N-30D 1 value-ssf030452s1_n30d.txt VALUE LINE SPECIAL SIT FUND, INC. FORM N30D ================================================================================ INVESTMENT ADVISER Value Line, Inc. ------------------ 220 East 42nd Street ANNUAL REPORT New York, NY 10017-5891 ------------------ DECEMBER 31, 2002 DISTRIBUTOR Value Line Securities, Inc. ------------------ 220 East 42nd Street New York, NY 10017-5891 CUSTODIAN BANK State Street Bank and Trust Co. 225 Franklin Street Boston, MA 02110 SHAREHOLDER State Street Bank and Trust Co. SERVICING AGENT c/o NFDS P.O. Box 219729 Kansas City, MO 64121-9729 INDEPENDENT PricewaterhouseCoopers LLP ACCOUNTANTS 1177 Avenue of the Americas New York, NY 10036 LEGAL COUNSEL Peter D. Lowenstein, Esq. Two Sound View Drive, Suite 100 Greenwich, CT 06830 DIRECTORS Jean Bernhard Buttner THE VALUE LINE John W. Chandler SPECIAL Frances T. Newton SITUATIONS Francis C. Oakley FUND, INC. David H. Porter Paul Craig Roberts Marion N. Ruth Nancy-Beth Sheerr OFFICERS Jean Bernhard Buttner CHAIRMAN AND PRESIDENT Alan N. Hoffman VICE PRESIDENT Philip J. Orlando VICE PRESIDENT Stephen E. Grant VICE PRESIDENT David T. Henigson VICE PRESIDENT AND SECRETARY/TREASURER [LOGO] Joseph Van Dyke VALUE LINE ASSISTANT SECRETARY/TREASURER NO-LOAD Stephen La Rosa MUTUAL ASSISTANT SECRETARY/TREASURER FUNDS THIS REPORT IS ISSUED FOR INFORMATION OF SHAREHOLDERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND (OBTAINABLE FROM THE DISTRIBUTOR). #524248 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. TO OUR VALUE LINE SPECIAL -------------------------------------------------------------------------------- TO OUR SHAREHOLDERS: The Value Line Special Situations Fund lost 15.15% in 2002, compared to a loss of 22.10% for the unmanaged Standard & Poor's 500 Index(1) . Your Fund continues to perform well relative to its peer group of funds. Among the "mid-cap growth" funds tracked by Lipper Inc., the Fund ranked in the top 5% for the year ending December 31, 2002, the top 6% for five years, and the top 7% for ten years(2) . Sticking with a disciplined investment strategy has served us well. Portfolio holdings must demonstrate strong stock price momentum and strong earnings momentum in relation to the general universe of U.S. stocks. Any holding that slips in momentum becomes a likely candidate for sale, to be replaced by a better-performing stock. This discipline helped us avoid most of the treacherous corporate pitfalls that plagued 2002, and kept us underweighted in the lagging technology and telecommunications sectors. Healthcare, financial services, and retailing are the Fund's largest sector investments. The portfolio currently includes about 350 stocks, with the largest single holding representing only 1.1% of assets. Wide diversification is an important tool in minimizing your Fund's risk. Median market capitalization is just under $3 billion, but holdings range in size from microcaps up through the largest of U.S. companies. In this difficult market, our disciplined approach is more important than ever, and we will remain alert and nimble. Thank you for investing with us. Sincerely, /s/ Jean Bernhard Buttner Jean Bernhard Buttner CHAIRMAN AND PRESIDENT February 18, 2003 -------------------------------------------------------------------------------- (1) THE STANDARD & POOR'S 500 INDEX CONSISTS OF 500 STOCKS WHICH ARE TRADED ON THE NEW YORK STOCK EXCHANGE, AMERICAN STOCK EXCHANGE AND THE NASDAQ NATIONAL MARKET SYSTEM AND IS REPRESENTATIVE OF THE BROAD STOCK MARKET. THIS IS AN UNMANAGED INDEX AND DOES NOT REFLECT CHARGES, EXPENSES OR TAXES. IT IS NOT POSSIBLE TO DIRECTLY INVEST IN THIS INDEX. (2) LIPPER RANKED THE FUND #23 OUT OF 498, #81 OUT OF 340, #12 OUT OF 222, AND #4 OUT OF 63 MID CAP GROWTH FUNDS FOR THE 1, 3, 5, AND 10 YEAR PERIODS ENDED 12/31/02, RESPECTIVELY. -------------------------------------------------------------------------------- 2 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. SITUATIONS FUND SHAREHOLDERS -------------------------------------------------------------------------------- ECONOMIC OBSERVATIONS The U.S. economy is continuing to chart an uneven course. Thus, following a strong opening quarter in 2002, in which the nation's gross domestic product surged by 5.0%, a lackluster second quarter that saw the pace of expansion cut back sharply to 1.3%, and a subsequent stepup in the third quarter, with GDP growth coming in at a relatively strong 4.0%, the pace of activity has slowed again, and markedly so. For example, industrial production, factory usage, and consumer confidence are all contracting at present, while the employment outlook remains unsettled. The lone uniformly bright spot is the resilient housing market. Given this weak overall backdrop, however, it wasn't very surprising that the government reported that GDP growth eased to just 0.7% in the October-to-December period. What's more, there appears to be no quick or easy cure for what ails this economy, with the outcome of both a likely war with Iraq and the President's fiscal stimulus package still up in the air. Such uncertainty will continue to have a negative effect on both consumer spending and business capital investment. All told, we project that GDP will increase by 2%, or less, during the opening half of 2003, before some expected resolution of the above global and domestic uncertainties helps to better underpin the economy after midyear. Inflation, meantime, remains muted, thanks, in part, to generally modest labor cost increases. Adequate supplies of raw materials are also helping to keep the costs of production low. We caution, though, that as the U.S. economy moves further along the recovery road over the next several years, some modest increases in pricing pressures will emerge. Absent a more vigorous long-term business recovery than we now forecast, or a prolonged rise in oil prices stemming from a surprisingly long conflict in the Middle East, inflation should continue to be held in comparative check through the middle years of this decade. Interest rates, therefore, are likely to remain relatively stable. -------------------------------------------------------------------------------- 3 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. -------------------------------------------------------------------------------- COMPARISON OF A CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE VALUE LINE SPECIAL SITUATIONS FUND AND THE S&P 500 Stock Index* [PLOT POINTS GRAPH] VALUE LINE SPECIAL S&P STOCK SITUATIONS FUND INDEX --------------- ----- 1/93 $10,000 $10,000 12/02 $28,526 $24,431 (FROM 1/1/93 TO 12/31/02) -------------------------------------------------------------------------------- * THE STANDARD AND POOR'S 500 INDEX (S&P 500 INDEX) IS AN UNMANAGED INDEX THAT IS REPRESENTATIVE OF THE LARGER-CAPITALIZATION STOCKS TRADED IN THE UNITED STATES. THE RETURN FOR THE INDEX DOES NOT REFLECT EXPENSES WHICH ARE DEDUCTED FROM THE FUND'S RETURNS. PERFORMANCE DATA:** AVERAGE ANNUAL GROWTH OF AN ASSUMED TOTAL RETURN INVESTMENT OF $10,000 ---------------- ---------------------- 1 year ended 12/31/02 .......... -15.15% $ 8,485 5 years ended 12/31/02 ......... + 6.46% $13,678 10 years ended 12/31/02 ......... +11.05% $28,526 ** THE PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF FUTURE PERFORMANCE. THE AVERAGE ANNUAL TOTAL RETURNS AND GROWTH OF AN ASSUMED INVESTMENT OF $10,000 INCLUDE DIVIDENDS REINVESTED AND CAPITAL GAINS DISTRIBUTIONS ACCEPTED IN SHARES. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTMENT, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ITS ORIGINAL COST. THE PERFORMANCE DATA AND GRAPH DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. -------------------------------------------------------------------------------- 4 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. PORTFOLIO HIGHLIGHTS AT DECEMBER 31, 2002 (UNAUDITED) -------------------------------------------------------------------------------- TEN LARGEST HOLDINGS
VALUE PERCENTAGE ISSUE SHARES (IN THOUSANDS) OF NET ASSETS ----------------------------------------------------------------------------------------------------- Varian Medical Systems, Inc. ......................... 53,000 $2,629 1.1% Alliant Techsystems, Inc. ............................ 38,812 2,420 1.0 Wal-Mart Stores, Inc. ................................ 44,000 2,222 0.9 Forest Laboratories, Inc. ............................ 22,000 2,161 0.9 Career Education Corp. ............................... 50,000 2,000 0.8 Bed Bath & Beyond Inc. ............................... 56,000 1,934 0.8 Chico's FAS, Inc. .................................... 102,000 1,929 0.8 Apollo Group, Inc. Class "A" ......................... 42,750 1,881 0.8 Affiliated Computer Services, Inc. Class "A" ......... 34,000 1,790 0.7 Corinthian Colleges, Inc. ............................ 47,000 1,779 0.7 FIVE LARGEST INDUSTRY CATEGORIES VALUE PERCENTAGE INDUSTRY (IN THOUSANDS) OF NET ASSETS ----------------------------------------------------------------------------------------------------- Medical Supplies ..................................................... $18,925 7.8% Retail - Special Lines ............................................... 13,297 5.5 Bank ................................................................. 11,556 4.8 Restaurant ........................................................... 9,944 4.1 Medical Services ..................................................... 9,202 3.8 FIVE LARGEST NET SECURITY PURCHASES* COST ISSUE (IN THOUSANDS) ----------------------------------------------------------------------------------------------------- Cephalon, Inc. ......................................................................... $637 Washington Post Co. (The) Class "B" .................................................... 574 Arkansas Best Corp. .................................................................... 573 Zebra Technologies Corp. Class "A" ..................................................... 569 Unit Corp. ............................................................................. 561 FIVE LARGEST NET SECURITY SALES* PROCEEDS ISSUE (IN THOUSANDS) ----------------------------------------------------------------------------------------------------- Microsoft Corp. ........................................................................ $1,774 General Dynamics Corp. ................................................................. 1,617 Chico's FAS, Inc. ...................................................................... 1,125 Argosy Gaming Company .................................................................. 1,020 Citigroup, Inc. ........................................................................ 1,015
* FOR THE SIX MONTH PERIOD ENDED 12/31/02 -------------------------------------------------------------------------------- 5 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. SCHEDULE OF INVESTMENTS -------------------------------------------------------------------------------- VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- COMMON STOCKS (90.3%) ADVERTISING (0.4%) 28,500 Harte-Hanks, Inc. ..................... $ 532 16,000 R.H. Donnelley Corp.* ................. 469 ------ 1,001 AEROSPACE/DEFENSE (2.0%) 38,812 Alliant Techsystems, Inc.* ............ 2,420 20,000 DRS Technologies, Inc.* ............... 627 3,000 ESCO Technologies, Inc.* .............. 111 28,000 L-3 Communications Holdings, Inc.* ...................... 1,257 21,000 Rockwell Collins, Inc. ................ 488 ------ 4,903 AIR TRANSPORT (0.2%) 10,000 FedEx Corp. ........................... 542 APPAREL (0.5%) 13,000 Columbia Sportswear Co.* .............. 577 16,000 VF Corp. .............................. 577 ------ 1,154 AUTO PARTS (1.1%) 10,000 Advance Auto Parts, Inc.* ............. 489 20,000 American Axle & Manufacturing Holdings, Inc.* ...................... 468 17,000 Gentex Corp.* ......................... 538 11,000 Genuine Parts Co. ..................... 339 10,000 Johnson Controls, Inc. ................ 802 ------ 2,636 BANK (4.8%) 26,000 BancorpSouth, Inc. .................... 505 8,000 Bank of America Corp. ................. 556 25,000 Bank of Hawaii Corp. .................. 760 25,000 BB&T Corp. ............................ 925 20,000 Commerce Bancorp, Inc. ................ 864 18,000 Community First Bankshares, Inc. ..................... 476 32,000 Compass Bancshares, Inc. .............. 1,001 VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- 15,000 First Virginia Banks, Inc. ............ $ 558 37,000 Hibernia Corp. Class "A" .............. 713 21,000 National Commerce Financial Corp. ...................... 501 13,000 North Fork Bancorporation, Inc. ....... 439 4,000 Popular, Inc. ......................... 135 13,000 Regions Financial Corp. ............... 434 23,000 South Financial Group, Inc. (The) 475 40,000 SouthTrust Corp. ...................... 994 15,000 United Bankshares, Inc. ............... 436 30,000 W Holding Company, Inc.* .............. 492 13,000 Wells Fargo & Co. ..................... 609 17,000 Westamerica Bancorporation ............ 683 ------- 11,556 BANK -- MIDWEST (1.5%) 13,650 Commerce Bancshares, Inc. ............. 536 18,000 Fifth Third Bancorp ................... 1,054 18,000 Marshall & Ilsley Corp. ............... 493 34,000 TCF Financial Corp. ................... 1,486 -------- 3,569 BEVERAGE -- ALCOHOLIC (0.8%) 11,000 Anheuser-Busch Companies, Inc. 532 2,000 Brown-Forman Corp. Class "B" .......... 131 28,000 Constellation Brands, Inc. Class "A"* ........................... 664 8,000 Coors (Adolph) Co. Class "B" .......... 490 -------- 1,817 BEVERAGE -- SOFT DRINK (0.8%) 30,000 Pepsi Bottling Group, Inc. (The) ...... 771 25,000 PepsiCo, Inc. ......................... 1,056 -------- 1,827 BIOTECHNOLOGY (0.0%) 6,000 Medicines Company (The)* .............. 96 -------------------------------------------------------------------------------- 6 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. DECEMBER 31, 2002 -------------------------------------------------------------------------------- VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- BUILDING MATERIALS (0.5%) 6,000 American Woodmark Corp. .............. $ 285 28,000 Jacobs Engineering Group, Inc.* ...... 997 ------- 1,282 CHEMICAL -- DIVERSIFIED (0.8%) 11,000 Air Products & Chemicals, Inc. ....... 470 18,000 Albemarle Corp. ...................... 512 7,000 3M Company ........................... 863 ------- 1,845 CHEMICAL -- SPECIALTY (1.1%) 9,000 Avery Dennison Corp. ................. 550 12,000 Ecolab Inc. .......................... 594 5,000 Ferro Corp. .......................... 122 15,000 Praxair, Inc. ........................ 866 10,000 Sigma-Aldrich Corp. .................. 487 ------- 2,619 COMPUTER & PERIPHERALS (0.6%) 16,000 Inter-Tel Inc. ....................... 335 4,000 NetScreen Technologies, Inc.* ........ 67 3,500 ScanSource, Inc.* .................... 172 9,000 Tech Data Corp.* ..................... 243 9,000 Zebra Technologies Corp. Class "A"* .......................... 516 ------- 1,333 COMPUTER SOFTWARE & SERVICES (2.9%) 34,000 Affiliated Computer Services, Inc. Class "A"* ..................... 1,790 15,000 ANSYS, Inc.* ......................... 303 15,000 CACI International, Inc.* ............ 535 12,000 Cognizant Technology Solutions Corp. Class "A"* .................... 867 10,000 Fair, Issac & Co., Inc. .............. 427 31,500 Fiserv, Inc.* ........................ 1,069 VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- 6,000 Infosys Technologies Ltd. (ADR)* ......................... $ 417 29,000 Intergraph Corp.* .................... 515 11,000 Intuit Inc.* ......................... 516 14,000 Symantec Corp.* ...................... 567 ------- 7,006 DIVERSIFIED COMPANY (2.2%) 10,000 American Standard Companies, Inc.* .................... 711 15,000 Ametek, Inc. ......................... 577 7,900 Danaher Corp. ........................ 519 11,000 Fortune Brands, Inc. ................. 512 19,000 Hillenbrand Industries, Inc. ......... 918 21,000 ITT Industries, Inc. ................. 1,275 3,000 Pentair, Inc. ........................ 104 17,000 Teleflex, Inc. ....................... 729 ------- 5,345 DRUG (3.5%) 12,000 Amylin Pharmaceuticals, Inc.* ........ 194 12,000 Cephalon, Inc.* ...................... 584 16,000 Cima Labs, Inc.* ..................... 387 21,000 Covance Inc.* ........................ 516 22,000 Forest Laboratories, Inc.* ........... 2,161 24,000 Gilead Sciences, Inc.* ............... 816 8,000 Kos Pharmaceuticals, Inc.* ........... 152 34,000 NBTY, Inc.* .......................... 598 13,000 Neurocrine Biosciences, Inc. ......... 594 18,000 Pharmaceutical Product Development, Inc.* .................. 527 19,000 Pharmaceutical Resources, Inc.* ...... 566 18,000 Scios Inc.* .......................... 586 20,000 Teva Pharmaceutical Industries Ltd. (ADR) .......................... 772 ------- 8,453 -------------------------------------------------------------------------------- 7 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. SCHEDULE OF INVESTMENTS -------------------------------------------------------------------------------- VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- EDUCATIONAL SERVICES (3.2%) 42,750 Apollo Group, Inc. Class "A"* .......... $1,881 50,000 Career Education Corp.* ................ 2,000 47,000 Corinthian Colleges, Inc.* ............. 1,779 25,000 Education Management Corp.* ............ 940 24,000 ITT Educational Services, Inc.* ........ 565 8,500 Strayer Education, Inc. ................ 489 ------ 7,654 ELECTRIC UTILITY -- CENTRAL (0.4%) 11,500 DTE Energy Co. ......................... 534 12,000 Entergy Corp. .......................... 547 ------ 1,081 ELECTRONICS (0.6%) 17,000 Harman International Industries, Inc. ...................... 1,012 15,000 Imation Corp.* ......................... 526 ------ 1,538 ENTERTAINMENT (1.0%) 24,000 Belo Corp. Series "A" .................. 512 30,000 Cumulus Media, Inc. Class "A"* ......... 446 10,000 Entercom Communications Corp.* ................................ 469 20,000 Fox Entertainment Group, Inc. Class "A"* ............................ 519 14,000 Westwood One, Inc.* .................... 523 ------ 2,469 ENTERTAINMENT TECHNOLOGY (1.1%) 45,000 Activision, Inc.* ...................... 657 16,000 Electronic Arts Inc.* .................. 796 9,000 Electronics Boutique Holdings Corp.* ....................... 142 53,000 Pinnacle Systems, Inc.* ................ 721 24,000 THQ, Inc.* ............................. 318 ------ 2,634 VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- ENVIRONMENTAL (0.9%) 37,000 Headwaters, Inc.* ...................... $ 574 34,000 Stericycle, Inc.* ...................... 1,101 14,000 Waste Connections, Inc.* ............... 540 ------ 2,215 FINANCIAL SERVICES -- DIVERSIFIED (3.3%) 37,000 BankAtlantic Bancorp, Inc. Class "A"* ............................ 350 20,000 Block (H. & R.), Inc. .................. 804 17,000 Brown & Brown, Inc. .................... 549 45,000 Cendant Corp.* ......................... 472 22,001 Citigroup, Inc. ........................ 774 24,000 Doral Financial Corp. .................. 686 26,400 Fidelity National Financial, Inc. ...... 867 20,000 Global Payments, Inc. .................. 640 15,000 Hilb, Rogal & Hamilton Co. ............. 614 6,000 Leucadia National Corp. ................ 224 5,000 SLM Corp. .............................. 519 14,000 Unitrin, Inc. .......................... 409 20,000 Willis Group Holdings Ltd.* ............ 573 15,000 Wintrust Financial Corp.* .............. 470 ------ 7,951 FOOD PROCESSING (2.0%) 23,000 Bunge Limited .......................... 554 16,000 Dean Foods Co.* ........................ 594 17,000 Dole Food Co., Inc. .................... 554 30,000 Fresh Del Monte Produce, Inc. .......... 567 22,500 Kraft Foods, Inc. Class "A" ............ 876 24,000 Sara Lee Corp. ......................... 540 13,200 Smucker (J.M.) Co. ..................... 525 6,000 United Natural Foods, Inc.* ............ 152 10,000 Wrigley (Wm.) Jr. Co. .................. 549 ------ 4,911 -------------------------------------------------------------------------------- 8 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. DECEMBER 31, 2002 -------------------------------------------------------------------------------- VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- FOOD WHOLESALERS (0.5%) 21,000 Performance Food Group Co.* ......... $ 713 17,000 SYSCO Corp. ......................... 507 ------- 1,220 FURNITURE/HOME FURNISHINGS (0.6%) 4,000 Ethan Allen Interiors, Inc. ......... 137 21,000 La-Z-Boy, Inc. ...................... 504 9,000 Mohawk Industries, Inc.* ............ 513 21,900 Tuesday Morning Corp.* .............. 374 ------- 1,528 GROCERY (0.5%) 21,000 Whole Foods Market, Inc.* ........... 1,107 HEALTHCARE INFORMATION SYSTEMS (0.3%) 21,000 Cerner Corp.* ....................... 656 HOME APPLIANCE (0.5%) 11,000 Black & Decker Corp. ................ 472 10,000 Toro Company (The) .................. 639 ------- 1,111 HOME BUILDING (0.1%) 5,000 Hovanian Enterprises, Inc.* ......... 159 HOTEL/GAMING (1.4%) 31,000 Alliance Gaming Corp.* .............. 528 20,000 GTECH Holdings Corp.* ............... 557 10,000 Harrah's Entertainment, Inc.* ....... 396 12,000 International Game Technology* ...... 911 14,000 MGM Mirage, Inc.* ................... 462 32,000 Penn National Gaming, Inc.* ......... 507 ------- 3,361 HOUSEHOLD PRODUCTS (1.5%) 15,000 Church & Dwight Co., Inc. ........... 457 26,000 Dial Corp. (The) .................... 530 VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- 22,000 Energizer Holdings, Inc.* ........... $ 614 10,000 Procter & Gamble Co. (The) .......... 859 14,000 Rent-A-Center, Inc.* ................ 699 11,000 Scotts Company (The) Class "A"* ......................... 539 ------- 3,698 HUMAN RESOURCES (0.1%) 6,000 Manpower, Inc. ...................... 191 INDUSTRIAL SERVICES (1.2%) 16,000 ARAMARK Corp. Class "B"* ............ 376 11,000 Cintas Corp. ........................ 503 19,000 Coinstar, Inc.* ..................... 431 16,000 EMCOR Group, Inc.* .................. 848 15,000 FTI Consulting, Inc.* ............... 602 16,000 Tier Technologies, Inc. Class "B"* ......................... 256 ------- 3,016 INFORMATION SERVICES (1.2%) 16,000 Arbitron, Inc.* ..................... 536 14,000 ChoicePoint, Inc.* .................. 553 14,000 Dun & Bradstreet Corp. (The)* ....... 483 23,000 Equifax, Inc. ....................... 532 15,000 FactSet Research Systems, Inc. ...... 424 10,000 Moody's Corp. ....................... 413 ------- 2,941 INSURANCE -- LIFE (0.5%) 17,000 AFLAC, Inc. ......................... 512 8,000 Prudential Financial, Inc. .......... 254 11,000 TorchMark, Inc. ..................... 402 ------- 1,168 INSURANCE -- PROPERTY/ CASUALTY (2.5%) 13,000 Allstate Corp. ...................... 481 16,500 Berkley (W.R.) Corp. ................ 654 8,000 IPC Holdings, Ltd.* ................. 252 45,000 Old Republic International Corp. 1,260 -------------------------------------------------------------------------------- 9 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. SCHEDULE OF INVESTMENTS -------------------------------------------------------------------------------- VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- 10,000 PartnerRe Ltd. ...................... $ 518 18,000 Progressive Corp. ................... 893 17,400 RenaissanceRe Holdings Ltd. ......... 689 3,000 RLI Corp. ........................... 84 15,000 Safeco Corp. ........................ 520 9,000 XL Capital Ltd. Class "A" ........... 695 ------ 6,046 MACHINERY (1.3%) 2,000 Actuant Corp. Class "A"* ............ 93 35,000 AGCO Corp.* ......................... 774 11,000 Donaldson Co., Inc. ................. 396 18,750 Graco Inc. .......................... 537 14,000 Manitowoc Co., Inc. (The) ........... 357 14,000 Smith (A.O.) Corp. .................. 378 14,000 Tractor Supply Co.* ................. 526 ------- 3,061 MANUFACTURED HOUSING/RECREATIONAL VEHICLE (0.5%) 9,500 Oshkosh Truck Corp. ................. 584 13,600 Winnebago Industries, Inc. .......... 534 ------- 1,118 MEDICAL SERVICES (3.8%) 10,000 Anthem, Inc.* ....................... 629 22,000 Apria Healthcare Group, Inc.* ....... 489 15,500 Coventry Health Care, Inc.* ......... 450 4,718 DaVita, Inc.* ....................... 116 19,500 First Health Group Corp.* ........... 475 22,000 Gentiva Health Services Inc.* ....... 194 35,000 Hanger Orthopedic Group, Inc.* ...... 460 16,000 HCA, Inc. ........................... 664 10,000 Health Net, Inc.* ................... 264 16,000 IGEN International, Inc.* ........... 686 34,000 Lincare Holdings, Inc.* ............. 1,075 17,000 Mid Atlantic Medical Services, Inc.* .................... 551 8,500 Quest Diagnostics, Inc.* ............ 484 16,000 Renal Care Group, Inc.* ............. 506 20,000 Triad Hospitals, Inc.* .............. 597 VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- 2,000 UnitedHealth Group, Inc. ............ $ 167 12,000 Universal Health Services, Inc. Class "B"* ......................... 541 12,000 Wellpoint Health Networks, Inc.* 854 -------- 9,202 MEDICAL SUPPLIES (7.8%) 5,000 Alcon, Inc.* ........................ 197 9,000 AmerisourceBergen Corp. ............. 489 27,750 Biomet, Inc. ........................ 795 17,000 Biosite, Inc.* ...................... 578 14,000 Boston Scientific Corp.* ............ 595 16,000 Charles River Laboratories International, Inc.* ............... 616 36,000 Cooper Companies, Inc. .............. 901 34,500 DENTSPLY International, Inc. ........ 1,283 21,000 Edwards Lifesciences Corp.* ......... 535 19,000 Fisher Scientific International, Inc.* ............... 572 34,000 Henry Schein, Inc.* ................. 1,530 17,000 IDEXX Laboratories, Inc.* ........... 559 21,000 Inamed Corp.* ....................... 647 15,000 Johnson & Johnson ................... 806 22,702 Medtronic, Inc. ..................... 1,035 14,000 Mentor Corp. ........................ 539 25,250 Merit Medical Systems, Inc.* ........ 503 34,000 Patterson Dental Co.* ............... 1,487 17,000 Respironics, Inc.* .................. 517 14,000 St. Jude Medical, Inc.* ............. 556 17,000 STERIS Corp.* ....................... 412 9,000 Stryker Corp. ....................... 604 53,000 Varian Medical Systems, Inc.* ....... 2,629 13,000 Zimmer Holdings, Inc.* .............. 540 -------- 18,925 NATURAL GAS -- DISTRIBUTION (0.4%) 21,000 AGL Resources Inc. .................. 510 14,000 UGI Corp. ........................... 524 -------- 1,034 -------------------------------------------------------------------------------- 10 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. DECEMBER 31, 2002 -------------------------------------------------------------------------------- VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- NATURAL GAS -- DIVERSIFIED (0.3%) 8,000 Patina Oil & Gas Corp. ................ $ 253 23,000 XTO Energy, Inc. ...................... 568 ------- 821 NEWSPAPER (1.7%) 7,000 Gannett Co., Inc. ..................... 503 16,500 Lee Enterprises, Inc. ................. 553 9,000 McClatchy Co. (The) Class "A" ......... 510 5,000 Media General, Inc. Class "A" ......... 300 11,000 New York Times Co, (The) Class "A" ............................ 503 7,000 Scripps (E.W.) Co. Class "A" .......... 539 11,000 Tribune Co. ........................... 500 800 Washington Post Co. (The) Class "B" ............................ 590 ------- 3,998 OFFICE EQUIPMENT & SUPPLIES (0.6%) 30,000 Global Imaging Systems, Inc.* ......... 551 40,000 Moore Corporation Ltd.* ............... 364 30,000 Staples, Inc.* ........................ 549 ------- 1,464 OILFIELD SERVICES/EQUIPMENT (0.2%) 13,000 Teekay Shipping Corp. ................. 529 PACKAGING & CONTAINER (1.2%) 12,000 Ball Corp. ............................ 614 10,000 Bemis Co., Inc. ....................... 496 17,000 CLARCOR Inc. .......................... 549 40,000 Packaging Corp. of America* ........... 730 29,000 Pactiv Corp.* ......................... 634 ------- 3,023 PETROLEUM -- PRODUCING (0.5%) 14,000 Pogo Producing Co. .................... 522 VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- 31,000 Unit Corp.* ........................... $ 575 9,000 Westport Resources Corp.* ............. 187 ------- 1,284 PHARMACY SERVICES (1.1%) 21,352 Accredo Health, Inc.* ................. 753 46,000 Caremark Rx, Inc.* .................... 747 18,000 Express Scripts, Inc. Class "A"* ...... 865 13,000 Omnicare, Inc. ........................ 310 ------- 2,675 PRECISION INSTRUMENT (0.7%) 12,000 FLIR Systems, Inc.* ................... 586 24,000 Garmin Ltd.* .......................... 703 15,000 Varian, Inc.* ......................... 430 ------- 1,719 PUBLISHING (0.4%) 14,000 Deluxe Corp. .......................... 589 11,500 Meredith Corp. ........................ 473 ------- 1,062 R.E.I.T. (1.3%) 6,000 Annaly Mortgage Management, Inc. ..................... 113 5,000 Anworth Mortgage Asset Corp. .......... 63 24,000 Capital Automotive REIT ............... 569 32,000 Chelsea Property Group, Inc. .......... 1,066 17,000 Macerich Company (The) ................ 523 14,500 Pan Pacific Retail Properties, Inc. ..................... 530 15,000 Thornburg Mortgage, Inc. .............. 301 ------- 3,165 RAILROAD (0.3%) 18,000 CP HOLDRS Holding Co. Depository Receipts* ................. 786 RECREATION (1.8%) 7,000 Expedia, Inc. Class "A"* .............. 469 22,000 Harley-Davidson, Inc. ................. 1,016 -------------------------------------------------------------------------------- 11 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. SCHEDULE OF INVESTMENTS -------------------------------------------------------------------------------- VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- 56,000 Mattel, Inc. .......................... $1,072 12,000 Polaris Industries, Inc. .............. 703 20,000 SCP Pool Corp.* ....................... 584 25,000 Shuffle Master, Inc.* ................. 478 ------ 4,322 RESTAURANT (4.1%) 22,500 Applebee's International, Inc. ........ 522 20,000 Bob Evans Farms, Inc. ................. 467 39,000 Brinker International, Inc.* .......... 1,258 22,000 CBRL Group, Inc. ...................... 663 43,500 Cheesecake Factory Incorporated (The)* .................. 1,572 60,500 Darden Restaurants, Inc. .............. 1,237 5,000 Landry's Restaurants, Inc. ............ 106 7,000 P.F. Chang's China Bistro, Inc.* ...... 254 18,000 Panera Bread Co. -- Class "A"* ........ 627 19,000 RARE Hospitality International, Inc.* ................. 525 60,800 Ruby Tuesday, Inc. .................... 1,051 56,250 Sonic Corp.* .......................... 1,153 25,000 Starbucks Corp.* ...................... 509 ------ 9,944 RETAIL -- SPECIAL LINES (5.5%) 14,000 A. C. Moore Arts & Crafts, Inc.* 178 13,000 AutoZone, Inc.* ....................... 918 56,000 Bed Bath & Beyond Inc.* ............... 1,934 10,000 CDW Computer Centers, Inc.* ........... 438 102,000 Chico' s FAS, Inc.* ................... 1,929 12,000 Christopher & Banks Corp.* ............ 249 24,000 Coach, Inc.* .......................... 790 24,000 Fossil, Inc.* ......................... 488 15,000 Guitar Center, Inc.* .................. 248 29,000 Gymboree Corp.* ....................... 460 30,000 Hollywood Entertainment Corp.* 453 14,000 Michaels Stores, Inc.* ................ 438 27,500 Movie Gallery, Inc.* .................. 358 14,000 O'Reilly Automotive, Inc.* ............ 354 28,000 PETsMART, Inc.* ....................... 480 VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- 31,000 Pier 1 Imports, Inc. .................. $ 587 19,000 Ross Stores, Inc. ..................... 805 28,000 TJX Companies, Inc. (The) ............. 547 32,000 Too, Inc.* ............................ 753 17,000 Weight Watchers International, Inc.* ................. 781 4,000 Williams-Sonoma, Inc.* ................ 109 ------ 13,297 RETAIL BUILDING SUPPLY (0.6%) 14,000 Fastenal Co. .......................... 523 28,000 Lowe's Companies, Inc. ................ 1,050 ------ 1,573 RETAIL STORE (2.9%) 17,000 Dollar Tree Stores Inc* ............... 418 51,000 Family Dollar Stores, Inc. ............ 1,592 19,200 Kohl's Corp.* ......................... 1,074 30,666 99 Cents Only Stores* ................. 824 26,000 Target Corp. .......................... 780 44,000 Wal-Mart Stores, Inc. ................. 2,222 ------ 6,910 SEMICONDUCTOR (0.4%) 25,500 Microchip Technology Inc. ............. 623 53,000 Skyworks Solutions Inc* ............... 457 ------ 1,080 SHOE (0.9%) 12,000 Brown Shoe Company, Inc. .............. 286 21,000 Kenneth Cole Productions, Inc. Class "A"* ........................... 426 10,000 Nike, Inc. Class "B" .................. 445 38,000 Reebok International Ltd.* ............ 1,117 ------ 2,274 STEEL -- GENERAL (0.1%) 7,000 Quanex Corp. .......................... 235 -------------------------------------------------------------------------------- 12 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. DECEMBER 31, 2002 -------------------------------------------------------------------------------- VALUE SHARES (IN THOUSANDS) --------------------------------------------------------------------- THRIFT (2.9%) 43,000 Brookline Bancorp, Inc. .............. $ 512 31,972 Charter One Financial, Inc. .......... 919 7,500 First BanCorp ........................ 169 4,000 Golden West Financial Corp. .......... 287 13,000 GreenPoint Financial Corp. ........... 587 28,000 Hudson City Bancorp, Inc. ............ 522 32,000 New York Community Bancorp, Inc. ................................ 924 63,000 Sovereign Bancorp, Inc. .............. 885 45,000 Staten Island Bancorp, Inc. .......... 906 29,920 Washington Federal, Inc. ............. 744 17,000 Webster Financial Corp. .............. 592 -------- 7,047 TOILETRIES/COSMETICS (0.6%) 11,000 Avon Products, Inc. .................. 592 22,000 Chattem, Inc.* ....................... 452 19,000 Regis Corp. .......................... 494 -------- 1,538 TRUCKING/TRANSPORTATION LEASING (1.3%) 19,000 Arkansas Best Corp.* ................. 494 8,000 CNF, Inc. ............................ 266 19,000 Landstar System, Inc.* ............... 1,109 8,000 Roadway Corp. ........................ 294 25,000 Werner Enterprises, Inc. ............. 538 17,000 Yellow Corporation ................... 428 -------- 3,129 TOTAL COMMON STOCKS AND TOTAL INVESTMENT SECURITIES (90.3%) (COST $187,395,000)........................... $218,854 ======== VALUE PRINCIPAL (IN THOUSANDS AMOUNT EXCEPT PER SHARE (IN THOUSANDS) AMOUNT) ------------------------------------------------------------------------------- REPURCHASE AGREEMENTS (8.9%) (INCLUDING ACCRUED INTEREST) 10,600,000 Collateralized by $7,105,000 U.S. Treasury Bonds 8.875%, due 2/15/19, with a value of $10,796,270 (with Morgan Stanley, Dean Witter & Co., 1.05%, dated 12/31/02, due 1/2/03, delivery value $10,600,618) ........................................ $ 10,600 11,000,000 Collateralized by $9,450,000 U.S. Treasury Notes 6.000%, due 8/15/09, with a value of $11,221,875 (with State Street Bank and Trust Company, 1.05%, dated 12/31/02, due 1/2/03, delivery value $11,000,642) .................................. 11,001 --------- 21,601 --------- CASH AND OTHER ASSETS IN EXCESS OFLIABILITIES (0.8%) .................................... 1,939 --------- NET ASSETS(100.0%) .............................................. $242,394 ========= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER OUTSTANDING SHARE ($242,393,595\D 15,070,919 SHARES OUTSTANDING) $ 16.08 ========= * NON-INCOME PRODUCING. (ADR) AMERICAN DEPOSITORY RECEIPTS. SEE NOTES TO FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 13 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. STATEMENT OF ASSETS AND LIABILITIES AT DECEMBER 31, 2002 -------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNT) ------------ ASSETS: Investment securities, at value (Cost - $187,395) ........................... $218,854 Repurchase agreements (Cost - $21,601) ............................ 21,601 Cash ........................................... 39 Receivable for securities sold ................. 2,845 Receivable for capital shares sold ............. 1,059 Dividends receivable ........................... 141 Prepaid insurance expense ...................... 3 --------- TOTAL ASSETS ................................ 244,542 --------- LIABILITIES: Payable for securities purchased ............... 1,608 Payable for capital shares repurchased ......... 284 Accrued expenses: .............................. Advisory fee ................................ 158 Service and distribution plan fees payable .................................. 53 Other ....................................... 45 --------- TOTAL LIABILITIES ........................... 2,148 --------- NET ASSETS ..................................... $242,394 ========= NET ASSETS CONSIST OF: Capital stock, at $1.00 par value (authorized 100,000,000, outstanding 15,070,919 shares) .......................... $ 15,071 Additional paid-in capital ..................... 220,528 Accumulated net realized loss on investments ................................. (24,664) Net unrealized appreciation of investments ................................. 31,459 --------- NET ASSETS ..................................... $242,394 ========= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER OUTSTANDING SHARE ($242,393,595 - 15,070,919 SHARES OUTSTANDING) ............ $ 16.08 ========= STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 -------------------------------------------------------------------------------- (IN THOUSANDS) --------------- INVESTMENT INCOME: Dividends (Net of foreign withholding taxes of $5)............................... $ 1,969 Interest ................................... 270 -------- Total Income .............................. 2,239 -------- EXPENSES: Advisory fee ............................... 1,891 Service and distribution plan fees ......... 630 Transfer agent ............................. 145 Custodian fees ............................. 75 Trading service expense .................... 66 Auditing and legal fees .................... 55 Postage .................................... 43 Printing ................................... 43 Registration fees .......................... 25 Directors' fees and expenses ............... 21 Insurance, dues and other .................. 20 Telephone .................................. 18 -------- Total Expenses Before Custody Credits ............................... 3,032 Less: Custody Credits ................... (3) -------- Net Expenses ............................ 3,029 -------- NET INVESTMENT LOSS ........................ (790) -------- NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net Realized Loss ....................... (14,704) Change in Net Unrealized Appreciation .......................... (26,726) -------- NET REALIZED LOSS AND CHANGE IN NET UNREALIZED APPRECIATION ON INVESTMENTS ............................. (41,430) -------- NET DECREASE IN NET ASSETS FROM OPERATIONS .............................. $(42,220) ======== SEE NOTES TO FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 14 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. STATEMENT OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2002 2001 ------------------------------ (IN THOUSANDS) OPERATIONS: Net investment loss .............................................. $ (790) $ (1,216) Net realized loss on investments ................................. (14,704) (9,710) Change in net unrealized appreciation ............................ (26,726) (59,848) -------------------------- Net decrease in net assets from operations ....................... (42,220) (70,774) -------------------------- DISTRIBUTIONS TO SHAREHOLDERS: Net realized gain from investment transactions ................... -- (6,030) -------------------------- CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares ..................................... 546,946 575,420 Proceeds from reinvestment of distributions to shareholders ...... -- 5,714 Cost of shares repurchased ....................................... (524,161) (630,765) -------------------------- Net increase (decrease) from capital share transactions .......... 22,785 (49,631) -------------------------- TOTAL DECREASE IN NET ASSETS ...................................... (19,435) (126,435) NET ASSETS: Beginning of year ................................................ 261,829 388,264 -------------------------- End of year ...................................................... $ 242,394 $ 261,829 ==========================
SEE NOTES TO FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 15 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES The Value Line Special Situations Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company whose primary investment objective is long-term growth of capital. The Fund invests primarily in a broadly diversified list of "special situations." The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. (A) SECURITY VALUATION. Securities listed on a securities exchange and over-the-counter securities traded on the NASDAQ national market are valued at the closing sales prices on the date as of which the net asset value is being determined. In the absence of closing sales prices for such securities and for securities traded in the over-the-counter market, the security is valued at the midpoint between the latest available and representative asked and bid prices. Securities for which market quotations are not readily available or which are not readily marketable and all other assets of the Fund are valued at fair value as the Board of Directors may determine in good faith. Short-term instruments with maturities of 60 days or less are valued at amortized cost, which approximates market value. (B) REPURCHASE AGREEMENTS. In connection with transactions in repurchase agreements, the Fund's custodian takes possession of the underlying collateral securities, the value of which exceeds the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market on a daily basis to ensure the adequacy of the collateral. In the event of default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. (C) FEDERAL INCOME TAXES. It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies, including the distribution requirements of the Tax Reform Act of 1986, and to distribute all of its taxable income to its shareholders. Therefore, no federal income tax or excise tax provision is required. (D) SECURITY TRANSACTIONS AND DISTRIBUTIONS. Security transactions are accounted for on the date the securities are purchased or sold. Interest income is accrued as earned. Realized gains and losses on sales of securities are calculated for financial accounting and federal income tax purposes on the identified cost basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. -------------------------------------------------------------------------------- 16 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. DECEMBER 31, 2002 -------------------------------------------------------------------------------- 2. CAPITAL SHARE TRANSACTIONS, DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Transactions in capital stock were as follows (in thousands except per share amounts): YEAR YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, 2002 2001 -------------- ------------- Shares sold ..................... 31,210 28,406 Shares issued to shareholders in reinvestment of dividends and distributions ................ -- 305 ------ ------ 31,210 28,711 Shares repurchased .............. 29,954 (31,384) ------ ------- Net increase (decrease) ......... 1,256 (2,673) ====== ======= Distributions per share from net realized gains ...... $ -- $ .4385 ====== ======= 3. PURCHASES AND SALES OF SECURITIES Purchases and sales of investment securities, excluding short-term securities, were as follows: YEAR ENDED DECEMBER 31, 2002 ------------------ (IN THOUSANDS) Purchases: Investment Securities ........... $161,620 ======== Sales: Investment Securities ........... $156,431 ======== 4. Income Taxes At December 31, 2002, information on the tax components of capital is as follows: YEAR ENDED DECEMBER 31, 2002 ----------------- (IN THOUSANDS) Cost of investments for tax purposes ............................. $209,028 ======== Gross tax unrealized appreciation ......................... $ 39,114 Gross tax unrealized depreciation ......................... (7,687) -------- Net tax unrealized appreciation on investments ....................... $ 31,427 ======== Capital loss carryforward, expires December 31, 2009 ............ $ 9,758 expires December 31, 2010 ............ 11,671 -------- Total capital loss carryforward ......... $ 21,429 ======== During the year ended December 31, 2002, as permitted under Federal income tax regulations, the Fund elected to defer $3,203,000 of post-October net capital losses to the next taxable year. Net realized gains/losses differ for financial statement and tax purposes primarily due to differing treatments of wash sales. To the extent future capital gains are offset by capital losses, the Fund does not anticipate distributing any such gains to the shareholders. The tax composition of distributions to shareholders during the year ended December 31, 2001 was from ordinary income. Permanent book-tax differences relating to current year net operating loss are reclassified within the composition of net asset accounts. During 2002, the Fund reclassified $790,000 from accumulated net investment loss to additional paid-in-capital. Net investment loss, net realized gains, and net assets were not affected by this reclassification. Net realized gain (loss) differ for financial statements and tax purposes primarily due to differing treatments of wash sales. -------------------------------------------------------------------------------- 17 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002 -------------------------------------------------------------------------------- 5. INVESTMENT ADVISORY CONTRACT, MANAGEMENT FEES, AND TRANSACTIONS WITH AFFILIATES An advisory fee of $1,891,000 was paid or payable to Value Line, Inc., the Fund's investment adviser (the "Adviser"), for the year ended December 31, 2002. This was computed at the rate of 3/4 of 1% of the average daily net assets during the year and paid monthly. The Adviser provides research, investment programs, supervision of the investment portfolio and pays costs of administrative services, office space, equipment and compensation of administrative, bookkeeping and clerical personnel necessary for managing the affairs of the Fund. The Adviser also provides persons, satisfactory to the Fund's Board of Directors, to act as officers and employees of the Fund and pays their salaries and wages. The Fund bears all other costs and expenses. The Fund has a Service and Distribution Plan (the "Plan"), adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, for the payment of certain expenses incurred by Value Line Securities, Inc. (the "Distributor"), a wholly-owned subsidiary of the Adviser, 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. For the year ended December 31, 2002, fees amounting to $630,000 were paid or payable to the Distributor under this Plan. In the nine months ended September 30, 2002, the Fund reimbursed the Distributor $66,000 for trading services it performed on behalf of the Fund. During the three month period ended December 31, 2002, the Fund paid brokerage commissions totaling $30,044 to the distributor which clears its transactions through unaffiliated brokers. Certain officers and directors of the Adviser and its wholly owned subsidiary, Value Line Securities, Inc. (the Fund's distributor and a registered broker/dealer), are also officers and directors of the Fund. For the year ended December 31, 2002, the Fund's expenses were reduced by $2,685 under a custody credit agreement with the Custodian. The Adviser and/or affiliated companies and the Value Line, Inc. Profit Sharing and Savings Plan at December 31, 2002, owned 88,556 shares of the Fund's capital stock, representing 0.6% of the outstanding shares at December 31, 2002. -------------------------------------------------------------------------------- 18 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ========== ========== ========== ========== ========== NET ASSET VALUE, BEGINNING OF YEAR ............. $ 18.95 $ 23.55 $ 27.09 $ 17.70 $ 14.48 ---------- ---------- ---------- ---------- ---------- INCOME (LOSS) FROM INVESTMENT OPERATIONS: Net investment loss ........................... (.05) (.09) (.19) (.04) (.04) Net gains or losses on securities (both realized and unrealized) ............... (2.82) (4.07) (1.64) 10.83 4.30 ---------- ---------- ---------- ---------- ---------- Total from investment operations .............. (2.87) (4.16) (1.83) 10.79 4.26 ---------- ---------- ---------- ---------- ---------- LESS DISTRIBUTIONS: Dividends from net investment income ....................................... -- -- -- -- -- Distributions from net realized gains ......... -- (.44) (1.71) (1.40) (1.04) ---------- ---------- ---------- ---------- ---------- Total distributions ........................... -- (.44) (1.71) (1.40) (1.04) ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF YEAR ................... $ 16.08 $ 18.95 $ 23.55 $ 27.09 $ 17.70 ========== ========== ========== ========== ========== TOTAL RETURN ................................... -15.15% -17.65% -6.78% 61.66% 29.88% ========== ========== ========== ========== ========== RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (in thousands) ................................ $ 242,394 $ 261,829 $ 388,264 $ 421,031 $ 190,634 Ratio of expenses to average net assets .................................... 1.20%(1) 1.14%(1) 1.01%(1) .89%(1) 1.02% Ratio of net investment loss to average net assets .................................... (.31)% (.39)% (.68)% (.22)% (.34)% Portfolio turnover rate ........................ 66% 88% 78% 85% 183%
(1) RATIOS REFLECT EXPENSES GROSSED UP FOR CUSTODY CREDIT ARRANGEMENT. THE RATIOS OF EXPENSES TO AVERAGE NET ASSETS NET OF CUSTODY CREDITS WOULD NOT HAVE CHANGED. SEE NOTES TO FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 19 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. REPORT OF INDEPENDENT ACCOUNTANTS -------------------------------------------------------------------------------- TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE VALUE LINE SPECIAL SITUATIONS FUND, INC. In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The Value Line Special Situations Fund, Inc. (the "Fund") at December 31, 2002, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 14, 2003 -------------------------------------------------------------------------------- 20 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. MANAGEMENT OF THE FUND -------------------------------------------------------------------------------- MANAGEMENT INFORMATION The following table sets forth information on each Director and officer of the Fund. Each Director serves as a director or trustee of each of the 15 Value Line Funds and oversees a total of 16 portfolios. Each Director serves until his or her successor is elected and qualified.
PRINCIPAL OCCUPATION LENGTH OF DURING THE OTHER DIRECTORSHIPS NAME, ADDRESS, AND AGE POSITION TIME SERVED PAST 5 YEARS HELD BY DIRECTOR ================================================================================================================== INTERESTED DIRECTORS* --------------------- Jean Bernhard Buttner Chairman of the Since 1983 Chairman, President and Value Line, Inc. Age 68 Board of Directors Chief Executive Officer of and President Value Line, Inc. (the "Adviser") and Value Line Publishing, Inc. Chairman and President of each of the 15 Value Line Funds and Value Line Securities, Inc. (the "Distributor"). ------------------------------------------------------------------------------------------------------------------ Marion N. Ruth Director Since 2000 Real Estate Executive: Value Line, Inc. 5 Outrider Road President, Ruth Realty (real Rolling Hills, CA 90274 estate broker); Director of the Age 68 Adviser since October 2000. ------------------------------------------------------------------------------------------------------------------ NON-INTERESTED DIRECTORS ------------------------ John W. Chandler Director Since 1991 Consultant, Academic Search None 1611 Cold Spring Rd. Consultation Service, Inc. Williamstown, MA 01267 Trustee Emeritus and Age 79 Chairman (1993-1994) of the Board of Trustees of Duke University; President Emeritus, Williams College. ------------------------------------------------------------------------------------------------------------------ Frances T. Newton Director Since 2000 Customer Support Analyst, None 4921 Buckingham Drive Duke Power Company. Charlotte, NC 28209 Age 61 ------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 21 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. MANAGEMENT OF THE FUND --------------------------------------------------------------------------------
PRINCIPAL OCCUPATION LENGTH OF DURING THE OTHER DIRECTORSHIPS NAME, ADDRESS, AND AGE POSITION TIME SERVED PAST 5 YEARS HELD BY DIRECTOR ====================================================================================================== Francis C. Oakley Director Since 2000 Professor of History, Berkshire Life 54 Scott Hill Road Williams College, 1961 to Insurance Company. Williamstown, MA 01267 2002; President Emeritus Age 71 since 1994 and President, 1985-1994; Chairman (1993-1997) and Interim President (2002) of the American Council of Learned Societies. ------------------------------------------------------------------------------------------------------ David H. Porter Director Since 1997 Visiting Professor of None 5 Birch Run Drive Classics, Williams College, Saratoga Springs, NY 12866 since 1999; President Age 67 Emeritus, Skidmore College since 1999 and President, 1987-1998. ------------------------------------------------------------------------------------------------------ Paul Craig Roberts Director Since 1983 Chairman, Institute for A. Schulman Inc. 169 Pompano St. Political Economy. (plastics) Panama City Beach, FL 32413 Age 63 ------------------------------------------------------------------------------------------------------ Nancy-Beth Sheerr Director Since 1996 Senior Financial Advisor, None 1409 Beaumont Drive Hawthorne, since January Gladwyne, PA 19035 2001; Chairman, Radcliffe Age 53 College Board of Trustees, 1990-1999. ------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- 22 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. MANAGEMENT OF THE FUND --------------------------------------------------------------------------------
PRINCIPAL OCCUPATION LENGTH OF DURING THE OTHER DIRECTORSHIPS NAME, ADDRESS, AND AGE POSITION TIME SERVED PAST 5 YEARS HELD BY DIRECTOR =========================================================================================================== OFFICERS Stephen Grant Vice President Since 1997 Portfolio Manager with the -- Age 49 Adviser. ----------------------------------------------------------------------------------------------------------- Alan Hoffman Vice President Since 2001 Portfolio Manager with the -- Age 49 Adviser. ----------------------------------------------------------------------------------------------------------- David T. Henigson Vice President, Since 1994 Director, Vice President and -- Age 45 Secretary and Compliance Officer of the Treasurer Adviser. Director and Vice President of the Distributor. Vice President, Secretary and Treasurer of each of the 15 Value Line Funds. -----------------------------------------------------------------------------------------------------------
* MRS. BUTTNER IS AN "INTERESTED PERSON" AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940 BY VIRTUE OF HER POSITIONS WITH THE ADVISER AND HER INDIRECT OWNERSHIP OF A CONTROLLING INTEREST IN THE ADVISER; MRS. RUTH IS AN INTERESTED PERSON BY VIRTUE OF BEING A DIRECTOR OF THE ADVISER. UNLESS OTHERWISE INDICATED, THE ADDRESS FOR EACH OF THE ABOVE IS 220 EAST 42ND STREET, NEW YORK, NY 10017. -------------------------------------------------------------------------------- The Fund's Statement of Additional Information (SAI) includes additional information about the Fund's directors and is available, without charge, upon request, by calling 1-800-243-2729. -------------------------------------------------------------------------------- 23 THE VALUE LINE SPECIAL SITUATIONS FUND, INC. THE VALUE LINE FAMILY OF FUNDS -------------------------------------------------------------------------------- 1950 -- THE VALUE LINE FUND seeks long-term growth of capital. Current income is a secondary objective. 1952 -- VALUE LINE INCOME AND GROWTH FUND'S primary investment objective is income, as high and dependable as is consistent with reasonable risk. Capital growth to increase total return is a secondary objective. 1956 -- THE VALUE LINE SPECIAL SITUATIONS FUND seeks long-term growth of capital. No consideration is given to current income in the choice of investments. 1972 -- VALUE LINE LEVERAGED GROWTH INVESTORS' sole investment objective is to realize capital growth. 1979 -- THE VALUE LINE CASH FUND, a money market fund, seeks to secure as high a level of current income as is consistent with maintaining liquidity and preserving capital. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. 1981 -- VALUE LINE U.S. GOVERNMENT SECURITIES FUND seeks maximum income without undue risk to capital. Under normal conditions, at least 80% of the value of its net assets will be invested in securities issued or guaranteed by the U.S. Government and its agencies and instrumentalities. 1983 -- VALUE LINE CENTURION FUND* seeks long-term growth of capital. 1984 -- THE VALUE LINE TAX EXEMPT FUND seeks to provide investors with the maximum income exempt from federal income taxes while avoiding undue risk to principal. The Fund offers investors a choice of two portfolios: The Money Market Portfolio and The National Bond Portfolio. The fund may be subject to state and local taxes and the Alternative Minimum Tax (if applicable). 1985 -- VALUE LINE CONVERTIBLE FUND seeks high current income together with capital appreciation primarily from convertible securities ranked 1 or 2 for year-ahead performance by the Value Line Convertible Ranking System. 1986 -- VALUE LINE AGGRESSIVE INCOME TRUST seeks to maximize current income. 1987 -- VALUE LINE NEW YORK TAX EXEMPT TRUST seeks to provide New York taxpayers with the maximum income exempt from New York State, New York City and federal income taxes while avoiding undue risk to principal. The fund may be subject to state and local taxes and the Alternative Minimum Tax (if applicable). 1987 -- VALUE LINE STRATEGIC ASSET MANAGEMENT TRUST* seeks to achieve a high total investment return consistent with reasonable risk. 1993 -- VALUE LINE EMERGING OPPORTUNITIES FUND invests primarily in common stocks or securities convertible into common stock, with its primary objective being long-term growth of capital. 1993 -- VALUE LINE ASSET ALLOCATION FUND seeks high total investment return, consistent with reasonable risk. The Fund invests in stocks, bonds and money market instruments utilizing quantitative modeling to determine the asset mix. 1995 -- VALUE LINE U.S. MULTINATIONAL COMPANY FUND'S investment objective is maximum total return. It invests primarily in securities of U.S. companies that have significant sales from international operations. * ONLY AVAILABLE THROUGH THE PURCHASE OF GUARDIAN INVESTOR, A TAX DEFERRED VARIABLE ANNUITY, OR VALUEPLUS, A VARIABLE LIFE INSURANCE POLICY. FOR MORE COMPLETE INFORMATION ABOUT ANY OF THE VALUE LINE FUNDS, INCLUDING CHARGES AND EXPENSES, SEND FOR A PROSPECTUS FROM VALUE LINE SECURITIES, INC., 220 EAST 42ND STREET, NEW YORK, NEW YORK 10017-5891 OR CALL 1-800-223- 0818, 24 HOURS A DAY, 7 DAYS A WEEK, OR VISIT US AT WWW.VALUELINE.COM. READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST OR SEND MONEY. -------------------------------------------------------------------------------- 24