VALU

Business Context and Reporting Period

Company: Value Line, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: April 30, 2011
Primary Business: Production of investment-related periodical publications and licensing of proprietary ranking data to third parties. Prior to December 23, 2010, the Company also operated an investment management and mutual fund distribution business.

Key Event: On December 23, 2010, the Company completed a "Restructuring Transaction" to comply with an SEC settlement. This involved deconsolidating its asset management and distribution subsidiaries (EAM LLC and ESI) into a new Delaware statutory trust, EULAV Asset Management (EAM). Value Line retained non-voting revenue and profit interests in EAM but lost voting control, transferring it to five individual trustees.

Key Financial Metrics

Note: Fiscal 2011 Net Income includes a non-cash gain of $50.5 million from the deconsolidation of subsidiaries.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 16.3% to $48.7 million. This was driven by a 43.5% drop in investment management fees (due to the restructuring and lower assets under management) and a 4.3% decline in periodical revenues. Copyright data fees increased 10.0%.
• Profitability Shift: The Company swung from a net loss of $23.2 million in 2010 to a net income of $37.8 million in 2011. This reversal is primarily attributable to the $50.5 million accounting gain from deconsolidation and the absence of the $48.1 million SEC settlement provision recorded in 2010.
• Operating Expenses: Total operating expenses decreased 55.6% to $40.1 million. This reduction reflects the removal of investment management segment expenses and a $1.8 million reduction in the estimated liability for SEC settlement administration costs.
• Liquidity: Working capital turned negative ($5.7 million) compared to a positive $21.3 million in 2010, largely due to a special $20 million dividend paid in November 2010 and cash transfers to the new EAM trust.

Guidance, Outlook, and Risks

Management Commentary:

• Subscription Trends: Management acknowledges a negative trend in overall subscription revenue, driven by competition from free online research and a shift in investor behavior. They expect this decline to continue, albeit at a slower rate, until new electronic products are successfully developed and marketed.
• Copyright Data: This segment is viewed as a key growth area to replace shrinking publishing revenues. Assets under management for copyright data clients grew 34% to $3.5 billion.
• Investment Management: While no longer a consolidated segment, the Company retains a significant economic interest in EAM. EAM's assets under management decreased 3.4% to $2.24 billion due to net redemptions, though market appreciation offset some losses.

Risks and Contingencies:

• SEC Settlement Compliance: The Company believes the restructuring achieved compliance with the 2009 SEC order, but risks remain that additional steps could be required, potentially affecting financial results.
• Derivative Litigation: A derivative shareholder suit regarding the SEC matter reached an agreement in principle for a $2.9 million settlement. The Company expects no material financial impact as the payment is to be made by parties other than the Company.
• Key Personnel: The business is dependent on key executives, and the Company does not maintain "key man" insurance.
• Market Conditions: Adverse market conditions could reduce assets under management for EAM, directly impacting the cash flows Value Line receives from its non-voting interests.

Investor Verification Checklist

• Deconsolidation Gain: Verify the sustainability of the $37.8 million net income, noting that $50.5 million of the pre-tax income was a one-time non-cash accounting gain from the restructuring.
• Subscription Revenue Trend: Monitor the continued decline in print and electronic subscription revenues and the success of new product launches intended to reverse this trend.
• EAM Cash Flows: Assess the stability of cash flows from the non-voting revenue and profit interests in EAM, which are now the primary source of income from the former investment management business.
• SEC Settlement Liability: Confirm the remaining liability for the Fair Fund administration ($1.5 million) and any potential for further cost adjustments.
• Liquidity Position: Review the negative working capital position and the Company's ability to fund operations and dividends without external borrowing, given the reduction in cash reserves.