[July 29, 2011] VALUE LINE INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Tweet (Edgar Glimpses Via Acquire Media NewsEdge) The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help a reader understand Value Line, its operations and business factors. The MD&A should be read in conjunction with Item 1, "Business", Item 1A, "Risk Factors", and in conjunction with the consolidated financial statements and the accompanying notes contained in Item 8 of this report. The MD&A includes the following subsections: ? Executive Summary of the Business ? Results of Operations ? Liquidity and Capital Resources ? Critical Accounting Estimates and Policies Executive Summary of the Business 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 date of the Restructuring Transaction discussed below under "Restructuring of Asset Management and Mutual Fund Distribution Businesses", the Company, through its wholly owned subsidiary EAM LLC, provided investment management services to the Value Line Funds, institutions and individual accounts, and, through its wholly-owned subsidiary ESI, provided distribution, marketing, and administrative services to the Value Line Funds. Value Line markets under well known brands including The Value Line Investment Survey, The Value Line Research Center, and The Most Trusted Name in Investment Research. The name "Value Line" as used to describe the Company, its products, and its subsidiaries, is a registered trademark of the Company. The Company's target audiences within the investment related periodical publications field are individual investors, colleges, libraries, and investment management professionals. Individuals come to Value Line for complete research in one package. Institutional subscribers, such as libraries and universities, offer the Company's detailed research to their patrons and students. Investment management professionals use the research and historical information in their day to day businesses. Depending upon the product, the Company offers three months or less, annual and/or multi-year subscriptions. Generally, all subscriptions are paid for in advance of fulfillment. Renewal orders for the retail market are solicited primarily through a series of efforts that include letters, email, and telemarketing. New orders are generated primarily from targeted direct mail campaigns for specific products. Other sales channels used by the Company include advertising in media publications, the Internet, cross selling via telesales efforts and Internet promotions through third parties. Institutional subscribers consist of corporations, financial professionals, colleges, and municipal libraries. The Company has a dedicated department that solicits institutional subscriptions. Fees for institutional services vary by the university or college enrollment, number of users, and the number of products purchased. Cash received and the value of receivables for amounts billed to retail and institutional customers is recorded as unearned revenue until the order is fulfilled. As the subscriptions are fulfilled, the Company recognizes revenue in equal installments over the life of the particular 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. Until December 23, 2010, the Company's businesses consolidated into two business segments. The investment related periodical publications (retail and institutional) and fees from copyright data including proprietary ranking system information and other proprietary information consolidate into one segment entitled Investment Periodicals, Publications and Copyright Data. Until December 23, 2010, the investment management services to the Value Line Funds and other managed accounts were consolidated into a second business segment entitled Investment Management. As of April 30, 2011, the end of the Company's 2011 fiscal year, the Investment Periodicals, Publications and Copyright Data segment constitutes the Company's only business segment. 24 -------------------------------------------------------------------------------- Restructuring of Asset Management and Mutual Fund Distribution Businesses As of December 23, 2010, the Company completed its previously announced restructuring of its asset management and mutual fund distribution businesses (the "Restructuring Transaction"). As part of the Restructuring Transaction: (1) EULAV Securities, Inc., a New York corporation and wholly-owned subsidiary of the Company that acted as the distributor of the 14 Value Line Funds ("ESI"), was restructured into a Delaware limited liability company named EULAV Securities LLC ("ES"); (2) the Company transferred 100% of its interest in ES to EULAV Asset Management LLC ("EULAV Asset Management"), a wholly-owned subsidiary of the Company that acted as the investment adviser to the Value Line Funds; (3) EULAV Asset Management was converted into EULAV Asset Management Trust, a Delaware trust ("EAM"); and (4) EAM issued voting profits interests to five individuals (the "Voting Profits Interest Holders") who were selected by the independent directors of the Company, and (5) pursuant to the EAM Trust Agreement, the Company received an interest in certain revenues of EAM and a portion of the residual profits of EAM but has not voting authority with respect to the election or removal of the trustees of EAM. Value Line restructured its ownership interests in EAM to non-voting revenues and profits interests. Pursuant to EAM's Declaration of Trust (the "EAM Trust Agreement"), Value Line has no voting authority with respect to the election or removal of the trustees of EAM and holds an interest in non-12b-1 revenues of EAM and generally 50% of the residual profits of EAM. The Voting Profits Interest Holders paid no consideration in exchange for their interests in EAM. Mitchell Appel, formerly the president of ESI and EULAV Asset Management as well as a director of each of the Value Line Funds, is one of the Voting Profits Interest Holders of EAM and, effective December 23, 2010, was appointed the first Chief Executive Officer of EAM by the Trustees of EAM. Mr. Appel resigned his positions as Chief Financial Officer and a director of the Company on December 9, 2010 and resigned from his position as an employee of the Company on December 22, 2010. The Company recorded as post-employment compensation expense the value of the voting profits interests in EAM granted to Mr. Appel. Pursuant to the EAM Trust Agreement, the Company granted EAM the right to use the Value Line name for all existing Value Line Funds and agreed to supply the Value Line Proprietary Ranking information to EAM without charge or expense. As a result of the Restructuring Transaction, which involved the deconsolidation of Value Line's former subsidiaries, EAM LLC and ESI, the Company recorded a pre-tax accounting gain (non-cash) of $50,510,000, restructuring expenses of $3,764,000, non-cash postemployment compensation expense of $1,770,000, and $914,000 of expenses related to the operating lease exit obligation for the vacated EAM office space, during the twelve months ended April 30, 2011. The net income of the Company for the fiscal year ended April 30, 2011 also includes approximately $17.1 million of deferred income tax expense that resulted from the Restructuring Transaction, including the deconsolidation of Value Line's former subsidiaries, EAM LLC and ESI. Business Environment During the Company's fiscal year ended April 30, 2011 (which we sometimes refer to as "fiscal 2011) the global financial markets had positive performance. For the twelve months ended April 30, 2011, the NASDAQ and Dow Jones Industrial Average were up 17% and 16%, respectively. Value Line top ranked stocks (Timeliness Rank 1 and 2) gained 26.4% in the twelve months ended April 30, 2011, significantly ahead of the S&P 500 Index which rose 13.2% during the same period. The NASDAQ and the Dow Jones Industrial Average declined 39.1% and 38.6% respectively from the end of September 2008 to March 9, 2009. From March 9, 2009 to April 30, 2011, those indices have increased nearly 127% and 96%, respectively, with the NASDAQ 38% and the Dow Jones Industrial Average 18% above their respective September 2008 levels. Nevertheless, the severe downturn experienced in the September 2008 to March 2009 period and continued volatility in the financial markets have resulted in many individual investors withdrawing money from equity investments, including equity mutual funds. This risk averse temperament of investors continues to negatively impact both the Company's revenues from its research periodicals and publications and the Company's cash flows derived from its non-voting revenues and non-voting profits interests in EAM. Investment management fees for fiscal 2011 declined primarily as a result of an 11% decline in average Value Line Fund assets under management during fiscal 2011 as compared to the average Value Line Fund assets under management for the twelve months ended April 30, 2010 (which we sometimes refer to as "fiscal 2010"). In response, the Company continues to be diligent in operational and marketing execution, and in expense management. 25 -------------------------------------------------------------------------------- Results of Operations The operating results of the Company for fiscal year 2011 improved from the previous year. The following table illustrates the key earnings figures for each of the three years ended April 30, 2011, 2010, and 2009. Year Ended April 30, 2011 2010 2009 Percentage Change (in thousands, except earnings/(loss) per share) 11 vs. 10 10 vs. 09 Earnings/(loss) per share $ 3.79 ($ 2.32 ) $ 2.30 263.4 % -200.9 % Net income/(loss) $ 37,782 ($ 23,188 ) $ 22,953 262.9 % -201.0 % Operating income/(loss) $ 8,533 ($ 32,190 ) $ 24,223 126.5 % -232.9 % Operating expenses $ 40,134 $ 90,330 $ 45,018 -55.6 % 100.7 % Gain from de-consolidation of subsidiaries $ 50,510 - - n/a n/a Revenues and profits interests from EAM $ 2,355 - - n/a n/a Income from securities transactions, net $ 65 $ 837 $ 11,625 -92.2 % -92.8 % For the twelve months ended April 30, 2011, the Company's net income of $37,782,000, or $3.79 per share, which included a pre-tax gain of $50,510,000 from deconsolidation of the Company's former investment management subsidiaries, EAM LLC and ESI, restructuring expenses of $3,764,000, post-employment compensation expense of $1,770,000 related to the grant of a voting profits interest in EAM to a former employee, $914000 of expenses for operating lease exit costs related to the relocation of the EAM operations and a $1,767,000 reduction in the estimated cost of administration of the Fair Fund, was $60,970,000 above the net loss of $23,188,000, or $2.32 per share, for the twelve months ended April 30, 2010. The net loss for fiscal 2010 included $48,106,000 of expenses related to the SEC Settlement discussed in Item 3, "Legal Proceedings" of this Form 10-K and a one-time charge of $727,000 for the write down of development software. Net loss of $23,188,000 for fiscal 2010 was $46,141,000 below net income of $22,953,000, or $2.30 per share, for the twelve months ended April 30, 2009 (which we sometimes refer to as "fiscal 2009"), primarily as a result of the SEC Settlement expense and the write down of development software during fiscal 2010. Operating income was $8,533,000 for fiscal 2011 compared to the operating loss of $32,190,000 for fiscal 2010. Operating income for fiscal 2010 included the previously mentioned SEC Settlement expense while operating income for fiscal 2011 included a reduction of $1,767,000 to these expenses resulting from a change in the estimated cost of administration of the Fair Fund. Operating loss of $32,190,000 for fiscal 2010 was $56,413,000 below the operating income of $24,223,000 for fiscal 2010 primarily as a result of the expenses related to SEC Settlement. Excluding the provision of $48,106,000 for the SEC Settlement and a one-time charge of $727,000 for the write down of development software, operating income for fiscal 2010 would have been $16,643,000, $7,580,000 or 31% below operating income for fiscal 2009. Operating revenues from investment periodicals and related publications, and investment management fees and services (this segment was discontinued as of December 23, 2010) declined for the twelve months ended April 30, 2011, while copyright data fees for the period increased above the prior fiscal year. 26 -------------------------------------------------------------------------------- Operating revenues and % of total by year Year Ended April 30, 2011 2010 2009 Percentage Change (in thousands) $$ % $$ % $$ % 11 vs. 10 10 vs. 09 Investment periodicals and related publications $ 34,406 70.7 % $ 35,965 61.9 % $ 39,935 57.7 % -4.3 % -9.9 % Copyright data fees $ 3,568 7.3 % $ 3,243 5.6 % $ 4,333 6.3 % 10.0 % -25.2 % Investment management fees and services $ 10,693 22.0 % $ 18,932 32.5 % $ 24,973 36.0 % -43.5 % -24.2 % Total Operating Revenues $ 48,667 $ 58,140 $ 69,241 -16.3 % -16.0 % Investment periodicals and related publications revenues Investment periodicals and related publications revenues were down $1,559,000, or 4%, for twelve months ended April 30, 2011, as compared to fiscal 2010. While the Company continued its efforts to attract new subscribers through various marketing channels, primarily direct mail and the internet for retail users, and by the efforts of our sales personnel in the institutional market, total product line circulation remains lower than in past years. Factors that have contributed to the decline in the investment periodicals and related publications revenues include competition in the form of free or low cost investment research on the Internet and research provided by brokerage firms at no direct cost to their clients. As of April 30, 2011, total company-wide circulation has declined 2% compared to total circulation at April 30, 2010. Although renewal rates for the flagship product, The Value Line Investment Survey, are 77%, up from 74% for fiscal 2010, the Company is not adding enough new subscribers to offset the subscribers that choose not to renew the flagship product and other Value Line products. The Company has been successful in growing revenues from electronic investment periodicals within institutional sales, with earned revenues increasing $554,000 or 7% for the twelve months ended April 30, 2011, as compared to fiscal 2010. Gross institutional sales were $9,748,000 for the twelve months ended April 30, 2011, an increase of $387,000 or 4% from fiscal 2010. This increase continues a positive growth trend for Institutional Sales, but is not sufficient to wholly offset the lost revenues from retail subscribers. For fiscal 2010, investment periodicals and related publications revenues were down $3,970,000 or 10%, as compared to fiscal 2009. As of April 30, 2010, total company-wide circulation had dropped 11% compared to total circulation at April 30, 2009. Although renewal rates for The Value Line Investment Survey, were 74%, up from 70% for fiscal 2009, the Company did not add enough new subscribers to offset the subscribers that chose not to renew to the flagship product and other Value Line products. The Company was successful in growing electronic investment periodicals revenues within institutional sales, which increased $671,000 or 10% from fiscal 2009. Gross institutional sales for fiscal 2010 were $9,361,000, up $1,174,000, or 14%, from fiscal 2009. Within investment periodicals and related publications are subscription revenues derived from print and electronic products. The following chart illustrates the year-to-year change in the revenues associated with print and electronic subscriptions. Subscription Revenues Year Ended April 30, 2011 2010 2009 Percentage Change (in thousands) 11 vs. 10 10 vs. 09 Print publication revenues $ 21,625 $ 23,309 $ 27,089 -7.2 % -14.0 % Electronic publication revenues 12,781 12,656 12,846 1.0 % -1.5 % Total investment periodicals and related publications revenue $ 34,406 $ 35,965 $ 39,935 -4.3 % -9.9 % 27-------------------------------------------------------------------------------- Sources of Subscription Revenues 2011 2010 2009 Print Electronic Print Electronic Print Electronic New Subscribers 11.0 % 29.3 % 10.6 % 31.0 % 11.0 % 32.8 % Renewals 89.0 % 70.7 % 89.4 % 69.0 % 89.0 % 67.2 % Total Subscribers 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % At April 30, 2011 2010 2009 Percentage Change (in thousands) 11 vs. 10 10 vs. 09 Unearned revenues (short and long term) $27,001 $27,177 $28,997 -0.6 % -6.3 % For the twelve months ended April 30, 2011, print publication revenues decreased $1,683,000, or 7%, from fiscal 2010 for the reasons described earlier. Print circulation, which has always dominated the Company's subscription base, has fallen 5% as of April 30, 2011 as compared to print circulation at April 30, 2010. For the twelve months ended April 30, 2011, electronic publications revenues were 1% higher than for fiscal 2010. The electronic publication revenues are broken down into institutional accounts and retail subscribers. For the twelve months ended April 30, 2011, institutional revenues increased $554,000, or 7%, as compared to fiscal 2010. For the twelve months ended April 30, 2011 electronic publications revenues from retail subscribers were down $429,000, or 9%, as compared to fiscal 2010. The Company has relied more on its institutional sales marketing efforts, and the increase in institutional revenues is a direct result of a focused effort to sell to colleges, libraries and corporate accounts. The decrease in electronic retail publications revenues is primarily attributable to the decrease in circulation within the Company's software products, which have not had a major update recently. For the twelve months ended April 30, 2010, print publication revenues decreased $3,780,000 or 14% from fiscal 2009. Fiscal 2010 print circulation, which has always dominated our subscription base, had decreased 12% from year end fiscal 2009. Electronic publications revenues decreased by $190,000, or less than 2% for the twelve months ended April 30, 2010 as compared to fiscal 2009. The electronic publication revenues are broken down into institutional accounts and retail subscribers. For the twelve months ended April 30, 2010, institutional revenues had increased $671,000, or 10%, while revenues from retail subscribers were down $861,000, or 15%, in each case as compared to fiscal 2009. The majority of the Company's subscribers have traditionally been individual investors who generally receive printed publications via US Mail on a weekly basis. Consistent with the experience of other print publishers in many fields, the Company found that its universe of customers has been declining as individuals migrate to online delivered services. Investors interested in online investment information have access to free equity research from many sources. For example, most retail broker-dealers with online trading capabilities offer their customers free or low cost research services that directly compete with the Company's services. The Company believes that the volatility of the equity market and the severe economic recession, which economics authorities say is likely to have ended during the fourth quarter of calendar 2010, have to some extent eroded retail investor interest in equities. The Company also believes that the negative trend in overall subscription revenue is likely to continue, albeit at a slower rate than the decline experienced in recent years, until new products have been developed and marketed. The Company has established the goal of developing competitive electronic products and marketing them effectively through traditional and electronic channels. Towards that end, the Company has been working closely with a third-party firm with expertise both in crafting effective online marketing strategies and modernizing legacy information technology systems. The Company is not able to predict when these efforts will result in the launch of new services or whether they will be successful in reversing the trend of declining retail publishing revenues. 28-------------------------------------------------------------------------------- The Value Line Timeliness Ranking SystemTM ("the Ranking System"), a component in the Company's flagship product, The Value Line Investment Survey, is also an important part of the Company's copyright data business. During the twelve months ended April 30, 2011, the combined Ranking System "Rank 1 & 2" stock performance of 26.4% allowing for weekly changes in Ranks, compares very favorably to the S&P 500 index performance of 13.2%. By contrast, during fiscal 2010, the Combined Ranking System "Rank 1 and 2" stock performance compared unfavorably to the S&P 500 index performance for that period. The Company attributes this relative underperformance to the rapid and severe price actions in the markets experienced during the fiscal 2010 period, which, appear to have favored short-term investing, as investors bought well known names whose earnings had plunged and whose stock prices were depressed in hopes the stock prices would rebound. Such stocks are generally not well ranked by the Company because the Ranking System emphasizes among other data points, earnings results, cash flow and price momentum. The Ranking System is designed to be predictive over a six to twelve month period. Copyright data fees Copyright data fees have increased $325,000, or 10%, for the twelve months ended April 30, 2011, as compared to fiscal 2010. As of April 30, 2011, total third party sponsored assets were attributable to four contracts for copyright data representing $3.5 billion in various products, as compared to four contracts and $2.6 billion in assets at the end of fiscal 2010, representing a 34% increase in assets. The Company believes the growth of this part of the business is dependent upon the desire of third parties to use the Value Line trademarks and proprietary research for their products. This market has become significantly more competitive as a result of product diversification and increased use of indices by portfolio managers. Copyright data fees have been an important component of the Company's plan to replace shrinking publishing revenues. No new products have been added in fiscal year 2011. The Company believes that the growth of this part of the business is dependent upon the desire of third parties to use the Value Line trademarks and proprietary research for their products. One account was added and one lost in June 2010, so there was no net change in the number of accounts in fiscal 2011. For fiscal 2010 copyright data fees decreased $1,090,000, or 25%, as compared to fiscal 2009. As of April 30, 2010, total third party sponsored assets were attributable to four contracts for copyright data and represented $2.6 billion in various products, as compared to four contracts and $2.0 billion in assets at the end of fiscal 2009, representing a 28% increase in assets. Despite the increase in year-end assets under management from April 30, 2009 to April 30, 2010, average assets under management during the year ended April 30, 2010 were lower than for the year ended April 30, 2009. The Company believes that this decrease in average assets under management resulted from both the underperformance by the Ranking System in fiscal 2010 and the broad and deep declines in the equity markets from September 2008 until March 2009 which significantly impacted assets of the third party sponsors that are customers of our copyright data business and resulted in lower asset based fees paid to the Company. No new accounts were added in fiscal 2010. Investment management segment As of the Restructuring Date, December 23, 2010, the Company deconsolidated its asset management and mutual fund distribution businesses and its interest in these businesses was restructured as a non-voting revenues and non-voting profits interest in EAM. Accordingly, the Company will no longer report this operation as a separate business segment, although it still maintains a significant interest in the cash flows generated by this business. Total assets in the Value Line Funds managed by EAM at April 30, 2011 were approximately $2.24 billion, as compared to total assets in the Value Line Funds managed by EAM LLC, the predecessor of EAM, at April 30, 2010 of approximately $2.32 billion. This decrease of approximately $78 million, or 3.4% resulted primarily from net redemptions from all major fund categories, with market appreciation fully offsetting redemptions in the variable annuity asset class and partially offsetting redemptions in the equity fund class of assets in the Value Line Funds. At the end of fiscal 2010, overall Value Line Fund assets were flat as compared to the end of fiscal 2009. The following table shows the change in assets for the past three fiscal years including sales (inflows), redemptions (outflows), dividends and capital gain distributions, and market value change. Inflows for sales, and outflows for redemptions reflect decisions of individual investors. The table illustrates the assets within the Value Line Funds broken down into equity funds, variable annuity funds and fixed income funds as of April 30, 2011, 2010 and 2009. 29-------------------------------------------------------------------------------- Total Net Assets Asset Flows 2011 vs. 2010 vs. For the Years Ended April 30, 2011 2010 2009 2010 2009 Value Line equity fund assets (excludes variable annuity)- beginning $ 1,446,104,954 $ 1,445,168,855 $ 2,499,824,428 0.1 % -42.2 % Sales/inflows 74,397,936 119,362,892 400,940,827 -37.7 % -70.2 % Redemptions/outflows (370,072,264 ) (516,461,559 ) (575,670,435 ) -28.3 % -10.3 % Dividend and Capital Gain Distributions (2,683,333 ) (6,832,954 ) (35,888,690 ) -60.7 % -81.0 % Market value change 250,625,095 404,867,720 (844,037,275 ) -38.1 % 148.0 % Value Line equity fund assets (non-variable annuity)- ending 1,398,372,388 1,446,104,954 1,445,168,855 -3.3 % 0.1 % Variable annuity fund assets - beginning $ 495,004,319 $ 453,958,992 $ 808,054,829 9.0 % -43.8 % Sales/inflows 15,170,774 42,428,972 127,997,022 -64.2 % -66.9 % Redemptions/outflows (78,046,318 ) (82,785,322 ) (113,787,522 ) -5.7 % -27.2 % Dividend and Capital Gain Distributions (3,815,539 ) (32,487,231 ) (112,587,503 ) -88.3 % -71.1 % Market value change 92,425,046 113,888,908 (255,717,834 ) -18.8 % 144.5 % Variable annuity fund assets - ending 520,738,282 495,004,319 453,958,992 5.2 % 9.0 % Fixed income fund assets - beginning $ 249,868,326 $ 248,927,635 $ 266,172,054 0.4 % -6.5 % Sales/inflows 27,627,007 26,239,120 32,599,409 5.3 % -19.5 % Redemptions/outflows (44,038,991 ) (36,388,184 ) (33,028,853 ) 21.0 % 10.2 % Dividend and Capital Gain Distributions (1,358,551 ) (8,277,052 ) (378,440 ) -83.6 % 2087.2 % Market value change 4,428,430 19,366,807 (16,436,535 ) -77.1 % 217.8 % Fixed income fund assets - ending 236,526,222 249,868,326 248,927,635 -5.3 % 0.4 % Money market fund assets - ending 89,356,239 132,102,912 181,573,202 -32.4 % -27.2 % Assets under management - ending $ 2,244,993,131 $ 2,323,080,511 $ 2,329,628,685 -3.4 % -0.3 % Of the fourteen funds, shares of Value Line Strategic Asset Management Trust ("SAM") and Value Line Centurion Fund ("Centurion") are available to the public only through the purchase of certain variable annuity and variable life insurance contracts issued by The Guardian Insurance & Annuity Company, Inc. ("GIAC"). The next table provides a breakdown of the major distribution channels for the Value Line Funds in terms of assets and shareholder accounts as of April 30, 2011. 30-------------------------------------------------------------------------------- Fund Categories Percentage of Shareholder Aggregate Asset Percentage of Assets Shareholder Accounts in Levels in Category Accounts Category Guardian (SAM and Centurion Funds) $520,738,281 23% 29,308 26% Value Line Funds direct accounts & other dealers $860,924,868 38% 40,514 37% Top five dealer platforms $863,329,982 39% 41,109 37% Total $2,244,993,131 100% 110,931 100% Prior to December 1, 2010, EAM LLC, in addition to managing the Value Line Funds, separately managed accounts of institutions and high net worth individuals for which it was paid an advisory fee. EAM had no separately managed accounts as of April 30, 2011. As of April 30, 2010 assets under management in separately managed accounts of EAM LLC were $48.4 million, up from $48.2 million at April 30, 2009. Of the $48.4 million as of April 30, 2010, $24.5 million was affiliated with AB&Co. Assets within the separately managed accounts were held at third party custodians, were subject to the terms of the applicable advisory agreement and did not have any advance notice requirement for withdrawals. For the period from May 1, 2010 through December 23, 2010 and twelve months ended April 30, 2010, investment management fees and distribution service fees (which we sometimes refer to as "12b-1 fees") amounted to $10,584,000 and $18,710,000, respectively, after giving effect to account fee waivers for certain of the Value Line Funds. These amounts included 12b-1 fees of $2,308,000 and $4,124,000, earned for the period from May 1, 2010 through December 23, 2010 and for the twelve months ended April 30, 2010, respectively. For the period from May 1, 2010 through December 23, 2010 and twelve months ended April 30, 2010, total investment management fee waivers were $513,000 and $898,000, respectively. For the period from May 1, 2010 through December 23, 2010 and twelve months ended April 30, 2010, total 12b-1 fee waivers were $1,651,000 and $2,642,000, respectively. The Company, EAM LLC and ESI had no right to recoup the previously waived amounts of investment management fees and 12b-1 fees except for a potential partial recovery for up to 3 years in the case of the Value Line U.S. Government Money Market Fund. Any such recoupment of waived investment management fees is subject to the provisions of the applicable prospectus. For the period from May 1, 2010 through December 23, 2010 and for the twelve months ended April 30, 2010, separately managed account revenues were $109,000 and $222,000, respectively. As a result of a 20% decline in average assets under management for fiscal 2010 as compared to fiscal 2009, investment management fees and 12b-1 fees for the twelve months ended April 30, 2010 were down $6,041,000, or 24%, below fiscal 2009. Investment Management fees for the twelve months ended April 30, 2010 were down $4,149,000, or 22%, as compared to fiscal 2009. There was a net decrease of $1,250,000 or 23% in 12b-1 fees for fiscal 2010 as compared to fiscal 2009. During fiscal 2010, contractual fee waivers applied to most of the Value Line Funds. For the twelve months ended April 30, 2010 and 2009, 12b-1 fee waivers were $2,642,000 and $2,889,000, respectively. For the twelve months ended April 30, 2010 and 2009, investment management fee waivers were $898,000 and $208,000, respectively. As of April 30, 2010 twelve of the fourteen Value Line Funds had all or a portion of the 12b-1 fees being waived and five of the fourteen Value Line Funds have partial management fee waivers in place. EAM - The Company's non-voting revenue and profits interest As a result of the Restructuring Transaction, the Company no longer engages, through subsidiaries, in the investment management or mutual fund distribution businesses. The Company does hold non-voting revenues and non-voting profits interests in EAM which entitle the Company to receive from EAM an amount ranging from 41% to 55% of EAM's investment management fee revenues from its mutual fund and separate accounts business. EAM currently has no separately managed account clients. During the period from December 23, 2010 through April 30, 2011 the Company recorded revenues of $2,187,000 and profits of $168,000 from its non-voting interests in EAM without incurring any directly related expenses. During the period from December 23, 2010 until May 28, 2011, EAM and ES occupied a portion of the premises that the Company leases from a third party. The Company received $189,000 during the period from December 23, 2010 to April 30, 2011 for rent and a payment for certain accounting and other administrative support services provided to EAM and ES on a transitional basis during such period. 31-------------------------------------------------------------------------------- EAM - Results of operations subsequent to Restructuring Date The overall results of EAM's investment management operations for the period from December 23, 2010 through April 30, 2011, before interest holder distributions, include total investment management fees earned from the Value Line Funds of $4,592,000, 12b-1 fees of $1,293,000 and other income of $2,000. For the same period, total investment management fee waivers were $303,000 and 12b-1 fee waivers were $855,000. For the period from December 23, 2010 through April 30, 2011, EAM's net income was $336,000, after giving effect to Value Line's non-voting revenues interest of $2,187,000, but before distributions to voting interest holders and to the Company in respect of its non-voting profits interest. As of April 30, 2011 twelve of the fourteen Value Line Funds have all or a portion of the 12b-1 fees being waived and five of the fourteen funds have partial investment management fee waivers in place. Although, under the terms of the EAM Trust Agreement, the Company no longer receives or shares in the revenues from 12b-1 distribution fees, the Company could benefit from the fee waivers to the extent that the resulting reduction of expense ratios and enhancement of the performance of the Value Line Funds attracts new assets. As of April 30, 2011, three of the six equity mutual funds, excluding SAM and Centurion, had an overall four star or five star rating by Morningstar, Inc. The equity funds as a group experienced net redemptions for the twelve months ended April 30, 2011. As of April 30, 2011, the number of shareholder accounts had declined 21% from the number of shareholder accounts at April 30, 2010, to 110,931 from 140,904. The largest distribution channel for the Value Line Funds remains the fund supermarket platforms such as Charles Schwab & Co., Inc., TD Ameritrade and Fidelity. The Value Line fixed income Fund assets (excluding the Value Line U.S. Government Money Market Fund ("USGMMF")), represent approximately 11% of total mutual fund assets at April 30, 2011, about the same proportion of total mutual fund assets as at April 30, 2010. The USGMMF assets represent 4% of the total Fund assets at April 30, 2011, a decrease from 6% of the total Fund assets at April 30, 2010. This decline resulted primarily from the Company's withdrawing assets from the USGMMF to fund the special dividend aggregating approximately $20,000,000 paid during 2011. Management fees from the USGMMF were essentially zero with the Company having waived nearly all fees for the Fund since the end of November 2009 until the Restructuring Date and, because of the historically low interest rate environment and new regulations restricting investments, substantially subsidizing the USGMMF expenses. EAM did not have any separately managed accounts as at April 30, 2011. Shareholder transactions for the Value Line Funds are processed each business day by a third party transfer agent. Shares can be redeemed without advance notice upon request of the shareholders each day that the New York Stock Exchange is open. As of April 30, 2010, one of the six equity mutual funds, excluding SAM and Centurion, had a four star rating by Morningstar, Inc. The equity funds experienced net redemptions for the twelve months ended April 30, 2010, as compared to net sales for fiscal 2009. As of April 30, 2010, the number of shareholder accounts had declined 22% from the number of shareholder accounts at April 30, 2009, to 140,904 from 181,487. The Value Line fixed income Fund assets (excluding the USGMMF), represented 11% of total Fund assets at April 30, 2010, about the same proportion of total Fund assets as at April 30, 2009. At April 30, 2010 USMMF assets represented 6% of the total Fund assets, a decrease from 8% of the total Fund assets at April 2009, primarily as a result of cash held in the USGMMF by the Company and AB&Co. having been redeployed into other fixed income investments such as pre-refunded municipal bonds, U.S. Treasury securities, and FDIC backed floating rate notes. In addition, during fiscal 2010, the Company reduced its cash held in the USGMMF by approximately $44 million to fund the SEC Settlement payment in November 2009 and by an additional $30 million to fund the special dividend paid to shareholders of the Company in April 2010. 32 -------------------------------------------------------------------------------- Separately managed account revenues decreased $643,000 or 74% for the twelve months ended April 30, 2010 as compared to the twelve months ended April 30, 2009 primarily due to the loss of a major account at the end of fiscal 2009. The Company's separately managed accounts as of April 30, 2010 had $48.4 million in assets, up from $48.2 million as of April 30, 2009. Of the $48.4 million as of April 30, 2010, $24.5 million was affiliated with AB&Co. During the third quarter of fiscal 2011, the affiliated entities cancelled their separately managed account agreements with EAM LLC. Assets within the separately managed accounts were held at third party custodians and were subject to the terms of each advisory agreement and did not have any advance notice requirement for withdrawals. The Company did not add any new accounts during the fiscal year 2010 and lost one small account in November 2009. Expenses Expenses within the Company are categorized into advertising and promotion, salaries and employee benefits, production and distribution, office and administration, restructuring and provision for settlement. Operating expenses of $40,134,000 for the twelve months ended April 30, 2011 were $50,196,000, or 56%, below operating expenses of $90,330,000 for fiscal 2010. During the twelve months ended April 30, 2011, expenses included a reduction of $1,767,000 in the estimated costs of administration of the Fair Fund claims and increased administration expenses of $914,000 related to the Company's operating lease exit obligation associated with the office space formerly occupied by EAM LLC. The twelve months ended April 30, 2011 also includes $3,764,000 of costs associated with the Restructuring Transaction and an additional post-employment compensation expense of $1,770,000 related to the grant of a voting profits interest in EAM to a former employee of the Company. During the twelve months ended April 30, 2010, expenses included a provision for the SEC Settlement of $48,106,000. Operating expenses of $90,330,000 for the twelve months ended April 30, 2010 were $45,312,000 above operating expenses of $45,018,000 for fiscal 2009. Excluding the provision for the SEC Settlement, operating expenses for fiscal 2010 would have been $42,224,000, 6% below operating expenses for fiscal 2009. Advertising and promotion Year Ended April 30, 2011 2010 2009 Percentage Change (in thousands) 11 vs. 10 10 vs. 09 Advertising and promotion $6,673 $9,346 $10,874 -28.6% -14.1% Advertising and promotion expenses for the fiscal year 2011 decreased $2,673,000, or 28%, as compared to the fiscal 2010. As a result of the disassociation and deconsolidation of the investment management business on December 23, 2010, the Company discontinued advertising expenses associated with the distribution of the Value Line Funds, resulting in a decline in expenses of $2,976,000, or 57%, for fiscal 2011 as compared to fiscal 2010. Within the publishing segment, costs for fiscal 2011 associated with direct mail decreased 2% below fiscal 2010. Media print advertising and promotional costs for fiscal 2011increased $453,000 as compared to fiscal 2010, with the increase relating to the digital product and software promotion project, public relations partially offset by a decline in direct mail for print products and renewal solicitation costs. Advertising and promotion expenses for the twelve months ended April 30, 2010 decreased $1,528,000 as compared to fiscal 2009. Within the investment management segment, supermarket and Guardian (GIAC) platform expenses for fiscal 2010 associated with the distribution of the Value Line Funds decreased $947,000, or 16%, below fiscal 2009 due to the decline in the average net assets under management. Print advertising was limited due to the market volatility and uncertainty and as a result print advertising costs fell $692,000 during fiscal 2010 as compared to fiscal 2009. Within the publishing segment, costs associated with direct mail were relatively flat for fiscal 2010 as compared to fiscal 2009. Salaries and employee benefits Year Ended April 30, 2011 2010 2009 Percentage Change (in thousands) 11 vs. 10 10 vs. 09 Salaries and employee benefits $17,242 $16,314 $17,676 5.7% -7.7% 33-------------------------------------------------------------------------------- Salaries and employee benefits increased by $928,000 during the twelve months ended April 30, 2011 as compared to fiscal 2010, partly as a result of the $1,770,000 non-cash post employment compensation expense discussed above offset partially by the elimination of approximately $1,300,000 related to the deconsolidation of the investment management business. This increase in expenses was also affected by the recording of $500,000 of accrued profit sharing expense and $663,000 to support upgrades to the Company's digital and software products and fulfillment system. Over the past several years, the Company has saved money by combining the roles and responsibilities of various personnel and by selective outsourcing. During fiscal 2010, salaries and employee benefits decreased by $1,362,000 as a result of the consolidation of positions, outsourcing and cost controls. There was no profit sharing contribution recorded for fiscal 2010 or 2009. During fiscal 2011, 2010 and 2009, the Company capitalized $402,000, $285,000 and $335,000 of internal costs of developing software for internal use, respectively. Production and distribution Year Ended April 30, 2011 2010 2009 Percentage Change (in thousands) 11 vs. 10 10 vs. 09 Production and distribution $4,718 $5,244 $5,868 -10.0% -10.6% Production and distribution expenses for the twelve months ended April 30, 2011 were $526,000, or 10%, below fiscal 2010 primarily as a result of the discontinuance of a third party fulfillment and distribution provider during the latter part of fiscal 2010. Production and distribution expenses for fiscal 2010 were $624,000, or 10.6%, below expenses for fiscal 2009. Amortized software costs decreased $325,000 from fiscal 2009 due to a reduction in prior years expenditures for capitalized costs. The remaining decline in expenses during fiscal 2011 and fiscal 2010 were primarily due to volume reductions in paper, printing and mailing that resulted from a decrease in circulation of the print products. Office and administration Year Ended April 30, 2011 2010 2009 Percentage Change (in thousands) 11 vs. 10 10 vs. 09 Office and administration $9,504 $11,320 $10,600 -16.0% 6.8% Office and administration expenses for the twelve months ended April 30, 2011 of $9,504,000, which includes $914,000 of expenses for operating lease exit costs associated with the office space formerly occupied by EAM LLC, were $1,816,000, or 16.0%, lower than fiscal 2010. Exclusive of the operating lease exit costs, office and administration expenses decreased primarily as a result of lower professional fees related to regulatory matters, rent reimbursement of $189,000 received from EAM in fiscal 2011 and an expense of $727,000 recorded in fiscal 2010 for the write-down of capitalized development costs related to a software production project that was determined to be no longer viable. Additionally, office and administration expenses for fiscal 2011 declined by $608,000 as a result of the elimination of expenses related to the deconsolidation of the investment management business. Office and administration expenses for fiscal 2010 were $720,000, or 6.8%, above expenses for fiscal 2009 due largely to the aforementioned write-down of software development costs in fiscal 2010. Expenses related to restructuring Year Ended April 30, 2011 2010 2009 Percentage Change (in thousands) 11 vs. 10 10 vs. 09 Expenses related to restructuring $3,764 - - n/a n/a For fiscal 2011, professional fees including the cost of the proxy solicitation for the Value Line Funds, of $3,764,000 were associated with the Restructuring Transaction that was completed on December 23, 2010. The Company's policy is to expense these costs as incurred. 34 -------------------------------------------------------------------------------- Provision for Settlement On November 4, 2009, the Company, its former Chief Executive Officer and another former officer of the Company concluded a Settlement with the SEC as a result of an investigation regarding the execution of portfolio transactions on behalf of the Value Line Funds (see Item 3, "Legal Proceedings"). In connection with the Settlement, the Company recorded a provision for settlement during fiscal year 2010 of $48,106,000 including $43,706,100 paid to the SEC in November 2009 and $4,400,000 of estimated expenses associated with the Fair Fund administration and other costs related to the Settlement which the Company is required to pay, of which $43,706,000 was paid to the SEC in November 2009. During the fourth quarter of fiscal year 2010, the Company recorded $400,000 of additional anticipated costs relating to the Settlement, in particular relating to the Fair Fund distribution process. During fiscal 2011, the SEC appointed A.B. Data, Ltd as the Administrator of the Fair Fund. In connection with its ongoing administration of the Fair Fund, A.B. Data, Ltd estimated that the remaining costs of administration would be less than originally determined as a result of a modification in the manner of administration and distribution of the Fair Fund. Accordingly, the Company reduced its liability for the costs of administration by $1,767,000 during the fourth quarter of fiscal 2011. Subsequent to the Settlement and pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, the Company's disgorgement, interest and penalty payments to the SEC were to be placed into a Fair Fund created by the SEC. The Fair Fund will be used to reimburse shareholders who owned shares in the affected Value Line Funds in the period covered by the Settlement and to complete prescribed claims procedures. The Company is required to bear all the costs associated with the Fair Fund distribution, including retaining a third party consultant appointed by the SEC to administer the Fair Fund administration and distribution. Segment Operating Profit Until December 23, 2010, the Company operated in two business segments, Investment Periodicals, Publishing & Copyright Data and Investment Management. Investment Periodicals, Publishing & Copyright Data Investment Management Twelve Months Ended April 30, Twelve Months Ended April 30, 2011 2010 2009 Percentage Change 2011 2010 2009 Percentage Change (in thousands) 11 vs. 10 10 vs. 09 11 vs. 10 10 vs. 09 Segment revenues from external customers $ 37,974 $ 39,208 $ 44,268 -3.1 % -11.4 % $ 10,693 $ 18,932 $ 24,973 -43.5 % -24.2 % Segment profit from operations $ 8,984 $ 10,425 $ 16,237 -13.8 % -35.8 % $ (448 ) $ (42,614 ) $ 7,998 98.9 % -632.8 % Segment profit margin from operations 23.7% 26.6% 36.7% -11.0% -27.5% -4.2% -225.1% 32.0% 98.1% -802.8% (1) Period from May 1, 2010 through December 23, 2010. The decrease in the operating profit margin and segment operating profits in the Investment Periodicals, Publishing and Copyright Data segment resulted primarily from the decline in investment publication and periodicals revenues without a proportionate decrease in expenses for production and administration, including overhead costs. This decline was partially offset by an increase in copyright data revenues, which are asset based, during fiscal 2011 while the Company's costs to provide the copyright data are relatively fixed. The negative operating profit margin and operating loss in the Investment Management segment during fiscal 2011 resulted from $3.7 million of expenses associated with the Restructuring Transaction, the non-cash compensation to a former employee of $1.77 million and recognition of $914,000 of expenses associated with an operating lease exit obligation partially offset by a reduction of $1.8 million in estimated Settlement expenses to administer the Fair Fund. Investment management fees and distribution revenues declined as compared to fiscal 2010 resulting from lower average assets under management in the Value Line Mutual Funds and from the Investment Management business being converted, on December 23, 2010 into a non-voting revenues interest and a non-voting profits interest which are not considered to be operating activities of the Company. Fiscal 2010's negative operating profit margin and loss was a direct result of the $48,106,000 Provision for the Settlement. 35 -------------------------------------------------------------------------------- Investment Periodicals, Publishing & Copyright Data Segment revenues from the Company's Investment Periodicals, Publishing & Copyright Data business for fiscal 2011 declined from fiscal 2010 levels primarily due to the continued deterioration in circulation of the total product line while operating profit and operating profit margins declined due to the relatively fixed costs related to producing the Company's products and overhead costs classified as Administrative expenses. The Company believes that competition in the form of free or low cost investment research on the Internet and research provided by brokerage firms at no cost to their clients contributed to the decline in revenue in this segment. The recession and continued volatility in the markets have also contributed to the decline in subscriptions, to the Company's products, as individuals have reduced many forms of discretionary spending. Also, some investors may have shifted from equity investments to fixed income investments. The Company provides only limited research on fixed income investments, and this is not a core aspect of Value Line's business. The 2.9% decline in the operating profit margin in this segment from fiscal 2010's operating margin was offset partially by the increase in revenues from copyright data fees, which are asset-based. Costs for the Company's copyright data products are relatively fixed costs for the Company, so that expenses do not increase proportionately to increases in revenue. Investment Management Negative operating margins for the investment management business conducted by the Company during the period from May 1, 2010 through December 23, 2010 resulted primarily from the incurrence of expenses related to the Restructuring Transaction and declines in certain asset based revenues with no offsetting expense reductions. Lower management fees from the Value Line Funds for this period resulted from lower average assets under management (through December 23, 2010) and fee waivers. The Company waived management fees of $352,000 for the period from May 1, 2010 through December 23, 2010 in the USGMMF and, due to the low interest rate environment and new regulations restricting investments, that Fund generated insufficient portfolio income to cover its normalized expenses, which were subsidized by the Company. Segment operating profit and the operating profit margin for fiscal 2011 through December 23, 2010, the date of consummation of the Restructuring Transaction, includes $3,764,000 of expenses related to the Restructuring Transaction, $1,770,000 of post-employment compensation expense related to the grant of the voting profits interest in EAM to a former employee in connection with the Restructuring Transaction and $914,000 of operating lease exit costs related to the office space formerly occupied by EAM LLC. These expenses in fiscal 2011 were partially offset by a reduction of $1,767,000 in the estimated cost to administer the Fair Fund. As previously mentioned, the negative results for the investment management segment in fiscal 2010 resulted primarily from the provision for the Settlement. Income from Securities Transactions, net During the twelve months ended April 30, 2011, the Company's income from securities transactions, net, of $65,000 was $772,000 or 92% below income from securities transactions, net, of $837,000 during fiscal 2010. Income from securities transactions, net, of $837,000 during fiscal 2010 was $10,788,000 or 93% below income from securities transactions, net, of $11,625,000 during fiscal 2009. Income from securities transactions, net, includes dividend and interest income of $135,000, $859,000 and $1,467,000 earned during the twelve months ended April 30, 2011, 2010 and 2009, respectively. These declines reflect the lower level of the Company's invested assets resulting from the Settlement payment of $43,706,100 in November 2009, payment of a special $3 per share dividend (aggregating approximately $30,000,000) in April 2010, and payment of a special $2 per share dividend (aggregating approximately $20,000,000) in November 2010. The maturity of higher yielding fixed income investments during fiscal 2010 also contributed to the decline in investment income in fiscal 2011. Capital losses during the twelve months ended April 30, 2011 were $63,000 primarily from the sale of fixed income obligations. Net capital gains for fiscal 2010 and 2009 were $42,000 and $9,788,000, respectively. Net capital gains during the fiscal 2009 of $9,788,000 included realized capital gains of $9,539,000 from the sale of the Company's entire equity securities portfolio, which had been invested primarily in Value Line Funds. Effective income tax rate The overall effective income tax rate, as a percentage of pre-tax ordinary income for the twelve months ended April 30, 2011 and April 30, 2010 was 38.53% and 26.04%, respectively. The change in the effective income tax rate is attributable to the non-deductible portion of the provision for the SEC Settlement included in fiscal 2010, the alternative minimum tax on the Company's net operating loss carry forward in fiscal 2011, and the change in the Company's non-taxable investment income. 36 -------------------------------------------------------------------------------- Liquidity and Capital Resources The Company had negative working capital of $5,680,000 as of April 30, 2011 and working capital of $21,262,000 as of April 30, 2010. These amounts include short-term unearned income of $22,442,000 and $22,314,000 reflected in total current liabilities at April 30, 2011 and April 30, 2010, respectively. The decrease in working capital for fiscal 2011 resulted primarily from the payment in November 2010 of a special $2.00 per share dividend, aggregating approximately $20 million, in lieu of the Company's regularly scheduled $.20 per share dividend. Also in fiscal 2011, in connection with the Restructuring Transaction, the Company transferred cash and marketable securities of $7,000,000 to EAM, and incurred professional expenses of $3,764,000. Working capital of $21,262,000 as of April 30, 2010 was reduced from working capital of $80,439,000 as of April 30, 2009. The decrease in working capital in fiscal 2010 resulted primarily from the SEC Settlement payment of $43,706,000 made in November 2009 and the payment in April 2010 of a special dividend of $3.00 per share aggregating approximately $30 million. Cash and short-term securities were $19,476,000 as of April 30, 2011, and $39,964,000 as of April 30, 2010. Cash from operating activities The Company had cash inflows from operations of $10,660,000 for the twelve months ended April 30, 2011 as compared to cash outflows from operations of $8,658,000 for the twelve months ended April 30, 2010. The change in cash flows from fiscal 2010 to fiscal 2011was primarily due to cash outflows during fiscal 2010 resulting from the payment to the SEC of $43,706,000 in connection with the Settlement with the SEC in November 2009, partially offset by cash inflows of $16,840,000 from the liquidation of the Company's trading portfolio during fiscal 2010. Fiscal 2011 includes cash inflows from the receipt of $2,027,000 in federal, state and local income tax refunds, and cash outflows related to payments of $764,000 and $2,783,000 in Settlement and Restructuring Transaction related expenses, respectively, as well as the payments made during fiscal 2011 for expenses incurred during fiscal 2010. Cash from investing activities The Company's cash inflow from investing activities of $3,753,000 for the twelve months ended April 30, 2011 was 82% lower than cash inflow from investing activities of $21,085,000 for the twelve months ended April 30, 2010. Cash inflows in fiscal 2011 were lower than cash inflows from investing activities in fiscal 2010 due to the Company's lower level of invested cash assets in fiscal 2011 and the transfer of $5,484,000 of cash as part of the capitalization of EAM. In fiscal 2010 the Company's cash inflows from investing activities of $21,085,000 were 39% lower than in fiscal 2009. Cash inflows in fiscal 2010 were lower than cash inflows from investing activities in fiscal 2009 due to the Company's lower level of invested assets in fiscal 2010. Cash from financing activities The Company's fiscal 2011 net cash outflow for financing activities was $14,882,000, or 38.2% lower than cash outflow from financing activities for fiscal 2010. During fiscal 2011, cash outflows for financing activities consisted of $90,000 for common stock repurchases and dividend payments of $2.40 per share. During fiscal 2010, cash outflows for financing activities consisted of dividend payments of $3.90 per share. Management believes that the Company's cash and other liquid asset resources used in its business together with the future cash flows from operations and from the Company's non-voting revenues and non-voting profits interests in EAM will be sufficient to finance current and forecasted liquidity needs for the year ending April 30, 2012 ("fiscal 2012"). Management does not anticipate making any borrowings in fiscal 2012. Retained earnings were over $31 million and liquid assets over $19 million at April 30, 2011. 37 -------------------------------------------------------------------------------- Critical Accounting Estimates and Policies The Company prepares its consolidated financial statements in accordance with generally accepted accounting principles as in effect in the United States (U.S. GAAP"). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent, and the Company evaluates its estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies reflect the significant judgments and estimates used in the preparation of its Consolidated Financial Statements: ? Revenue recognition ? Income taxes ? Reserve for settlement expenses Revenue Recognition The majority of the Company's revenues come from the sale of print and electronic subscriptions and fees for copyright proprietary information, and, prior to December 23, 2010, investment management and 12b-1fees. The Company recognizes subscription revenue in equal amounts over the term of the subscription, which generally ranges from three months to one year or longer, varying based on the product or service. Copyright data fees are calculated monthly based on market fluctuation and billed quarterly. Prior to the Restructuring Date, December 23, 2010, investment management fee and 12b-1 fee revenues for the Value Line Funds were recognized each month based upon the daily net asset value of each Fund. The Company believes that the estimates related to revenue recognition are critical accounting estimates, and to the extent that there are material differences between its determination of revenues and actual results, its financial condition or results of operations may be affected. Income Taxes The Company's effective annual income tax expense rate is based on the U.S. federal and state and local jurisdiction tax rates on income and losses that are part of its Consolidated Financial Statements. Tax-planning opportunities and the blend of business income, including income derived from the Company's non-voting revenue and non-voting profits interests in EAM and income from securities transactions, will impact the effective tax rate in the various jurisdictions in which the Company operates. Significant judgment is required in evaluating the Company's tax positions. Tax law requires items to be included in the tax return at different times from when these items are reflected in the Company's Consolidated Financial Statements. As a result, the effective tax rate reflected in the Company's Consolidated Financial Statements is different from the tax rate reported on the Company's tax returns (the Company's cash tax rate). Some of these differences are permanent, such as non-taxable income that is not includable in the Company's tax return and expenses that are not deductible in the Company's tax return and some differences reverse over time, such as depreciation and amortization expenses. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax basis of assets and liabilities. As of April 30, 2011 and 2010, the Company had $3,022,000 and $8,690,000, respectively, of deferred tax assets, which included $2,494,000 and $7,847,000 of short-term deferred Federal, State, and local taxes, respectively, related to the net operating loss carryforwards of $6.4 million and $19.3 million respectively. In assessing the Company's deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or utilized in the Company's tax filings. 38-------------------------------------------------------------------------------- In assessing the need for a valuation allowance, the Company considers both positive and negative evidence, including tax-planning strategies, projected future taxable income, and recent financial performance. If after future assessments of the realizability of the deferred tax assets the Company determines a lesser allowance is required, the Company would record a reduction to the income tax expense and to the valuation allowance in the period this determination was made. This would cause the Company's income tax expense, effective tax rate, and net income to fluctuate. In addition, the Company establishes reserves at the time that it determines that it is more likely than not that it will need to pay additional taxes related to certain matters. The Company adjusts these reserves, including any impact of the related interest and penalties, in light of changing facts and circumstances such as the progress of a tax audit. A number of years may elapse before a particular matter for which the Company has established a reserve is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. Such liabilities are recorded as income taxes payable in the Company's Consolidated Balance Sheets. Settlement of any particular issue would usually require the use of cash. Favorable resolutions of tax matters for which the Company has previously established reserves are recognized as a reduction to the Company's income tax expense when the amounts involved become known. Assessing the future tax consequences of events that have been recognized in the Company's financial statements or tax returns requires judgment. Variations in the actual outcome of these future tax consequences could materially impact the Company's financial position, results of operations, or cash flows. Reserve for settlement expenses As of April 30, 2011 and 2010 the Company had $1,464,000 and $4,247,000, respectively, reserved for expected expenses related to the SEC Settlement. The amount of the reserve for expected expense is an estimate of the expected cost of the administration of the Fair Fund established by the SEC to reimburse shareholders who owned shares in the affected Value Line Funds in the period covered by the Settlement and other related costs. Included in the estimate are calculations for the third party administrator appointed in September 2010 by the SEC, the tax advisor named in November 2009 by the SEC, legal fees, and transfer agent fees, and communication expense required to identify and notify eligible shareholders as well as other costs associated with the calculation and distribution of the proceeds of the Fair Fund. These costs are estimated based on the scope of the work and bids received from the third party vendors. Due to the complexity of the Fair Fund distribution, these estimates are subject to change. During Fiscal 2011, as a result of modification in the manner of administration of the Fair Fund, the Company reduced its estimate of the costs required to administer the Fair Fund by $1,767,000. During the fourth quarter of fiscal 2010, the Company had increased such estimate by $400,000. There could be a positive or negative impact to the Company predicated on the complexity of the calculation and determination of shareholders who will receive distributions from the Fair Fund and resultant costs to the Company which is required to pay all the costs of administration of the Fair Fund. Contractual Obligations Below is a summary of certain contractual obligations of the Company ($ in thousands): Payments due by period Contractual Obligations Total Less than 1 1-3 years 3-5 years More than 5 year years Long-Term Debt Obligations - - - - - Capital Lease Obligations - - - - - Operating Lease Obligations $6,142 $2,948 $3,194 - - Purchase Obligations 1,714 1,714 - - - TOTAL $7,856 $4,662 $3,194 - - 39-------------------------------------------------------------------------------- [ Back To TMCnet.com's Homepage ]