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VALUE LINE INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Statement Regarding Forward-Looking Information This report contains statements that are predictive in nature, depend upon or refer to future events or conditions (including certain projections and business trends) accompanied by such phrases as "believe", "estimate", "expect", "anticipate", "will", "intend" and other similar or negative expressions, that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, as amended. Actual results for Value Line, Inc. ("Value Line" or "the Company") may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to the following: • maintaining revenue from subscriptions for the Company's digital and print published products; • changes in market and economic conditions, including global financial issues; • protection of intellectual property rights; • dependence on non-voting revenues and non-voting profits interests in EULAV Asset Management, a Delaware statutory trust ("EAM" or "EAM Trust"), which serves as the investment advisor to the Value Line Funds and engages in related distribution, marketing and administrative services; • fluctuations in EAM's assets under management due to broadly based changes in the values of equity and debt securities, redemptions by investors and other factors, and the effect these changes may have on the valuation of EAM's intangible assets; • dependence on key personnel; • competition in the fields of publishing, copyright data and investment management; • the impact of government regulation on the Company's and EAM's businesses; • availability of free or low cost investment data through discount brokers or generally over the internet; • terrorist attacks, cyber security attacks and natural disasters; • other risks and uncertainties, including but not limited to the risks described in Item 1A, "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended April 30, 2014 and in Part II, Item 1A of this Quarterly Report on Form 10-Q for the period ended July 31, 2014; and other risks and uncertainties arising from time to time. These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors which may involve external factors over which we may have no control or changes in our plans, strategies, objectives, expectations or intentions, which may happen at any time at our discretion, could also have material adverse effects on future results. Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with the SEC pursuant to the SEC's rules, we have no duty to update these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, current plans, anticipated actions, and future financial conditions and results may differ from those expressed in any forward-looking information contained herein. In this report, "Value Line," "we," "us," "our" refers to Value Line, Inc. and the "Company" refers to Value Line and its subsidiaries unless the context otherwise requires. 19 Executive Summary of the Business The Company's core business is producing investment periodicals and their underlying research and making available copyright data, including certain Proprietary Ranking System and other proprietary information, to third parties under written agreements for use in third-party managed and marketed investment products and for other purposes. Value Line markets under well-known brands including Value Line®, the Value Line logo®, The Value Line Investment Survey®, Smart Research. Smarter Investing™ 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. Prior to December 23, 2010, (see "Asset Management and Mutual Fund Distribution Businesses" below), the Company provided investment management services to the Value Line® Mutual Funds ("Value Line Funds"), institutional and individual accounts and provided distribution, marketing, and administrative services to the Value Line Funds. Since December 23, 2010, EULAV Asset Management Trust ("EAM") provides the investment management services to the Value Line Funds, institutional and individual accounts and provides distribution, marketing, and administrative services to the Value Line Funds. Value Line holds a substantial non-voting revenues and non-voting profits interests in EAM. The Company's target audiences within the investment research field are individual investors, colleges, libraries, and investment management professionals. Individuals come to Value Line for complete research in one package. Institutional licensees consist of corporations, financial professionals, colleges, and municipal libraries. 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. The Company has a dedicated department that solicits institutional subscriptions. Fees in institutional relationships vary, for example, by the university or college enrollment, number of users, and nature of the use. Payments received for new and renewal subscriptions and the value of receivables for amounts billed to retail and institutional customers are recorded as unearned revenue until the order is fulfilled. As the orders are fulfilled, the Company recognizes revenue in equal installments over the life of the particular subscription. Accordingly, the subscription fees to be earned by fulfilling subscriptions after the date of a particular balance sheet are shown on that balance sheet as unearned revenue within current and long term liabilities. The investment periodicals and related publications (retail and institutional) and fees from copyright data including the Proprietary Ranking System information and other proprietary information consolidate into the Publishing segment. Subsequent to December 23, 2010, the Investment Management business is no longer considered a business segment. Asset Management and Mutual Fund Distribution Businesses The business of EAM is managed by its trustees each owning 20% of the voting profits interest in EAM and by its officers subject to the direction of the trustees. The Company's non-voting revenues and non-voting profits interests in EAM entitle it to receive a range of 41% to 55% of EAM's revenues (excluding distribution revenues) from EAM's mutual fund and separate account business and 50% of the residual profits of EAM (subject to temporary increase in certain limited circumstances). The Voting Profits Interest Holders will receive the other 50% of residual profits of EAM. Current distribution is set at 90% of EAM's profits payable each fiscal quarter under the provisions of the EAM Trust Agreement. Value Line's percent share of EAM's revenues calculated each fiscal quarter was 49.18% in the first quarter of fiscal 2015 and 46.66% during the first quarters of fiscal 2014. Pursuant to the EAM Declaration of Trust, 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 System information to EAM without chargeor expense. 20 Business Environment During the three months ended July 31, 2014, the NASDAQ and the Dow Jones Industrial Average were up 6.20% and down .11%, respectively. The nation's economy, which faltered badly during the weather-impacted first quarter, as GDP declined 2.1%, came back strongly during April-to-July 2014, gaining an outsized 4.2%, led by fairly steady gains in consumer spending, industrial output, exports, and housing. A spike in inventories also contributed notably. Additionally encouraging as we look ahead is the healthier outlook on the employment front, where solid strides are being made in job creation and in reducing the unemployment rate. However, a likely drawdown of the aforementioned higher inventories could well keep third- and fourth-quarter growth to a range of 3.0%-3.5%. Meanwhile, our relative optimism on the domestic front does not carry over to the global side, where Europe is moving back and forth between a listless recovery and a series of business setbacks, now worsened by growing fears of deflation and the Middle East, where there seems to be no end to the military standoff between Russia and Ukraine. Thus far, these global ills have not had a material impact on the United States, and our belief is that this will continue to be the case in the months to come. Encouragingly, we would expect the Federal Reserve to pursue accommodative monetary policies over the next 12 to 18 months, with just marginal increases in short-term borrowing costs (directly controlled by the central bank) probably taking hold toward the latter portions of this extended stretch. Underscoring our monetary view is the unevenness of the economic expansion at home, lingering uncertainties overseas, and a sustained lack of inflation. Finally, the highly accommodative monetary policies being kept in place by the Fed have helped to sustain the long bull market in equities. The Federal Reserve's likely completion of its multi-year long program of bond purchases later this year, moreover, should not disrupt this durable market upturn, as this eventuality has been long anticipated by Wall Street. Results of Operations for the Three Months Ended July 31, 2014 and July 31, 2013 The following table illustrates the Company's key components of revenues and expenses. Three Months Ended July 31,($ in thousands, except earnings per share) 2014 2013 Change Income from operations $ 1,062 $ 469 126 % Revenues and profits interests from EAM Trust $ 2,022 $ 1,769 14 % Income from operations plus non-voting revenues and non-voting profits interests from EAM Trust $ 3,084 $ 2,238 38 % Operating expenses $ 8,008 $ 8,483 -6 % Income from securities transactions, net $ 41 $ 38 8 % Income before income taxes $ 3,125 $ 2,276 37 % Net income $ 2,036 $ 1,445 41 % Earnings per share $ 0.21 $ 0.15 40 % During the three months July 31, 2014, the Company's net income of $2,036,000, or $0.21 per share, was $591,000 or 41% above net income of $1,445,000, or $0.15 per share, for the three months ended July 31, 2013. At July 31, 2014 there were 9,815,175 average common shares outstanding as compared to 9,863,388 average common shares outstanding at July 31, 2013. Income from operations of $1,062,000 for the three months ended July 31, 2014 which included additional depreciation and amortization expense of $205,000 was $593,000 above income from operations of $469,000 for the three months ended July 31, 2013. 21 Total operating revenues Three Months Ended July 31, ($ in thousands) 2014 2013 Change Investment periodicals and related publications: Print $ 4,247 $ 4,673 -9 % Digital 4,026 3,523 14 % Total investment periodicals and related publications 8,273 8,196 1 % Copyright data fees 797 756 5 % Total publishing revenues $ 9,070 $ 8,952 1 % Total publishing revenues from investment periodicals and related publications excluding copyright data fees were $8,273,000 during the three months ended July 31, 2014, which is 1% above the total publishing revenues excluding copyright data fees of $8,196,000 during the three months ended July 31, 2013. As a result of the completion of the Restructuring Transaction on December 23, 2010, investment management activity is reported as non-voting revenues and non-voting profits interests in EAM and is not included in operating revenues. Within investment periodicals and related publications, subscription sales orders are derived from print and digital products. The following chart illustrates the changes in the sales orders associated with print and digital subscriptions. Sources of subscription sales orders Three Months Ended July 31, 2014 2013 Print Digital Print Digital New Sales Orders 10.9 % 23.2 % 23.9 % 27.6 %Conversion and Renewal Sales Orders 89.1 % 76.8 % 76.1 % 72.4 % Total Gross Sales Orders 100.0 % 100.0 % 100.0 % 100.0 % During the three months ended July 31, 2014 new sales orders decreased as a result of reduced direct marketing efforts and renewal orders increased as compared to last fiscal year due to increased efforts of the in-house Telemarketing department. As of April As of July 31, 30, As of July 31, Change July-14 vs. July-14 vs. ($ in thousands) 2014 2014 2013 Apr-14 July-13 Unearned subscription revenue (current and long term liabilities) $ 24,736 $ 25,124 $ 23,427 -1.5 % 5.6 % Unearned subscription revenue as of July 31, 2014 is 1.5% below April 31, 2014 and 5.6% above July 31, 2013. A certain amount of variation is to be expected due to the volume of new orders and timing of renewal orders, direct mail campaigns or large Institutional Sales orders. 22 Investment periodicals and related publications revenues Investment periodicals and related publications revenues of $8,273,000 increased 1% for the three months ended July 31, 2014, as compared to the prior fiscal year. The Company continued its efforts to attract new subscribers through various marketing channels, primarily direct mail, e-mail, and by the efforts of our sales personnel. Total product line circulation at July 31, 2014 was slightly below total product line circulation at July 31, 2013. The Company has been successful in growing revenues from digitally-delivered investment periodicals within institutional area. However, Institutional Sales generated sales orders of $2,136,000 for the three months ended July 31, 2014, were 7%, above comparable sales orders of $1,995,000, for the three months ended July 31, 2013. We have also benefited from "converting" some customers from retail to professional price services. Print publication revenues decreased $426,000 or 9% for the three months ended July 31, 2014 from fiscal 2014. Earned revenues from institutional print publications increased $2,000 or 0.3% for the three months ended July 31, 2014 as compared to the prior fiscal year. Print publications revenues from retail subscribers decreased $428,000 or 10.2% for the three months ended July 31, 2014, as compared to the prior fiscal year. Total print circulation at July 31, 2014 was 6.4% below total print circulation at July 31, 2013. Continuing factors that have contributed to the decline in the retail print 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. It is expected that print revenues will continue to decline long term, while we emphasize circulation of our digital offerings. Digital publications revenues increased $503,000 or 14% for the three months ended July 31, 2014 as compared to the prior fiscal year. Earned revenues from institutional digital publications increased $353,000 or 15.4% for the three months ended July 31, 2014, as compared to the prior fiscal year. Digital publications revenues from retail subscribers increased $152,000 or 12.4% for the three months ended July 31, 2014, as compared to the prior fiscal year. The year to year retail digital publications percentage revenues comparison benefited in part from a relatively lower base. This rate of percentage growth would not be expected to persist. At July 31, 2014 total digital product circulation has increased 12.1% above total digital product circulation at July 31, 2013. The Company has relied more on its personnel selling efforts in both the institutional segment and retail retention and sales development. The majority of the Company's subscribers have traditionally been individual investors who generally receive printed publications via U.S. Mail on a weekly basis. Consistent with the experience of other print publishers in many fields, the Company has found that its roster of print customers has been gradually declining as individuals migrate to various digital services including our own. Individual investors interested in digitally-delivered investment information have access to both free and subscription equity research from many sources. Value Line serves individual and professional investors who are able to pay, whether on a regular monthly plan or annual subscription for basic services, or as much as $100,000 or more annually for extensive premium quality research, not obtainable elsewhere. The ongoing goal of adding new subscribers has led us to experiment with varying terms for our reliable, proprietary research. The Company has established the goal of developing competitive products and marketing them effectively through traditional as well as internet and mobile channels. Towards that end, the Company continues to modernize legacy information technology systems. Copyright data fees During the three months ended July 31, 2014, copyright data fees increased $41,000 or 5% as compared to the prior fiscal year. As of July 31, 2014, total third party sponsored assets were attributable to four contracts for copyright data representing $2.35 billion in various products, as compared to four contracts for copyright data representing $2.8 billion in assets at July 31, 2013. The decrease in assets managed by third party sponsors resulted from a shift in assets in one of the underlying portfolios during April 2013 and then in February 2014 a second asset reassignment of similar magnitude to new subadvisors which was beyond Value Line's control. The three shifts of assets are anticipated to cause a reduction in pre-tax revenues from copyright data fees, cumulatively, of about $1.5 million on an annual basis beginning with the fourth quarter of fiscal 2014. While we are seeking new copyright data arrangements, it clearly will take considerable time to make up a material part of the loss, if the Company can do so at all. The field is competitive and downward pressure on fee scales has been observed. 23 Currently our efforts focus on sales we are seeking to make to existing copyright data partners. In addition, our Quantitative Research department has several "models," or methods of selecting stocks and mutual funds to buy or sell, which are promising based on computerized testing we have done so far. We are unable to project when additional assets may come under the management of Value Line-linked selection models. The Company believes 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, competition and on fluctuations in segments of the equity markets. Management is actively pursuing potential channels for the copyright data products, including Ranking System-based concepts as well as other proprietary quantitative models. Investment management fees and services - (unconsolidated) The Company no longer reports this operation as a separate business segment, although the Company still maintains a significant interest in the cash flows generated by this business and will receive ongoing payments in respect of its non-voting revenues and non-voting profits interests. Total assets in the Value Line Funds managed and/or distributed by EAM at July 31, 2014, were $2.37 billion, which is $168 million, or 7.6%, above total assets of $2.20 billion in the Value Line Funds managed by EAM at July 31, 2013. Value Line Mutual Funds Total Net Assets As of July 31, ($ in millions) 2014 2013 Change Variable annuity assets ("GIAC") $ 474 $ 481 -1.5 % All other open end equity and hybrid fund assets 1,627 1,522 6.9 % Total equity funds 2,101 2,003 4.9 % Fixed income funds 159 172 -7.6 % Total EAM managed net assets 2,260 2,175 3.9 % Daily Income Fund managed by Reich & Tang Asset Management LLC ("Reich & Tang") 51 58 -12.1 % Total net assets $ 2,311 $ 2,233 3.5 % Shares of the variable annuity funds, 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). EAM Trust - Results of operations before distribution to interest holders The overall results of EAM's investment management operations during the three months ended July 31, 2014, before interest holder distributions, include total investment management fees earned from the Value Line Funds of $3,787,000, 12b-1 fees and other fees of $1,360,000 and other income of $5,000. For the same period, total investment management fee waivers for the Value Line Core Bond Fund were $14,000 and 12b-1 fee waivers for six Value Line Funds were $128,000. During the three months ended July 31, 2014, EAM's net income was $378,000 after giving effect to Value Line's non-voting revenues interest of $1,833,000, but before distributions to voting profits interest holders and to the Company in respect of its 50% non-voting profits interest. 24 The overall results of EAM's investment management operations during the three months ended July 31, 2013, before interest holder distributions, include total investment management fees earned from the Value Line Funds of $3,485,000, 12b-1 fees and other fees of $1,119,000 and other income of $2,000. For the same period, total investment management fee waivers for one fund were $24,000 and 12b-1 fee waivers for eight Value Line Funds were $523,000. During the three months ended July 31, 2013, EAM's net income was $343,000 after giving effect to Value Line's non-voting revenues interest of $1,598,000, but before distributions to voting profits interest holders and to the Company in respect of its 50% non-voting profits interest. As of July 31, 2014, six of the Value Line Funds have all or a portion of the 12b-1 fees being waived, and one fund has partial investment management fee waivers in place. Fee waivers for certain of the Value Line Funds including all of the 12b-1 fees being waived cannot be recouped. Although, under the terms of the EAM Declaration of Trust, 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 August 1, 2013, EULAV Securities began to receive additional 12b-1 revenues from select Value Line Funds. Waivers were removed or reduced on two funds, in an effort to continue to expand the marketing programs. As a result, EAM committed to sponsor events in the latter portion of 2013 with its biggest platform, Schwab. In November 2013, the Value Line Funds exhibited at the Schwab Impact 2013 conference with over 2000 RIAs in attendance. The EAM management was able to meet with RIAs and key staff members of Schwab's distribution platform The Value Line equity and hybrid funds' assets represent 72%, variable annuity funds issued by GIAC represent 21%, and fixed income fund assets represent 7%, respectively, of total fund assets under management ("AUM") as of July 31, 2014. At July 31, 2014, equity, hybrid and GIAC variable annuities AUM increased by 5% and fixed income AUM decreased by 8% as compared to the prior fiscal year. As of July 31, 2014, four of the six Value Line equity mutual funds, excluding SAM and Centurion, had an overall four star rating by Morningstar, Inc. The largest distribution channel for the Value Line Funds remains the fund supermarket platforms such as Charles Schwab & Co., Inc., Fidelity, Pershing and E-Trade. In a strong market environment, performance of some Value Line Funds slightly lagged competitors' in this fiscal year. One of the eight equity and hybrid funds is in the top quartile of their respective peer groups for one year while three of the eight are in the top quartile for the three year period according to Lipper. At this time last year, two were in the top quartile for one year and five were in the top quartile for three years. Value Line equity funds continue to be recognized for both their excellent performance and lower-risk profile. Value Line Funds are now widely found at hundreds of broker/dealers, registered investment advisors ("RIAs") and retirement plans. The Value Line Asset Allocation Fund which reached $200 million in assets in October 2013 continues to be on the Schwab Mutual Fund OneSource Select List® since August 2012. The fund is one of only seven asset allocation funds among the 23 third-party funds selected for the Additional Fund Categories section. The Value Line Asset Allocation Fund was also added to the Schwab Select List Advisor Edition™ for the fourth calendar quarter of 2013 providing even more exposure. The Value Line Asset Allocation Fund is the only fund in Morningstar's Aggressive Allocation category (out of 124 funds) to have top 20% performance for the 3, 5, 10, and 15 year periods with "Overall Below Average" risk as of September 31, 2013. During the fiscal quarter ended October 31, 2013, the Value Line Small Cap Opportunities Fund was added to a select list at Lincoln Financial. For the ten year period ended December 31, 2013, the Value Line Small Cap Opportunities Fund outperformed both the Morningstar Small Growth and Mid-Cap Growth category averages and did so with 16% and 8% less risk, as measured by standard deviation, respectively. In Kiplinger's annual mutual fund rankings published in September 2013, three funds, Asset Allocation and Small Cap, both were ranked as top 10 performers for varying periods. The Value Line Small Cap Opportunities Fund remains a "Fund Pick" at Fidelity®. During October 2012, the USGMMF merged into a third party fund, the Daily Income Fund, managed by Reich & Tang. EAM distributes the Daily Income Fund on behalf of Reich & Tang and maintains the shareholder accounts on behalf of the Value Line Funds' shareholders who invest in the Daily Income Fund, but EAM is no longer subsidizing the expenses of the USGMMF in connection with the low interest rate economic environment. In addition, the merger of the USGMMF eliminated the cost of administration and fund accounting. 25 EAM - The Company's non-voting revenues and non-voting profits interests 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, and 50% of EAM's net profits. EAM currently has no separately managed account clients. The Company recorded income from its non-voting revenues interest and its non-voting profits interest in EAM as follows: Three Months Ended July 31, ($ in thousands) 2014 2013 Change Non-voting revenues interest $ 1,833 $ 1,598 14.7 % Non-voting profits interest 189 171 10.5 % $ 2,022 $ 1,769 14.3 % During the three months ended July 31, 2014, the Company recorded revenues of $2,022,000, consisting of $1,833,000, from its non-voting revenues interest in EAM and $189,000, from its non-voting profits interest in EAM without incurring any directly related expenses. During the three months ended July 31, 2013, the Company recorded revenues of $1,769,000, consisting of $1,598,000, from its non-voting revenues interest in EAM and $171,000, from its non-voting profits interest in EAM. Operating expenses Three Months Ended July 31, ($ in thousands) 2014 2013 Change Advertising and promotion $ 975 $ 1,043 -6.5 % Salaries and employee benefits 4,115 3,900 5.5 % Production and distribution 1,640 1,542 6.4 % Office and administration 1,278 1,998 -36.0 % Total expenses $ 8,008 $ 8,483 -5.6 % Expenses within the Company are categorized into advertising and promotion, salaries and benefits, production and distribution, office and administration. Operating expenses of $8,008,000 for the three months ended July 31, 2014, decreased $475,000, or 5.6%, as compared to the three months ended July 31, 2013. The decrease in expenses resulted primarily from a $615,000 decrease in rent expense and one less direct mail campaign in fiscal 2015. Advertising and promotion Advertising and promotion expenses during the three months ended July 31, 2014 decreased $68,000 or 6.5%, as compared to the prior year period, mainly due to a $243,000 decline in direct mail costs with one less direct mail campaign in the first quarter of fiscal 2015 compared to fiscal 2014 offset by an increase in third-party client support expenses for the new product launch in July 2014 and in-house renewal solicitation costs. 26 Salaries and employee benefits Salaries and employee benefits of $4,115,000 during the three months ended July 31, 2014 are $215,000 above last fiscal year primarily as a result of an increase in the internal telemarketing staff. Production and distribution Production and distribution expenses of $1,640,000 during the three months ended July 31, 2014 increased 6.4% as compared to fiscal 2014. During the three months ended July 31, 2014, an increase of $131,000 was attributable to additional amortization of internally developed software costs for the upgrade of our fulfillment system, single sign on, website development and new service oriented production architecture. The increase in expenses was partially offset by a $43,000 decrease in paper and printing costs due to gradually decreasing use of paper as some subscribers migrate to digital services. Office and administration The Company's move to new headquarters in the second quarter of fiscal 2014 resulted a significant decrease in the Company's annual rental expenses for the New York City office facility under the sublease terms for the new office space between Value Line, Inc. and Citibank, with the office move also responsible in part for a decline in maintenance, taxes and utilities for our New York City headquarters. The rental expenses during the fiscal quarter ended July 31, 2013 included additional one time overlapping rent of $304,000 for the previously occupied office facilities during the short term lease extension which ended September 15, 2013. Total office and administration expenses of $1,278,000 during the three months ended July 2014 decreased $720,000 or 36%, as compared to the prior fiscal year. For the three months ended July 2014, office and administration expenses included a $615,000 decrease in rent, decrease in real estate taxes, building maintenance and utilities expenses. Income from Securities Transactions, net During the three months ended of July 2014 the Company's income from securities transactions, net, which included primarily dividend income, was $41,000, a $3,000 increase over the prior fiscal year. There were no sales, or gains or losses from sales of equity securities during the three months ended July 2014 and July 2013. Effective income tax rate The overall effective income tax rate, as a percentage of pre-tax ordinary income, for the three months ended July 31, 2014 and July 31, 2013 was 34.86% and 36.51%, respectively. The Company's effective tax rate may change due to a number of factors including but not limited to an increase or decrease in the ratio of items that do not have tax consequences to pre-tax income, the Company's geographic profit mix between tax jurisdictions, new tax laws, new interpretations of existing tax laws and rulings by and settlements with tax authorities. The fluctuation in the effective income tax rate during fiscal 2015 is attributable to an increase in unincorporated business tax credits in New York City and an increase in the domestic production tax credit. Liquidity and Capital Resources The Company had negative working capital, defined as current assets less current liabilities, of $8,201,000 and $11,019,000 as of July 31, 2014 and July 31, 2013, respectively. These amounts include short term unearned revenues of $20,663,000 and $21,176,000 reflected in total current liabilities at July 31, 2014 and July 31, 2013, respectively. Cash and short term securities were $16,007,000 as of July 31, 2014 and $11,924,000 as of July 31, 2013. 27 The Company's cash and cash equivalents include $6,506,000 and $3,758,000 at July 31, 2014 and July 31, 2013, respectively, invested primarily in savings accounts at commercial banks and Money Market Funds at brokers' accounts, which operate under Rule 2a-7 of the 1940 Act and invest primarily in short term U.S. government securities. Cash from operating activities The Company's cash inflows from operating activities were $1,353,000 during the three months ended July 31, 2014 and cash outflows were $790,000 during the three months ended July 31, 2013, respectively. The change in cash flows from fiscal 2014 to fiscal 2015 were primarily due to a $593,000 increase in operating income, the slowdown in the decline of unearned revenues as conversion and renewal subscription order activity increased, the timing of the payment of income taxes, and the decrease in accounts receivable. Cash from investing activities The Company's cash inflows from investing activities were $1,285,000 during the three months ended July 31, 2014 and cash outflows from investing activity during the three months ended July 31, 2013 were $322,000, respectively. Cash inflows from investing activities for the three months ended July 31, 2014 were higher than the prior year primarily due to the Company's decision to reinvest in the inverse ETF securities available-for-sale during the prior fiscal year and increased receipts from EAM Trust from the Company's non-voting revenues interest and non-voting profits interest. The Company expects that investing activities should provide cash from continued receipts from its non-voting revenues and non-voting profits interests distributions from EAM. Cash from financing activities The Company's cash outflows from financing activities were $1,514,000 and $1,707,000 during the three months ended July 31, 2014 and July 31, 2013, respectively. Cash outflows from financing activities for the three months ended July 31, 2014, were lower primarily due to the decrease in the repurchase of the Company's common stock under the September 19, 2012 board approved common stock repurchase program and slightly lower dividends paid as a result of the decrease in common shares outstanding. The Company expects financing activities to continue to include use of cash for dividend payments and treasury stock purchases for the foreseeable future. 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 next twelve months and does not anticipate making any borrowings during the next twelve months. As of July 31, 2014, retained earnings were $33,747,000 and liquid assets were $16,007,000. Seasonality Our publishing revenues are comprised of subscriptions which are generally annual subscriptions, paid in advance. Our cash flows from operating activities are minimally seasonal in nature, primarily due to the timing of customer payments made for orders and subscription renewals. Off-balance sheet arrangements We are not a party to any off-balance sheet arrangements, other than operating leases entered into in the ordinary course of business. 28 Recent Accounting Pronouncements In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income ("ASU 2013-02"), which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income, if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required that provide additional detail about those amounts. The amendments in ASU 2013-02 supersede the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU 2011-05 and ASU 2011-12. ASU 2013-02 is effective for reporting periods beginning after December 15, 2012; early adoption is permitted. The Company adopted the provisions of ASU 2013-02 effective May 1, 2013; it did not have a material impact on our Consolidated Condensed Financial Statements. Critical Accounting Estimates and Policies The Company prepares its Consolidated Condensed Financial Statements in accordance with 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 Condensed Financial Statements. |