VALUE LINE INC - Quarter Report: 2008 July (Form 10-Q)

New York		13-3139843
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
220 East 42nd Street, New York, New York		10017-5891
(Address of principal executive offices)		(Zip Code)

Large accelerated filer o	Accelerated filer o	Non-accelerated filer x	Smaller reporting company o
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Class		Outstanding at August 31, 2008
Common stock, $.10 par value		9,981,600 Shares

 

		July 31,			Apr. 30,
		2008			2008
		(unaudited)
Assets
Current Assets:
Cash and cash equivalents (including short term investments of $14,740 and $8,159, respectively)		$	15,300		$	8,955
Trading securities			16,608			19,857
Securities available for sale			91,945			97,043
Accounts receivable, net of allowance for doubtful accounts of $49 and $107, respectively			3,505			2,733
Receivable from affiliates			2,653			2,445
Prepaid expenses and other current assets			979			1,048
Deferred income taxes			155			155
Total current assets			131,145			132,236
Long term assets
Property and equipment, net			4,596			4,709
Capitalized software and other intangible assets, net			769			1,008
Total long term assets			5,365			5,717
Total assets		$	136,510		$	137,953
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities		$	3,238		$	5,135
Accrued salaries			1,444			1,471
Dividends payable			3,993			2,995
Accrued taxes payable			2,763			129
Unearned revenue			24,353			26,610
Deferred income taxes			7,181			7,839
Total current liabilities			42,972			44,179
Long term liabilities
Unearned revenue			5,827			5,920
Total long term liabilities			5,827			5,920
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			72,023			70,954
Treasury stock, at cost (18,400 shares on 7/31/08 and 4/30/08)			(354	)		(354	)
Accumulated other comprehensive income, net of tax			14,051			15,263
Total shareholders' equity			87,711			87,854
Total liabilities and shareholders' equity		$	136,510		$	137,953

 

 

		For the three months
		ended
		July 31,			July 31,
		2008			2007
Cash flows from operating activities:
Net income		$	5,062		$	5,943
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			306			436
Losses on sales of trading securities and securities available for sale			191			-
Unrealized losses/(gains) on trading securities			(31	)		104
Deferred income taxes			11			(36	)
Other			69			-
Changes in assets and liabilities:
Proceeds from sales/(purchases) of trading securities			3,155			(1,411	)
Decrease in unearned revenue			(2,350	)		(1,001	)
Increase/(decrease) in deferred charges			110			(6	)
Decrease in accounts payable and accrued expenses			(2,007	)		(1,390	)
Decrease in accrued salaries			(27	)		(135	)
Increase in accrued taxes payable			2,634			2,455
Decrease in prepaid expenses and other current assets			58			626
(Increase)/decrease in accounts receivable			(772	)		478
Increase in receivable from affiliates			(208	)		(47	)
Total adjustments			1,139			73
Net cash provided by operations			6,201			6,016
Cash flows from investing activities:
Purchases and sales of securities classified as available for sale:
Proceeds from sales of fixed income securities			3,165			683
Purchase of fixed income securities			-			(2,824	)
Purchases of equity securities			(3	)		(4	)
Acquisition of property and equipment			(7	)		(2	)
Expenditures for capitalized software			(16	)		(13	)
Net cash provided by/(used in) investing activities			3,139			(2,160	)
Cash flows from financing activities:
Dividends paid			(2,995	)		(2,995	)
Net cash used in financing activities			(2,995	)		(2,995	)
Net increase in cash and cash equivalents			6,345			861
Cash and cash equivalents at beginning of year			8,955			20,605
Cash and cash equivalents at end of period		$	15,300		$	21,466

		Common stock
																				Accumulated
		Number						Additional												Other
		of						paid-in			Treasury			Comprehensive			Retained			Comprehensive
		shares			Amount			capital			Stock			income			earnings			income			Total
Balance at April 30, 2008			9,981,600		$	1,000		$	991		$	(354	)				$	70,954		$	15,263		$	87,854
Comprehensive income
Net income														$	5,062			5,062						5,062
Other comprehensive income, net of tax:
Change in unrealized gains on securities, net of taxes															(1,212	)					(1,212	)		(1,212	)
Comprehensive income														$	3,850
Dividends declared																		(3,993	)					(3,993	)
Balance at July 31, 2008			9,981,600		$	1,000		$	991		$	(354	)				$	72,023		$	14,051		$	87,711

		Common stock
																				Accumulated
		Number						Additional												Other
		of						paid-in			Treasury			Comprehensive			Retained			Comprehensive
		shares			Amount			capital			Stock			income			earnings			income			Total
Balance at April 30, 2007			9,981,600		$	1,000		$	991		$	(354	)				$	57,383		$	16,552		$	75,572
Comprehensive income
Net income														$	5,943			5,943						5,943
Other comprehensive income, net of tax:
Change in unrealized gains on securities, net of taxes															547						547			547
Comprehensive income														$	6,490
Dividends declared																		(2,995	)					(2,995	)
Balance at July 31, 2007			9,981,600		$	1,000		$	991		$	(354	)				$	60,331		$	17,099		$	79,067

 

Note 1-Organization and Summary of Significant Accounting Policies:

The interim consolidated condensed financial statements of Value Line, Inc., together with its subsidiaries (collectively referred to as the “Company”), are unaudited. In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of normal recurring accruals except as noted below) considered necessary for a fair presentation. This report should be read in conjunction with the financial statements and footnotes contained in the Company's annual report on Form 10-K, dated July 17, 2008 for the fiscal year ended April 30, 2008. Results of operations covered by this report may not be indicative of the results of operations for the entire year.

 

Value Line, Inc. ("VLI") is incorporated in the State of New York. The Company's primary businesses are producing investment related periodical publications and data, licensing 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, providing investment management services to the Value Line Funds, institutions and individual accounts and providing distribution, marketing, and administrative services to the Value Line Funds. The name "Value Line" as used to describe the Company, its products, and its subsidiaries, is a registered trademark of the Company.

Principles of consolidation:

 

The consolidated condensed financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition:

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

 

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

 

Investment management fees consist of management fees from the Value Line Mutual Funds ("Value Line Funds"), and from asset management clients. Investment management fees for the mutual funds are earned on a monthly basis as services are performed and the fee is calculated based on average daily net assets of the mutual funds in accordance with each fund's advisory agreement. Investment management fees for the asset management accounts are earned on a monthly basis as services are performed and the fee is calculated on assets in accordance with each of the management agreements (see note 6).

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

 

Valuation of Securities:

The Company's securities classified as available for sale consist of shares of the Value Line 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 available for sale and trading securities reflected in the consolidated condensed financial statements at fair value are valued at market and  unrealized gains and losses on securities available for sale, net of applicable taxes are reported, as a separate component of Shareholders' Equity. Realized gains and losses on sales of the securities 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.

Market valuation of securities listed on a securities exchange is based on the closing sales prices on the last business day of each month. Valuation of open-end mutual fund shares is based upon the publicly quoted net asset value of the shares. The market value of the Company's fixed maturity government debt obligations are determined utilizing publicly quoted market prices.

 

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The Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157"), effective for fiscal years beginning after November 15, 2007. In accordance with FAS 157, fair value is defined as the price that the Company would receive upon selling an investment in a timely transaction to an independent buyer in the principal or most advantageous market of the investment. FAS 157 established a three-tier hierarchy to maximize the use of observable market data and minimize the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value including such a pricing model and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below.

 

Level 1 – quoted prices in active markets for identical investments

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

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

The valuation techniques used by the Company to measure fair value during the three months ended July 31, 2008 maximized the use of observable inputs and minimized the use of unobservable inputs. The Company utilized the following fair value techniques: multi-dimensional relational pricing model, option adjusted spread pricing and estimated the price that would have prevailed in a liquid market given information available at the time of evaluation.

The following is a summary of the inputs used as of July 31, 2008 in valuing the Company’s investments carried at value:

 

					(In Thousands)
Valuation Inputs		Cash Equivalents			Investments in Trading Securities			Investments in Securities Available for Sale
Level 1 - Quoted Prices		$	14,740			-		$	50,183
Level 2 - Other Significant Observable Inputs					$	16,608			41,762
Level 3 - Significant Unobservable Inputs			-			-			-
Total		$	14,740		$	16,608		$	91,945
The Company had no other financial instruments including futures, forwards and swap contracts.
For the period ended 7/31/08, there were no Level 3 investments.

 

 

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 July 31, 2008 and April 30, 2008, cash equivalents included $14,740,000 and $8,159,000, respectively, invested in the Value Line Cash Fund.

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.

Note 2-Investments:

Securities held by the Company are classified as Trading Securities and Available-for-Sale Securities. All securities held in VLS, as a broker/dealer, are classified as trading securities. Securities held by the Company and its other subsidiaries, are classified as available-for-sale securities.

 

Trading Securities:

Trading securities held by the Company at July 31, 2008 had an aggregate cost of $16,762,000 and a market value of $16,608,000. Trading securities held by the Company at April 30, 2008 had an aggregate cost of $20,042,000 and a market value of $19,857,000. The proceeds from sales of trading securities during the first quarter of fiscal 2009 were $3,155,000 and related net realized trading losses amounted to $125,000. There were no sales and no realized trading gains or losses during the first three months of fiscal year 2008. The net changes in unrealized gains of $31,000 for the period ended July 31, 2008 and the net changes in unrealized losses of $104,000 for the period ended July 31, 2007, respectively, were included in the Consolidated Condensed Statement of Income.

 

Securities Available for Sale:

Equity Securities:

The aggregate cost of the equity securities classified as available for sale, which consist of investments in the Value Line Funds, was $28,152,000 and the market value was $50,183,000 at July 31, 2008. As of April 30, 2008, the aggregate cost of the equity securities classified as available for sale, which consist of investments in the Value Line Funds, was $28,149,000 and the market value was $51,870,000. The total gains for equity securities with net gains included in Accumulated Other Comprehensive Income on the Consolidated Condensed Balance Sheet are $22,362,000 and $23,972,000, net of deferred taxes of $7,871,000 and $8,438,000, as of July 31, 2008 and April 30, 2008, respectively. The total losses for equity securities with net losses included in Accumulated Other Comprehensive Income on the Consolidated Condensed Balance Sheet are $331,000 and $251,000, net of deferred tax benefit of $117,000 and $89,000, as of July 31, 2008 and April 30, 2008, respectively.

During the three months ended July 31, 2008 and 2007, there were no sales and no realized gains or losses on equity securities, for which unrealized gains and losses were included in Accumulated Other Comprehensive Income as of July 31, 2008 or July 31, 2007. The decrease in gross unrealized gains on equity securities classified as available for sale of $1,690,000, net of deferred tax benefit of $595,000 and the increase in gross unrealized gains of $941,000, net of deferred taxes of $331,000, were included in Shareholders' Equity at July 31, 2008 and 2007, respectively.

Government Debt Securities:

Government debt securities consist of federal, state, and local government securities within the United States. The Company's investments in debt securities are classified as available for sale and valued at market value. The aggregate cost and fair value at July 31, 2008 for government debt securities classified as available for sale were as follows:

					(In Thousands)
		Historical						Gross Unrealized
Maturity		Cost			Fair Value			Holding Losses
Due in less than 2 years		$	24,247		$	23,820		$	(427	)
Due in 2 years or more			17,862			17,942			80
Total investment in government debt securities		$	42,109		$	41,762		$	(347	)

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Three months ended July 31, 2007
Unrealized Gains on Securities:
Increase in Unrealized Holding Gains arising during the period		$	843		$	(296	)	$	547
Change in Other Comprehensive Income		$	843		$	(296	)	$	547

Note 6-Related Party Transactions:

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

 

For the three months ended July 31, 2008 and 2007, investment management fees and 12b-1 service and distribution fees amounted to $7,932,000 and $7,883,000, respectively, which included fee waivers for certain of the Value Line Funds. These amounts included service and distribution fees of $1,808,000 and $1,669,000 earned by VLS in fiscal years 2009 and 2008, respectively. The related receivables from the funds for investment management fees and service and distribution fees included in Receivables from affiliates were $2,569,000 and $2,557,000 at July 31, 2008 and April 30, 2008, respectively.

 

Reconciliation of Reportable Segment Revenues, Operating Profit and Assets

		(in thousands)
		2008			2007
Revenues
Total revenues for reportable segments		$	20,219		$	20,810
Elimination of intersegment revenues			(6	)		(9	)
Total consolidated revenues		$	20,213		$	20,801
Segment profit
Total profit for reportable segments			7,623			9,303
Add: Income from securities transactions related to corporate assets			478			367
Less: Depreciation related to corporate assets			(4	)		(4	)
Income before income taxes		$	8,097		$	9,666
Assets
Total assets for reportable segments			88,961			100,095
Corporate assets			47,549			32,583
Consolidated total assets		$	136,510		$	132,678

Note 9-Contingencies:

By letter dated June 15, 2005, the staff of the Northeast Regional Office of the Securities and Exchange Commission ("SEC") informed the Company that it was conducting an informal inquiry primarily regarding the execution of portfolio transactions by VLS for the Value Line Funds. The Company has supplied numerous documents to the SEC in response to its requests and various employees and former employees of the Company have provided testimony to the SEC. On May 8, 2008 the SEC issued a formal order of private investigation regarding whether the VLS' brokerage charges and related expense reimbursements during periods prior to 2005 were excessive and whether adequate disclosure was made to the SEC and the boards of directors and shareholders of the Value Line Funds. Thereafter, certain senior officers of the Company asserted their constitutional privilege not to provide testimony. Management believes that the SEC is nearing completion of its investigation and the Company will seek to settle this matter with the SEC. Management cannot determine the effect that the investigation will have on the Company's financial statements although it believes that any settlement is likely to be material.

 

On September 3, 2008, the Company was served with a derivative shareholder's suit filed in New York Supreme Court naming all of the Company's Directors and alleging breach of fiduciary duty and related allegations, all arising from the above SEC matter. The complaint seeks return of remuneration by the Directors and other remedies.

 

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