding voting securities, or any other class of securities, of any one
issuer. For purposes of this restriction, all outstanding debt securities of
an
B-7
<PAGE>
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.
(viii)
The Fund may not invest more than 5% of its total assets in
securities of issuers having a record, together with its
predecessors, of less than three years of continuous operation. This
restriction does not apply to any obligation issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
(ix)
The Fund may not purchase securities for the purpose of exercising
control over another company.
(x)
The Fund may not invest in commodities or commodity contracts except
that the Fund may invest in futures contracts and financial futures
contracts and options on futures contracts and financial futures contracts.
(xi)
The Fund may not purchase the securities of any issuer if, to the
knowledge of the Fund, those officers and directors of the Fund and
of the Adviser, who each owns more than 0.5% of the outstanding securities
of such issuer, together own more than 5% of such securities.
(xii)
The Fund may not invest more than 2% of the value of its total
assets in warrants (valued at the lower of cost or market), except
that warrants attached to other securities are not subject to these
limitations.
(xiii)
The primary investment objective of the Fund 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 Fund follows the industry classifications in The Value Line
Investment Survey.
The policies set forth above may not be changed without the affirmative vote
of the majority of the outstanding voting securities of the Fund which means the
lesser of (1) the holders of more than 50% of the outstanding shares of capital
stock of the Fund or (2) 67% of the shares present if more than 50% of the
shares are present at a meeting in person or by proxy.
B-8
<PAGE>
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed by the Fund's officers
under the direction of the Board of Directors. Set forth below is certain
information regarding the Directors and Officers of the Fund.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH FUND PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- ---------------------------------- --------------------- ---------------------------------------------
<S> <C> <C>
*Jean Bernhard Buttner Chairman of the Board Chairman, President and Chief Executive
Age 64 of Directors and Officer of the Adviser and Value Line Pub-
President lishing, Inc. Chairman and President of the
Value Line Funds and Value Line Securities,
Inc. (the "Distributor"); Chairman and
President of each of the 15 Value Line Funds.
Francis C. Oakley Director Professor of History, Williams College, 1961
54 Scott Hill Road to present and President Emeritus since 1994;
Williamstown, MA 01267 President of Williams College, 1985-1993;
Age 67 Director, Berkshire Life Insurance Company.
Marion N. Ruth Director Real Estate Executive; President, Ruth Realty
5 Outrider Road (real estate broker).
Rolling Hills, CA 90274
Age 64
Frances T. Newton Director Computer Programming Professional, Duke Power
4921 Buckingham Drive Company.
Charlotte, NC 28209
Age 58
Stephen Grant Vice President Portfolio Manager with the Adviser.
Age 45
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.
Nancy Bendig Vice President Portfolio Manager with the Adviser.
Age 43
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").
B-9
<PAGE>
Unless otherwise indicated, the address for each of the above is 220 East 42nd
Street, New York, NY.
Directors of the Fund are also directors of two other Value Line Funds.
The following table sets forth information regarding compensation of
Directors by the Fund and by the Fund and the two other Value Line Funds of
which each of the Directors was a director for the fiscal year ended March 31,
1999. Directors who are officers or employees of the Adviser do not receive any
compensation from the Fund or any of the Value Line Funds.
COMPENSATION TABLE
FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
TOTAL
PENSION OR ESTIMATED COMPENSATION
RETIREMENT ANNUAL FROM FUND
AGGREGATE BENEFITS BENEFITS AND FUND
COMPENSATION ACCRUED AS PART UPON COMPLEX
NAME OF PERSONS FROM FUND OF FUND EXPENSES RETIREMENT (3 FUNDS)
- ------------------------------------------- --------------- ------------------ ----------- --------------
<S> <C> <C> <C> <C>
Jean B. Buttner............................ $ -0- N/A N/A $ -0-
Francis C. Oakley.......................... 5,834 N/A N/A 20,000
Marion N. Ruth............................. 5,834 N/A N/A 20,000
Frances T. Newton.......................... 5,834 N/A N/A 20,000
</TABLE>
As of April 30, 1999, no person owned of record or, to the knowledge of the
Fund, owned beneficially, 5% or more of the outstanding stock of the Fund other
than the Adviser and affiliated companies which owned 3,552,437 shares of the
Fund's capital stock or 34.4% of the outstanding shares, National Financial
Services Co., 200 Liberty Street, New York, NY 10281, which owned 1,249,319
shares or 12.1%, Charles Schwab & Co. Inc., 101 Montgomery Street, San
Francisco, CA 94101, which owned 864,809 shares or 8.4% and Donaldson Lufkin &
Jenrette Securities Corp., PO Box 2052, Jersey City, NJ 07303, which owned
818,816 or 7.9%. In addition, First Union National Bank, as Trustee of the Value
Line, Inc. Profit Sharing and Savings Plan, owned 242,391 shares or 2.3% and
Jean B. Buttner, Chairman of the Board of Directors and President, owned 336,908
shares or 3.3%. Other officers and directors of the Fund owned 14,991 shares of
capital stock, representing less than 1% of the outstanding shares.
B-10
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Fund's investment adviser is Value Line, Inc. (the "Adviser"). Arnold
Bernhard & Co., Inc., 220 East 42nd Street, New York, NY 10017, a holding
company, owns approximately 81% of the outstanding shares of the Adviser's
common stock. Jean Bernhard Buttner, Chairman, President and Chief Executive
Officer of the Adviser and Chairman and President of the Fund, owns all of the
voting stock of Arnold Bernhard & Co., Inc.
The investment advisory agreement between the Fund and the Adviser, dated
July 8, 1993, provides for an advisory fee at an annual rate of 0.65% of the
Fund's average daily net assets during the year. During the fiscal years ended
March 31, 1997, 1998 and 1999, the Fund paid or accrued to the Adviser advisory
fees of $437,635, $630,175 and $984,445, respectively.
The investment advisory agreement provides that the Adviser shall render
investment advisory and other services to the Fund including, at its expense,
all administrative services, office space and the services of all officers and
employees of the Fund. The Fund pays all other expenses not assumed by the
Adviser including taxes, interest, brokerage commissions, insurance premiums,
fees and expenses of the custodian and shareholder servicing agents, legal,
audit and Fund accounting expenses and fees, fees and expenses in connection
with qualification under federal and state securities laws and costs of
shareholder reports and proxy materials. The Fund has agreed that it will use
the words "Value Line" in its name only so long as Value Line, Inc. serves as
investment adviser to the Fund. The agreement will terminate upon its
assignment.
The Adviser acts as investment adviser to 14 other investment companies
constituting The Value Line Family of Funds and furnishes investment counseling
services to private and institutional accounts resulting in combined assets
under management in excess of $5 billion.
Certain of the Adviser's clients may have investment objectives similar to
the Fund and certain investments may be appropriate for the Fund and for other
clients advised by the Adviser. From time to time, a particular security may be
bought or sold for only one client or in different amounts and at different
times for more than one but less than all such clients. In addition, a
particular security may be bought for one or more clients when one or more other
clients are selling such security, or purchases or sales of the same security
may be made for two or more clients at the same time. In such event, such
transactions, to the extent practicable, will be averaged as to price and
allocated as to amount in proportion to the amount of each order. In some cases,
this procedure could have a detrimental effect on the price or amount of the
securities purchased or sold by the Fund. In other cases, however, it is
believed that the ability of the Fund to participate, to the extent permitted by
law, in volume transactions will produce better results for the Fund.
The Adviser and/or its affiliates, officers, directors and employees may
from time to time own securities which are also held in the portfolio of the
Fund. The Adviser has imposed rules upon itself and such persons requiring
monthly reports of security transactions for their respective accounts and
restricting trading in various types of securities in order to avoid possible
conflicts of interest. The Adviser may from time to time, directly or through
affiliates, enter into agreements to furnish for compensation special research
or financial services to companies, including services in connection with
acquisitions, mergers or financings. In the event that such agreements are in
effect with respect to issuers of securities held in the portfolio of the Fund,
specific reference to such agreements will be made in the "Schedule of
Investments" in shareholder reports of the Fund. As of the date of this
Statement of Additional Information, no such agreements exist.
B-11
<PAGE>
The Fund has entered into a distribution agreement with Value Line
Securities, Inc. (the "Distributor") whose address is 220 East 42nd Street, New
York, NY 10017, pursuant to which the Distributor acts as principal underwriter
and distributor of the Fund for the sale and distribution of its shares. The
Distributor is a wholly-owned subsidiary of the Adviser. For its services under
the agreement, the Distributor is not entitled to receive any compensation. The
Distributor also serves as distributor to the other Value Line funds. Jean
Bernhard Buttner is Chairman and President of the Distributor.
The Adviser has retained State Street Bank and Trust Company ("State
Street") to provide certain bookkeeping and accounting services for the Fund.
The Adviser pays State Street $32,400 per annum for each Value Line fund for
which State Street provides these services. State Street, whose address is 225
Franklin Street, Boston, MA 02110, also acts as the Fund's custodian, transfer
agent and dividend-paying agent. As custodian, State Street is responsible for
safeguarding the Fund's cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on the Fund's investments.
As transfer agent and dividend-paying agent, State Street effects transfers of
Fund shares by the registered owners and transmits payments for dividends and
distributions declared by the Fund. National Financial Data Services, Inc., a
State Street affiliate, whose address is 330 W. 9th Street, Kansas City, MO
64105, provides certain transfer agency functions to the Fund as an agent for
State Street. PricewaterhouseCoopers LLP, whose address is 1177 Avenue of the
Americas, New York, NY 10036, acts as the Fund's independent accountants and
also performs certain tax preparation services.
SERVICE AND DISTRIBUTION PLAN
The Service and Distribution Plan (12b-1 Plan) provides for the payment of
certain expenses incurred by Value Line Securities, Inc. (the "Distributor") in
advertising, marketing and distributing Fund shares and for servicing Fund
shareholders at an annual rate of .25% of the Fund's average daily net assets.
During the fiscal year ended March 31, 1999, the Fund paid fees of $378,633 to
the Distributor under the Plan, the Distributor paid $105,535 to other
broker-dealers and incurred $208,221 in advertising and other marketing
expenses. The fees payable to the Distributor under the Plan are payable without
regard to actual expenses incurred.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Orders for the purchase and sale of portfolio securities are placed with
brokers and dealers who, in the judgment of the Adviser, are able to execute
them as expeditiously as possible and at the best obtainable price. Debt
securities are traded principally in the over-the-counter market on a net basis
through dealers acting for their own account and not as brokers. Purchases and
sales of securities which are not listed or traded on a securities exchange will
ordinarily be executed with primary market makers acting as principal, except
when it is determined that better prices and executions may otherwise be
obtained. The Adviser is also authorized to place purchase or sale orders with
brokers or dealers who may charge a commission in excess of that charged by
other brokers or dealers if the amount of the commission charged is reasonable
in relation to the value of the brokerage and research services provided. Such
allocation will be in such amounts and in such proportions as the Adviser may
determine. Orders may also be placed with brokers or dealers who sell shares of
the Fund or other funds for which the Adviser acts as investment adviser, but
this fact, or the volume of such sales, is not a consideration in their
selection. During the fiscal years ended March 31, 1997, 1998 and 1999, the Fund
paid brokerage commissions of $124,939, $179,410 and
B-12
<PAGE>
$222,413, respectively, of which $71,591 (57%), $97,238 (54%) and $131,914
(59%), respectively, was paid to Value Line Securities, Inc., the Fund's
distributor and a subsidiary of the Adviser. Value Line Securities, Inc. clears
transactions for the Fund through unaffiliated broker-dealers.
The Board of Directors has adopted procedures incorporating the standards of
Rule 17e-1 under the 1940 Act which requires that the commissions paid to Value
Line Securities or any other "affiliated person" be "reasonable and fair"
compared to the commissions paid to other brokers in connection with comparable
transactions. The procedures require that the Adviser furnish reports to the
Directors with respect to the payment of commissions to affiliated brokers and
maintain records with respect thereto. During the fiscal year ended March 31,
1999, 200,837 (90%) of the Fund's brokerage commissions were paid to brokers or
dealers solely for their services in obtaining the best prices and executions;
the balance, or $21,576 (10%), went to brokers or dealers who provided
information or services to the Adviser and, therefore, indirectly to the Fund
and to shareholders of the Value Line funds. The information and services
furnished to the Adviser include the furnishing of research reports and
statistical compilations and computations and the providing of current
quotations for securities. The services and information were furnished to the
Adviser at no cost to it; no such services or information were furnished
directly to the Fund, but certain of these services might have relieved the Fund
of expenses which it would otherwise have had to pay. Such information and
services are considered by the Adviser, and brokerage commissions are allocated
in accordance with its assessment of such information and services, but only in
a manner consistent with the placing of purchase and sale orders with brokers
and/or dealers, which, in the judgment of the Adviser, are able to execute such
orders as expeditiously as possible and at the best obtainable price. The Fund
is advised that the receipt of such information and services has not reduced in
any determinable amount the overall expenses of the Adviser.
PORTFOLIO TURNOVER. The Fund's annual portfolio turnover rate exceeds 100%.
A rate of portfolio turnover of 100% occurs when all of the Fund's portfolio is
replaced in a period of one year. To the extent that the Fund engages in
short-term trading in attempting to achieve its objective, it may
increase portfolio turnover and incur higher brokerage commissions and other
expenses than might otherwise be the case. The Fund's portfolio turnover rate
for recent fiscal years is shown under "Financial Highlights" in the Fund's
Prospectus.
CAPITAL STOCK
Each share of the Fund's common stock, $.001 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 Directors and,
if the Fund were liquidated, would receive the net assets of the Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
PURCHASES: Shares of the Fund are purchased at the net asset value next
calculated after receipt of a purchase order. Minimum orders are $1,000 for an
initial purchase and $100 for each subsequent purchase. The Fund reserves the
right to reduce or waive the minimum purchase requirements in certain cases such
as pursuant to payroll deduction plans, etc., where subsequent and continuing
purchases are contemplated.
B-13
<PAGE>
AUTOMATIC PURCHASES: The Fund offers a free service to its shareholders,
Valu-Matic, through which monthly investments of $25 or more may be made
automatically into the shareholder's Fund account. The required form to enroll
in this program is available upon request from the Distributor.
RETIREMENT PLANS: Shares of the Fund may be purchased as the investment medium
for various tax-sheltered retirement plans. Upon request, the Distributor will
provide information regarding eligibility and permissible contributions. Because
a retirement plan is designed to provide benefits in future years, it is
important that the investment objectives of the Fund be consistent with the
participant's retirement objectives. Premature withdrawals from a retirement
plan may result in adverse tax consequences. For more complete information,
contact Shareholder Services at 1-800-223-0818.
REDEMPTION: The right of redemption may be suspended, or the date of payment
postponed beyond the normal seven-day period, by the Fund under the following
conditions authorized by the 1940 Act: (1) For any period (a) during which the
New York Stock Exchange is closed, other than customary weekend and holiday
closing, or (b) during which trading on the New York Stock Exchange is
restricted; (2) For any period during which an emergency exists as a result of
which (a) disposal by the Fund of securities owned by it is not reasonably
practical, or (b) it is not reasonably practical for the Fund to determine the
fair value of its net assets; (3) For such other periods as the Securities and
Exchange Commission may by order permit for the protection of the Fund's
shareholders.
The value of shares of the Fund on redemption may be more or less than the
shareholder's cost, depending upon the market value of the Fund's assets at the
time. Shareholders should note that if a loss has been realized on the sale of
shares of the Fund, the loss may be disallowed for tax purposes if shares of the
same Fund are purchased within (before or after) 30 days of the sale.
It is possible that conditions may exist in the future which would, in the
opinion of the Board of Directors, make it undesirable for the Fund to pay for
redemptions in cash. In such cases the Board may authorize payment to be made in
portfolio securities or other property of the Fund. However, the Fund has
obligated itself under the 1940 Act to redeem for cash all shares presented for
redemption by any one shareholder up to $250,000 (or 1% of the Fund's net assets
if that is less) in any 90-day period. Securities delivered in payment of
redemptions are valued at the same value assigned to them in computing the net
asset value per share. Shareholders receiving such securities may incur
brokerage costs on their sales.
The net asset value of the Fund's shares for purposes of both purchases and
redemptions is determined once daily as of the close of regular trading on the
New York Stock Exchange (generally 4:00 p.m., New York time) on each day that
the New York Stock Exchange is open for trading except on days on which no
orders to purchase, sell or redeem Fund shares have been received. The New York
Stock Exchange is currently closed on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day and on the preceding Friday or subsequent
Monday if one of those days falls on a Saturday or Sunday, respectively. The net
asset value per share is determined by dividing the total value of the
investments and other assets of the Fund, less any liabilities, by the total
outstanding shares. 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
B-14
<PAGE>
in the over-the-counter market, the security is valued at the midpoint between
the latest available and representative asked and bid prices. Securities for
which market quotations are not readily available or which are not readily
marketable and all other assets of the Fund are valued at fair value as the
Board of Directors 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 value.
TAXES
(SEE "DIVIDENDS, DISTRIBUTIONS AND TAXES" IN THE FUND'S PROSPECTUS)
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances, nor to certain types of shareholders subject to
special treatment under the federal income tax laws. This discussion is based
upon present provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the regulations promulgated thereunder and judicial and administrative
ruling authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
FUND STATUS. The Fund intends to qualify and elect to be treated each year
as a regulated investment company under Subchapter M of the Code. Accordingly,
the Fund generally must, among other things, (i) derive in each taxable year at
least 90% of its gross income from dividends, interest, payments from certain
securities loans, and gains from the sale of stock, securities or foreign
currencies or other income (such as gains from options, futures or forward
contracts) from investing in stock, securities or currencies; and (ii) hold as
of the close of each quarter, at least 50% of its assets in certain investment
assets, such as cash, U.S. Government securities, securities of other regulated
investment companies and other securities, with such other securities limited as
to any issuer to not more than 5% of the value of the Fund's total assets and
10% of the outstanding voting securities of such issuer, and hold not more than
25% of the value of the Fund's assets in the securities of any issuer (other
than U.S. Government securities or securities of other regulated investment
companies).
FUND DISTRIBUTIONS. As a regulated investment company, the Fund generally
will not be subject to U.S. federal income tax on income and gains that it
distributes to shareholders, if at least 90% of the Fund's investment company
income -- dividends, interest and net short-term capital gains in excess of net
long-term capital losses -- for the taxable year is distributed. The Fund
intends to distribute substantially all of its investment company income and net
capital gains to shareholders for federal income tax purposes although such
distributions will be automatically reinvested in additional shares of the Fund
unless the shareholder has requested otherwise.
Amounts not timely distributed by the Fund are subject to a nondeductible 4%
excise tax at the Fund level. To avoid the tax, the Fund must distribute during
a calendar year at least 98% of its ordinary income, 98% of its capital gains in
excess of capital losses for the one year period ended October 31 of such year,
and all ordinary income and capital gains for previous years that were not
distributed in earlier years. The Fund will satisfy the annual distribution
requirement if it distributes
B-15
<PAGE>
the required amount on or before December 31 of such year or if the distribution
is declared in October, November or December of such year with a record date
within such period and paid by the Fund during January of the following calendar
year. Such distributions will be taxable to shareholders in the calendar year in
which the distributions are declared, rather than the calendar year in which the
distributions are received. The Fund anticipates that it will make sufficient
timely distributions to avoid imposition of the excise tax.
Options, futures contracts and short sales entered into by the Fund will be
subject to special tax rules. These rules may accelerate income to the Fund,
defer Fund losses, cause adjustments in the holding periods of Fund 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 Fund distributions.
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or reinvested. Dividends
paid to a corporate shareholder may qualify for the dividends-received
deduction, to the extent such dividends are attributable to dividends received
from a U.S. corporation. It is expected that dividends from U.S. corporations
will constitute most of the Fund's gross income and that a portion of the
dividends paid by the Fund will qualify for the dividends-received deduction for
corporate shareholders of the Fund. Upon request, the Fund will advise Fund
shareholders of the amount of dividends which qualify for the dividends-received
deduction.
Distributions of net capital gains (the excess of net long-term capital
gains over net short-term capital losses), if any, designated as capital gain
dividends will be taxable to shareholders as long-term capital gains, regardless
of how long a shareholder has held the Fund's shares. Distributions of capital
gain from the sale of assets held for one year or less will generally be taxed
as ordinary income.
Investors purchasing Fund shares prior to a distribution should be aware of
the tax consequences of purchasing such Fund shares. The purchase price paid for
such shares may reflect the amount of the forthcoming distribution. Although
distributions from the Fund shortly after the purchase of Fund shares may be
viewed in substance as a return of capital, nevertheless, such a distribution
will be attributed to the dividend or capital gain income of the Fund and,
therefore, be taxable to the shareholder.
REDEMPTION, SALE OR EXCHANGE OF FUND SHARES. Upon a redemption or sale of
shares of the Fund, a shareholder may realize a gain or loss for federal income
tax purposes depending upon his or her basis in the shares. A gain or loss will
be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and will be long-term or short-term depending on the share-
holder's holding period for the shares. Any loss realized on a redemption or
sale of Fund shares will be disallowed to the extent the Fund shares disposed of
are replaced (including through reinvestment of dividends) within a period of 61
days beginning 30 days before and ending 30 days after the Fund shares are
disposed of. In such a case, the basis of the Fund shares acquired will be
adjusted to reflect the disallowed loss. If a shareholder held Fund shares for
six months or less and during that period received a distribution taxable to the
shareholder as long-term capital gain, any loss realized on the sale of such
Fund shares during such six-month period would be a long-term loss to the extent
of such distribution.
B-16
<PAGE>
An exchange of shares in the Fund for shares of another Value Line fund will
be treated as a taxable sale of the exchanged Fund shares. Accordingly, a
shareholder may recognize a gain or loss for federal income tax purposes
depending upon his or her basis in the Fund shares exchanged. A gain or loss
will be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands, and will be long-term or short-term depending upon the
shareholder's holding period for the shares. The shareholder will have a tax
basis in the newly-acquired Fund shares equal to the amount invested and will
begin a new holding period for federal income tax purposes.
If a shareholder exchanges shares in the Fund for shares in another Value
Line fund pursuant to a reinvestment right, the sales charge incurred in the
purchase of the Fund shares exchanged may not be added to tax basis in
determining gain or loss for federal income tax purposes. Instead, the sales
charge for the exchanged Fund shares shall be added to basis for purposes of
determining gain or loss on the disposition of the newly-acquired Fund shares,
if such newly-acquired Fund shares are not disposed of in a similar exchange
transaction.
FUND INVESTMENTS. Any regulated futures contracts and certain options
(namely, nonequity options and dealer equity options) in which the Fund may
invest may be "section 1256 contracts." Gains (or losses) on these contracts
generally are considered to be 50% long-term and 40% short-term capital gains or
losses. Also, section 1256 contracts held by the Fund at the end of each taxable
year (and on certain other dates prescribed in the Code) are "marked to market"
with the result that unrealized gains or losses are treated as though they were
realized.
Transactions in options, futures and forward contracts undertaken by the
Fund may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Fund, and
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that the Fund may make with respect
to its straddle positions may also affect the amount, character and timing of
the recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Fund are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
CONSTRUCTIVE SALES. Under certain circumstances, the Fund may recognize
gain from a constructive sale of an "appreciated financial position" it holds if
it enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and
B-17
<PAGE>
its character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
REPORTING AND BACKUP WITHHOLDING. The Fund will be required to report to
the Internal Revenue Service ("IRS") all distributions and gross proceeds from
the redemption of the Fund's shares, except in the case of certain exempt
shareholders. The Fund may be required to withhold U.S. federal income tax at
the rate of 31% of all taxable distributions and redemption proceeds payable to
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make certain certifications or who have been
notified by the IRS that they are subject to backup withholding. Corporate
shareholders and certain other shareholders specified in the Code generally are
exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the shareholder's U.S. federal
income tax. If the backup withholding provisions are applicable to a
shareholder, distributions and gross proceeds payable to such shareholder will
be reduced by the amounts required to be withheld, regardless of whether such
distributions are paid or reinvested.
PERFORMANCE DATA
From time to time, the Fund may state its total return in advertisements and
investor communications. Total return may be stated for any relevant period as
specified in the advertisement or communication. Any statements of total return
or other performance data on the Fund will be accompanied by information on the
Fund's average annual compounded rate of return for the periods of one year,
five years and ten years, all ended on the last day of a recent calendar
quarter. The Fund may also advertise aggregate total return information for
different periods of time.
The Fund's average annual compounded rate of return is determined by
reference to a hypothetical $1,000 investment that includes capital appreciation
and depreciation for the stated period, according to the following formula:
P(1+T) to the power of n = ERV
Where: P = a hypothetical initial purchase order of
$1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of the
hypothetical $1,000 purchase at the end
of the period.
The Fund's average annual total returns as of March 31, 1999, for the one
year, five years and the period since inception were 12.16%, 22.65% and 20.87%,
respectively.
The Fund's total return may be compared to relevant indices and data from
Lipper Analytical Services, Inc., Morningstar or Standard & Poor's Indices.
From time to time, evaluations of the Fund's performance by independent
sources may also be used in advertisements and in information furnished to
present or prospective investors in the Fund.
B-18
<PAGE>
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended March 31, 1999, including
the financial highlights for each of the five fiscal years in the period ended
March 31, 1999, appearing in the 1999 Annual Report to Shareholders and the
report thereon of PricewaterhouseCoopers LLP, independent accountants, appearing
therein, are incorporated by reference in this Statement of Additional
Information.
B-19
