VALU

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended January 31, 2011, for Value Line, Inc. (VLI). The Company primarily produces investment-related periodical publications and licenses copyright data. A material event during this period was the completion of a Restructuring Transaction on December 23, 2010, wherein VLI deconsolidated its asset management and broker-dealer subsidiaries. In exchange, VLI received a nonvoting revenue and profits interest in EULAV Asset Management (EAM), a Delaware business trust. Consequently, the Investment Management segment is no longer reported as a separate business unit.

Key Financial Metrics

(All figures in thousands, except per share data)

Debt and Liquidity: The Company reported negative working capital of $6,365,000 as of January 31, 2011, primarily due to significant unearned revenue liabilities ($21,611,000 current). There is no long-term debt reported; however, the Company holds significant deferred tax liabilities ($18,880,000) related to the gain on deconsolidation. Cash and short-term securities totaled $17,600,000.

Material Changes vs. Prior Period

• Net Income Surge: Net income for the nine months ended Jan 31, 2011, was $35,021,000, a reversal from a net loss of $25,633,000 in the prior year. This improvement is primarily driven by a one-time $50,510,000 pre-tax gain from the deconsolidation of subsidiaries.
• Revenue Decline: Total operating revenues decreased 11.5% year-over-year for the nine-month period ($39,142 vs. $44,227). This was driven by a 25.8% drop in investment management fees (due to the restructuring) and a 5.4% decline in periodical revenues. Copyright data fees increased 4.8%.
• Expense Reduction: Total operating expenses decreased 57.9% year-over-year ($33,282 vs. $78,993). The prior year included a $47,706,000 provision for an SEC settlement. Current year expenses included $3,764,000 in restructuring costs and $1,475,000 in post-employment compensation.
• Segment Shift: The Investment Management segment is no longer consolidated. VLI now records revenue from this business as "Revenues and profits interest from EAM Trust" ($724,000 for the nine months).

Guidance, Outlook, and Risks

• Restructuring Compliance: Management notes a risk that additional steps may be required to ensure compliance with the SEC Settlement regarding the restructuring, which could negatively impact financial statements.
• Revenue Trends: The Company anticipates continued declines in retail subscription revenues due to competition from free online research and the migration of customers to digital platforms. Institutional electronic sales are growing but not yet sufficient to fully offset retail losses.
• Legal Proceedings: A derivative shareholder lawsuit regarding the SEC matter was settled in principle for $2.9 million, to be paid by parties other than the Company, resulting in no material effect on VLI's financial condition.
• Listing Status: The Company received a notice from NASDAQ regarding a failure to file the 10-Q timely (due March 22, filed March 24). Management believes compliance has been regained upon filing.
• Capital Allocation: The Board approved a stock repurchase program of up to $3,200,000. As of January 31, 2011, $57,000 had been spent to repurchase 4,298 shares.

Investor Verification Checklist

• Gain on Deconsolidation: Verify the sustainability of earnings by excluding the $50.5 million one-time gain from the deconsolidation of asset management subsidiaries.
• Unearned Revenue: Review the $25.7 million in unearned revenue (current and long-term) to understand the timing of future revenue recognition and the impact on working capital.
• EAM Trust Performance: Monitor the performance of EULAV Asset Management (EAM) and the resulting revenue/profit distributions to VLI, as this is now the primary link to the former asset management business.
• Subscription Circulation: Track the decline in print circulation (down 7% year-over-year) versus the growth in institutional electronic sales to assess the long-term viability of the publishing segment.
• SEC Settlement Reserve: Confirm the status of the $3,483,000 reserve for settlement expenses and ensure no additional liabilities arise from the SEC investigation.