UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file Number 811-03171
Value Line U.S. Government Securities Fund, Inc.
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(Exact name of registrant as specified in charter)
220 East 42nd Street, New York, N.Y. 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-907-1500
Date of fiscal year end: August 31, 2006
Date of reporting period: August 31, 2006
Item I. Reports to Stockholders.
A copy of the Annual Report to Stockholders for the period ended 8/31/06
is included with this Form.
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ANNUAL REPORT
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August 31, 2006
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Value Line
U.S. Government Securities
Fund, Inc.
[LOGO]
----------
VALUE LINE
No-Load
Mutual
Funds
Value Line U.S. Government Securities Fund, Inc.
To Our Value Line U.S. Government
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To Our Shareholders:
During the fiscal year ending August 31, 2006, the Federal Reserve Board
continued to maintain a restrictive monetary policy, raising interest rates to
deter inflation and inflationary expectations. The Federal Reserve's key
monetary tool, the Federal Funds rate, was pushed up to 5.25%, from 3.50% at the
beginning of the period.
Such a large move higher in the Federal Funds rate caused bond prices to fall
and yields to rise throughout the maturity spectrum. During the period from
August 31, 2005 to August 31, 2006, the 2-year Treasury note rose from 3.82% to
4.78%, and the 10-year Treasury note climbed from 4.02% to 4.73%.
Strong economic growth plus rising energy and commodity prices caused the
Federal Reserve to tighten policy and raise rates. The strong moves in energy
and commodity prices especially concerned the Federal Reserve, since its mandate
is to fight such inflationary forces.
During this bearish period for the bond market, your Fund kept a shorter risk
profile than usual, relying on a larger cash position and reducing exposure to
longer maturities, particularly those securities with a maturity between 10 and
30 years. The Fund managed to attain a positive return of 1.33% for the period,
which lagged the 2.18% return of the Fund's benchmark, the Lehman Brothers
Intermediate U.S. Government Bond Index(1). This slight underperformance was due
to the fact that the Fund's return includes a charge for expenses and fees,
while the Lehman Brothers Intermediate U.S. Government Bond Index is not a
direct investment and therefore has no expenses or fees.
Currently, the combination of high energy prices and higher interest rates has
brought about some slowing of the economy. In addition, the housing market has
begun to weaken and all of this has put pressure on consumer spending.
Therefore, looking ahead, the economy should continue to soften and energy and
commodity prices should decline somewhat as demand lessens. This development
should cause the Federal Reserve to end their interest rate hikes. If the
economy softens further as we expect and inflation stays under control, the
Federal Reserve could cut interest rates in 2007.
As a result, going forward your Fund's strategy will be to increase its risk
profile and extend maturities on the belief that a softer economy will cause
interest rates to fall and bond prices to rally. The Fund has already taken the
first steps in carrying out this more bullish strategy by reducing its cash
position and redeploying the funds in government issues and agency
mortgage-backed securities further out in maturity.
Your Fund's long-term strategy remains generating high income consistent with
safety of principal by investing in U.S. Government securities, representing the
highest level of safety. Additionally, we control risk by limiting the
portfolio's average maturity to a maximum of 10 years, and by maintaining a
well-diversified portfolio. These measures, we believe, will protect the Fund
from dramatic swings in value caused by gyrating interest rates and produce more
stable and consistent performance.
Along with the intermediate-term maturity structure, we continue to emphasize a
diversified allocation toward Treasury, agency and mortgage-backed securities.
We believe this will position the Fund for competitive performance going
forward. We appreciate your continued support.
Sincerely,
/s/ Jean Bernhard Buttner
Jean Bernhard Buttner
Chairman and President
October 10, 2006
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(1) The Lehman Brothers Intermediate U.S. Government Bond Index represents the
intermediate maturities (1-10 years) of the U.S. Treasury and U.S. Agency
segment of the fixed-income market. The returns for the Index do not
reflect charges, expenses, or taxes, and it is not possible to directly
invest in this Index
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2
Value Line U.S. Government Securities Fund, Inc.
Securities Fund Shareholders
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Economic Observations
The economy left the starting gate quickly this year, with the nation's gross
domestic product rising by a scintillating, but clearly unsustainable, 5.6% in
the opening quarter. However, higher oil prices, further monetary tightening by
the Federal Reserve, and faltering housing demand then combined to slow things
down materially during the April-through-June period, as GDP growth eased to
less than half the first-quarter rate.
This slower pace of improvement then continued in the third quarter. What's
more, we think economic growth of no more than 2.0%-2.5% will be sustained in
the fourth quarter and through 2007. That should be a sufficient rate of
strength to keep earnings moving higher next year, but a moderate enough pace to
keep inflation in check over this time period.
Helping to sustain this modest economic improvement are likely to be fairly
solid levels of activity in the capital goods sector, additional gains in
retailing, and a likely relaxation in Federal Reserve monetary policy in 2007.
Reining in economic growth is likely to be a weakening housing market. A severe
contraction in housing demand still seems unlikely, however, given the
prospective decline in short-term borrowing costs next year and the expected
relative stability in mortgage rates.
Moderating U.S. gross domestic product growth and an accompanying modest level
of inflation would have positive ramifications for the stock and bond markets,
in our view.
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3
Value Line U.S. Government Securities Fund, Inc.
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The following graph compares the performance of Value Line U.S. Government
Fund, Inc. to that of the Lehman Brothers Intermediate U.S. Government Bond
Index. Value Line U.S. Government Fund, Inc. is a professionally managed mutual
fund, while the Index is not available for investment and is unmanaged. The
returns for the Index do not reflect charges, expenses or taxes but do include
the reinvestment of dividends. The comparison is shown for illustrative
purposes only.
Comparison of a change in Value of a $10,000 Investment in the Value Line U.S.
Government Fund, Inc.
and the Lehman Brothers Intermediate U.S. Government Bond Index*
[The table below was represented as a line chart in the printed material.]
Lehman Brothers
Value Line U.S. Government Intermediate U.S.
Date Securities Fund, Inc. Government Bond Index
---- --------------------- ---------------------
9/1/1996 10,000 10,000
11/30/1996 10,550 10,420
2/28/1997 10,504 10,420
5/31/1997 10,597 10,559
8/31/1997 10,900 10,805
11/30/1997 11,329 11,074
2/28/1998 11,511 11,298
5/31/1998 11,676 11,465
8/31/1998 12,022 11,806
11/30/1998 12,231 12,064
2/28/1999 12,113 11,998
5/31/1999 12,122 12,037
8/31/1999 12,002 12,072
11/30/1999 12,190 12,209
2/29/2000 12,168 12,230
5/31/2000 12,224 12,397
8/31/2000 12,785 12,820
11/30/2000 13,219 13,212
2/28/2001 13,859 13,749
5/31/2001 13,876 13,862
8/31/2001 14,297 14,291
11/30/2001 14,577 14,647
2/28/2002 14,700 14,760
5/31/2002 14,853 14,913
8/31/2002 15,561 15,560
11/30/2002 15,635 15,691
2/28/2003 16,144 16,126
5/31/2003 16,486 16,429
8/31/2003 15,927 16,033
11/30/2003 16,122 16,221
2/29/2004 16,480 16,592
5/31/2004 16,110 16,282
8/31/2004 16,531 16,686
11/30/2004 16,492 16,638
2/28/2005 16,615 16,657
5/31/2005 16,889 16,943
8/31/2005 17,004 17,041
11/30/2005 16,778 16,908
2/28/2006 16,955 17,012
5/31/2006 16,814 16,981
8/31/2006 17,231 17,382
* The Lehman Brothers Intermediate U.S. Government Bond Index is
representative of securities issued by the U.S. Government. It includes
fixed-rate debt securities with maturities between one and ten years. The
returns for the Index do not reflect charges, expenses, or taxes, which
are deducted from the Fund's returns and it is not possible to directly
invest in this unmanaged Index.
Performance Data:**
Average Annual Total Growth of an Assumed
Return Investment of $10,000
---------------------- ----------------------
1 year ended 8/31/06 .......... 1.33% $10,133
5 years ended 8/31/06 ......... 3.80% $12,052
10 years ended 8/31/06 ......... 5.59% $17,231
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** 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.
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4
Value Line U.S. Government Securities Fund, Inc.
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FUND EXPENSES (unaudited):
Example
As a shareholder of the Fund, you incur ongoing costs, including management
fees; distribution and service (12b-1) fees; and other Fund expenses. This
Example is intended to help you understand your ongoing costs (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period (March 1, 2006 through August 31, 2006).
Actual Expenses
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example an $8,600
account value divided by $1,000=8.6), then multiply the result by the number in
the first line under the heading "Expenses Paid During Period" to estimate the
expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the table is
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if transactional
costs were included your costs would have been higher.
Expenses* paid
Beginning Ending during period
account value account value 3/1/06 thru
3/1/06 8/31/06 8/31/06
--------------- --------------- ---------------
Actual ........................................... $ 1,000.00 $ 1,016.20 $ 4.83
Hypothetical (5% return before expenses) ......... $ 1,000.00 $ 1,020.41 $ 4.84
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* Expenses are equal to the Fund's annualized expense ratio of 0.95%
multiplied by the average account value over the period, multiplied by
184/365 to reflect the one-half period.
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5
Value Line U.S. Government Securities Fund, Inc.
Portfolio Highlights at August 31, 2006 (unaudited)
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Ten Largest Holdings
Percentage of
Principal Fund's
Issue Amount Value Net Assets
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Federal National Mortgage Association, 6.45%, 4/1/08 .................. $10,000,000 $10,003,130 10.3%
Federal Home Loan Bank, 7.45%, 2/3/20 ................................. $ 3,000,000 $ 3,692,976 3.8%
Federal Farm Credit Bank, 5.70%, 7/3/17 ............................... $ 3,000,000 $ 3,099,795 3.2%
Federal Home Loan Bank, 4.43%, 4/7/08 ................................. $ 3,000,000 $ 2,970,855 3.1%
U.S. Treasury Notes, 4.00%, 11/15/12 .................................. $ 3,000,000 $ 2,887,383 3.0%
Federal Farm Credit Bank, 6.03%, 5/7/08 ............................... $ 2,000,000 $ 2,029,984 2.1%
Federal Home Loan Mortgage Corporation, 4.50%, 7/15/13 ................ $ 2,000,000 $ 1,935,140 2.0%
Federal Home Loan Mortgage Corporation Gold PC, 6.00%, 3/1/33 ......... $ 1,848,617 $ 1,857,964 1.9%
Federal Home Loan Mortgage Corporation, 5.50%, 9/15/11 ................ $ 1,500,000 $ 1,531,896 1.6%
Morgan Stanley & Co., Repurchase Agreement, 5.12%, 9/1/06 ............. $ 1,500,000 $ 1,500,000 1.5%
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Asset Allocation - Percentage of Fund's Net Assets
[The following table was represented as a pie chart in the printed material.]
Short-Term, Cash & Other 2.5%
U.S. Treasury Obligations 8.4%
U.S. Government Agency Obligations 89.1%
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Coupon Distribution
Percentage of
Fund's
Investments
- ---------------------------------------
Less than 4% ......... 4.0%
4 - 4.99% ............ 31.4%
5 - 5.99% ............ 32.8%
6 - 6.99% ............ 24.4%
7 - 7.99% ............ 6.0%
8 - 8.99% ............ 1.4%
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6
Value Line U.S. Government Securities Fund, Inc.
Schedule of Investments August 31, 2006
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Principal Maturity
Amount Rate Date Value
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U.S. TREASURY OBLIGATIONS (8.4%)
$ 1,000,000 U.S. Treasury Notes .................................................. 4.00 % 3/15/10 $ 977,696
3,000,000 U.S. Treasury Notes .................................................. 4.00 11/15/12 2,887,383
1,000,000 U.S. Treasury Notes .................................................. 4.00 2/15/14 954,454
1,062,540 U.S. Treasury Notes(1) ............................................... 1.63 1/15/15 1,012,195
1,000,000 U.S. Treasury Notes .................................................. 4.50 11/15/15 982,110
1,000,000 U.S. Treasury Notes .................................................. 8.75 5/15/17 1,326,641
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8,062,540 TOTAL U.S. TREASURY OBLIGATIONS (Cost $8,210,502)..................... 8,140,479
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U.S. GOVERNMENT AGENCY OBLIGATIONS (89.1%) FEDERAL FARM CREDIT BANK
(8.4%)
2,000,000 Federal Farm Credit Bank ............................................. 6.03 5/7/08 2,029,984
1,000,000 Federal Farm Credit Bank ............................................. 6.82 3/16/09 1,042,824
1,000,000 Federal Farm Credit Bank ............................................. 4.85 10/25/12 989,136
1,000,000 Federal Farm Credit Bank ............................................. 5.30 6/22/15 966,732
3,000,000 Federal Farm Credit Bank ............................................. 5.70 7/3/17 3,099,795
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8,000,000 TOTAL FEDERAL FARM CREDIT BANK (Cost $8,234,884) ..................... 8,128,471
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FEDERAL HOME LOAN BANK (16.6%)
500,000 Federal Home Loan Bank ............................................... 3.50 11/15/07 490,309
1,000,000 Federal Home Loan Bank ............................................... 4.00 3/10/08 984,431
3,000,000 Federal Home Loan Bank ............................................... 4.43 4/7/08 2,970,855
1,000,000 Federal Home Loan Bank ............................................... 6.01 4/22/08 1,014,654
1,000,000 Federal Home Loan Bank ............................................... 4.25 5/16/08 986,864
1,000,000 Federal Home Loan Bank ............................................... 4.10 6/13/08 983,892
1,000,000 Federal Home Loan Bank ............................................... 5.25 11/14/08 1,003,782
1,000,000 Federal Home Loan Bank ............................................... 6.21 6/2/09 1,029,885
1,000,000 Federal Home Loan Bank ............................................... 5.38 7/17/09 1,009,540
1,000,000 Federal Home Loan Bank ............................................... 4.38 3/17/10 979,403
1,000,000 Federal Home Loan Bank ............................................... 4.38 9/17/10 976,827
3,000,000 Federal Home Loan Bank ............................................... 7.45 2/3/20 3,692,976
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15,500,000 TOTAL FEDERAL HOME LOAN BANK (Cost $16,019,411) ...................... 16,123,418
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FEDERAL HOME LOAN MORTGAGE CORPORATION (27.8%)
1,000,000 Federal Home Loan Mortgage Corporation ............................... 4.26 7/19/07 991,315
1,000,000 Federal Home Loan Mortgage Corporation ............................... 3.25 11/2/07 978,251
802,126 Federal Home Loan Mortgage Corporation Gold PC Pool #M90840 .......... 3.00 9/1/08 774,888
1,000,000 Federal Home Loan Mortgage Corporation ............................... 4.25 7/15/09 979,788
1,000,000 Federal Home Loan Mortgage Corporation ............................... 4.00 12/15/09 969,515
See Notes to Financial Statements.
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7
Value Line U.S. Government Securities Fund, Inc.
Schedule of Investments
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Principal Maturity
Amount Rate Date Value
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$ 1,000,000 Federal Home Loan Mortgage Corporation ............................... 4.13% 7/12/10 $ 969,285
1,000,000 Federal Home Loan Mortgage Corporation ............................... 5.25 7/18/11 1,008,979
1,500,000 Federal Home Loan Mortgage Corporation ............................... 5.50 9/15/11 1,531,896
1,000,000 Federal Home Loan Mortgage Corporation ............................... 4.50 5/14/12 966,531
1,000,000 Federal Home Loan Mortgage Corporation ............................... 5.13 7/15/12 1,002,455
1,000,000 Federal Home Loan Mortgage Corporation ............................... 4.75 5/6/13 963,123
2,000,000 Federal Home Loan Mortgage Corporation ............................... 4.50 7/15/13 1,935,140
856,186 Federal Home Loan Mortgage Corporation REMIC Trust
Series 2849 Class VA ............................................... 5.00 8/15/15 842,759
27,086 Federal Home Loan Mortgage Corporation Gold PC Pool #E92226 .......... 5.00 11/1/17 26,608
447,027 Federal Home Loan Mortgage Corporation Gold PC Pool #E93499 .......... 5.00 12/1/17 439,127
30,539 Federal Home Loan Mortgage Corporation Gold PC Pool #E92829 .......... 5.00 12/1/17 29,999
732,500 Federal Home Loan Mortgage Corporation REMIC Trust
Series 2892 Class DC ............................................... 4.50 12/15/17 710,380
68,337 Federal Home Loan Mortgage Corporation Gold PC Pool #B17398 .......... 4.50 12/1/19 65,694
484,479 Federal Home Loan Mortgage Corporation Gold PC Pool #G18044 .......... 4.50 3/1/20 465,426
267,068 Federal Home Loan Mortgage Corporation Gold PC Pool #B18034 .......... 4.50 4/1/20 256,565
70,354 Federal Home Loan Mortgage Corporation Gold PC Pool #J00118 .......... 5.00 10/1/20 68,893
880,806 Federal Home Loan Mortgage Corporation Gold PC Pool #J00139 .......... 5.00 10/1/20 862,524
1,009,112 Federal Home Loan Mortgage Corporation REMIC Trust
Series 2773 Class DA ............................................... 5.00 6/15/22 995,112
957,611 Federal Home Loan Mortgage Corporation REMIC Trust
Series 2937 Class JC ............................................... 5.00 9/15/22 952,671
705,017 Federal Home Loan Mortgage Corporation Gold PC Pool #C90684 .......... 4.50 5/1/23 669,421
1,026,774 Federal Home Loan Mortgage Corporation REMIC Trust
Series 3147 Class YE ............................................... 5.50 7/15/24 1,024,700
1,000,000 Federal Home Loan Mortgage Corporation ............................... 6.75 3/15/31 1,205,637
658,414 Federal Home Loan Mortgage Corporation REMIC Trust
Series 2645 Class NA ............................................... 3.50 9/15/31 618,604
499,037 Federal Home Loan Mortgage Corporation REMIC Trust
Series 2594 Class OR ............................................... 4.25 6/15/32 482,570
1,848,617 Federal Home Loan Mortgage Corporation Gold PC Pool #C77717 .......... 6.00 3/1/33 1,857,964
1,129,985 Federal Home Loan Mortgage Corporation Gold PC Pool #A29526 .......... 5.00 1/1/35 1,084,335
611,774 Federal Home Loan Mortgage Corporation Gold PC Pool #A29633 .......... 5.00 1/1/35 587,060
784,031 Federal Home Loan Mortgage Corporation Pool #783022(2) ............... 4.42 2/1/35 763,997
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TOTAL FEDERAL HOME LOAN MORTGAGE
27,396,880 CORPORATION (Cost $27,461,031) ..................................... 27,081,212
----------- -----------
See Notes to Financial Statements.
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8
Value Line U.S. Government Securities Fund, Inc.
August 31, 2006
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Principal Maturity
Amount Rate Date Value
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FEDERAL NATIONAL MORTGAGE ASSOCIATION (33.8%)
$ 1,000,000 Federal National Mortgage Association ....................... 4.10% 6/14/07 $ 990,837
10,000,000 Federal National Mortgage Association ....................... 6.45 4/1/08 10,003,130
52,621 Federal National Mortgage Association Pool #254243 .......... 6.00 2/1/09 52,588
121,737 Federal National Mortgage Association Pool #254273 .......... 5.00 3/1/09 120,151
579,497 Federal National Mortgage Association Pool #254956 .......... 4.00 11/1/10 555,240
1,000,000 Federal National Mortgage Association ....................... 4.50 2/15/11 981,023
363,318 Federal National Mortgage Association Pool #255325 .......... 4.50 7/1/11 351,913
1,000,000 Federal National Mortgage Association ....................... 5.00 4/16/15 972,632
174,458 Federal National Mortgage Association Pool #511823 .......... 5.50 5/1/16 174,432
137,301 Federal National Mortgage Association Pool #615289 .......... 5.50 12/1/16 137,281
351,602 Federal National Mortgage Association Pool #622373 .......... 5.50 12/1/16 351,550
170,680 Federal National Mortgage Association Pool #631328 .......... 5.50 2/1/17 170,521
267,055 Federal National Mortgage Association Pool #623503 .......... 6.00 2/1/17 270,295
24,712 Federal National Mortgage Association Pool #643277 .......... 5.50 4/1/17 24,689
25,069 Federal National Mortgage Association Pool #638247 .......... 5.50 5/1/17 25,045
459,334 Federal National Mortgage Association Pool #254684 .......... 5.00 3/1/18 451,202
143,847 Federal National Mortgage Association Pool #685183 .......... 5.00 3/1/18 141,300
570,804 Federal National Mortgage Association Pool #695828 .......... 5.00 4/1/18 560,698
158,023 Federal National Mortgage Association Pool #703936 .......... 5.00 5/1/18 155,225
704,632 Federal National Mortgage Association Pool #703617 .......... 5.00 7/1/18 692,156
713,887 Federal National Mortgage Association Pool #790984 .......... 5.00 7/1/19 700,376
770,065 Federal National Mortgage Association Pool #786915 .......... 5.00 8/1/19 755,491
943,832 Federal National Mortgage Association Pool #844207 .......... 5.00 11/1/20 924,747
504,559 Federal National Mortgage Association REMIC Trust
Series 2003-28 Class KA ................................... 4.25 3/25/22 486,567
463,751 Federal National Mortgage Association REMIC Trust
Series 2003-38 Class TC ................................... 5.00 3/25/23 455,847
235,292 Federal National Mortgage Association Pool #412682 .......... 6.00 3/1/28 236,872
66,529 Federal National Mortgage Association Pool #424691 .......... 6.50 4/1/28 67,947
191,857 Federal National Mortgage Association Pool #425239 .......... 6.50 4/1/28 195,946
1,000,000 Federal National Mortgage Association ....................... 7.25 5/15/30 1,270,122
1,000,000 Federal National Mortgage Association ....................... 6.63 11/15/30 1,186,323
1,718 Federal National Mortgage Association Pool #568625 .......... 7.50 1/1/31 1,779
102,498 Federal National Mortgage Association Pool #571090 .......... 7.50 1/1/31 106,134
1,937 Federal National Mortgage Association Pool #573935 .......... 7.50 3/1/31 2,005
63,993 Federal National Mortgage Association Pool #629297 .......... 6.50 2/1/32 65,232
544,538 Federal National Mortgage Association Pool #626440 .......... 7.50 2/1/32 562,832
See Notes to Financial Statements.
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9
Value Line U.S. Government Securities Fund, Inc.
Schedule of Investments
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Principal Maturity
Amount Rate Date Value
- ------------------------------------------------------------------------------------------------------------------
$ 78,004 Federal National Mortgage Association Pool #634996 ............. 6.50% 5/1/32 $ 79,460
108,348 Federal National Mortgage Association Pool #254383 ............. 7.50 6/1/32 111,988
404,763 Federal National Mortgage Association Pool #254476 ............. 5.50 9/1/32 398,786
11,788 Federal National Mortgage Association Pool #688539 ............. 5.50 3/1/33 11,610
542,860 Federal National Mortgage Association Pool #650386 ............. 5.00 7/1/33 522,254
579,683 Federal National Mortgage Association Pool #726889 ............. 5.50 7/1/33 570,903
601,357 Federal National Mortgage Association Pool #759028 ............. 5.50 1/1/34 592,248
281,129 Federal National Mortgage Association Pool #761913 ............. 5.50 2/1/34 276,591
329,858 Federal National Mortgage Association Pool #763393 ............. 5.50 2/1/34 324,862
307,519 Federal National Mortgage Association Pool #769862 ............. 5.50 2/1/34 302,555
31,261 Federal National Mortgage Association Pool #769682 ............. 5.00 3/1/34 30,034
26,117 Federal National Mortgage Association Pool #778141 ............. 5.00 5/1/34 25,091
455,671 Federal National Mortgage Association Pool #773586 ............. 5.50 6/1/34 448,315
562,807 Federal National Mortgage Association Pool #255311 ............. 6.00 7/1/34 564,477
31,753 Federal National Mortgage Association Pool #258149 ............. 5.50 9/1/34 31,240
4,871 Federal National Mortgage Association Pool #789150 ............. 5.00 10/1/34 4,680
768,779 Federal National Mortgage Association Pool #255496 ............. 5.00 11/1/34 738,598
84,163 Federal National Mortgage Association Pool #797154 ............. 5.50 11/1/34 82,804
184,829 Federal National Mortgage Association Pool #801063 ............. 5.50 11/1/34 181,845
325,182 Federal National Mortgage Association Pool #803675 ............. 5.50 12/1/34 319,932
427,654 Federal National Mortgage Association Pool #804683 ............. 5.50 12/1/34 420,750
783,801 Federal National Mortgage Association Pool #815813(2) .......... 4.57 2/1/35 769,093
58,863 Federal National Mortgage Association Pool #255580 ............. 5.50 2/1/35 57,912
783,770 Federal National Mortgage Association Pool #735224 ............. 5.50 2/1/35 771,899
1,000,000 Federal National Mortgage Association Pool #896016 ............. 6.00 8/1/36 1,001,385
- ------------ -----------
TOTAL FEDERAL NATIONAL MORTGAGE
32,683,976 ASSOCIATION (Cost $33,073,234) ............................... 32,839,440
- ------------ -----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (2.5%)
266,158 Government National Mortgage Association Pool #003645 .......... 4.50 12/20/19 256,515
14,375 Government National Mortgage Association Pool #541349 .......... 6.00 4/15/31 14,533
31,882 Government National Mortgage Association Pool #557681 .......... 6.00 8/15/31 32,234
206,372 Government National Mortgage Association Pool #548880 .......... 6.00 12/15/31 208,650
160,389 Government National Mortgage Association Pool #551762 .......... 6.00 4/15/32 162,178
66,433 Government National Mortgage Association Pool #582415 .......... 6.00 11/15/32 67,174
380,367 Government National Mortgage Association Pool #604485 .......... 6.00 7/15/33 384,440
215,478 Government National Mortgage Association Pool #622603 .......... 6.00 11/15/33 217,786
10,898 Government National Mortgage Association Pool #429786 .......... 6.00 12/15/33 11,015
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10
Value Line U.S. Government Securities Fund, Inc.
August 31, 2006
- --------------------------------------------------------------------------------
Principal Maturity
Amount Rate Date Value
- ---------------------------------------------------------------------------------------------------------------------
$ 488,374 Government National Mortgage Association Pool #605025 .......... 6.00% 2/15/34 $ 493,643
12,742 Government National Mortgage Association Pool #626480 .......... 6.00 2/15/34 12,879
115,338 Government National Mortgage Association Pool #610944 .......... 5.50 4/15/34 114,381
153,765 Government National Mortgage Association Pool #605245 .......... 5.50 6/15/34 152,489
316,680 Government National Mortgage Association Pool #583008 .......... 5.50 6/15/34 314,052
- ------------ ------------
TOTAL GOVERNMENT NATIONAL MORTGAGE
2,439,251 ASSOCIATION (Cost $2,475,406) ................................ 2,441,969
- ------------ ------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
86,020,107 (Cost $87,263,966) ........................................... 86,614,510
- ------------ ------------
TOTAL INVESTMENT SECURITIES (97.5%)
94,082,647 (Cost $95,474,468) ........................................... 94,754,989
- ------------ ------------
REPURCHASE AGREEMENTS (1.5%)
1,500,000 With Morgan Stanley & Co., 5.12%, dated 8/31/06, due 9/1/06, delivery value
- ------------ $1,500,213 (collateralized by $1,545,000 U.S. Treasury Notes 4.50%, due 2/28/11
with a value of $1,533,171) (Cost $1,500,000)..................................... 1,500,000
------------
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES (1.0%) .............................. 950,352
------------
NET ASSETS (100.0%) ................................................................ $ 97,205,341
============
NET ASSET VALUE OFFERING AND REDEMPTION PRICE, PER
OUTSTANDING SHARE ($97,205,341 (divided by) 8,547,919 shares outstanding)......... $ 11.37
============
(1) Treasury Inflation Protected Security (TIPS).
(2) Adjustable rate security. The rate shown is as of August 31, 2006.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
11
Value Line U.S. Government Securities Fund, Inc.
Statement of Assets and Liabilities
at August 31, 2006
- --------------------------------------------------------------------------------
Assets:
Investment securities, at value
(Cost - $95,474,468) ....................................... $ 94,754,989
Repurchase agreement
(Cost - $1,500,000) ........................................ 1,500,000
Cash .......................................................... 32,576
Interest receivable ........................................... 1,090,491
Receivable for securities sold ................................ 970,958
Receivable for capital shares sold ............................ 737
------------
Total Assets ............................................... 98,349,751
------------
Liabilities:
Payable for securities purchased .............................. 955,363
Payable for capital shares repurchased ........................ 26,289
Accrued expenses:
Advisory fee ............................................... 41,352
Service and distribution plan fees ......................... 12,406
Directors' fees and expenses ............................... 3,646
Other ...................................................... 105,354
------------
Total Liabilities .......................................... 1,144,410
------------
Net Assets .................................................... $ 97,205,341
============
Net assets consist of:
Capital stock, at $1 par value
(authorized 100,000,000,
outstanding 8,547,919 shares) .............................. $ 8,547,919
Additional paid-in capital .................................... 91,375,530
Undistributed net investment income ........................... 676,489
Accumulated net realized loss on
investments ................................................ (2,675,118)
Net unrealized depreciation of
investments ................................................ (719,479)
------------
Net Assets .................................................... $ 97,205,341
============
Net Asset Value, Offering and
Redemption Price per Outstanding
Share ($97,205,341 (divided by) 8,547,919
shares outstanding) ........................................ $ 11.37
============
Statement of Operations
Year Ended August 31, 2006
- --------------------------------------------------------------------------------
Investment Income:
Interest income ............................................... $ 5,031,502
============
Expenses:
Advisory fee .................................................. 516,275
Service and distribution plan fees ............................ 258,137
Printing and postage .......................................... 89,000
Transfer agent fees ........................................... 68,000
Auditing and legal fees ....................................... 50,500
Custodian fees ................................................ 41,531
Registration and filing fees .................................. 23,299
Directors' fees and expenses .................................. 12,900
Insurance ..................................................... 12,002
Telephone ..................................................... 6,501
Other ......................................................... 1,856
------------
Total Expenses Before Custody
Credits and Fees Waived ................................. 1,080,001
Less: Service and Distribution Plan
Fees Waived ............................................. (48,362)
Less: Custody Credits ...................................... (3,031)
------------
Net Expenses ............................................... 1,028,608
------------
Net Investment Income ......................................... 4,002,894
------------
Net Realized and Unrealized Gain
(Loss) on Investments:
Net Realized Loss .......................................... (281,849)
Change in Net Unrealized
Appreciation (Depreciation) ............................. (2,502,696)
------------
Net Realized Loss and Change in
Net Unrealized Appreciation
(Depreciation) on Investments .............................. (2,784,545)
------------
Net Increase in Net Assets from
Operations ................................................. $ 1,218,349
============
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12
Value Line U.S. Government Securities Fund, Inc.
Statement of Changes in Net Assets for the
Years Ended August 31, 2006 and August 31, 2005
- --------------------------------------------------------------------------------
Year Ended Year Ended
August 31, 2006 August 31, 2005
------------------------------------
Operations:
Net investment income ................................................ $ 4,002,894 $ 4,170,837
Net realized gain (loss) on investments .............................. (281,849) 1,193,238
Net change in unrealized appreciation (depreciation) on investments .. (2,502,696) (2,205,458)
--------------------------------
Net increase in net assets from operations ........................... 1,218,349 3,158,617
--------------------------------
Distributions to Shareholders:
Net investment income ................................................ (4,699,866) (4,535,933)
--------------------------------
Capital Share Transactions:
Proceeds from sale of shares ......................................... 4,191,300 5,655,477
Proceeds from reinvestment of distributions to shareholders .......... 4,047,219 3,874,153
Cost of shares repurchased ........................................... (19,691,484) (17,456,421)
--------------------------------
Net decrease from capital share transactions ......................... (11,452,965) (7,926,791)
--------------------------------
Total Decrease in Net Assets ........................................... (14,934,482) (9,304,107)
Net Assets:
Beginning of year .................................................... 112,139,823 121,443,930
--------------------------------
End of year .......................................................... $ 97,205,341 $ 112,139,823
================================
Undistributed net investment income, at end of year .................... $ 676,489 $ 1,192,176
================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
13
Value Line U.S. Government Securities Fund, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Value Line U.S. Government Securities 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 to obtain
maximum income without undue risk to principal. Capital preservation and
possible capital appreciation are secondary objectives.
The following significant accounting principles are in conformity with generally
accepted accounting principles for investment companies. Such policies are
consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results may differ from those estimates.
(A) Security Valuation: The Fund's investments are carried at value. With
assistance from an independent pricing service (the "Service"), portfolio
securities are valued at the midpoint between the latest available and
representative asked and bid prices on the basis of valuations provided by
dealers in such securities. Some of the general factors which may be considered
by the dealers in arriving at such valuations include the fundamental analytic
data relating to the security and an evaluation of the forces which influence
the market in which these securities are purchased and sold. Determination of
values may involve subjective judgment, as the actual market value of a
particular security can be established only by negotiation between the parties
in a sales transaction. The values for other portfolio securities are determined
on the valuation date by reference to valuations obtained from the Service which
determines valuations for normal institutional-size trading units of debt
securities, without exclusive reliance upon quoted prices. The Service takes
into account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data in determining valuations.
Short-term instruments with maturities of 60 days or less at the date of
purchase are valued at amortized cost, which approximates market value. Other
assets and securities for which market valuations are not readily available will
be valued at fair value by the Adviser pursuant to policies and procedures
adopted by the Board of Directors.
(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, it is the Fund's policy to mark-to-market
the collateral 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 and capital gains to its
shareholders. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board issued Interpretation No.
48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement No. 109" (the "Interpretation"). The Interpretation establishes for
all entities, including pass-through entities such as the Fund, a minimum
threshold for financial statement recognition of the benefit of positions taken
in filing tax returns (including whether an entity is taxable in a particular
jurisdiction), and requires certain expanded tax disclosures. The Interpretation
is effective for fiscal years beginning after December 15, 2006, and is to be
applied to all open tax years as of the date of effectiveness. Management has
recently begun to evaluate the application of the Interpretation to the Fund,
and is not in a position at this time to estimate the significance of its
impact, if any, on the Fund's financial statements.
- --------------------------------------------------------------------------------
14
Value Line U.S. Government Securities Fund, Inc.
August 31, 2006
- --------------------------------------------------------------------------------
(D) Security Transactions and Related Income: Security transactions are
accounted for on the date the securities are purchased or sold. Realized gains
and losses on securities transactions are determined using the identified cost
method. Interest income, adjusted for amortization of discount and premium, is
earned from settlement date and recognized on the accrual basis.
The Fund may invest in Treasury Inflation-Protection Securities (TIPS). The
principal value and interest payout of TIPS are periodically adjusted according
to the rate of inflation based on the Consumer Price Index. The adjustments for
principal and income due to the inflation are reflected in interest income in
the Statement of Operations.
(E) Representations and Indemnifications: In the normal course of business the
Fund enters into contracts that contain a variety of representations and
warranties which provide general indemnifications. The Fund's maximum exposure
under these arrangements is unknown, as this would involve future claims that
may be made against the Fund that have not yet occurred. However, based on
experience, the Fund expects the risk of loss to be remote.
2. Capital Share Transactions and Dividends to Shareholders
Transactions in capital stock were as follows:
Year Ended Year Ended
August 31, 2006 August 31, 2005
-----------------------------------
Shares sold .......................... 370,712 482,186
Shares issued in reinvestment of
dividends ......................... 357,558 332,235
Shares repurchased ................... (1,735,814) (1,487,920)
-----------------------------------
Net decrease ......................... (1,007,544) (673,499)
===================================
Dividends per share
from net investment
income ............................ $ .5150 $ .4600
-----------------------------------
Dividends and distributions to shareholders are recorded on the ex-dividend
date.
3. Purchases and Sales of Securities
Purchases and sales of investment securities, excluding short-term investments,
were as follows:
Year Ended
August 31, 2006
----------------
Purchases:
U.S. Treasury Obligations ................................. $ 6,167,890
U.S. Government Agency Obligations ........................ 14,820,337
------------
$ 20,988,227
============
Sales:
U.S. Treasury Obligations ................................. $ 6,486,172
U.S. Government Agency Obligations ........................ 22,604,764
------------
$ 29,090,936
============
4. Income Taxes
At August 31, 2006, information on the tax basis of investments is as follows:
Cost of investments for tax purposes .................... $ 97,123,024
============
Gross tax unrealized appreciation ....................... $ 788,448
Gross tax unrealized depreciation ....................... (1,656,483)
------------
Net tax unrealized depreciation on
investments .......................................... $ (868,035)
============
Undistributed ordinary income ........................... $ 825,045
============
Capital loss carryforward, expires
August 31, 2008 ...................................... $ 2,132,091
Capital loss carryforward, expires
August 31, 2012 ...................................... 11,348
Capital loss carryforward, expires
August 31, 2013 ...................................... 39,865
------------
Capital loss carryforward, at
August 31, 2006 ...................................... $ 2,183,304
============
During the year ended August 31, 2006, as permitted under federal income tax
regulations, the Fund elected to defer $491,814 of post-October net capital
losses to the next taxable year.
To the extent that current or future capital gains are offset by capital losses,
the Fund does not anticipate distributing any such gains to shareholders.
- --------------------------------------------------------------------------------
15
Value Line U.S. Government Securities Fund, Inc.
Notes to Financial Statements August 31, 2006
- --------------------------------------------------------------------------------
Net investment income and net realized gain (loss) differ for financial
statement and tax purposes primarily due to differing treatment of bond premiums
and paydown gains (losses). These permanent book-tax differences relating to the
current year were reclassified within the composition of the net asset accounts.
The Fund increased undistributed net investment income by $181,285 and increased
accumulated net realized loss by $181,285. Net assets were not affected by this
classification.
The tax composition of dividends paid during the year ended August 31, 2006 and
year ended August 31, 2005 is as follows:
August 31, August 31,
2006 2005
- --------------------------------------------------------------------------------
Ordinary Income ............................. $4,699,866 $4,535,933
---------------------------
5. Investment Advisory Fees, Service and Distribution Fees and Transactions
With Affiliates
An advisory fee of $516,275 was paid or payable to Value Line, Inc., the Fund's
investment adviser ("Adviser"), for the year ended August 31, 2006. This was
computed at the rate of 1|M/2 of 1% of the Fund's average daily net assets
during the year and was paid monthly.
The Adviser provides research, investment programs, and 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 Advisor 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. The Plan compensates Value
Line Securities, Inc., a wholly-owned subsidiary of the Adviser (the
"Distributor"), for 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. Fees amounting to $258,137 were paid or payable
to the Distributor under this Plan for the year ended August 31, 2006. Effective
March 7, 2006, the Distributor voluntarily waived 0.10% of the service and
distribution plan fee. The fee waiver amounted to $48,362. The Distributor has
no right to recoup previously waived amounts.
For the year ended August 31, 2006 the Fund's expenses were reduced by $3,031
under a custody credit arrangement with the Custodian.
Certain officers and directors of the Adviser and the Distributor are also
officers and directors of the Fund.
The Adviser and/or affiliated companies and the Value Line, Inc. Profit Sharing
and Savings Plan at August 31, 2006 owned 117,858 shares of the Fund's capital
stock, representing 1.38% of the outstanding shares. In addition, certain
officers and directors of the Fund owned 761 shares, representing less than 1%
of the outstanding shares.
- --------------------------------------------------------------------------------
16
Value Line U.S. Government Securities Fund, Inc.
Financial Highlights
- --------------------------------------------------------------------------------
Selected data for a share of capital stock outstanding throughout each year:
U.S. Government Securities Fund, Inc.
------------------------------------------------------------------------------
Years Ended August 31,
------------------------------------------------------------------------------
2006 2005 2004 2003 2002
==============================================================================
Net Asset Value, beginning of year ...... $ 11.74 $ 11.87 $ 11.84 $ 12.00 $ 11.51
------------------------------------------------------------------------------
Income (loss) from Investment Operations:
Net investment income ................... .47 .52 .41 .44 .50
Net gains or (losses) on securities
(both realized and unrealized) ......... (.32) (.19) .03 (.15) .49
------------------------------------------------------------------------------
Total income from investment operations . .15 .33 .44 .29 .99
------------------------------------------------------------------------------
Less dividends and distributions:
Dividends from net investment income .... (.52) (.46) (.41) (.45) (.50)
------------------------------------------------------------------------------
Net Asset Value, end of year ............ $ 11.37 $ 11.74 $ 11.87 $ 11.84 $ 12.00
==============================================================================
Total return ............................ 1.33% 2.86% 3.79% 2.35% 8.84%
==============================================================================
Ratios/Supplemental Data:
Net assets, end of year (in thousands) .. $ 97,205 $ 112,140 $ 121,444 $ 144,264 $ 155,659
Ratio of operating expenses to
average net assets(1) .................. 1.05%(2) 1.04% 0.98% 0.96% 0.92%
Ratio of net investment income to
average net assets ..................... 3.88% 3.60% 3.40% 3.57% 4.17%
Portfolio turnover rate ................. 22% 60% 35% 65% 168%
(1) Ratio reflects expenses grossed up for custody credit arrangement. The
ratio of expenses to average net assets, net of custody credits would have
been 1.04% for the year ended August 31, 2006 and would not have changed
for the years ended August 31, 2005, August 31, 2004, August 31, 2003 and
August 31, 2002.
(2) Ratio reflects expenses grossed up for the voluntary fee waiver of a
portion of the service and distribution plan by the Distributor. The ratio
of expenses to average net assets net of the voluntary fee waiver, but
exclusive of the custody credit arrangement, would have been 1.00% as of
August 31, 2006.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
17
Value Line U.S. Government Securities Fund, Inc.
Report of Independent Registered Public Accounting Firm
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders
of Value Line U.S. Government Securities 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 Value Line U.S. Government
Securities Fund, Inc. (the "Fund") at August 31, 2006, 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 the
standards of the Public Company Accounting Oversight Board (United States).
Those standards 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 August 31, 2006 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
New York, New York
October 20, 2006
- --------------------------------------------------------------------------------
18
Value Line U.S. Government Securities Fund, Inc.
- --------------------------------------------------------------------------------
FACTORS CONSIDERED BY THE INDEPENDENT DIRECTORS
IN APPROVING THE INVESTMENT ADVISORY AGREEMENT
FOR VALUE LINE U.S. GOVERNMENT SECURITIES FUND, INC. (unaudited)
The Investment Company Act of 1940 (the "1940 Act") requires the Board of
Directors, including a majority of Directors who are not interested persons of
the Fund, as that term is defined in the 1940 Act (the "Independent Directors"),
annually to consider the investment advisory agreement between the Fund and its
investment adviser, Value Line, Inc. ("Value Line") (the "Agreement"). As
required by the 1940 Act, the Board requested and Value Line provided such
information as the Board deemed to be reasonably necessary to evaluate the terms
of the Agreement. At meetings held throughout the year, including the meeting
specifically focused upon the review of the Agreement, the Independent Directors
met in executive sessions separately from the Non-Independent Directors of the
Fund and any officers of Value Line. In selecting Value Line and approving the
Agreement, the Independent Directors relied upon the assistance of counsel to
the Independent Directors.
Both in meetings which specifically addressed the approval of the Agreement and
at other meetings during the course of the year, the Board, including the
Independent Directors, received materials relating to Value Line's investment
and management services under the Agreement. These materials included
information on: (i) the investment performance of the Fund compared to a peer
group of funds ("Performance Universe") and its benchmark index, each as
classified by Lipper, Inc., an independent evaluation service ("Lipper"); (ii)
sales and redemption data with respect to the Fund; (iii) the general investment
outlook in the markets in which the Fund invests; (iv) arrangements with respect
to the distribution of the Fund's shares; (v) the allocation of the Fund's
brokerage, if any; and (vi) the overall quality and scope of services provided
by Value Line.
As part of the review of the Agreement, the Board requested, and Value Line
provided, additional information in order to evaluate the quality of Value
Line's services and the reasonableness of its fees under the Agreement. In a
separate executive session, the Independent Directors engaged in an extensive
review of the following information, which included data comparing: (i) the
Fund's average management fees, transfer agent/custodian fees, service fees
(including 12b-1 fees), and other non-management fees, to those incurred by a
peer group of funds consisting of the Fund, six other retail front-end load and
no-load intermediate U.S. government funds, and eight other retail front-end
load and no-load short-intermediate U.S. government funds, as classified by
Lipper ("Expense Group") and a peer group of funds consisting of the Fund, the
Expense Group and all other retail front-end load and no-load intermediate U.S.
government funds and short-intermediate U.S. government funds, excluding
outliers ("Expense Universe"); (ii) the Fund's average expense ratio to those of
its Expense Group and Expense Universe; (iii) the Fund's investment performance
to the average performance of the Performance Universe as well as the Lipper
Index; (iv) Value Line's financial results and conditions, including Value
Line's and certain of its affiliates' profitability from the services that have
been performed for the Fund as well as the Value Line family of funds; (v) the
Fund's current investment management staffing; and (vi) the Fund's potential for
achieving economies of scale.
The following summarizes matters considered by the Board in connection with its
renewal of the Agreement. However, the Board did not identify any single factor
as all-important or controlling, and the summary does not detail all the matters
that were considered.
Investment Performance. The Board reviewed the Fund's overall investment
performance and compared it to its Performance Universe and the Lipper Index.
The Board noted that, although the Fund's performance for the three-year period
ended December 31, 2005 was below the Performance Universe Average and the
Fund's performance for the one-year, three-year and five-year periods ended
December 31, 2005 was below the Lipper Index, the Fund outperformed its
Performance Universe Average for the one-year, five-year and 10-year periods
ended December 31, 2005 as well as the Lipper Index for the 10-year period ended
December 31, 2005.
- --------------------------------------------------------------------------------
19
Value Line U.S. Government Securities Fund, Inc.
- --------------------------------------------------------------------------------
Value Line's Personnel and Methods. The Board reviewed the background of the
portfolio manager responsible for the daily management of the Fund's portfolio,
achieving the Fund's investment objective and adhering to the Fund's investment
strategy. The Independent Directors also engaged in discussions with Value
Line's senior management who are responsible for the overall functioning of the
Fund's investment operations. Based on this review, the Board concluded that the
Fund's portfolio management and Value Line's overall resources were well
developed and that Value Line had investment management capabilities and
personnel essential to performing its duties under the Agreement.
Management Fee and Expenses. The Board considered Value Line's fee under the
Agreement relative to the management fees charged by its Expense Group and
Expense Universe averages. The Board did not, however, consider Value Line's fee
under the Agreement relative to the management fees charged by Value Line for
other investment companies for which it provides investment advisory services
because none of these investment companies pursued substantially similar
investment objectives and strategies as the Fund. The Board noted that the
Fund's management fee and total expense ratio for the most recent fiscal year
were higher than those of the Expense Group and Expense Universe averages. In an
effort to reduce the Fund's higher total expense ratio, which was primarily due
to the Fund's small asset size, the Fund agreed to reduce its Rule 12b-1 fees
from 0.25% to 0.15% of the Fund's average daily net assets, effective March
2006. The Board noted that, as a result of this action, the Fund's projected
total expense ratio is anticipated to decrease to an amount that is below the
Expense Group average. Based on their overall review, the Board determined that
Value Line's management fee rate under the Agreement does not constitute fees
that are so disproportionately large as to bear no reasonable relationship to
the services rendered and that could not have been the product of arm's-length
bargaining, and concluded that the management fee rate under the Agreement is
fair and reasonable.
Nature and Quality of Other Services. The Board considered the nature, quality,
cost and extent of other services provided by Value Line and its affiliate,
Value Line Securities, Inc. At meetings held throughout the year, the Board
reviewed the effectiveness of Value Line's overall compliance program, as well
as the services provided by Value Line Securities, Inc., the Fund's principal
underwriter. The Board also reviewed the services provided by Value Line and its
affiliate in supervising third party service providers. Based on this review,
the Board concluded that the nature, quality, cost and extent of such other
services provided by Value Line and its affiliate were satisfactory, reliable
and beneficial to the Fund's shareholders.
Profitability. The Board considered the level of Value Line's profits with
respect to the management of the Fund, including the impact of certain actions
taken during 2004 and 2005. These actions included Value Line's review of its
methodology in allocating certain of its costs to the management of each Fund,
Value Line's voluntary reduction of management and/or Rule 12b-1 fees for
certain Funds, Value Line's termination of the use of soft dollar research, and
the cessation of trading through its affiliate, Value Line Securities, Inc.
Based on a review of these actions and Value Line's overall profitability, the
Board concluded that Value Line's profits from management of the Funds,
including the financial results derived from the Fund, bear a reasonable
relationship to the services rendered and are fair for the management of the
Fund in light of the business risks involved.
Other Benefits. The Board also considered the character and amount of other
direct and incidental benefits received by Value Line and its affiliates from
their association with the Fund. The Board noted that 12b-1 fees were
voluntarily reduced and concluded that potential "fall-out" benefits that Value
Line and its affiliates may receive, such as greater name recognition, appear to
be reasonable, and may in some cases benefit the Fund.
Economies of Scale. The Board noted that, given the current and anticipated size
of the Fund, any perceived and potential economies of scale were not yet a
relevant consideration for the Fund and the addition of break points was
determined not to be necessary at this time.
Conclusion. The Board, in light of Value Line's overall performance, considered
it appropriate to continue to retain Value Line as the Fund's investment
adviser. Based on their evaluation of all material factors deemed relevant, and
with the advice of independent counsel, the Directors concluded that the Fund's
Agreement is fair and reasonable and voted to approve the continuation of the
Agreement for another year.
- --------------------------------------------------------------------------------
20
Value Line U.S. Government Securities Fund, Inc.
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The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's website at
http://www.sec.gov and may be reviewed and copied at the SEC's Public Reference
Room in Washington, D.C. Information on the operation of the Public Reference
Room may be obtained by calling 1-800-SEC-0330.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities, and information regarding how
the Fund voted these proxies during the most recent 12-month period ended June
30 is available through the Fund's website at http://www.vlfunds.com and on the
SEC's website at http://www.sec.gov. The description of the policies and
procedures is also available without charge, upon request, by calling
1-800-243-2729.
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21
Value Line U.S. Government Securities Fund, Inc.
Management of the Fund
- --------------------------------------------------------------------------------
MANAGEMENT INFORMATION
The business and affairs of the Fund are managed by the Fund's officers under
the direction of the Board of Directors. 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 14 Value Line Funds. Each Director serves
until his or her successor is elected and qualified.
Other
Length of Principal Occupation Directorships
Name, Address, and Age Position Time Served During the Past 5 Years Held by Director
- ------------------------------------------------------------------------------------------------------------------------------
Interested Director*
- --------------------
Jean Bernhard Buttner Chairman of the Since 1983 Chairman, President and Chief Value Line, Inc.
Age 71 Board of Directors Executive Officer of Value Line,
and President Inc. (the "Adviser") and Value
Line Publishing, Inc. Chairman
and President of each of the 14
Value Line Funds and Value Line
Securities, Inc. (the
"Distributor").
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Non-Interested Directors
- ------------------------
John W. Chandler Director Since 1991 Consultant, Academic Search None
18 Victoria Lane Consultation Service, Inc.; Trustee
Lanesboro, MA 01237 Emeritus and Chairman (1993-
Age 82 1994) of the Board of Trustees of
Duke University; President
Emeritus, Williams College.
- ------------------------------------------------------------------------------------------------------------------------------
Frances T. Newton Director Since 2000 Customer Support Analyst, Duke None
4921 Buckingham Drive Power Company.
Charlotte, NC 28209
Age 64
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Francis C. Oakley Director Since 2000 Professor of History, Berkshire Life
54 Scott Hill Road Williams College, 1961 to Insurance
Williamstown, MA 01267 present. Professor Emeritus since Company
Age 74 2002. President Emeritus since of America
1994 and President, 1985-1994;
Chairman (1993-1997) and
Interim President (2002-2003)
of the American Council of
Learned Societies. Trustee
since 1997 and Chairman of the
Board since 2005, National
Humanities Center.
- ------------------------------------------------------------------------------------------------------------------------------
David H. Porter Director Since 1997 Visiting Professor of Classics, None
5 Birch Run Drive Williams College, since 1999;
Saratoga Springs, NY 12866 President Emeritus, Skidmore
Age 70 College since 1999 and President,
1987-1998.
- ------------------------------------------------------------------------------------------------------------------------------
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22
Value Line U.S. Government Securities Fund, Inc.
Management of the Fund
- --------------------------------------------------------------------------------
Other
Length of Principal Occupation Directorships
Name, Address, and Age Position Time Served During the Past 5 Years Held by Director
- -------------------------------------------------------------------------------------------------------------------------
Paul Craig Roberts Director Since 1983 Chairman, Institute for A. Schulman Inc.
169 Pompano St. Political Economy. (plastics)
Panama City Beach, FL 32413
Age 67
- -------------------------------------------------------------------------------------------------------------------------
Nancy-Beth Sheer Director Since 1996 Senior Financial Advisor, None
1409 Beaumont Drive Veritable L.P. (Investment
Gladwyne, PA 19035 Adviser) since 2004; Senior
Age 57 Financial Advisor, Hawthorn,
2001-2004.
- -------------------------------------------------------------------------------------------------------------------------
Officers
- --------
David T. Henigson Vice President, Since 1994 Director, Vice President and
Age 48 Secretary and Chief Compliance Officer of the
Compliance Officer Adviser. Director and Vice
President of the Distributor. Vice
President, Secretary and Chief
Compliance Officer of each of the
14 Value Line Funds.
- -------------------------------------------------------------------------------------------------------------------------
Stephen R. Anastasio Treasurer Since 2005 Controller of the Adviser until
Age 47 2003; Chief Financial Officer of
the Adviser, 2003-2005; Treasurer
of the Adviser since 2005;
Treasurer of each of the 14
Value Line Funds.
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Howard A. Brecher Assistant Treasurer/ Since 2005 Director, Vice President and
Age 51 Assistant Secretary Secretary of the Adviser. Director
and Vice President of the
Distributor.
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* 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.
Unless otherwise indicated, the address for each of the above is 220 East 42nd
Street, New York, NY 10017.
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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.
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23
Value Line U.S. Government Securities Fund, Inc.
The Value Line Family of Funds
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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 - Value Line Premier Growth Fund seeks long-term growth of capital. No
consideration is given to current income in the choice of investments.
1972 - Value Line Larger Companies Fund's 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 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 Trust 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.
* 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 1-800-243-2729, 9am
- - 5pm CST, Monday - Friday, or visit us at www.valueline.com. Read the
prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
24
INVESTMENT ADVISER Value Line, Inc.
220 East 42nd Street
New York, NY 10017-5891
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 BFDS
P.O. Box 219729
Kansas City, MO 64121-9729
INDEPENDENT PricewaterhouseCoopers LLP
REGISTERED PUBLIC 300 Madison Avenue
ACCOUNTING FIRM New York, NY 10017
LEGAL COUNSEL Peter D. Lowenstein, Esq.
Two Sound View Drive, Suite 100
Greenwich, CT 06830
DIRECTORS Jean Bernhard Buttner
John W. Chandler
Frances T. Newton
Francis C. Oakley
David H. Porter
Paul Craig Roberts
Nancy-Beth Sheerr
OFFICERS Jean Bernhard Buttner
Chairman and President
David T. Henigson
Vice President,
Secretary/
Chief Compliance Officer
Stephen R. Anastasio
Treasurer
Howard A. Brecher
Assistant Secretary/
Assistant Treasurer
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).
#537643
Item 2. Code of Ethics
(a) The Registrant has adopted a Code of Ethics that applies to its
principal executive officer, and principal financial officer and principal
accounting officer.
(f) Pursuant to item 12(a), the Registrant is attaching as an exhibit a
copy of its Code of Ethics that applies to its principal executive officer, and
principal financial officer and principal accounting officer.
Item 3. Audit Committee Financial Expert.
(a)(1)The Registrant has an Audit Committee Financial Expert serving on
its Audit Committee.
(2) The Registrant's Board has designated John W. Chandler, a member of
the Registrant's Audit Committee, as the Registrant's Audit Committee Financial
Expert. Mr. Chandler is an independent director who is a senior consultant with
Academic Search Consultation Service. He spent most of his professional career
at Williams College, where he served as a faculty member, Dean of the Faculty,
and President (1973-85). He also served as President of Hamilton College
(1968-73), and as President of the Association of American Colleges and
Universities (1985-90). He has also previously served as Trustee Emeritus and
Chairman of the Board of Trustees of Duke University.
A person who is designated as an "audit committee financial expert" shall not
make such person an "expert" for any purpose, including without limitation under
Section 11 of the Securities Act of 1933 or under applicable fiduciary laws, as
a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services
(a) Audit Fees 2006 - $14,366
(b) Audit-Related fees - None.
(c) Tax Preparation Fees 2006 -$8,083
(d) All Other Fees - None
(e) (1) Audit Committee Pre-Approval Policy. All services to be
performed for the Registrant by PricewaterhouseCoopers LLP
must be pre-approved by the audit committee. All services
performed during 2006 were pre-approved by the committee.
(e) (2) Not applicable.
(f) Not applicable.
(g) Aggregate Non-Audit Fees 2006 -$2,200
(h) Not applicable.
Item 11. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in rule 30a-2(c) under the Act (17 CFR
270.30a-2(c) ) based on their evaluation of these controls and
procedures as of a date within 90 days of the filing date of this
report, are appropriately designed to ensure that material
information relating to the registrant is made known to such
officers and are operating effectively.
(b) The registrant's principal executive officer and principal financial
officer have determined that there have been no significant changes
in the registrant's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation, including corrective actions with regard to significant
deficiencies and material weaknesses.
Item 12. Exhibits.
(a) Code of Business Conduct and Ethics for Principal Executive and
Senior Financial Officers attached hereto as Exhibit 100.COE
(b) (1) Certification pursuant to Rule 30a-2(a) under the Investment
Company Act of 1940 (17 CFR 270.30a-2) attached hereto as
Exhibit 99.CERT.
(2) Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 attached hereto as Exhibit 99.906.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
By /s/ Jean B. Buttner
--------------------------
Jean B. Buttner, President
Date: 11/8/2006
--------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Jean B. Buttner
------------------------------------------------------------
Jean B. Buttner, President, Principal Executive Officer
By: /s/ Stephen R. Anastasio
------------------------------------------------------------
Stephen R. Anastasio, Treasurer, Principal Financial Officer
Date: 11/8/2006
--------------------------