Legal Proceedings and Restructuring:

12 Months Ended

Apr. 30, 2012

Legal Proceedings and Restructuring [Abstract]

Legal Proceedings and Restructuring:

Note 15-Legal Proceedings and Restructuring:

In November 2009, the Company concluded a negotiated settlement with the SEC as a result of an investigation into former brokerage practices (the “Settlement”).  To comply with the SEC order, the Company during fiscal 2011 disassociated itself from the former Investment Adviser and broker-dealer operations in the previously defined Restructuring Transaction.

As required by the Settlement, the Company paid $43,706,000 to the SEC in November 2009. This payment was used by the SEC to create a “Fair Fund” pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002.  The Fair Fund is being used to reimburse shareholders who owned shares in the affected Value Line Funds in the period covered by the Settlement.  The Company is required to bear all costs associated with the Fair Fund distribution, including compensating a third party consultant appointed by the SEC to administer the Fair Fund distribution.  The SEC has appointed A.B. Data, Ltd., which has no affiliation with the Company, as the Administrator of the Fair Fund.  During fiscal 2011, the Company reduced its estimate of the costs of administration of the Fair Fund and other costs associated with the Settlement from $4,400,000 to $2,633,000.

In order to comply with the Settlement, the Company also entered into the Restructuring Transaction, which was effective as of December 23, 2010 (the “Restructuring Date”), whereby the investment advisory business (including both the investment adviser to the Value Line Funds and the underwriter and distributor of the Value Line Funds) was transferred to EAM, a Delaware business statutory trust.  As part of the Restructuring Transaction, the Company transferred 100% of the voting power in EAM to five individual voting profits interest holders of EAM. Each of the five individuals holding voting profits interests in EAM, none of whom is under the control of the Company or its direct or indirect majority shareholder, was granted 20% of the voting power in EAM.  As a result, the Company ceased to “control” (as that term is defined in the 1940 Act) the Adviser or the Distributor, even though the Company continues to have both a non-voting revenues interest and a non-voting profits interest in EAM.

In connection with the Restructuring Transaction, in accordance with the requirements of the 1940 Act, at the time of the Restructuring Transaction, each Fund’s prior investment advisory agreement terminated and EAM entered into a new investment advisory agreement with each Fund.  The services provided by EAM under each new agreement and the rates at which fees are paid by each Fund under its new agreement are the same as under that Fund’s prior investment advisory agreement.  In addition, the other terms of each Fund’s new investment advisory agreement are the same as that Fund’s prior investment advisory agreement, except for the date of execution, the two-year initial term, immaterial updating changes and immaterial changes in form.

Each Fund had a distribution agreement with ESI (the “Distributor”), a wholly-owned subsidiary of EAM LLC, pursuant to which the Distributor acted as principal underwriter and distributor of the Funds.  As part of the Restructuring Transaction ESI was restructured as a Delaware limited liability company and changed its name to EULAV Securities LLC (which we sometimes refer to as “ES”).  No other changes were made to the Distributor’s organization, including its operations and personnel.  The Distributor is not entitled to receive any compensation for its services under the Agreements, although it is entitled to receive fees under each Fund’s Service and Distribution Plan.

As part of the Restructuring Transaction, EAM’s capital structure was revised so that Value Line owns only a non-voting revenues interest and a non-voting profits interest in EAM and five individuals each own 20% of the voting profits interests of EAM.  The holders of EAM’s voting profits interests were required to elect five individual trustees and a Delaware resident trustee of EAM.  The trustees of EAM, other than the Delaware trustee, function like a board of directors in managing the business of EAM.  The five holders of the voting profits interests elected themselves as the five initial individual trustees of EAM and elected the Corporation Trust Company as the Delaware resident trustee. 

Collectively, the holders of the voting profits interests in EAM are entitled to receive 50% of the residual profits of the business, in which the share of Mr. Appel is 45% and the others each 1.25%, subject to temporary adjustments in certain circumstances.  Value Line retains a non-voting profits interest representing 50% of residual profits, subject to temporary adjustments in certain circumstances, and has no power to vote for the election, removal or replacement of the trustees of EAM. Value Line also has a non-voting revenues interest in EAM pursuant to which it is entitled to receive a portion of the non-distribution revenues of the business ranging from 41% at non-distribution fee revenue levels of $9 million or less to 55% at such revenue levels of $35 million or more.  In the event the business is sold or liquidated, the first $56.1 million of net proceeds (the value of the business at the time the Restructuring Transaction was approved as determined by the directors of Value Line after reviewing a valuation report by the directors’ financial advisors) plus any additional capital contributions (Value Line or any holder of a voting profits interest, at its discretion, may make future contributions to its capital account in EAM), which contributions would increase its capital account but not its percentage interest in operating profits, will be distributed in accordance with capital accounts; 20% of the next $56.1 million will be distributed to the holders of the voting profits interests and 80% to the holder of the non-voting profits interests (currently, Value Line); and the excess will be distributed 45% to the holders of the voting profits interests and 55% to the holder of the non-voting profits interest (currently, Value Line).

In connection with the Restructuring Transaction, Value Line (1) granted each Fund use of the name “Value Line” so long as EAM remains the Fund’s adviser and on the condition that the Fund does not alter its investment objectives or fundamental policies from those in effect on the date of the investment advisory agreement with EAM, provided also that the Funds do not use leverage for investment purposes or engage in, short selling or other complex or unusual investment  strategies that create a risk profile similar to that of so-called hedge funds, (2) agreed to provide EAM its Proprietary System information without charge on as favorable a basis as to Value Line’s best institutional customers and (3) agreed to capitalize the business with $7 million of cash and cash equivalents.

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

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

On a short-term transitional basis, EAM occupied a portion of the premises that the Company leases from a third party.  The Company received rental payments from EAM and provided certain accounting and other administrative support services to EAM on a transitional basis. In accordance with the terms of the Restructuring Transaction, EAM vacated the Company’s leased premises before June 1, 2011. 

On September 3, 2008, the Company was served with a derivative shareholder’s suit filed in the New York County Supreme Court (the “Court”) naming as defendants certain current and former directors of the Company and alleging breach of fiduciary duty, primarily arising from matters which gave rise to the settlement of the SEC matter. The complaint sought return of remuneration by the directors and other remedies. A second derivative shareholder’s suit was filed in the Court on or about November 9, 2009, naming certain current and former Value Line directors and Value Line’s controlling shareholder, AB&Co., as defendants. The allegations made and remedies sought in this suit were substantially identical to those of the September 2008 derivative suit.  In January 2010, the Court consolidated the two actions.

Following mediation, the defendants in the consolidated cases filed in 2008 and 2009 entered into a settlement agreement with the plaintiffs, which was approved by the Court on December 7, 2011. The settlement called for payment of settlement funds, from sources other than Value Line or any of its subsidiaries, in an aggregate sum of $2.9 million, inclusive of all legal fees and other costs and expenses of the plaintiffs, for the benefit of the Company’s shareholders other than AB&Co., all other named defendants and members of the immediate families of named defendants.  The settlement payment was made on February 6, 2012, and the net settlement funds in the amount of $1.5177 per share were distributed on March 9, 2012 to all shareholders of record (other than the excepted categories) as of December 7, 2011.

Since the settlement payment into the settlement fund was by parties other than the Company, the settlement had no material effect on the financial condition, results of operations or cash flows of the Company.