reorganization did not result
in an “assignment” of the investment advisory agreements (as such term is defined in the Investment Company Act of 1940).
Arnold Bernhard & Co., Inc.,
220 East 42nd Street, New York, NY 10017, a holding company, owns approximately 86% of the outstanding shares of Value Line’s common stock. Jean
Bernhard Buttner, Chairman, President and Chief Executive Officer of Value Line owns all of the voting stock of Arnold Bernhard & Co.,
Inc.
The investment advisory agreement
between the Fund and the Adviser, dated September 26, 1991, provides for an advisory fee at an annual rate equal to 0.70% on the first $100 million of
the Fund’s average daily net assets and 0.65% of such net assets in excess thereof. During 2005, 2006 and 2007, the Fund paid or accrued to the
Adviser advisory fees of $1,415,512, $1,418,348 and $1,351,288, 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 and accounting fees,
fees and expenses in connection with qualification under federal and state securities laws and costs of shareholder reports and proxy materials. The
Fund has agreed that it will use the words “Value Line” in its name only so long as Value Line, Inc. or a subsidiary serves as investment
adviser to the Fund. The agreement will terminate upon its assignment.
The Adviser currently acts as
investment adviser to 13 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 of approximately $4 billion as of June 30, 2008.
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 Fund, the
Adviser and the Distributor have adopted a Code of Ethics under Rule 17j-1 of the 1940 Act which permits personnel subject to the Code of Ethics to
invest in securities, including securities that may be purchased or held by the Fund. The Code of Ethics requires that such personnel submit reports of
security transactions for their respective accounts and restricts trading in various types of securities in order to avoid possible conflicts of
interest.
The Fund has entered into a
distribution agreement with 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 Value
Line. For its services under the agreement, the Distributor is not entitled to receive
B-13
any compensation, although it
is entitled to receive fees under the Service and Distribution Plan. The Distributor also serves as distributor to the other Value Line funds. Jean
Bernhard Buttner is Chairman of the Distributor.
State Street Bank and Trust
Company (“State Street”) has been retained to provide certain bookkeeping, accounting and administrative services for the Fund. The Adviser
pays State Street $76,400 per annum for providing 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. Boston 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 300 Madison
Avenue, New York, NY 10017, acts as the Fund’s independent registered public accounting firm and also performs certain tax preparation
services.
Portfolio Managers
Kathleen Bramlage is primarily
responsible for the day-to-day management of the Fund’s portfolio using a quantitative investment strategy which relies on the Value Line
Timeliness Ranking System.
Compensation. Each portfolio manager employed by the Adviser receives a fixed base salary and customary benefits
that are offered generally to all full-time and some part-time employees of the Adviser. In addition, a manager may receive an annual bonus in the
Adviser’s discretion. Base salary is normally reevaluated on an annual basis. Any bonus is completely discretionary and may be in excess of a
manager’s base salary. The profitability of the Adviser and the after tax investment performance of the accounts that the portfolio manager is
responsible for are factors in determining the manager’s overall compensation. The level of any bonus compensation may be influenced by the
relative performance of the accounts managed by the portfolio manager or the financial performance of the Adviser. However, as noted, all bonus
compensation is discretionary and the Adviser does not employ formulas with respect to either of these factors to compute a portfolio manager’s
bonus. There are no differences in a portfolio manager’s compensation structure for managing mutual funds or private accounts.
Other Accounts
Managed. Kathleen Bramlage is primarily or jointly responsible for the day-to-day management of six Value Line mutual funds
with combined total assets at December 31, 2007, of approximately $1 billion.
Material Conflicts of
Interest. The Adviser’s portfolio managers typically manage more than one account. Portfolio managers make investment
decisions for each account based on the investment objectives and policies of each such account. If the portfolio manager identifies an investment
opportunity that may be suitable for multiple accounts, the Fund may not take full advantage of that opportunity because the opportunity may need to be
allocated among more than one account. In addition, a portfolio manager may purchase or sell securities for one account and not another account. The
Adviser’s private accounts, like the Fund, pay an advisory fee based primarily upon the size of the accounts. None of the accounts pay
performance-related fees. Investments are allocated among all of the Adviser’s accounts in a manner which the Adviser deems to be fair and
equitable.
Ownership of
Securities. Kathleen Bramlage does not own any shares of the Fund.
B-14
SERVICE AND DISTRIBUTION PLAN
The Service and Distribution Plan
(12b-1 Plan) (the “Plan”) is designed to finance the activities of the Distributor in advertising, marketing and distributing Fund shares and
for servicing Fund shareholders at an annual rate of 0.25% of the Fund’s average daily net assets. During the fiscal year ended December 31, 2007,
fees of $500,496 before fee waivers were accrued to the Distributor under the Plan. The Distributor paid $48,809 to other broker-dealers and incurred
$50,133 in advertising and other marketing expenses. Effective May 1, 2007 through April 30, 2008, the Distributor contractually agreed to waive the
Fund’s 12b-1 fee equal to 0.25% of the Fund’s average daily net assets. For the fiscal year ended December 31, 2007, fees waived amounted to
$500,496. The Distributor has agreed to extend the contractual fee waiver through April 30, 2009. There can be no assurance that the Distributor will
extend the contractual fee waiver beyond such date.
The principal services and
expenses for which such compensation may be used include: compensation to employees or account executives and reimbursement of their expenses; overhead
and telephone costs of such employees or account executives; printing of prospectuses or reports for prospective shareholders; advertising;
preparation, printing and distribution of sales literature; and allowances to other broker-dealers. A report of the amounts expended under the Plan is
submitted to the Directors each quarter. Because of the Plan, long-term shareholders may pay more than the economic equivalent of the maximum sales
charge permitted by the Financial Industry Regulatory Authority regarding investment companies.
The Plan is a compensation plan,
which means that the Distributor’s fees under the Plan are payable without regard to actual expenses incurred by the Distributor. To the extent
the revenue received by the Distributor pursuant to the Plan exceeds the Distributor’s marketing expenses, the Distributor may earn a profit under
the Plan.
The Plan is subject to annual
approval by the Directors, including the non-interested Directors. The Plan is terminable at any time by vote of the Directors or by vote of a majority
of the shares of the Fund. Pursuant to the Plan, a new Director who is not an interested person (as defined in the 1940 Act) must be nominated by
existing Directors who are not interested persons.
Because amounts paid pursuant to
the Plan are paid to the Distributor, the Distributor and its officers, directors and employees may be deemed to have a financial interest in the
operation of the Plan. None of the non-interested Directors has a financial interest in the operation of the Plan.
The Plan was adopted because of
its anticipated benefits to the Fund. These anticipated benefits include: the ability to realize economies of scale as a result of increased promotion
and distribution of the Fund’s shares, an enhancement in the Fund’s ability to maintain accounts and improve asset retention, increased
stability of net assets for the Fund, increased stability in the Fund’s investment positions, and greater flexibility in achieving investment
objectives. The costs of any joint distribution activities between the Fund and other Value Line Funds will be allocated among the Funds in proportion
to the number of their shareholders.
Additional Dealer Compensation
If you purchase shares of the
Fund through a broker, fund trading platform or other financial intermediary (collectively, “intermediaries”), your intermediary may receive
various forms of compensation from the Distributor. Such payments may be based on a variety of factors, including sales of Fund shares through that
intermediary or the value of shares held by investors through that intermediary. Compensation
B-15
from the Distributor may vary
among intermediaries. The types of payments an intermediary may receive include:
• |
|
Payments under the Plan which are asset based charges paid from
the assets of the Fund; |
• |
|
Payments by the Distributor out of its own assets. These
payments are in addition to payments made under the Plan. |
You should ask your intermediary
for information about any payments it receives from the Distributor.
The maximum amount of
compensation that may be paid to any intermediary under the Plan is 0.25% of the Fund’s average daily net assets. Generally, the maximum amount of
additional compensation that the Distributor pays to any intermediary from its own assets is 0.15% of the Fund’s average daily net assets.
However, to the extent the Distributor waives any fees it would have otherwise received under the Plan, the Distributor (and not the Fund) would pay
the intermediaries out of its own assets any such amounts waived.
As of December 31, 2007, the
Distributor may make payments out of its own assets to the following financial intermediaries whose fees exceed the Fund’s payment, if any,
pursuant to the Plan.
|
|
National City Bank
Pershing LLC
National Financial
Services Corp.
E*TRADE
TD Ameritrade
Charles Schwab
USAA Investment Management Co.
The 401(k) Company
SunGard Transaction
Network
MSCS Financial Services, LLC
The Vanguard Group |
Financial intermediaries may have
been added or removed from the list above since December 31, 2007.
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, will obtain the best results for the Fund’s
portfolio taking into consideration such relevant factors such as price, the ability of the broker to effect the transaction and the broker’s
facilities, reliability and financial responsibility. Commission rates, being a component of price, are considered together with such factors. 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.
Pursuant to the provisions of Section 28(e) of the Securities Exchange Act of 1934, 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 viewed either in terms of that particular transaction or in
relation to the Adviser’s overall responsibilities with respect to the account as to which the Adviser exercises investment discretion. Such
allocation will be in such amounts and in such proportion as the Adviser may determine. The information and services furnished to the Adviser include
the furnishing of research reports
B-16
and statistical compilations
and computations and the providing of current quotations for securities. The services and information are 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 judgement of the Adviser, are able to execute such orders as expeditiously as possible. 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 2005, 2006 and 2007, the
Fund paid brokerage commissions of $499,969, $315,754 and $239,036, respectively. During 2007, all of the Fund’s brokerage commissions were paid
to brokers or dealers solely for their services in obtaining the best prices and executions.
Portfolio
Turnover. The Fund’s annual portfolio turnover exceeded 100% in each of the last five years. A rate of portfolio
turnover of 100% would occur if all of the Fund’s portfolio were replaced in a period of one year. To the extent that the Fund engages in
short-term trading in attempting to achieve its objectives, 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, $1 par value, has one vote with fractional shares voting proportionately. Shares have no preemptive rights, are freely transferable, are
entitled to dividends as declared by the 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 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.
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
800-243-2729.
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
B-17
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 SEC may by order permit for the protection of the Fund’s shareholders.
The value of shares of the Fund
on redemption may be more or less than the shareholder’s cost, depending upon the market value of the Fund’s assets at the time. Shareholders
should note that if a loss has been realized on the sale of shares of the Fund, the loss may be disallowed for tax purposes if shares of the same Fund
are purchased within (before or after) 30 days of the sale.
It is possible that conditions
may exist in the future which would, in the opinion of the Board of Directors, make it undesirable for the Fund to pay for redemptions in cash. In such
cases the Board may authorize payment to be made in portfolio securities or other property of the Fund. However, the Fund has obligated itself under
the 1940 Act to redeem for cash all shares presented for redemption by any one shareholder up to $250,000 (or 1% of the Fund’s net assets if that
is less) in any 90-day period. Securities delivered in payment of redemptions are valued at the same value assigned to them in computing the net asset
value per share. Shareholders receiving such securities may incur brokerage costs on their sales.
Calculation of Net Asset
Value: The net asset value of the Fund’s shares for purposes of both purchases and redemptions is determined once daily
as of the close of regular trading on the New York Stock Exchange (generally 4:00 p.m., New York time) on each day that the New York Stock Exchange is
open for trading except on days on which no orders to purchase, sell or redeem Fund shares have been received. The 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 are valued at the closing sales price on the date as of which the net asset value is being determined. The
Fund generally values equity securities traded on the NASDAQ Stock Market at the NASDAQ Official Closing Price. 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 or persons acting at their direction may determine in good faith. Short-term
instruments with maturities of 60 days or less at the date of purchase are valued at amortized cost, which approximates market.
TAXES
The Fund has elected to be
treated, has qualified and intends to continue to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the
“Code”). By so qualifying, and assuming the Fund meets the distribution requirements stated below, the Fund is not subject to federal income
tax on its net investment income or net realized capital gains which are distributed to shareholders (whether or not reinvested in additional Fund
shares). In order to qualify as a regulated investment company under Subchapter M of the Code, which qualification this discussion assumes, the Fund
must, among other things, (i) derive at least 90% of its gross income for each taxable year from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including gains from options,
futures and forward contracts) derived with respect to its business of investing in such stock, securities or currencies and net income derived from an
interest in a qualified publicly traded partnership (as defined in Section 851(h) of the Code) (the “90% income test”) and (ii) diversify its
holdings so that at the end
B-18
of each quarter of each
taxable year: (a) at least 50% of the value of the Fund’s total assets is represented by (1) cash and cash items, U.S. government securities,
securities of other regulated investment companies, and (2) other securities, with such other securities limited, in respect to any one issuer, to an
amount not greater than 5% of the value of the Fund’s total assets and to not more than 10% of the outstanding voting securities of such issuer
and (b) not more than 25% of the value of the Fund’s total assets is invested in (1) the securities (other than U.S. government securities and
securities of other regulated investment companies) of any one issuer, (2) the securities (other than securities of other regulated investment
companies) of two of more issuers that the Fund controls and that are engaged in the same, similar, or related trades or businesses, or (3) the
securities of one or more qualified publicly traded partnerships.
If the Fund qualifies as a
regulated investment company and, for each taxable year, it distributes to its shareholders an amount equal to or exceeding the sum of (i) 90% of its
“investment company taxable income” as that term is defined in the Code (which includes, among other things, dividends, taxable interest, and
the excess of any net short-term capital gains over net long-term capital losses, as reduced by certain deductible expenses) without regard to the
deduction for dividends paid and (ii) 90% of the excess of its gross tax-exempt interest, if any, over certain disallowed deductions, the Fund
generally will be relieved of U.S. federal income tax on any income of the Fund, including “net capital gain” (the excess of net long-term
capital gain over net short-term capital loss), distributed to shareholders. However, if the Fund meets such distribution requirements, but chooses to
retain some portion of its investment company taxable income or net capital gain, it generally will be subject to U.S. federal income tax at regular
corporate rates on the amount retained. The Fund intends to distribute at least annually all or substantially all of its investment company taxable
income, net tax-exempt interest, and net capital gain. If for any taxable year the Fund did not qualify as a regulated investment company or did not
satisfy the distribution requirement described above, it generally would be treated as a corporation subject to U.S. federal income tax and when the
Fund’s income is distributed, it would be subject to a further tax at the shareholder level.
The Code requires each regulated
investment company to pay a nondeductible 4% excise tax to the extent the company does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains in excess of capital losses, determined, in general, for a one-year period
ending on October 31 of such year, plus certain undistributed amounts from previous years. The Fund anticipates that it will make sufficient timely
distributions to avoid imposition of the excise tax.
Unless a shareholder elects
otherwise, distributions from the Fund will be automatically invested in additional common shares of the Fund. For U.S. federal income tax purposes,
such distributions generally will be taxable whether a shareholder takes them in cash or they are reinvested in additional shares of the Fund. In
general, assuming that the Fund has sufficient earnings and profits, dividends from investment company taxable income are taxable either as ordinary
income or, if so designated by the Fund and certain other conditions are met, as “qualified dividend income” taxable to individual
shareholders at a maximum 15% U.S. federal income tax rate. Dividend income distributed to individual shareholders will qualify for such maximum 15%
U.S. federal income tax rate to the extent that such dividends are attributable to “qualified dividend income” as that term is defined in
Section 1(h)(11)(B) of the Code from the Fund’s investment in common and preferred stock of U.S. companies and stock of certain foreign
corporations, provided that certain holding period and other requirements are met by both the Fund and the shareholders.
A dividend that is attributable
to qualified dividend income of the Fund that is paid by the Fund to an individual shareholder will not be taxable as qualified dividend income to such
shareholder if (1) the
B-19
dividend is received with
respect to any share of the Fund held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which
such share became ex-dividend with respect to such dividend, (2) to the extent that the shareholder is under an obligation (whether pursuant to a short
sale or otherwise) to make related payments with respect to positions in substantially similar or related property, or (3) the shareholder elects to
have the dividend treated as investment income for purposes of the limitation on deductibility of investment interest.
Distributions from net capital
gain that are designated as capital gain dividends, if any, are taxable as long-term capital gains for U.S. federal income tax purposes without regard
to the length of time the shareholder has held shares of the Fund. Capital gain dividends distributed by the Fund to individual shareholders generally
will qualify for the maximum 15% federal tax rate on long-term capital gains. A shareholder should also be aware that the benefits of the favorable tax
rate on long-term capital gains and qualified dividend income may be impacted by the application of the alternative minimum tax to individual
shareholders. Under current law, the maximum 15% U.S. federal income tax rate on qualified dividend income and long-term capital gains will cease to
apply to taxable years beginning after December 31, 2010.
Distributions by the Fund in
excess of the Fund’s current and accumulated earnings and profits will be treated as a return of capital to the extent of (and in reduction of)
the shareholder’s tax basis in its shares and any such amount in excess of that basis will be treated as gain from the sale of shares, as
discussed below. The federal income tax status of all distributions will be reported to shareholders annually.
At the time of an investor’s
purchase of Fund shares, a portion of the purchase price may be attributable to realized or unrealized appreciation in the Fund’s portfolio or
undistributed taxable income of the Fund. Consequently, subsequent distributions by the Fund with respect to these shares from such appreciation or
income may be taxable to such investor even if the net asset value of the investor’s shares is, as a result of the distributions, reduced below
the investor’s cost for such shares and the distributions economically represent a return of a portion of the investment. In particular, investors
should be careful to consider the tax implications of buying shares just prior to a distribution. The price of shares purchased at that time (at the
net asset value per share) may include the amount of the forthcoming distribution. Those purchasing just prior to a distribution will then receive, in
effect, a return of capital upon the distribution which will nevertheless be taxable to them.
Under the Code, dividends
declared by the Fund in October, November or December of any calendar year, and payable to shareholders of record in such a month, shall be deemed to
have been received by such shareholder on December 31 of such calendar year if such dividend is actually paid in January of the following calendar
year. In addition, certain other distributions made after the close of a taxable year of the Fund may be “spilled back” and treated as paid
by the Fund (except for purposes of the 4% excise tax) during such taxable year. In such case, shareholders generally will be treated as having
received such dividends in the taxable year in which the distributions were actually made.
If the Fund invests in certain
pay-in-kind securities, zero coupon securities or, in general, any other securities with original issue discount (or with market discount if the Fund
elects to include market discount in income currently), the Fund generally must accrue income on such investments for each taxable year, which
generally will be prior to the receipt of the corresponding cash payments. However, the Fund must distribute, at least annually, all or substantially
all of its investment company taxable income, including such accrued income, to shareholders to qualify as a regulated investment company under the
Code and avoid U.S. federal income and excise taxes. Therefore, the Fund may have to dispose of its portfolio
B-20
securities under
disadvantageous circumstances to generate cash, or may have to borrow the cash, to satisfy distribution requirements.
Dividends received by the Fund
from U.S. corporations in respect of any share of stock with a tax holding period of at least 46 days (91 days in the case of certain preferred stock)
extending before and after each dividend held in an unleveraged position and distributed and designated by the Fund (except for capital gain dividends
received from a regulated investment company) may be eligible for the 70% dividends-received deduction generally available to corporations under the
Code. Any corporate shareholder should consult its adviser regarding the possibility that its tax basis in its shares may be reduced for U.S. federal
income tax purposes by reason of “extraordinary dividends” received with respect to the shares and, to the extent reduced below zero, current
recognition of income may be required. In order to qualify for the deduction, corporate shareholders must meet the minimum holding period requirement
stated above with respect to their Fund shares, taking into account any holding period reductions from certain hedging or other transactions or
positions that diminish their risk of loss with respect to their Fund shares, and, if they borrow to acquire or otherwise incur debt attributable to
Fund shares, they may be denied a portion of the dividends-received deduction. The entire dividend, including the otherwise deductible amount, will be
included in determining the excess, if any, of a corporation’s adjusted current earnings over its alternative minimum taxable income, which may
increase a corporation’s alternative minimum tax liability. Upon request, the Fund will inform shareholders of the amounts of the qualifying
dividends.
To the extent that the Fund
invests in stock of foreign issuers, it may be subject to withholding and other taxes imposed by foreign countries, including taxes on interest,
dividends and capital gains with respect to such investments. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes
in some cases. The Fund does not expect to satisfy the requirements for passing through to its shareholders their pro rata shares of qualified foreign
taxes paid by the Fund, with the result that shareholders will not be entitled to a tax deduction or credit for such taxes on their own tax
returns.
If the Fund acquires any equity
interest (under Treasury regulations that may be promulgated in the future, generally including not only stock but also an option to acquire stock such
as is inherent in a convertible bond) in certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such
as interest, dividends, certain rents and royalties, or capital gains) or that hold at least 50% of their assets in investments producing such passive
income (“passive foreign investment companies”), the Fund could be subject to U.S. federal income tax and additional interest charges on
“excess distributions” received from such companies or on gain from the sale of stock in such companies, even if all income or gain actually
received by the Fund is timely distributed to its shareholders. The Fund would not be able to pass through to its shareholders any credit or deduction
for such a tax. Elections may generally be available that would ameliorate these adverse tax consequences, but such elections could require the Fund to
recognize taxable income or gain (subject to tax distribution requirements) without the concurrent receipt of cash. These investments could also result
in the treatment of capital gains from the sale of stock of passive foreign investment companies as ordinary income. The Fund may limit and/or manage
its holdings in passive foreign investment companies to limit its tax liability or maximize its return from these investments.
Options written or purchased by
the Fund and futures contracts purchased on certain securities and indices may cause the Fund to recognize gains or losses from marking-to-market even
though such options may not have lapsed, been closed out, or exercised or such futures contracts may not have been performed or closed out. The tax
rules applicable to these contracts may affect the characterization of
B-21
some capital gains and losses
recognized by the Fund as long-term or short-term. Additionally, the Fund may be required to recognize gain if an option, futures contract, short sale,
or other transaction that is not subject to the mark-to-market rules is treated as a “constructive sale” of an “appreciated financial
position” held by the Fund under Section 1259 of the Code. Any net mark-to-market gains and/or gains from constructive sales may also have to be
distributed to satisfy the distribution requirements referred to above even though the Fund may receive no corresponding cash amounts, possibly
requiring the Fund to dispose of portfolio securities or to borrow to obtain the necessary cash. Losses on certain options, futures and/or offsetting
positions (portfolio securities or other positions with respect to which the Fund’s risk of loss is substantially diminished by one or more
options or futures contracts) may also be deferred under the tax straddle rules of the Code, which may also affect the characterization of capital
gains or losses from straddle positions and certain successor positions as long-term or short-term. Certain tax elections may be available that would
enable the Fund to ameliorate some adverse effects of the tax rules described in this paragraph. The tax rules applicable to options, futures
contracts, short sales, and straddles may affect the amount, timing and character of the Fund’s income and gains or losses and hence of its
distributions to shareholders.
Realized losses incurred after
October 31, if so elected by the Fund, are deemed to arise on the first day of the following fiscal year. In addition, for U.S. federal income tax
purposes, the Fund is permitted to carry forward a net capital loss for any year to offset its capital gains, if any, for up to eight years following
the year of the loss. To the extent subsequent capital gains are offset by such losses, they would not result in U.S. federal income tax liability to
the Fund and are not expected to be distributed as such to shareholders.
A shareholder may realize a
capital gain or capital loss on the sale, exchange or redemption of shares of the Fund. The tax consequences of a sale, exchange or redemption depend
upon several factors, including the shareholder’s adjusted tax basis in the shares sold, exchanged or redeemed and the length of time the shares
have been held. Initial basis in the shares will be the actual cost of those shares (net asset value of Fund shares on purchase or reinvestment date).
Shareholders should consult their own tax advisers with reference to their individual circumstances to determine whether any particular transaction in
the Fund’s shares is properly treated as a sale for tax purposes, as the following discussion assumes, and the tax treatment of any gains or
losses recognized in such transactions. In general, if Fund shares are sold, redeemed or exchanged, the shareholder will recognize gain or loss equal
to the difference between the amount realized on the sale and the shareholder’s adjusted tax basis in the shares. Such gain or loss generally will
be treated as long-term capital gain or loss if the shares were held for more than one year and otherwise generally will be treated as short-term
capital gain or loss. Any loss realized by shareholders upon the sale, redemption or exchange of shares within six months of the date of their purchase
will generally be treated as a long-term capital loss to the extent of any distributions of net long-term capital gains with respect to such shares.
Moreover, a loss on a sale, exchange or redemption of Fund shares will be disallowed if shares of the Fund are purchased within 30 days before or after
the shares are sold, exchanged or redeemed. Individual shareholders may generally deduct in any year only $3,000 of capital losses that are not offset
by capital gains and remaining losses may be carried over to future years. Corporations may generally deduct capital losses only against capital gains
with certain carryovers for excess losses.
Under Treasury regulations, if a
shareholder recognizes a loss with respect to Fund shares of $2 million or more for an individual shareholder, or $10 million or more for a corporate
shareholder, in any single taxable year (or greater amounts over a combination of years), the shareholder must file with the Internal Revenue Service a
disclosure statement on Form 8886. Shareholders who own portfolio
B-22
securities directly are in
many cases excepted from this reporting requirement but, under current guidance, shareholders of regulated investment companies are not excepted. A
shareholder who fails to make the required disclosure to the IRS may be subject to substantial penalties. The fact that a loss is reportable under
these regulations does not affect the legal determination of whether or not the taxpayer’s treatment of the loss is proper. Shareholders should
consult with their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
Shareholders that are exempt from
U.S. federal income tax, such as retirement plans that are qualified under Section 401 of the Code, generally are not subject to U.S. federal income
tax on Fund dividends or distributions or on sales or exchanges of Fund shares unless the acquisition of the Fund shares was debt-financed. A plan
participant whose retirement plan invests in the Fund generally is not taxed on Fund dividends or distributions received by the plan or on sales or
exchanges of Fund shares by the plan for U.S. federal income tax purposes. However, distributions to plan participants from a retirement plan account
generally are taxable as ordinary income and different tax treatment, including penalties on certain excess contributions and deferrals, certain
pre-retirement and post-retirement distributions and certain prohibited transactions, is accorded to accounts maintained as qualified retirement plans.
Shareholders should consult their tax advisers for more information.
For shareholders who fail to
furnish to the Fund their social security or taxpayer identification numbers and certain related information or who fail to certify that they are not
subject to backup withholding, dividends, distributions of capital gains and redemption proceeds paid by the Fund will be subject to U.S. federal 28%
“backup withholding” requirement. In addition, the Fund may be required to backup withhold if it receives notice from the IRS or a broker
that the number provided is incorrect or backup withholding is applicable as a result of previous underreporting of interest or dividend income. If the
withholding provisions are applicable, any such dividends or capital gain distributions to these shareholders, whether taken in cash or reinvested in
additional shares, and any redemption proceeds will be reduced by the amounts required to be withheld.
The foregoing discussion relates
solely to U.S. federal income tax law as applicable to shareholders who are U.S. persons (i.e., U.S. citizens or residents, domestic corporations and
partnerships, and certain trusts and estates) and who hold their shares as capital assets and is not intended to be a complete discussion of all
federal tax consequences. Except as otherwise provided, this discussion does not address the special tax rules that may be applicable to particular
types of investors, such as financial institutions, insurance companies, securities dealers or tax-exempt or tax-deferred plans, accounts or entities.
Shareholders who are not U.S. persons may be subject to a non-resident alien U.S. withholding tax at the rate of 30% or at a lower treaty rate on
amounts treated as ordinary dividends from the Fund (other than certain dividends derived from short-term capital gains and qualified interest income
of the Fund currently only for certain taxable years of the Fund commencing prior to January 1, 2008 and only if the Fund chooses to make a specific
designation relating to such dividends) and, unless an effective IRS Form W-8 BEN or other authorized certificate is on file, to backup withholding at
the rate of 28% on certain other payments from the Fund. The Fund does not expect to be a “U.S. real property holding corporation” as defined
in section 897(c)(2) of the Code and, therefore, does not expect to be subject to look-through rules for gains from the sale or exchange of U.S. real
property interests. If the Fund were a U.S. real property holding corporation, certain distributions by the Fund to non-U.S. shareholders would be
subject to U.S. federal withholding tax at a rate of up to 35% and non-U.S. shareholders owning 5% or more of the Fund within one year of certain
distributions would be required to file a U.S. federal income tax return to report such gains. Shareholders are advised to consult with their tax
advisers concerning the application of federal, state, local and foreign taxes to an investment in the Fund.
B-23
FINANCIAL STATEMENTS
The Fund’s financial
statements for the year ended December 31, 2007, including the financial highlights for each of the five fiscal years in the period ended December 31,
2007, appearing in the 2007 Annual Report to Shareholders and the report thereon of PricewaterhouseCoopers LLP, independent registered public
accounting firm, appearing therein, are incorporated by reference in this Statement of Additional Information.
B-24