VALUE LINE INC - Quarter Report: 2006 January (Form 10-Q)

Part I - Financial Information
Item 1. Financial Statements
Value Line, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
(unaudited)
		Jan. 31,			Apr. 30,
		2006			2005
		(unaudited)
Assets
Current Assets:
Cash and cash equivalents (including short term
investments of $9,828 and $5,654, respectively)		$	10,674		$	5,971
Trading securities			22,407			0
Securities available for sale			64,244			76,274
Accounts receivable, net of allowance for doubtful
accounts of $74 and $52, respectively			2,597			3,096
Receivable from affiliates			2,834			2,557
Prepaid expenses and other current assets			1,469			1,468
Deferred income taxes			32			32
Total current assets			104,257			89,398
Long term assets
Property and equipment, net			5,549			5,984
Capitalized software and other intangible assets, net			2,486			3,483
Total long term assets			8,035			9,467
Total assets		$	112,292		$	98,865
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities		$	4,974		$	4,331
Accrued salaries			1,335			1,247
Dividends payable			2,495			2,495
Unearned revenue			30,418			29,748
Deferred income taxes			7,952			6,176
Total current liabilities			47,174			43,997
Long term liabilities
Unearned revenue			7,054			10,344
Deferred charges			381			381
Total long term liabilities			7,435			10,725
Shareholders' Equity:
Common stock, $.10 par value; authorized 30,000,000
shares; issued 10,000,000 shares			1,000			1,000
Additional paid-in capital			991			991
Retained earnings			41,040			30,798
Treasury stock, at cost (18,400 shares on 1/31/06
and 4/30/05)			(354	)		(354	)
Accumulated other comprehensive income, net of tax			15,006			11,708
Total shareholders' equity			57,683			44,143
Total liabilities and shareholders' equity		$	112,292		$	98,865

 

Part I - Financial Information
Item 1. Financial Statements
Value Line, Inc.
Consolidated Condensed Statements of Income
(in thousands, except per share amounts)
(unaudited)
		Three months ended						Nine months ended
		Jan. 31,						Jan. 31,
		2006			2005			2006			2005
Revenues:
Investment periodicals and
related publications		$	11,890		$	12,525		$	35,963		$	37,556
Licensing fees			1,442			648			3,335			1,716
Investment management fees & svcs			8,250			7,885			24,160			24,088
Total revenues			21,582			21,058			63,458			63,360
Expenses:
Advertising and promotion			3,826			5,455			9,902			16,245
Salaries and employee benefits			4,747			4,812			14,605			15,337
Production and distribution			1,712			2,106			5,314			6,615
Office and administration			3,260			2,248			7,967			6,613
Total expenses			13,545			14,621			37,788			44,810
Income from operations			8,037			6,437			25,670			18,550
Income from securities transactions, net			2,858			1,104			3,571			8,033
Income before income taxes			10,895			7,541			29,241			26,583
Provision for income taxes			4,201			2,884			11,514			10,187
Net income		$	6,694		$	4,657		$	17,727		$	16,396
Earnings per share, basic & fully diluted		$	0.67		$	0.46		$	1.78		$	1.64
Weighted average number of common shares			9,981,600			9,981,600			9,981,600			9,981,600

VALUE LINE, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Significant Accounting Policies - Note 1:
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 29, 2005 and Form 10-K Amended, dated August 26, 2005 for the fiscal year ended April 30, 2005. Results of operations covered by this report may not be indicative of the results of operations for the entire year.
Value Line, Inc. (the "Company") is incorporated in New York State and carries on the investment periodicals and related publications and investment management activities formerly performed by Arnold Bernhard & Co., Inc. (the "Parent") which owns approximately 86% of the issued and outstanding common stock of the Company.
Principles of Consolidation:
The consolidated condensed financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition:
Subscription revenues are recognized ratably over the terms of the subscriptions. Accordingly, the amount of subscription fees to be earned by servicing subscriptions after the date of the balance sheet is shown as unearned revenue.
Investment management fees (except 12b-1 fees) are recorded as the related services are performed (see note 6). Service and distribution fees collected under rule 12b-1 are recorded in the Consolidated Condensed Statements of Income based upon the average daily net asset values of the respective Value Line mutual funds.
Valuation of Securities:
The Company's securities classified as available for sale consist of shares of the Value Line Mutual Funds and government debt securities accounted for in accordance with Statement of Financial Accounting Standards No.115, "Accounting for Certain Investments in Debt and Equity Securities". The securities are valued at market with unrealized gains and losses on these securities reported, net of applicable taxes, as a separate component of Shareholders' Equity. Realized gains and losses on sales of the securities 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 assets available for sale to fully satisfy its current liabilities should the need arise.
Trading securities held by the Company are valued at market with unrealized gains and losses included in earnings.
Market valuation of securities listed on a securities exchange and over-the-counter securities traded on the NASDAQ national market is based on the closing sales prices on the last business day of each month. In the absence of closing sales prices for such securities, and for other securities traded in the over-the-counter market, the security is valued at the midpoint between the latest available and representative asked and bid prices.
Valuation of open-ended mutual fund shares are based upon the net asset values of the shares as calculated by such funds.
Market valuation of the Company's fixed maturity government debt obligations are valued utilizing quoted prices provided by a third party pricing service.
Advertising Expenses:
The Company expenses advertising costs as incurred.

 

 

Reclassification:
Certain items in the prior year 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 provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". 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.
Earnings per Share, basic & fully diluted:
Earnings per share are based on the weighted average number of shares of common stock and common stock equivalents outstanding during each year.
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, 2006 and April 30, 2005, cash equivalents included $9,784,000 and $5,546,000 respectively, invested in the Value Line money market funds.
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.
Marketable Securities - Note 2:
Trading Securities:
Securities held by the Company had an aggregate cost of $22,403,000 and a fair market value $22,407,000 at January 31, 2006. There were no trading securities held at April 30, 2005. There were no sales of trading securities in fiscal 2006. The proceeds from sales of trading securities, during the nine months ended January 31, 2005, were $42,205,000 and the related gains on these sales were $2,425,000. Unrealized gains on the trading securities portfolio of $4,000 and unrealized losses of $1,055,000 for the nine months ended January 31, 2006 and 2005, respectively, were included in the Consolidated Condensed Statements of Income.
Securities Available for Sale:
Equity Securities:
The aggregate cost of the equity securities classified as available for sale, which are invested in the Value Line mutual funds, was $21,632,000 and the market value was $44,916,000 at January 31, 2006. The aggregate cost of the equity securities classified as available for sale at April 30, 2005 was $19,169,000 and the market value was $37,209,000. The total gains for equity securities with net gains included in Accumulated Other Comprehensive Income on the Consolidated Condensed Balance Sheet were $23,284,000 and $18,157,000, net of deferred income taxes of $8,149,000 and $6,355,000, as of January 31, 2006 and April 30, 2005, respectively. Losses on equity securities included in Accumulated Other Comprehensive Income at April 30, 2005 were $117,000, net of deferred income taxes of $41,000. The net increase in unrealized holding gains on these securities of $5,244,000 and the decrease of $2,503,000, net of deferred income taxes of $1,835,000 and $875,000, were included in Shareholders' Equity at January 31, 2006 and 2005, respectively.

 

Realized capital gains from the sales of equity securities classified as available for sale during the nine months ended January 31, 2006 and January 31, 2005 were $2,430,000 and $6,301,000, of which $2,355,000 and $5,861,000, respectively, were reclassified out of Accumulated Other Comprehensive Income into earnings. The proceeds received from the sales of these securities during the nine months ended January 31, 2006 and January 31, 2005 were $2,430,000 and $12,669,000, respectively. Proceeds and capital gains included $75,000 and $433,000 from an installment sale of an investment in a privately held Company, in fiscal 2006 and 2005, respectively.

Government Debt Securities:

The Company's investments in debt securities are available for sale and valued at market value. The aggregate cost and market value at January 31, 2006 for U.S. Government debt securities classified as available for sale were as follows:

 

					(In Thousands)
		Historical			Market			Gross Unrealized
Maturity		Cost			Value			Holding Losses
Due in less than 2 years		$	15,103		$	14,974			($129	)
Due in 2-5 years			4,420			4,354			(66	)
Total investment in debt securities		$	19,523		$	19,328			($195	)

 

The aggregate cost and market value at April 30, 2005 for U.S. Government debt securities classified as available for sale were as follows:

 

					(In Thousands)
		Historical			Market			Gross Unrealized
Maturity		Cost			Value			Holding Losses
Due in less than 2 years		$	34,506		$	34,481			($25	)
Due in 2-5 years			4,587			4,584			(3	)
Total investment in debt securities		$	39,093		$	39,065			($28	)

 

The unrealized losses of $195,000 and $28,000 on U.S. government debt securities net of deferred income taxes of $66,000 and $10,000, respectively, were included in Accumulated Other Comprehensive Income on the Consolidated Condensed Balance Sheets as of January 31, 2006 and April 30, 2005. During the third quarter of fiscal 2006, the Company reclassified $18,038,000 of US Government debt securities from the classification of available for sale to trading securities that resulted in the recognition and reclassification of an unrealized loss of $129,000 from Accumulated Other Comprehensive Income to the Consolidated Condensed Statement of Income.
The average yield on the U.S. Government debt securities classified as available for sale at January 31, 2006 and 2005 was 1.85% and 1.31%, respectively.
Proceeds from sales of government debt securities classified as available for sale were $9,650,000 and $9,019,000 during the first nine months of fiscal year 2006 and 2005, respectively. There were no related gains or losses.
For the nine months ended January 31, 2006, and 2005, income from securities transactions, net also included $358,000 and $161,000 of dividend income; $957,000 and $199,000 of interest income; and $11,000 and $7,000 of related interest expense, respectively.

 

Supplemental Disclosure of Cash Flow Information - Note 3:
Cash payments for income taxes were $11,406,000 and $11,111,000 during the nine months ended January 31, 2006 and 2005, respectively.
Employees' Profit Sharing and Savings Plan - Note 4:
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 by a formula based upon 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 $911,000 and $797,000 for the nine months ended January 31, 2006 and 2005, respectively.
Comprehensive Income - Note 5:
Statement of Financial Accounting Standards no. 130 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 historically has not been recognized in the calculation of net income.
At January 31, 2006 and April 30, 2005 the Company held both equity securities 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)
Nine months ended 1-31-06		Before Tax Amount			Tax (Expense) or Benefit			Net of Tax Amount
Unrealized Gains on Securities:
Unrealized Holding Gains/(Losses) arising during the period		$	7,303			($2,563	)	$	4,740
Add: Reclassification adjustments for losses realized in net income			129			(45	)		84
Less: Reclassification adjustments for gains realized in net income			(2,355	)		829			(1,526	)
Other Comprehensive income		$	5,077			($1,779	)	$	3,298

 

Nine months ended 1-31-05
Unrealized Gains on Securities:
Unrealized Holding Gains/(Losses) arising during the period		$	3,296			($1,166	)	$	2,130
Less: Reclassification adjustments for gains realized in net income			(5,861	)		2,063			(3,798	)
Other Comprehensive income			($2,565	)	$	897			($1,668	)

 

Related Party Transactions - Note 6:
The Company acts as investment adviser and manager for fourteen open-ended investment companies, the Value Line Family of Funds. The Company earns investment management fees based upon the average daily net asset values of the respective Value Line mutual funds. In addition, effective July 1, 2000, twelve of the fourteen Value Line Mutual Funds adopted a service and distribution plan under rule 12b-1 of the Investment Company Act of 1940. Effective September 18, 2002, the remaining two funds for which Value Line is the adviser adopted a service and distribution plan under rule 12b-1 of the Investment Company Act of 1940. Further, the Company earned brokerage commission income on securities transactions executed by Value Line Securities, Inc. (VLS) on behalf of the funds that cleared on a fully disclosed basis through non-affiliated brokers, who received a portion of the gross commission. Pending a review of effecting trades for the Value Line Funds, VLS in November 2004 suspended effectuation of trades through VLS for any of the Value Line Funds.
For the nine months ended January 31, 2006 investment management fees and 12b-1 service and distribution fees amounted to $23,362,000, which includes fee waivers for certain of the Value Line Mutual Funds. For the nine months ended January 31, 2005, investment management fees, 12b-1 service and distribution fees and brokerage commission income amounted to $23,164,000. The amounts for service and distribution fees during the nine months ended January 31, 2006 and 2005 were $7,498,000 and $7,214,000, respectively. The related receivables from the funds for management advisory fees and 12b-1 service fees included in Receivable from affiliates on the Consolidated Condensed Balance Sheet were $2,721,000 and $2,406,000 at January 31, 2006 and April 30, 2005, respectively.
For the nine months ended January 31, 2006 and 2005, the Company was reimbursed $700,000 and $387,000, respectively, for payments it made on behalf of and services it provided to Arnold Bernhard and Company, Inc. ("Parent"). At January 31, 2006 and April 30, 2005, Receivable from affiliates on the Consolidated Condensed Balance Sheet also included a receivable from the Parent of $83,000 and $107,000, respectively.
From time to time, the Parent has purchased additional shares of Value Line, Inc. 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.
Federal, State and Local Income Taxes - Note 7:
The Company computes its tax in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
The provision for income taxes includes the following:

		Nine months ended January 31,
		2006			2005
		(in thousands)
Current:
Federal		$	9,492		$	9,051
State and local			2,210			1,522
		$	11,702		$	10,573
Deferred:
Federal			($271	)		($371	)
State and local			83			(15	)
			($188	)		($386	)
Total:		$	11,514		$	10,187

 

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 liability are primarily a result of unrealized gains on the Company's available for sale securities portfolios.
Business Segments - Note 8:
The Company operates two reportable business segments: Publishing and Investment Management Services. The publishing segment produces investment related periodicals in both print and electronic form, and licensing fees. The investment management segment provides advisory services to the Value Line family of mutual funds, as well as institutional and individual clients. 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 depreciation and income from securities transactions related to corporate assets, between the two reportable segments.
Disclosure of Reportable Segment Profit and Segment Assets (in thousands)

 

		Nine months ended January 31, 2006
		Publishing			Investment Management Services			Total
Revenues from external customers		$	39,298		$	24,160		$	63,458
Intersegment revenues			64			0			64
Income from securities transactions, net			124			327			451
Depreciation and amortization			1,581			66			1,647
Segment operating profit			13,408			12,274			25,682
Segment assets			17,490			73,937			91,427
Expenditures for segment assets			227			0			227

		Nine months ended January 31, 2005
		Publishing			Investment Management Services			Total
Revenues from external customers		$	39,272		$	24,088		$	63,360
Intersegment revenues			167			0			167
Income from securities transactions, net			2			8,031			8,033
Depreciation and amortization			1,717			71			1,788
Segment operating profit			10,466			8,096			18,562
Segment assets			16,140			60,910			77,050
Expenditures for segment assets			613			139			752

 

Reconciliation of Reportable Segment Revenues,

Operating Profit and Assets (in thousands)

 

		Nine months ended January 31,
		2006			2005
Revenues
Total revenues for reportable segments		$	63,522		$	63,527
Elimination of intersegment revenues			(64	)		(167	)
Total consolidated revenues		$	63,458		$	63,360
Segment profit
Total profit for reportable segments		$	26,133		$	26,595
Add: Income from securities transactions related to corporate assets			3,120			0
Less: Depreciation related to corporate assets			(12	)		(12	)
Income before income taxes		$	29,241		$	26,583
Assets
Total assets for reportable segments		$	91,427		$	77,050
Corporate assets			20,865			20,654
Consolidated total assets		$	112,292		$	97,704

 

Contingencies - Note 9:
On September 17, 2003 the Company commenced an action in New York Supreme Court, seeking damages in an unspecified amount, against a small mutual fund company pertaining to a contemplated transaction. The Company was countersued for alleged damages in excess of $5,000,000. The action was settled in November, 2004 without a material adverse effect on the Company. A related entity of the defendant in the New York action brought suit against the Company and certain Directors in Federal Court in Texas in March, 2004 based on the same transaction. On the Company's motion, that action has been transferred from Texas to New York. On March 2, 2006 the Federal Judge in New York granted the Company's motion dismissing three causes of action. The court allowed one cause of action to continue at this time. Although the ultimate outcome of the litigation is subject to the inherent uncertainties of any legal proceeding, based upon Counsel's analysis of the factual and legal issues and the Company's meritorious defenses, it is management's belief that the expected outcome of this matter will not have a material adverse effect on the Company's consolidated results of operations and financial condition.
By letter dated June 15, 2005, the staff of the Securities and Exchange Commission requested the Company as part of a preliminary inquiry to provide documents relating to, among other things, trades for the Company's proprietary accounts, and the effectuation and execution of trades through VLS for the Value Line Funds. The Company is cooperating with the preliminary inquiry.

		Estimated Fair Value After
		Hypothetical Change in Interest Rates
		(bp = basis points)
		Fair			50bp			50bp			100bp			100bp
Fixed Income Securities		Value			increase			decrease			increase			decrease
As of January 31, 2006
Investments in securities with fixed maturities		$	41,735		$	41,550		$	41,890		$	41,560		$	41,943
As of April 30, 2005
Investments in securities with fixed maturities		$	39,065		$	38,927		$	39,253		$	38,911		$	39,326

 

								Estimated			Hypothetical
								Fair Value after			Percentage
					Hypothetical			Hypothetical			Increase (Decrease) in
Equity Securities		Fair Value			Price Change			Change in Prices			Shareholders’ Equity
As of January 31, 2006		$	44,916			30% increase		$	58,390			15.1	%
						30% decrease		$	31,441			(15.1	)%
As of April 30, 2005		$	37,209			30% increase		$	48,372			16.4	%
						30% decrease		$	26,046			(16.4	)%

 

	Value Line, Inc. (Registrant)
Date: March 17, 2006	By:	/s/ Jean Bernhard Buttner
		Jean Bernhard Buttner
		Chairman & Chief Executive Officer