UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2011

or

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________________________ to __________________________________

Commission File Number:    0-11306

VALUE LINE, INC.

(Exact name of registrant as specified in its charter)

New York	13-3139843
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

220 East 42nd Street, New York, New York	10017-5891
(Address of principal executive offices)	(Zip Code)

 

(212) 907-1500

 (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)”.     Yes ¨   No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨		Accelerated filer  ¨		Non-accelerated filer  x		Smaller reporting company  ¨
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ¨   No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class	Outstanding at February 28, 2011
Common stock, $.10 par value	9,974,881 Shares

 

 

VALUE LINE INC.

 

TABLE OF CONTENTS

 

 

 

Part I - Financial Information

Item 1. Financial Statements

Value Line, Inc.

Consolidated Condensed Statements of Income

(in thousands, except share & per share amounts)

(unaudited)

 

		Three months ended								Nine months ended
		Jan. 31,								Jan. 31,
		2011				2010				2011				2010
Revenues:
Investment periodicals and related publications		$	8,669			$	8,864			$	25,853			$	27,343
Copyright data fees			954				883				2,596				2,477
Investment management fees & services			2,412				4,825				10,693				14,407
Total revenues			12,035				14,572				39,142				44,227
Expenses:
Advertising and promotion			1,366				2,440				5,443				6,933
Salaries and employee benefits			5,322				4,084				13,587				12,634
Production and distribution			1,238				1,330				3,518				3,895
Office and administration			2,283				2,135				6,970				7,825
Expenses related to restructuring			1,302				-				3,764				-
Provision for settlement			-				-				-				47,706
Total expenses			11,511				9,989				33,282				78,993
Income/(loss) from operations			524				4,583				5,860				(34,766	)
Gain on deconsolidation of subsidiaries			50,510				-				50,510				-
Revenues and profits interest from EAM Trust			724				-				724				-
Income from securities transactions, net			(40	)			185				48				553
Income/(loss) before income taxes			51,718				4,768				57,142				(34,213	)
Provision for income taxes/(benefit)			20,101				1,198				22,121				(8,580	)
Net income/(loss)		$	31,617			$	3,570			$	35,021			$	(25,633	)
Earnings/(loss) per share, basic & fully diluted		$	3.17			$	0.36			$	3.51			$	(2.57	)
Weighted average number of common shares			9,981,447				9,981,600				9,981,549				9,981,600

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

 

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Part I - Financial Information

Item 1. Financial Statements

Value Line, Inc.

Consolidated Condensed Statements of Cash Flows

(in thousands)

(unaudited)

 

		For the nine months
		ended
		Jan. 31,				Jan. 31,
		2011				2010
Cash flows from operating activities:
Net income/(loss)		$	35,021			$	(25,633	)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization			439				548
Amortization of bond premium			13				853
Gain on deconsolidation of subsidiaries			(50,510	)			-
Postemployment non-cash compensation			1,475				-
Revenues and profits interest in EAM Trust			(724	)			-
(Gains)/losses on sales of trading securities
and securities classified as available for sale			64				(71	)
Unrealized gains/(losses) on securities			(5	)			201
Deferred income taxes			22,121				(8,326	)
Writedown of software			-				720
Changes in assets and liabilities:
Proceeds from sales of trading securities			-				10,511
(Decrease) in unearned revenue			(1,388	)			(3,427	)
(Decrease)/increase in reserve for settlement			(764	)			4,000
(Decrease)/increase in accounts pay. & accrued exp.			(1,536	)			844
(Decrease) in accrued salaries			(389	)			(122	)
Increase/(decrease) in accrued taxes payable			161				(392	)
Decrease/(increase) in prepaid and refundable income taxes			1,598				(1,920	)
Decrease in prepaid exp. and other current assets			139				27
Decrease in accounts receivable			252				114
Decrease/(increase) in receivable from affiliates			1,358				(585	)
Total adjustments			(27,696	)			2,975
Net cash provided by/(used in) operating activities			7,325				(22,658	)
Cash flows from investing activities:
Purchases/sales of securities classified as available for sale:
Proceeds from sales of fixed income securities			34,024				30,202
Purchase of fixed income securities			(21,314	)			(28,748	)
Purchase of equity securities			(790	)			-
Cash contributed to deconsolidated subsidiary capital			(5,484	)			-
Revenues and profits distribution from EAM Trust			156				-
Acquisition of property and equipment			(98	)			(55	)
Expenditures for capitalized software			(662	)			(466	)
Net cash provided by investing activities			5,832				933
Cash flows from financing activities:
Purchase of treasury stock at cost			(57	)			-
Dividends paid			(21,960	)			(6,987	)
Net cash used in financing activities			(22,017	)			(6,987	)
Net (decrease) in cash and cash equivalents			(8,860	)			(28,712	)
Cash and cash equivalents at beginning of year			16,435				42,936
Cash and cash equivalents at end of period		$	7,575			$	14,224

 

 

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

 

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Part I - Financial Information

Item 1. Financial Statements

   

VALUE LINE, INC.

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED JANUARY 31, 2011

(in thousands, except share amounts)

(unaudited)

		Common stock																								Accumulated
		Number								Additional																Other
		of								paid-in				Treasury				Comprehensive				Retained				Comprehensive
		shares				Amount				capital				Stock				income/(loss)				earnings				income/(loss)				Total
Balance at April 30, 2010			9,981,600			$	1,000			$	991			$	(354	)						$	19,813			$	(2	)		$	21,448
Comprehensive income
Net income																		$	35,021				35,021								35,021
Other comprehensive income, net of tax:
Change in unrealized gains on securities, net of taxes																			10								10				10
Comprehensive income																		$	35,031
Purchase of treasury stock			(4,298	)											(57	)															(57	)
Dividends declared																							(23,956	)							(23,956	)
Balance at January 31, 2011			9,977,302			$	1,000			$	991			$	(411	)						$	30,878			$	8			$	32,466

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

 

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Part I - Financial Information

Item 1. Financial Statements

VALUE LINE, INC.

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED JANUARY 31, 2010

(in thousands, except share amounts)

(unaudited)

		Common  stock																								Accumulated
		Number								Additional																Other
		of								paid-in				Treasury				Comprehensive				Retained				Comprehensive
		shares				Amount				capital				Stock				income/(loss)				earnings				income/(loss)				Total
Balance at April 30, 2009			9,981,600			$	1,000			$	991			$	(354	)						$	78,935			$	297			$	80,869
Comprehensive income/(loss)
Net income/(loss)																		$	(25,633	)			(25,633	)							(25,633	)
Other comprehensive income/(loss), net of tax:
Change in unrealized gains on securities, net of taxes																			(77	)							(77	)			(77	)
Comprehensive income/(loss)																		$	(25,710	)
Dividends declared																							(5,989	)							(5,989	)
Balance at January 31, 2010			9,981,600			$	1,000			$	991			$	(354	)						$	47,313			$	220			$	49,170

The accompanying notes are an integral part of these consolidated condensed financial statements.

 

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Notes to Consolidated Condensed Financial Statements

Note 1 - Organization and Summary of Significant Accounting Policies:

The interim consolidated condensed financial statements of Value Line, Inc., together with its subsidiaries (collectively referred to as the “Company” or "VLI"), are unaudited.  In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of normal recurring accruals except as noted below) considered necessary for a fair presentation.  This report should be read in conjunction with the financial statements and footnotes contained in the Company's annual report on Form 10-K, dated July 15, 2010  for the fiscal year ended April 30, 2010. Results of operations covered by this report may not be indicative of the results of operations for the entire year.

VLI is incorporated in the State of New York.  The Company's primary businesses are producing investment related periodical publications and making available copyright data including certain Value Line trademarks and Value Line proprietary ranking system information to third parties under written agreements for use in third party managed and marketed investment products.  Prior to December 23, 2010, the restructuring date, VLI provided investment management services to the Value Line Mutual Funds ("Value Line Funds"), institutions and individual accounts and provided distribution, marketing, and administrative services to the Value Line Funds.  On December 23, 2010, the Company deconsolidated the asset management and broker-dealer subsidiaries and exchanged its controlling interest in these subsidiaries for a nonvoting revenues and profits interest in EULAV Asset Management, a Delaware business trust ("EAM"), the successor to the asset management business and the sole member of EULAV Securities LLC ("ES" or the "Distributor"), the distributor of the Value Line Funds, (the "Restructuring Transaction").  VLI also recorded as compensation a voting profits interest in EAM granted to one of the Trustees of EAM, a former VLI employee.  Pursuant to the EAM Trust Agreement, VLI granted EAM the right to use the Value Line name for all existing Value Line Mutual Funds and agreed to supply, without charge or expense, the Value Line Proprietary Ranking information to EAM for use in managing the Value Line Funds.  The name "Value Line" as used to describe the Company, its products, and its subsidiaries, is a registered trademark of the Company.

Principles of consolidation:  The consolidated condensed financial statements include the accounts of the Company and all of its subsidiaries.  In accordance with FASB's Topic 810, the assets, liabilities, and results of operations of subsidiaries in which the Company has a controlling interest have been consolidated.  All significant intercompany accounts and transactions have been eliminated in consolidation.  On December 23, 2010, the Company completed the Restructuring Transaction and deconsolidated the related affiliates in accordance with FASB's Topic 810.  As part of the Restructuring Transaction, the Company received a significant nonvoting interest in the revenues (excluding distribution revenues) and profits of the new entity, EAM.  The Company relied on the guidance in FASB Topics 323 and 810 in its determination to not consolidate its investment in EAM and to account for it under the equity method of accounting. The Company reports the amount it receives for its nonvoting revenue and nonvoting profit interests as a separate line item below operating income in the Consolidated Condensed Statement of Income.

Accounting Standards Codification:

During fiscal year 2010, the Company adopted the Financial Accounting Standards Board's ("FASB's") Accounting Standards Codification ("ASC"). The FASB's ASC is the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission ("SEC").  The FASB's ASC reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. Although not the official source, it also includes relevant portions of authoritative SEC guidance that follows the same topical structure in separate sections in the Codification.  The financial statements of the Company have been updated to reflect the relevant references to the FASB's ASC.

Revenue Recognition:

Depending upon the product, subscription fulfillment is available in print, via internet access  and CD-ROM.  The length of a subscription varies by product and offer received by the subscriber.  Generally, subscriptions are available as trial subscriptions, annual subscriptions and/or multi-year subscriptions.  Subscription revenues are recognized on a straight line basis over the life of the subscription.  Accordingly, the amount of subscription fees to be earned by fulfilling subscriptions after the date of the balance sheet is shown as unearned revenue within current and long-term liabilities.

Copyright data revenues are derived from providing certain Value Line trademarks and Value Line proprietary ranking system information to third parties under written agreements for use in selecting securities for third party marketed products, including unit investment trusts, annuities and exchange traded funds.  The Company earns asset-based copyright data fees as specified in the individual agreements.  Revenue is recognized monthly over the term of the agreement and will fluctuate as the market value of the underlying portfolio increases or decreases in value.

Prior to the restructuring, the Company earned investment management fees that consist of management fees from the Value Line Funds and from asset management clients.  Investment management fees for the mutual funds were earned on a monthly basis as services were performed.  The fees were calculated based on average daily net assets of the mutual funds in accordance with each fund's advisory agreement.

The management fees and average daily net assets for the Value Line Funds are calculated by State Street Bank, which serves as the fund accountant, fund administrator, and custodian of the Value Line Funds.

 

 

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Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

The Value Line Funds are open-end management companies registered under the Investment Company Act of 1940.   Shareholder transactions for the Value Line Funds are processed each business day by the third party transfer agent of the Funds.  Shares can be redeemed without advance notice upon request of the shareowners each day that the New York Stock Exchange is open.  Assets within the separately managed accounts are held at third party custodians and subject to the terms of each advisory agreement and do not have any advance notice requirement for withdrawals, although they generally have a 30 day advance notice requirement for termination of the account.

Also, prior to the Restructuring Transaction, service and distribution fees were received from the Value Line Funds in accordance with service and distribution plans under rule 12b-1 of the Investment Company Act of 1940.  The plans are compensation plans, which means that the distributor’s fees under the plans are payable without regard to actual expenses incurred by the distributor, and therefore the distributor may earn a profit under the plan.  Expenses incurred by ES, the distributor of the Value Line Funds, include payments to securities dealers, banks, financial institutions and other organizations, that provide distribution, marketing, and administrative services with respect to the distribution of the Value Line Funds.  Service and distribution fees are received on a monthly basis and calculated on the average daily net assets of the respective mutual fund in accordance with each fund prospectus (see Note 6).

Investment in Unconsolidated Entities:

The Company accounts for its investments in unconsolidated entities (EAM) using the equity method of accounting in accordance with FASB’s ASC 323.  The equity method is an appropriate means of recognizing increases or decreases measured by generally accepted accounting principles ("GAAP") in the economic resources underlying the investments.  Under the equity method, an investor recognizes its share of the earnings or losses of an investee in the periods for which they are reported by the investee in its financial statements rather than in the period in which an investee declares a dividend or distribution.  An investor adjusts the carrying amount of an investment for its share of the earnings or losses recognized in the investee.

The Company’s “interests” in EAM,  the investment adviser to and the sole member of the distributor of the Value Line Funds are evidenced by a “revenue interest” and “nonvoting profits interest” in EAM.  The revenue interest entitles the Company to receive a range of 41% to 55% (depending on the amount of revenues) of EAM’s adjusted gross revenues (excluding distribution revenues).  The nonvoting profits interest entitles the Company to receive 50% (subject to certain limited adjustments) of the profits (as defined in the Trust agreement) of EAM.  The revenue interest and at least 90% of the profits interest are to be distributed each quarter to all interest holders of EAM including Value Line.  Subsequent to December 23, 2010, the Company's revenue interest in EAM excludes participation in ES' (EAM's subsidiary) service and distribution fees.   The Company reflects its nonvoting revenues and nonvoting profits interests in EAM as non-operating income under the equity method of accounting subsequent to the Restructuring Transaction.  Although the Company will not have control over the operating and financial policies of EAM, it does have a contractual right to receive these revenues and profits.  On December 23, 2010, VLI agreed  to distribute a Class A voting profits interest in EAM to one of the Trustees of EAM, a former employee of VLI.  As such, the Company has recorded postemployment compensation expense in its Consolidated Condensed Statement of Income of $1,475,000, the value assigned to the voting profits interest granted to the former VLI employee, Mr. Mitchell E. Appel.

Valuation of Securities:

The Company's securities classified as available-for-sale and cash equivalents consist of shares of U.S. Government Money Market Funds ("USGMMF"), investments in exchange traded equity funds, government debt securities, and FDIC insured commercial paper accounted for in accordance with the requirements of the Fair Value Measurements Topic of the FASB's ASC 820.  The securities available-for-sale reflected in the consolidated condensed balance sheets are valued at market  and unrealized gains and losses on securities classified as available-for-sale, net of applicable taxes, are reported as a separate component of Shareholders' Equity. Realized gains and losses on sales of the securities classified as available-for-sale are recorded in earnings on trade date and are determined on the identified cost method.

The Company classifies its securities available-for-sale as current assets. It does so to properly reflect its liquidity and to recognize the fact that it has liquid assets available-for-sale should the need arise.

Market valuation of securities listed on a securities exchange is based on the closing sales prices on the last business day of each month. Valuation of exchange traded funds shares is based upon the publicly quoted price of the shares listed on a securities exchange. The market value of the Company's fixed maturity government debt obligations is determined utilizing publicly quoted market prices or other observable inputs.  Cash equivalents consist of investments in USGMMF and are valued at $1 per share in accordance with rule 2a-7 of the Investment Company Act of 1940.

The Fair Value Measurements Topic of FASB's ASC defines fair value as the price that the Company would receive upon selling an investment in a timely transaction to an independent buyer in the principal or most advantageous market for the investment. The  Fair Value Measurements Topic established a three-tier hierarchy to maximize the use of observable market data and minimize the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the information that market participants would use in pricing the asset or liability, including assumptions about risk. Examples of risks include those inherent in a particular valuation technique used to measure fair value such as the risk inherent in the inputs to the valuation technique. Inputs are classified as observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the factors market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized in the three broad levels listed below.

 

 

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Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

Level 1 – quoted prices in active markets for identical investments

Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)

The valuation techniques used by the Company to measure fair value during the nine months ended January 31, 2011 for Level 1 securities consisted exclusively of quoted prices.

The securities valued as Level 2 investments consist primarily of U.S. Treasury Bills and Notes, and FDIC insured commercial paper. Valuation techniques used by the Company to measure fair value for government securities during the period consisted primarily of third party pricing services that utilized actual market data such as trades of comparable bond issues, broker/dealer quotations for the same or similar investments in active markets and other observable inputs.  When necessary, the third party services may use discounted future cash flows to calculate the net present value.

The following is a summary of the inputs used as of January 31, 2011 in valuing the Company’s investments carried at fair value:

		(in thousands)
Valuation Inputs		Total Investments				Cash Equivalents				Investments in Securities Available-for- Sale
Level 1 - quoted prices		$	7,818			$	7,004			$	814
Level 2 - other significant observable inputs			9,211				-				9,211
Level 3 - significant unobservable inputs			-				-				-
Total		$	17,029			$	7,004			$	10,025

The Company had no other financial instruments including futures, forwards and swap contracts. For the period ended January 31, 2011, there were no Level 3 investments. The Company does not have any liabilities subject to Fair Value Measurement.

Advertising expenses:  The Company expenses advertising costs as incurred.

Reclassification:  Certain items in the prior year and prior quarterly financial statements have been reclassified to conform to the current year presentation.

Income Taxes:

The Company computes its income tax provision in accordance with the Income Tax Topic of the FASB's ASC.  Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the Consolidated Condensed Financial Statements. Deferred tax liabilities and assets are determined based on the differences between the book values and the tax bases of particular assets and liabilities, using tax rates currently in effect for the years in which the differences are expected to reverse.

The Income Tax Topic of the FASB's ASC establishes for all entities 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.  As of January 31, 2011, management has reviewed the tax positions for the years still subject to tax audit under the statute of limitations, evaluated the implications, and determined that there is no impact to the Company's financial statements.

Earnings per share:  Earnings per share are based on the weighted average number of shares of common stock and common stock equivalents outstanding during each period.

Cash and Cash Equivalents:  For purposes of the Consolidated Condensed Statements of Cash Flows, the Company considers all cash held at banks and short term liquid investments with an original maturity of less than three months to be cash and cash equivalents. As of January 31, 2011 and April 30, 2010, cash equivalents included $7,004,000 and $15,943,000, respectively, invested in USGMMFs.

Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Expenses associated with restructuring:

The Company expenses  all costs associated with the Restructuring Transaction as incurred (see Note 10).  In addition, as mentioned above, the Company recorded as compensation expense the value of the Class A voting profits interest in EAM granted to its former employee.

 

 

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Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

Note 2 - Investments:

Securities Available-for-Sale:

Securities held by the Company and its subsidiaries are classified as available-for-sale securities in accordance with FASB's ASC 320, Investments - Debt and Equity Securities.

Equity Securities:

As of January 31, 2011, the aggregate cost of the equity securities classified as available-for-sale, which consist of investments in the First Trust Value Line Dividend and S&P Dividend ETFs, was $790,000 and the market value was $814,000. The Company did not hold any equity securities as of April 30, 2010. The total gains for equity securities with net gains included in Accumulated Other Comprehensive Income on  the Consolidated Condensed Balance Sheet were $24,000, net of deferred taxes of $9,000 as of January 31, 2011.

The increase in gross unrealized gains on equity securities classified as available-for-sale due to changes in market conditions of $24,000, net of deferred  taxes of $9,000, was included in Shareholders' Equity at January 31, 2011.

Government Debt Securities (Fixed Income Securities):

Government debt securities consist of securities issued by federal, state, and local governments within the United States. The aggregate cost and fair value at January 31, 2011 for government debt securities classified as available-for-sale were as follows:

		(in thousands)
		Amortized Historical								Gross Unrealized
Maturity		Cost				Fair Value				Holding Losses
Due within 1 year		$	9,222			$	9,211			$	(11	)
Total investment in government debt securities		$	9,222			$	9,211			$	(11	)

The aggregate cost and fair value at April 30, 2010 for government debt securities classified as available-for-sale were as follows:

		(in thousands)
		Amortized Historical								Gross Unrealized
Maturity		Cost				Fair Value				Holding Gains/(Losses)
Due within 1 year		$	22,012			$	22,014			$	2
Due 1 year through 5 years			1,520				1,515				(5	)
Total investment in government debt securities		$	23,532			$	23,529			$	(3	)

The increase in gross unrealized  losses of $8,000 and $461,000 on fixed income securities classified as available-for-sale net of deferred income tax of $3,000 and $162,000, respectively, were included in Accumulated Other Comprehensive Income on the Consolidated Condensed Balance Sheets as of January 31, 2011 and April 30, 2010, respectively.

The average yield on the Government debt securities classified as available-for-sale at January 31, 2011 and April  30, 2010, was 0.38% and 0.54%, respectively.

Proceeds from sales of government debt securities classified as available-for-sale during the nine months ended January 31, 2011 and 2010 were $34,024,000 and $30,202,000, respectively.  During the nine months ended January 31, 2011 and 2010, capital losses on sales of fixed income securities of $64,000 and $20,000, respectively, were reclassified from Accumulated Other Comprehensive Income in the Balance Sheet to the Consolidated Condensed Statement of Income.

For the  nine months ended January 31, 2011 and 2010, income from securities transactions also included $7,000 and $3,000 of dividend income; $109,000 and $728,000 of interest income, net of bond amortization of $14,000 and $853,000, respectively.  During the  nine months ended January 31, 2011 and 2010, income from securities transactions also included $2,000 and $20,000 of related interest expense, respectively.

 

 

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Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

 

Investment in Unconsolidated Entities:
Equity Method Investment:
The Company has recorded an asset, Investment in EAM, on its consolidated condensed balance sheet of $56,100,000 as a result of the deconsolidation of EULAV Asset Management LLC ("EULAV Asset Management") and EULAV Securities, Inc. ("ESI"), the former asset management and broker-dealer subsidiaries.  In accordance with the Consolidation Topic of the FASB’s ASC, the Company recognized a pre-tax gain in net income of $50,510,000 measured as the difference between the fair value of the consideration received, including satisfaction of its postemployment compensation obligation of $1,475,000, less the carrying value of the former subsidiaries’ assets and liabilities. In addtion, the Company incurred expenses of $3,764,000 associated with the divestiture. The value of VLI's investment in EAM at January 31, 2011 reflects the fair value of the nonvoting revenues and profits interest received in the Transaction, plus the $7,000,000 of cash and liquid securities contributed to EAM's capital account by VLI, and $568,000 of undistributed earnings from EAM. EAM is an investment adviser and through its wholly owned subsidiary ES, is the distributor of the Value Line Funds.
The Company utilized the services of valuation consultants to determine the fair value of the EAM asset and the value of the Class A voting profits interest granted to its former employee.  The methodology utilized by the third party valuation consultants was the discounted cash flows method to determine the fair value of VLI's nonvoting revenues and profits interest and the fair value of the Class A voting profits interest granted to a former employee. Based upon the results of the valuation and cash and other assets transferred by VLI to EAM in the transaction, the Company recorded a fair value of $56,100,000 for VLI's nonvoting EAM Trust investment. The obligation for postemployment compensation granted to the former employee was valued at $1,475,000 for the Class A voting profits interest.
The Company evaluates this asset for impairment which requires a determination as to whether an event or change in circumstances has occurred in the period that may have a significant adverse effect on the fair value of the investment.  Impairment indicators include, but are not limited to the following: (a) a significant deterioration in the earnings performance, asset quality, or business prospects of the investee, (b) a significant adverse change in the regulatory, economic, or technological environment of the investee, (c) a significant adverse change in the general market condition of the industry in which the investee operates, or (d) factors that raise significant concerns about the investee’s ability to continue as a going concern such as negative cash flows, working capital deficiencies, or noncompliance with statutory capital requirements.  The Company did not record any impairment losses on its equity method investment in EAM during fiscal year 2011.
EAM's overall results before distributions to all interest holders including Value Line for the period from December 23, 2010 through January 31, 2011 consist of  total management fees earned from the Value Line Funds of $1,388,000 and service and distribution 12b-1 fees of $390,000.  For the same period, total management fee waivers were $72,000 and 12b-1 fee waivers were $213,000.  After revenue distributions of $665,000 to VLI, total revenues were $1,113,000 for the period from December 23, 2010 to January 31, 2011. Operating expenses of EAM for the period from December 23, 2010 through January 31, 2011, were $994,000 and EAM's net income was $119,000 before distribution to interest holders.   At January 31, 2011, EAM's total assets were $57,413,000, total liabilities were $1,221,000 and total equity was $56,192,000.
Note 3 - Supplementary Cash Flow Information:
Cash payments for income taxes were $262,000 and $2,401,000 for the nine months ended January 31, 2011 and 2010, respectively.  The Company also received $1,598,000 of federal income tax refunds during the first quarter of fiscal 2011, which was included as prepaid and refundable income taxes as of April 30, 2010.
On December 23, 2010, the Company completed the Restructuring Transaction which included the receipt of a nonvoting revenues and profits interest in EAM in exchange for VLI's voting shares in EULAV Asset Management and ESI. This investment, classified as Investment in EAM on the Consolidated Condensed Balance Sheet was valued at $56,100,000, which included cash of $5,484,000 and $1,516,000 of FDIC insured corporate notes, contributed by VLI to EAM as part of the Transaction. The Company satisfied its postemployment compensation obligation valued at $1,475,000 by granting a Class A voting profits interest to VLI's former employee in connection with the transaction.

 

Note 4 - Employees' Profit Sharing and Savings Plan:

Substantially all employees of the Company and its subsidiaries are members of the Value Line, Inc. Profit Sharing and Savings Plan (the "Plan").  In general, this is a qualified, contributory plan which provides for a discretionary annual Company contribution which is determined based on the salaries of eligible employees and the amount of consolidated net operating income as defined in the Plan. The estimated profit sharing  plan contribution,  which is included as an expense in salaries and employee benefits in the Consolidated Condensed Statement of Income, was $300,000 and $0 for the nine months ended January 31, 2011 and 2010, respectively.

 

 

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Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

Note 5 - Comprehensive Income:

The FASB's ASC Comprehensive Income topic requires the reporting of comprehensive income in addition to net income from operations.  Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that otherwise would not be recognized in the calculation of net income.

At January 31, 2011 and 2010, the Company held both equity and U.S. Government debt securities that are classified as available-for-sale on the Consolidated Condensed Balance Sheets.  The change in valuation of these securities, net of deferred income taxes, has been recorded in Accumulated Other Comprehensive Income in the Company's Consolidated Condensed Balance Sheets.

The components of comprehensive income that are included in the Statement of Changes in Shareholders' Equity are as follows:

		(in thousands)
		Before				Tax Expense				Net of
Nine months ended January 31, 2011		Tax Amount				(Benefit)				Tax Amount
Unrealized gains/(losses) on securities:
Unrealized holding losses arising during the period		$	(48	)		$	17			$	(31	)
Add: Reclassification adjustments for
losses realized in net income			64				(23	)			41
Other comprehensive income		$	16			$	(6	)		$	10
		(in thousands)
		Before				Tax Expense				Net of
Nine months ended January 31, 2010		Tax Amount				(Benefit)				Tax Amount
Unrealized gains/(losses) on securities:
Unrealized holding losses arising during the period		$	(139	)		$	50			$	(89	)
Add: Reclassification adjustments for
losses realized in net income			20				(8	)			12
Other comprehensive income		$	(119	)		$	42			$	(77	)

Note 6 - Related Party Transactions:

Investment Management Segment:

The Company's former subsidiary, EULAV Asset Management, was the investment adviser and manager for  the Value Line Funds.  EULAV Asset Management earned investment management fees based upon the average daily net asset values of the respective Value Line Funds.  As discussed in Note 1, service and distribution fees were received by ESI from the Value Line Funds in accordance with service and distribution plans under rule 12b-1 of the Investment Company Act of 1940.  The plans are compensation plans, which means that the distributor’s fees under the plans are payable without regard to actual expenses incurred by the distributor, and therefore the distributor may earn a profit under the plans.  Expenses incurred by ESI include payments to securities dealers, banks, financial institutions and other organizations which provide distribution, marketing, and administrative services (including payments by ESI to VLI for allocated compensation and administration expenses) with respect to the distribution of the funds’ shares.  Service and distribution fees were received on a monthly basis and calculated on the daily net assets of the respective fund in accordance with each fund's prospectus.

For the period from May 1, 2010 through December 23, 2010 and nine months ended January 31, 2010, investment management fees and 12b-1 service and distribution fees amounted to $10,584,000 and $14,237,000, respectively, which took into account fee waivers for certain of the Value Line Funds. These amounts included service and distribution fees of $2,308,000 and $3,140,000, earned by ESI for the  period from May 1, 2010 through December 23, 2010 and nine months ended January 31, 2010, respectively.  For the period from May 1, 2010 through December 23, 2010 and nine months ended January 31, 2010, total management fee waivers were $513,000 and $712,000, respectively.  For the period from May 1, 2010 through December 23, 2010 and nine months ended January 31, 2010, 12b-1 fee waivers were $1,651,000 and $2,014,000, respectively.  The Company and its former subsidiary, ESI, had no right to recoup the previously waived amounts of management fees and 12b-1 fees, except for waived management fees for the Value Line U.S. Government Money Market Fund.  Any recoupment is subject to the provisions of the prospectus.

For the period from May 1, 2010 through December 23, 2010 and nine months ended January 31, 2010, separately managed account revenues were $109,000 and $170,000, respectively.

The related receivables from Value Line Funds included in Receivables from affiliates were $1,516,000 at April 30, 2010.

 

 

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Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

EAM Trust - VLI's nonvoting revenue and profits interests:

As a result of Restructuring Transaction on December 23, 2010, the Company no longer receives distribution services revenues.  The Company received monthly revenues interest in investment management fees in a range of 41% to 55% of EAM's mutual fund and separate accounts business revenues.  During the period from December 23, 2010 through January 31, 2011, the Company recorded as nonvoting revenues and profits interest from EAM Trust $665,000 and $59,000, respectively as non-operating income from its equity investment in EAM.  On a transitional basis EAM and ES occupy a portion of the premises that the Company leases from a third party.  The Company has received $56,000 during the period from December 23, 2010 to January 31, 2011 for rental and certain accounting and other administrative support services.  In accordance with the terms of the restructuring plan and EAM Trust Agreement, the Company has given notice to EAM to vacate the Company's premises on or before June 1, 2011.

On March 11, 2010, VLI and the Boards of Trustees/Directors of the Value Line Funds entered into an agreement providing for VLI to reimburse the Funds in the aggregate amount of $917,302 for various past expenses incurred by the Funds in connection with the SEC Settlement referred to in Note 10. The payable for this expense reimbursement was included in the reserve for settlement expenses on the Consolidated Condensed Balance Sheet of the Company.  The reimbursement was paid in full by VLI in October 2010.

As of January 31, 2011, the Company had $2,789,000 invested in the USGMMF held at brokers and $4,215,000 invested in the Value Line USGMMF representing 4% of that fund's total net assets.

Transactions with Parent:

For the  nine months ended January 31, 2011 and 2010, the Company was reimbursed $275,000 and $1,471,000, respectively, for payments it made on behalf of and services it provided to its majority shareholder, Arnold Bernhard & Co., Inc. ("the Parent").  At January 31, 2011 and April 30, 2010, the Receivables from affiliates included a receivable from  the Parent of $25,000 and $5,000, respectively.

From time to time, the Parent has purchased additional shares of the Company in the market when and as the Parent has determined it to be appropriate.  As stated several times in the past, the public is reminded that the Parent may make additional purchases from time to time in the future. The Parent has suspended purchases of Value Line shares until Value Line's share repurchase program is complete (see Note 9). The Parent owns approximately 86.5% of the issued and outstanding common stock of the Company.

Note 7 - Federal, State and Local Income Taxes:

The Company computes its income tax provision in accordance with the requirements of the Income Tax Topic of the FASB's ASC.

The provision for income taxes includes the following:		Nine months ended January 31,
		2011				2010
		(in thousands)
Current tax expense:
Federal		$	248			$	-
State and local			-				-
			248				-
Deferred tax expense/(benefit):
Federal			19,282				(6,662	)
State and local			2,591				(1,918	)
			21,873				(8,580	)
Provision for income taxes/(benefit)		$	22,121			$	(8,580	)

Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities.  The tax effect of temporary differences giving rise to the Company's deferred tax assets is primarily the result of the tax benefit from its net operating loss carryover from fiscal year 2010 of approximately $19,169,000 which the Company expects to be fully utilized by the first quarter of the fiscal year ending April 30, 2012.  The tax effect of temporary differences giving rise to the Company's long term deferred tax liability of $18,880,000 is primarily a result of the federal, state, and local taxes related to the $50,510,000 gain from deconsolidation of the Company's asset management and broker-dealer subsidiaries.

At the end of each interim reporting period, the Company estimates the effective income tax rate to apply for the full year. The Company uses the effective income tax rate determined to provide for income taxes on a year-to-date basis and reflect the tax effect of any tax law changes and certain other discrete events in the period in which they occur.

The overall effective income tax rate, as a percentage of pre-tax income, for the nine months ended January 31, 2011 and 2010 was 38.71% and 25.08%, respectively. The non-deductible portion of the provision for settlement included in fiscal 2010 and the change in the non-taxable investment income, events that do not have tax consequences, significantly contributed to the increase in the fiscal 2011 versus fiscal 2010 tax rate.  The fluctuation in the effective income tax rate is also attributable to the alternative minimum tax on the Company's net operating loss carry forward in fiscal 2011.  Additionally, the state and local tax provision has increased approximately 2% after consideration of the federal tax benefit as a result of the classification of the gain on deconsolidation of the Company's asset management and broker-dealer subsidiaries.

 

 

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Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

The annual effective tax rate for fiscal 2011 could change due to a number of factors including but not limited to an increase or decrease in the ratio of income or loss to pre-tax income for items that do not have tax consequences, the Company's geographic profit mix between tax jurisdictions, new tax laws, new interpretations of existing tax law and rulings by and settlements with tax authorities. For the nine months ended January 31, 2011, there were no new material uncertain tax positions.

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. federal statutory income tax rate to pretax income as a result of the following:

		Nine months ended January  31,
		2011				2010
U.S. statutory federal rate			35.00	%			35.00	%
Increase/(decrease) in tax rate from:
Tax effect of non-deductible portion of provision for settlement			-				-11.97	%
State and local income taxes, net of federal income tax benefit			2.95	%			3.59	%
Effect of tax exempt income and dividend deductions			-				0.69	%
Alternative minimum tax - net operating loss limitation			0.96	%			-
Other, net			-0.20	%			-2.23	%
Effective income tax rate			38.71	%			25.08	%

The Company is included in the consolidated federal income tax return of the Parent.  The Company has a tax sharing agreement which requires it to make tax payments to the Parent equal to the Company's liability/(benefit) as if it filed a separate return.

The Company's federal income tax returns (included in the Parent's consolidated returns) and state and city tax returns for fiscal years ended April 30, 2008, 2009, and 2010 are subject to examination by the tax authorities, generally for three years after they were filed.  The IRS and NYS tax authorities have recently concluded an examination for the years ended through April 30, 2008. The examinations by the IRS and NYS resulted in no changes that had any adverse effect on the Company's financial statements.  The Company received a refund from NYS in the amount of $264,546 for the years under audit.

Note 8 - Business Segments:

The Company operated two reportable business segments: (1) Investment Periodicals, Publishing & Copyright Data and (2) Investment Management. The Investment Periodicals, Publishing & Copyright Data segment produces investment related periodical publications (retail and institutional) in both print and electronic form, and includes copyright data fees for Value Line proprietary ranking system information and other proprietary information. The Investment Management segment provides advisory services to the Value Line Funds, as well as institutional and individual accounts. The segments are differentiated by the products and services they offer. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company allocates all revenues and expenses, except for revenues and profits derived from EAM Trust accounted for under the equity method and depreciation and income from securities transactions related to corporate assets, between the two reportable segments.

As more fully described in Note 1, the Company deconsolidated its investment management business on December 23, 2010 and therefore will no longer report the investment management operation as a separate business unit.  Although VLI will continue to receive significant revenues and cash flows from these operations through EAM, it no longer considers this to be a reportable business segment subsequent to the Restructuring Transaction due to its lack of control over the operating and financial policies of EAM.  Accordingly, the investment management segment reflects activity only through the date of the Restructuring Transaction.

 

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Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

 

Disclosure of Reportable Segment Revenues, Profit/(Loss) and Segment Assets (in thousands)

		Nine months ended January 31, 2011
		Investment
		Periodicals,
		Publishing &				Investment
		Copyright Data				Management				Total
Revenues from external customers		$	28,449			$	10,693			$	39,142
Intersegment revenues			7				-				7
Income/(loss) from securities transactions			(3	)			6				3
Gain from deconsolidation of subsidiaries*			-				50,510				50,510
Depreciation and amortization			425				14				439
Segment profit/(loss) from operations *			6,866				(1,006	)			5,860
Segment assets			12,101				-				12,101
Expenditures for segment assets			750				10				760
		Nine months ended January 31, 2010
		Investment
		Periodicals,
		Publishing &				Investment
		Copyright Data				Management				Total
Revenues from external customers		$	29,820			$	14,407			$	44,227
Intersegment revenues			15				-				15
Income/(loss) from securities transactions			(57	)			167				110
Depreciation and amortization			514				33				547
Segment profit/(loss) from operations *			8,017				(42,783	)			(34,766	)
Segment assets			12,467				12,189				24,656
Expenditures for segment assets			516				5				521

Reconciliation of Reportable Segment Revenues, Profit/(Loss) Before Income Taxes and Assets

 

							(in thousands)
							Nine months ended January 31,
								2011				2010
Revenues
Total revenues for reportable segments							$	39,149			$	44,242
Elimination of intersegment revenues								(7	)			(15	)
Total consolidated revenues							$	39,142			$	44,227
Profit/(loss) before income taxes *
Total profit/(loss) for reportable segments							$	56,373			$	(34,656	)
Add:  Revenues and profits interest from EAM Trust								724				-
Add: Income from securities transactions related to corporate assets								45				444
Less: Depreciation related to corporate assets								-				(1	)
Profit/(loss) before income taxes							$	57,142			$	(34,213	)
Assets
Total assets for reportable segments							$	12,101			$	24,656
Corporate assets								75,475				61,105
Consolidated total assets							$	87,576			$	85,761

* Included in the Investment Management segment in fiscal 2011 is the gain of $50,510,000 from deconsolidation of the asset management and broker-dealer subsidiaries, expenses of $3,764,000 associated with the Company’s restructure of its asset management business segment, and postemployment compensation expense of $1,475,000 related to the value of the Class A voting profits interest in EAM granted by VLI to a former employee of the Company who is presently the CEO of EAM.. During fiscal year 2010 the operating loss from the Investment Management segment includes a provision for settlement of approximately $47.7 million.

 

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Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

Note 9 - Treasury Stock and Repurchase Program:

On January 20, 2011,  the Company's Board of Directors approved the repurchase of shares of the Company’s common stock up to an aggregate purchase price not to exceed $3,200,000.  Based on current market prices, the Company believes that the repurchase program is in the best interests of the shareholders.  The repurchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market within the Rule 10b-18 Safe Harbor rule. The repurchase program is expected to continue through January 15, 2012 unless extended or shortened by the Board of Directors.

Treasury stock, at cost, consists of the following:

(in thousands except for shares and cost per share)		Date		Shares				Total Average Cost  Assigned				Average Cost per Share
Balance April 30, 2010					18,400			$	354
Purchases effected in open market		January, 2011			4,298				57			$	13.26
Balance January 31, 2011					22,698			$	411

Note 10 - Legal Proceedings & Restructuring:

During the period from 1986 until voluntarily suspended by VLI in November 2004, VLI had arrangements with several of the Value Line Funds managed by VLI pursuant to which, acting through an affiliated broker in respect of certain securities trades, it charged the Funds commission rates of $0.0488 per share, forwarded such transactions to unaffiliated brokerage firms for execution, clearance and settlement at a commission rate that varied from $.02 to $.01 per share.  The SEC alleged that VLI’s affiliated broker retained the excess without providing any brokerage services. On November 4, 2009, the Company, its former brokerage subsidiary and Jean Bernhard Buttner and David T. Henigson, who were former officers and directors of the Company concluded a settlement with the SEC as a result of an investigation into the brokerage practices discussed above (the “Settlement”).

The Settlement required that the two former officers and directors no longer be directors or officers of any publicly traded company in the U.S. that has a class of securities registered pursuant to section 12(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) or is required to file reports pursuant to section 15(d) of the Exchange Act and disassociate themselves from the Company’s investment management and brokerage business.  In the case of the Company’s former CEO and indirect controlling shareholder, Jean Bernhard Buttner, the Settlement expressly permitted her to continue to exercise control until November 4, 2010, which date was extended by the Commission to December 24, 2010, for the purpose of engaging in one or more transactions that would result in her terminating her affiliated person status with respect to the Company’s then broker-dealer and investment adviser subsidiaries.  This was achieved on December 23, 2010 upon the closing of the Restructuring Transaction in which EAM succeeded to the regulated businesses formerly conducted by the Company.

The Settlement with the SEC that resolved the Commission’s investigation resulted in VLI being precluded from receiving the revenue, through its brokerage subsidiary, from commissions charged for securities trading by the Value Line Funds. VLI had suspended this practice in 2004, five years prior to the Settlement, so this aspect of the Settlement will not result in any change in revenue compared to more recent fiscal years. The Settlement also resulted in the investment adviser business being transferred to EAM. However, VLI continues to have both a nonvoting revenues interest and a nonvoting profits interest in EAM.

The outstanding provision for settlement in the amount of $3,483,000 reflected as liability in the consolidated condensed balance sheet as of January 31, 2011, includes anticipated costs of Fair Fund administration as well as certain fees and costs arising from reaching and implementing the Settlement.

On December 23, 2010, EULAV Asset Management, LLC was restructured as a Delaware statutory trust and renamed EULAV Asset Management (which we refer to as the “Adviser” or "EAM").  In accordance with the Investment Company Act of 1940 (the “1940 Act”), at the time of the restructuring, each Fund’s prior investment advisory agreement terminated and the Adviser entered into a new investment advisory agreement with each Fund.  The services provided by the Adviser under each new agreement and the rates at which fees are paid by each Fund under its new agreement are the same as under that Fund’s prior investment advisory agreement.  In addition, the other terms of each Fund’s new investment advisory agreement are the same as that Fund’s prior investment advisory agreement, except for the date of execution, the two-year initial term, immaterial updating changes and immaterial changes in form. Neither VLI nor EAM provided any guarantees as it relates to the Funds and/or the new investment advisory agreements.

Each Fund has a distribution agreement with EULAV Securities LLC (the “Distributor" or "ES"), a wholly-owned subsidiary of the Adviser, pursuant to which the Distributor acts as principal underwriter and distributor of the Value Line Funds for the sale and distribution of their shares.  On May 5, 2009, the Distributor changed its name from “Value Line Securities, Inc.” to “EULAV Securities, Inc.”  As part of the restructuring described above, EULAV Securities, Inc. was restructured as a Delaware limited liability company and changed its name to EULAV Securities LLC.  No other changes were made to the Distributor’s organization, including its operations and personnel.  For its services under the agreements, the Distributor is not entitled to receive any compensation, although it is entitled to receive fees under each Fund’s Service and Distribution Plan.

 

 

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Value Line, Inc.

Notes to Consolidated Condensed Financial Statements

As part of the restructuring, the predecessor Adviser’s capital structure was revised so that VLI owns only nonvoting revenue and profits interests and five individuals each owns 20% of the voting profits interests of the Adviser.  The holders of the Adviser’s voting profits interests have the right to elect five trustees of the Adviser, who manage the combined company consisting of the Adviser and the Distributor much like a board of directors.  The five initial holders of the Adviser’s voting profits interests are:  Mr. Appel, Avi T. Aronovitz, Richard Berenger, Howard B. Sirota and R. Alastair Short.  These persons elected themselves as the five initial Trustees of the Adviser. Mr. Sirota subsequently resigned as a Trustee but continues to hold 20% of the voting profits interests, and the Company understands he has not yet been replaced as a Trustee as of this writing. The Trustees initially delegated the authority to manage the day-to-day business of the Adviser and the Distributor to the Adviser’s senior executive, Mitchell E. Appel, who is one of the Trustees.

Each of these five individuals was granted a voting profits interest having 20% of the voting power for the election of Trustees and other matters submitted for approval by the holders of the voting profits interests of the Adviser in exchange for the agreement by such individual to act as an initial voting profits interest holder and, in the case of Mr. Appel, as the initial senior executive officer, of EAM in order to enable VLI to complete the required disassociation with EAM and ES.  Collectively, the voting profits interests receive 50% of the residual profit of the business, in which the share of Mr. Appel is 45% and the others each 1.25%, subject to temporary adjustments in certain circumstances.  VLI retains a nonvoting profits interest representing 50% of residual profits, subject to temporary adjustments in certain circumstances and has no power to vote for the election, removal or replacement of the trustees of the Adviser. VLI also has an interest in non-distribution revenues of the business ranging from 41% at non-distribution fee revenue levels of $9 million or less to 55% at such revenue levels of $35 million or more.  In the event the business is sold or liquidated, the first $56.1 million of net proceeds (the value of the business at the time the Restructuring Transaction was approved as determined by the directors of Value Line after reviewing a valuation report by the directors’ financial advisors) plus any additional capital contributions (VLI or any holder of a voting profits interest, at its discretion, may make future contributions to its capital account in EAM), which contributions would increase its capital account but not its percentage interest in operating profits, will be distributed in accordance with capital accounts; 20% of the next $56.1 million will be distributed to the holders of the voting profits interests and 80% to the holders of the nonvoting profits interests (initially VLI); and the excess will be distributed 45% to the holders of the voting profits interests and 55% to the holders of the nonvoting profits interests.

When VLI contributed its investment advisory business to EULAV Asset Management in June 2008, it granted EULAV Asset Management the right to have the existing Value Line Funds use the name "Value Line" inasmuch as the then existing investment advisory agreements gave the Value Line Funds that right, agreed to continue its access to Value Line's ranking information and agreed to maintain a stated level of liquid capital.  In connection with the Restructuring Transaction in 2010 VLI re-granted such license of the Value Line name to EAM for use by the existing Value Line Funds with certain new conditions not in effect in 2008 and also imposed certain conditions for continued use of the Value Line name in the new investment advisory agreements, extended its agreement to provide access to the ranking information and capitalized the business with $7 million while disclaiming any agreement to provide any future capital support.VLI has not provided any guarantee with respect to any aspect of EAM's operations, including but not limited to future debt agreements. VLI has not assumed and does not assume any liability of the Company for any period on or after the effective date of the restructuring, December 23, 2010.

The EAM Trust has no fixed term, but in the event that control of the Company’s majority shareholder changes or the majority shareholder no longer owns 5% or more of the voting securities of the Company, then the Company has the right, but not the obligation, to buy the voting profits interests at a fair market value to be determined by an independent valuation firm in accordance with the terms of the EAM Trust Agreement.

The Company has with respect to the Adviser the benefit of certain consent rights involving extraordinary events, such as a proposed sale of all or a significant part of the Adviser, material acquisitions, entering into businesses other than asset management and fund distribution, paying compensation in excess of the mandated limit of 22.5%-30% of non-distribution fee revenues (depending on the level of such revenues), declaring voluntary bankruptcy, making material changes in tax or accounting policies or making substantial borrowings, and entering into related party transactions. These rights were established to protect the Company’s nonvoting revenues and nonvoting profits interests in EAM.

As a result of the restructuring, the Company ceased to “control” (as that term is defined in the 1940 Act) the Adviser or the Distributor.  Under the terms of the settlement with the SEC stemming from the Company’s brokerage practices with certain Value Line Funds prior to November 2004, Jean Bernhard Buttner, who controls Arnold Bernhard & Co., Inc., which owns 86.5% of the Company’s common stock (the “Control Person”), and David Henigson, a former officer and director of the Company were barred from association with any broker, dealer, or investment adviser and were prohibited from serving or acting in various capacities, including as an “affiliated person” (as that term is defined in the 1940 Act) of the Value Line Funds, the Adviser or the Distributor (due to Mrs. Buttner’s control over the Company, the requirement of disassociation on her part was postponed until December 24, 2010). The required “disassociation” was accomplished when the Company transferred 100% of the voting control over the regulated investment adviser and broker-dealer subsidiaries to the five individual voting profits interest holders of the Adviser, none of whom is under the control of the Company, its majority shareholder or Mrs. Buttner.