The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help a reader understand Value
Line, its operations and business factors. The MD&A should be read in
conjunction with Item 1, "Business", Item 1A, "Risk Factors", and in conjunction
with the consolidated financial statements and the accompanying notes contained
in Item 8 of this report.
The MD&A includes the following subsections:
? Executive Summary of the Business
? Results of Operations
? Liquidity and Capital Resources
? Recent Accounting Pronouncements
? Critical Accounting Estimates and Policies
Executive Summary of the Business
The Company's primary business is producing investment periodicals and related
publications 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. Value Line markets under well-known brands including Value Line, the
Value Line Logo, The Value Line Investment Survey, and The Most Trusted Name in
Investment Research. The name "Value Line" as used to describe the Company, its
products, and its subsidiaries, and is a registered trademark of the Company.
Prior to December 23, 2010, the date of the completion of the Restructuring
Transaction (see "Restructuring of Asset Management and Mutual Fund Distribution
Businesses" below), the Company provided investment management services to the
Value Line® Mutual Funds ("Value Line Funds"), institutions and individual
accounts and provided distribution, marketing, and administrative services to
the Value Line Funds.
The Company's target audiences within the investment periodicals and related
publications field are individual investors, colleges, libraries, and investment
management professionals. Individuals come to Value Line for complete research
in one package. Institutional subscribers 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 for institutional subscriptions vary by the
university or college enrollment, number of users, and the number of products
purchased.
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 subscriptions 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.
Prior to December 23, 2010, the Company's businesses consolidated into two
reportable business segments. 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 one segment called Publishing and the investment management
services to the Value Line Funds and other managed accounts were consolidated
into a second business segment called Investment Management. Subsequent to
December 23, 2010, the date of the Restructuring Transaction, the Publishing
segment constitutes the Company's only reportable business segment.
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Restructuring of Asset Management and Mutual Fund Distribution Businesses
The Company completed the restructuring of its asset management and mutual fund
distribution businesses (the "Restructuring Transaction") on December 23, 2010
(the "Restructuring Date") and executed the EAM Declaration of Trust (the "EAM
Declaration of Trust"). As part of the Restructuring Transaction: (1) EULAV
Securities, Inc. ("ESI"), a New York corporation and wholly-owned subsidiary of
the Company that acted as the distributor of the thirteen Value Line Funds was
restructured into EULAV Securities LLC ("ES"), a Delaware limited liability
company; (2) the Company transferred 100% of its interest in ES to EULAV Asset
Management LLC ("EAM LLC"), a wholly-owned subsidiary of the Company that acted
as the investment adviser to the Value Line Funds and certain separate accounts;
(3) EAM LLC was converted into EAM; and (4) EAM admitted five individuals (the
"Voting Profits Interest Holders"), as the initial holders of voting profits
interests in EAM, with each of such individuals owning 20% of the voting profits
interests of EAM, and (5) pursuant to the EAM Declaration of Trust, the Company
received an interest in certain revenues of EAM and a portion of the residual
profits of EAM but has no voting authority with respect to the election or
removal of the trustees of EAM. The Voting Profits Interest Holders, who were
selected by the independent directors of the Company, paid no consideration in
exchange for their interests in EAM.
The business of EAM is managed by its trustees 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.
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 charge or
expense.
Business Environment
For the twelve months ended April 30, 2012, the NASDAQ and the Dow Jones
Industrial Average were up 6% and 3%, respectively. However, we believe that the
severe downturn experienced in the September 2008 to March 2009 period and the
continued volatility in the financial markets since then have resulted in many
individual investors withdrawing money from equity investments, including equity
mutual funds, and that this risk-averse temperament of investors continues to
restrain both the Company's revenues from its research periodicals and
publications and the Company's cash flows from its non-voting revenues and
non-voting profits interests in EAM.
25
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Results of Operations for Fiscal Years 2012, 2011 and 2010
The operating results of the Company for the twelve months ended April 30, 2012
declined from fiscal 2011. The following table illustrates the Company's key
earnings figures.
Fiscal Years Ended April 30,
($ in thousands, except earnings
(loss) per share) 2012 2011 2010
Income (loss) from operations $ 5,338$ 8,533 $ (32,190 )
Revenues and profits interests from
EAM Trust $ 5,890 $ 2,355 $ -
Income (loss) from operations plus
revenues and profits interests from
EAM Trust $ 11,228 $ 10,888 $(32,190 )
Operating expenses $ 31,271 $ 40,134 $ 90,330
Gain from deconsolidation of
subsidiaries $ - $ 50,510 $ -
Income from securities
transactions, net $ 70 $ 65 $ 837 Income (loss) before income taxes $ 11,298$ 61,463 $ (31,353 )
Net income (loss) $ 6,925 $ 37,782 $ (23,188 )
Earnings (loss) per share $ 0.70 $ 3.79 $ (2.32 )
During the twelve months ended April 30, 2012, the Company's net income of
$6,925,000, or $0.70 per share, was $30,857,000 or 82% below net income of
$37,782,000, or $3.79 per share, for the twelve months ended April 30, 2011. The
net income of the Company during the twelve months ended April 30, 2011 included
$50,510,000 of pre-tax accounting (non-cash) gain and applicable deferred income
taxes of $19,462,000 on the non-cash gain from deconsolidation of Value Line's
former investment management subsidiaries, EAM LLC and ESI.
Income from operations of $5,338,000 for the twelve months ended April 30, 2012,
does not include the non-voting revenues and non-voting profits interests from
EAM of $5,890,000, while income from operations for the twelve months ended
April 30, 2011 of $8,533,000 includes $10,693,000 of advisory management fees
and service distribution fees from the former Value Line subsidiaries, EAM LLC
and ESI, that performed the operations of the investment management business
prior to deconsolidation of these subsidiaries on December 23, 2010. During the
twelve months ended April 30, 2011, the net income and income from operations
included restructuring expenses of $3,764,000, non-cash post-employment
compensation expense of $1,770,000 related to the grant of a voting profits
interest in EAM to a former employee and a $1,767,000 reduction in the estimated
cost of administration of the Fair Fund created as part of the Settlement with
the SEC.
Income before income taxes, which is inclusive of the non-voting revenues and
non-voting profits interests from EAM through April 30, 2012, was $11,298,000 as
compared to $61,463,000 for the twelve months ended April 30, 2011, which
included the aforementioned gain on Restructuring Transaction of $50,510,000.
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For the twelve months ended April 30, 2011, the Company's net income of
$37,782,000, or $3.79 per share, which included a pre-tax gain of $50,510,000
from deconsolidation of the Company's former investment management subsidiaries,
EAM LLC and ESI, restructuring expenses of $3,764,000, non-cash post-employment
compensation expense of $1,770,000 related to the grant of a voting profits
interest in EAM to a former employee, $914,000 of expenses for operating lease
exit costs related to the relocation of the EAM operations and a $1,767,000
reduction in the estimated cost of administration of the Fair Fund created as
part of the Settlement with the SEC (see Item 3, "Legal Proceedings"), was
$60,970,000 above the net loss of $23,188,000, or $2.32 per share, for the
twelve months ended April 30, 2010 ("fiscal 2010"). The net loss for fiscal 2010
included $48,106,000 of expenses related to the Settlement and a one-time charge
of $727,000 for the write down of development software. Operating income was
$8,533,000 for fiscal 2011 as compared to the operating loss of $32,190,000 for
fiscal 2010. Operating income for fiscal 2010 included the previously mentioned
Settlement expense while operating income for fiscal 2011 was partially affected
by a reduction of $1,767,000 in the amount of these expenses resulting from a
change in the estimated cost of administration of the Fair Fund.
Operating revenues and % of total
Fiscal Years Ended April 30,
2012 2011 2010 Change
($ in thousands) $ % $ % $ % 12 vs. 11 11 vs. 10
Investment
periodicals and
related
publications:
Print $ 20,366 $ 21,625 $ 23,309 -5.8 % -7.2 %
Digital 12,652 12,781 12,656 -1.0 % 1.0 %
Total investment
periodicals and
related
publications 33,018 90.2 % 34,406 70.7 % 35,965 61.9 % -4.0 % -4.3 %
Copyright data
fees 3,591 9.8 % 3,568 7.3 % 3,243 5.6 % 0.6 % 10.0 %
Total publishing
revenues 36,609 37,974 39,208 -3.6 % -3.1 %
Investment
management - - 10,693 22.0 % 18,932 32.5 % -100.0 % -43.5 %
Total
revenues $ 36,609 $ 48,667 $ 58,140 -24.8 % -16.3 %
Total publishing revenues from investment periodicals and related publications
including copyright data fees were $36,609,000 during the twelve months ended
April 30, 2012, which is 4% below the total publishing revenues from the
previous fiscal year. As a result of the completion of the Restructuring
Transaction on December 23, 2010, investment management activity for the twelve
months ended April 30, 2012, and for the period from December 23, 2010 through
April 30, 2011 during fiscal 2011, is reported as non-voting revenues and
non-voting profits interests in EAM and is not included in operating revenues.
Investment periodicals and related publications revenues
Investment periodicals and related publications revenues were down $1,388,000,
or 4%, for the twelve months ended April 30, 2012, as compared to fiscal
2011. While the Company continued its efforts to attract new subscribers through
various marketing channels, primarily direct mail and the internet for retail
users, and by the efforts of our sales personnel in the institutional market,
total product line circulation at April 30, 2012 was 4.6% lower than total
product line circulation at April 30, 2011. Factors that have contributed to the
decline in the 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. Core subscriber renewal rates for the flagship product, The Value Line
Investment Survey, are 73%, down from 80% for fiscal 2011. The Company is not
adding enough new subscribers to offset the subscribers that choose not to renew
this product. The Company has been successful in growing revenues from
digitally-delivered investment periodicals within institutional sales. Gross
institutional sales orders of $10,586,000 for the twelve months ended April 30,
2012, were $838,000 or 9% above comparable sales orders of $9,748,000, for the
twelve months ended April 30, 2011. This increase continues a positive growth
trend for Institutional Sales, but is not sufficient to wholly offset the lost
revenues from retail subscribers.
27
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Investment periodicals and related publications revenues were down $1,559,000,
or 4%, for the twelve months ended April 30, 2011, as compared to fiscal
2010. As of April 30, 2011, total product line circulation declined 2% as
compared to total product line circulation at April 30, 2010. Gross
institutional sales orders were $9,748,000 for the twelve months ended April 30,
2011, an increase of $387,000 or 4% above fiscal 2010.
Within investment periodicals and related publications, subscription sales
orders are derived from print and digital products. The following chart
illustrates the fiscal year-to-fiscal year changes in the gross sales orders
associated with print and digital subscriptions.
Sources of Subscription Gross Sales Orders
2012 2011 2010
Print Digital Print Digital Print DigitalNew Sales Orders 16.8 % 18.6 % 13.0 % 21.0 % 10.6 % 31.0 %
Conversion and
Renewal Sales Orders 83.2 % 81.4 % 87.0 % 79.0 % 89.4 % 69.0 %
Total Gross Sales
Orders 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
As of April 30,
($ in thousands) 2012 2011 Change
Deferred subscription income (current and long
term liabilities) $ 25,995 $ 27,001 -3.7 %
Print publication revenues decreased $1,259,000, or 6%, for the twelve months
ended April 30, 2012 from fiscal 2011 for the reasons described earlier. For the
twelve months ended April 30, 2012, earned revenues from institutional print
publications increased $182,000 or 19% as compared to fiscal 2011. For the
twelve months ended April 30, 2012, print publications revenues from retail
subscribers decreased $1,441,000 or 7%, as compared to fiscal 2011. Print
circulation, which has always dominated the Company's subscription base, has
fallen 6.8% as of April 30, 2012 as compared to print circulation at April 30,
2011.
Digital publications revenues decreased $129,000, or 1%, for the twelve months
ended April 30, 2012 from fiscal 2011. For the twelve months ended April 30,
2012, earned revenues from institutional digital publications increased $59,000
or 1% as compared to fiscal 2011. For the twelve months ended April 30, 2012,
digital publications revenues from retail subscribers decreased $188,000 or 4%,
as compared to fiscal 2011.
For the twelve months ended April 30, 2011, print publication revenues decreased
$1,684,000, or 7%, from fiscal 2010. Print circulation declined 5% as of April
30, 2011 as compared to print circulation at April 30, 2010. For the twelve
months ended April 30, 2011, digital publications revenues increased $125,000 or
1% above fiscal 2010. For the twelve months ended April 30, 2011, earned
revenues from institutional digital publications increased $554,000, or 7%, as
compared to fiscal 2010. For the twelve months ended April 30, 2011 digital
publications revenues from retail subscribers were down $429,000, or 9%, as
compared to fiscal 2010.
The Company has relied more on its institutional sales marketing efforts, and
the increase in institutional revenues is a direct result of a focused effort to
sell to colleges, libraries and corporate accounts. The decrease in digital
retail publications revenues is primarily attributable to the decrease in
circulation within the Company's software products.
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 customers has been declining as
individuals migrate to various digital services.
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Individual investors interested in digitally-delivered investment information
have access to free equity research from many sources. For example, most retail
broker-dealers with computerized trading services offer their customers free or
low cost research services that compete with the Company's services. Revenues
from the Company's current retail online services have also declined because
many competing products offer more dynamic features.
The Company believes that the continued volatility of the equity market and the
modest pace of the recovery experienced since the severe economic downturn in
the period from September 2008 to March 2009 have to some extent eroded retail
investor interest in equities, which has accounted for some of the decline in
revenues from the Company's publications. The Company also believes that the
negative trend in overall subscription revenue is likely to continue until new
products, and in particular new products designed for professional investors,
have been developed and marketed.
The Company has established the goal of developing competitive digital products
and marketing them effectively through traditional as well as internet and
"social" channels. Towards that end, the Company has been modernizing legacy
information technology systems. The Company is not able to predict when these
efforts will result in the launch of new products or whether they will be
successful in reversing the trend of declining retail publishing revenues.
During fiscal 2012, the Company launched a refreshed web site that previews the
delivery of the Company's digital research products, including analysis of
covered securities, current economic conditions and expert research. The launch
of the refreshed website allows for easier navigation through the vast array of
products and research provided by the Company. Value Line has redesigned its
retail investor website with a new format and more user-friendly navigation of
features.
Single Sign On ("SSO") and the new shopping cart are among the features launched
with the redesigned retail website. The SSO offers tighter security and
automation of customer administrative tasks, acts as a gatekeeper to the
fulfillment system, and allows full automation of the renewal series and
promotional offerings. SSO will also assist the Company in offering product
variations expeditiously.
During fiscal 2012, the Company also implemented a new fulfillment system, which
is licensed from a third party. All print subscription properties and all
web-based/digital services are now managed and fulfilled by the new fulfillment
system. This database gives the Company the ability to centrally manage customer
acquisition, fulfillment and online/digital access.
In connection with the launch of the new fulfillment system licensed from a
third party and the new shopping cart, Value Line has enhanced its level of
security standards for payment card and data security.
In March 2012, the Company launched a new institutional sales website
ValueLinePro.com. ValueLinePro.com provides a dedicated internet destination for
investment advisers, portfolio managers, corporate professionals and library
patrons and seeks to educate this target audience as to how Value Line's
proprietary research tools can help them research stocks, mutual funds, options,
convertible securities and ETFs. The site thoroughly describes each of the
Company's customized products available to institutions and investment
professionals, and is designed to complement the Company's sales and marketing
efforts to institutions.
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Copyright data fees
The Value Line Proprietary Ranking System information (the "Ranking System"), a
component of the Company's flagship product, The Value Line Investment Survey,
is also utilized in the Company's copyright data business. The Ranking System is
also required to be made available to EAM for specific uses without charge or
expense. The Ranking System is designed to be predictive over a six to twelve
month period. For the twelve month period ended April 30, 2012, the combined
Ranking System "Rank 1 & 2" stocks declined by 1.8%, allowing for weekly changes
in Ranks, comparing unfavorably to an increase of 2.7% in the S&P 500 Index
during the same period. For the six months ended April 30, 2012, the combined
Ranking System "Rank 1 & 2" stocks gained 10.8%, underperforming the S&P 500
Index's increase of 11.5% during the same period.
During the twelve months ended April 30, 2012, copyright data fees of $3,591,000
were 1% above copyright data fees for fiscal 2011. As of April 30, 2012, total
third party sponsored assets were attributable to four contracts for copyright
data representing $3.4 billion in various products, as compared to four
contracts and $3.5 billion in assets at April 30, 2011, representing a 3%
decrease in assets. The Company believes the growth of 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. This market has become
significantly more competitive as a result of product diversification and
increased use of indices by portfolio managers. There was no net change in the
number of revenue-producing accounts during the twelve months ended April 30,
2012, while one account was added and one lost during fiscal 2011. Management is
focusing on the copyright data selling cycle, while maintaining good
communications with current third party sponsors, although there can be no
assurance that these efforts will be successful.
Copyright data fees increased $325,000, or 10%, for the twelve months ended
April 30, 2011, as compared to fiscal 2010. As of April 30, 2011, total third
party sponsored assets were attributable to four contracts for copyright data
representing $3.5 billion in various products, as compared to four contracts and
$2.6 billion in assets at the end of fiscal 2010, representing a 34% increase in
assets.
Investment management fees and services
As of the Restructuring Date, the Company deconsolidated its asset management
and mutual fund distribution businesses and its interest in these businesses was
restructured as a non-voting revenues and non-voting profits interests in
EAM. Accordingly, the Company no longer reports this operation as a separate
business segment, although it 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, as discussed
below. Total assets in the Value Line Funds managed by EAM at April 30, 2012,
were $2.1 billion, 6% below total assets of $2.2 billion in the Value Line Funds
managed by EAM at April 30, 2011, as a result of net redemptions for the twelve
months ended April 30, 2012.
The following table shows the change in assets for the past three fiscal years
including sales (inflows), redemptions (outflows), dividends and capital gain
distributions, and market value change. Inflows for sales, and outflows for
redemptions reflect decisions of individual investors.
The table illustrates the assets within the Value Line Funds broken down into
equity funds, variable annuity funds and fixed income funds as of April 30,
2012, 2011 and 2010.
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Value Line Mutual Funds
Total Net Assets
Asset Flows Fiscal Years ended April 30,
2012 2011
vs. vs.
2012 2011 2010 2011 2010
Value Line equity fund assets
(exclude variable annuity) -
beginning $ 1,398,372,388 $ 1,446,104,954 $ 1,445,168,855 -3.3 % 0.1 %
Sales/inflows 208,921,540 74,397,936 119,362,892 180.8 % -37.7 %
Redemptions/outflows (281,515,422 ) (370,072,264 ) (516,461,559 ) -23.9 % -28.3 %
Dividend and Capital Gain
Distributions (19,681,858 ) (2,683,333 ) (6,832,954 ) 633.5 % -60.7 %
Market value change 37,900,269 250,625,095 404,867,720 -84.9 % -38.1 %
Value Line equity fund assets
(non-variable annuity) - ending 1,343,996,918 1,398,372,388 1,446,104,954 -3.9 % -3.3 %
Variable annuity fund assets -
beginning 520,738,282 495,004,319 453,958,992 5.2 % 9.0 %
Sales/inflows 11,869,956 15,170,774 42,428,972 -21.8 % -64.2 %
Redemptions/outflows (72,557,743 ) (78,046,318 ) (82,785,322 ) -7.0 % -5.7 %
Dividend and Capital Gain
Distributions 503,582 (3,815,539 ) (32,487,231 ) 113.2 % -88.3 %
Market value change 23,921,941 92,425,046 113,888,908 -74.1 % -18.8 %
Variable annuity fund assets -
ending 484,476,017 520,738,282 495,004,319 -7.0 % 5.2 %
Value Line equity fund assets
(non-variable and variable
annuities) - ending 1,828,472,936 1,919,110,670 1,941,109,273 -4.7 % -1.1 %
Fixed income fund assets - beginning 236,526,222 249,868,326 248,927,635 -5.3 % 0.4 %
Sales/inflows 41,239,732 27,627,007 26,239,120 49.3 % 5.3 %
Redemptions/outflows (64,139,184 ) (44,038,991 ) (36,388,184 ) 45.6 % 21.0 %
Dividend and Capital Gain
Distributions (1,752,051 ) (1,358,551 ) (8,277,052 ) 29.0 % -83.6 %
Market value change 5,178,985 4,428,430 19,366,807 16.9 % -77.1 %
Fixed income fund assets - ending 217,053,704 236,526,222 249,868,326 -8.2 % -5.3 %
Money market fund assets - ending 67,682,443 89,356,239 132,102,912 -24.3 % -32.4 %
Assets under management - ending $ 2,113,209,083 $ 2,244,993,131 $ 2,323,080,511 -5.9 % -3.4 %
Of the thirteen funds, shares of 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").
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The next table provides a breakdown of the major distribution channels for the
Value Line Funds in terms of assets and shareholder accounts as of April 30,
2012.
Percentage of
Percentage of Shareholder
Fund Categories Assets in Shareholder Accounts
Aggregate Assets Category Accounts in Category
Guardian (SAM and Centurion Funds) $ 484,476,017 22.9 % 26,582 27.2 %
VL Funds direct accounts & other dealers 928,090,419 43.9 % 31,894 32.6 %
Top five dealer platforms 700,642,647 33.2 % 39,330 40.2 %
Total $ 2,113,209,083 100.0 % 97,806 100.0 %
During the period from May 1, 2010 through December 23, 2010 and the twelve
months ended April 30, 2010, investment management fees and distribution service
fees (which we refer to as "12b-1 fees") amounted to $10,584,000 and
$18,710,000, respectively, after giving effect to account fee waivers for
certain of the Value Line Funds. These amounts included 12b-1 fees of $2,308,000
and $4,124,000, earned for the period from May 1, 2010 through December 23, 2010
and for the twelve months ended April 30, 2010, respectively. For the period
from May 1, 2010 through December 23, 2010 and twelve months ended April 30,
2010, total investment management fee waivers were $513,000 and $898,000,
respectively, and total 12b-1 fee waivers were $1,651,000 and $2,642,000,
respectively. With limited exceptions, the Company, EAM LLC and ESI had no right
to recoup the previously waived amounts of investment management fees and 12b-1
fees. Any such recoupment of waived investment management fees is subject to the
provisions of the applicable Value Line Funds' prospectus. During the period
from May 1, 2010 through December 1, 2010, and for the twelve months ended April
30, 2010, separately managed accounts revenues were $109,000 and $222,000,
respectively. Separately managed accounts had $23 million in assets as of
December 1, 2010, including $20 million of assets in accounts managed for
affiliates of the Company's controlling shareholder AB&Co. During the third
quarter of fiscal 2011, the entities affiliated with AB&Co. cancelled their
separately managed account agreements with EAM LLC.
EAM - Results of operations before distribution to interest holders
The overall results of EAM's investment management operations during the twelve
months ended April 30, 2012, before interest holder distributions, include total
investment management fees earned from the Value Line Funds of $12,465,000,
12b-1 fees of $3,466,000 and other income of $12,000. For the same period, total
investment management fee waivers were $806,000 and 12b-1 fee waivers were
$2,257,000. During the twelve months ended April 30, 2012, EAM's net income was
$461,000 after giving effect to Value Line's non-voting revenues interest of
$5,684,000, but before distributions to voting interest holders and to the
Company in respect of its non-voting profits interest.
Total results of EAM's investment management operations for the period from
December 23, 2010 through April 30, 2011, before interest holder distributions,
include total investment management fees earned from the Value Line Funds of
$4,592,000, 12b-1 fees of $1,293,000 and other income of $3,100. For the same
period, total investment management fee waivers were $303,000 and 12b-1 fee
waivers were $855,000. For the period from December 23, 2010 through April 30,
2011, EAM's net income was $336,000, after giving effect to Value Line's
non-voting revenues interest of $2,187,000, but before distributions to voting
interest holders and to the Company in respect of its non-voting profits
interest.
As of April 30, 2012, ten of the thirteen Value Line Funds have all or a portion
of the 12b-1 fees being waived, three of the thirteen funds have partial
investment management fee waivers in place and, effective June 16, 2011, Value
Line U.S. Government Money Market Fund ("USGMMF") discontinued the 12b-1
program. 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.
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As of April 30, 2012, four of the six Value Line equity mutual funds, excluding
SAM and Centurion, had an overall four or five star rating by Morningstar, Inc.
The largest distribution channel for the Value Line Funds remains the fund
supermarket platforms such as Guardian, Charles Schwab & Co., Inc., Fidelity,
Pershing and E-Trade.
The Value Line fixed income Fund assets (excluding USGMMF), represent
approximately 10% of total Fund assets under management ("AUM") at April 30,
2012, an increase from 9% of total Fund AUM at April 30, 2011. The USGMMF assets
represent 3% of the total Fund AUM at April 30, 2012, a decrease from 4% of the
total Fund AUM at April 30, 2011. At April 30, 2012, fixed income AUM had
increased by 4%, and USGMMF AUM had decreased by 24%. The decline in USGMMF AUM
during fiscal 2012 was due primarily to redemptions arising from the Value Line
Profit Sharing Plan ("VLPSP") liquidation of its account of approximately $12
million in May 2011, which resulted from a change in the investment options made
available under the VLPSP. From November 2009 on, management fees from the
USGMMF were zero because EAM had waived all fees for the Fund management, and,
because of the historically low interest rate environment, had substantially
subsidized the USGMMF expenses.
At the Value Line Mutual Funds shareholder meeting held on December 15, 2011,
the Convertible Fund shareholders approved the merger of the Value Line
Convertible Fund into the Value Line Income and Growth Fund, effective December
16, 2011. The Value Line Convertible Fund had approximately $20 million in
assets under management as of December 16, 2011. On May 18, 2012, the VL New
York Tax Exempt Trust ($15 million AUM) combined into the VL Tax Exempt Fund
($90 million AUM). This increased the AUM in the VL Tax Exempt Fund over $100
million, which is an important milestone to raise assets, since many
institutions do not invest in funds under $100 million. Both combinations offer
many benefits for fund shareholders as described in the proxy materials. EAM is
anticipating leaving the money market business in August 2012. The current plan
approved by the Fund Board in June 2012, calls for the Money Market Fund to
merge into a third party fund. EAM would continue to maintain the shareholder
accounts on behalf of the Value Line Money Market Fund ("USGMMF") shareholders,
but EAM would no longer be subsidizing the expenses of the existing fund
resulting from the low interest rate economic environment, saving over $300,000
annually. In addition, closure or merger of the USGMMF would eliminate certain
costs of administration and fund accounting, increasing the total annual
savings.
EAM - The Company's non-voting revenues and non-voting profits interests
Following the Restructuring Transaction, 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. EAM currently has no separately managed account
clients. During the twelve months ended April 30, 2012, the Company recorded
revenues of $5,890,000, consisting of $5,684,000, from its non-voting revenues
interest in EAM and $206,000, from its non-voting profits interest in EAM
without incurring any directly related expenses. During the period from December
23, 2010 (the Restructuring Date) through April 30, 2011, the Company recorded
revenues of $2,355,000, consisting of $2,187,000, from its non-voting revenues
interest in EAM and $168,000 from its non-voting profits interest in EAM.
33
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Expenses
Fiscal Years Ended April 30,
Change
($ in thousands) 2012 2011 2010 12 vs. 11 11 vs. 10
Advertising and promotion $ 4,203 $ 6,673 $ 9,346 -37.0 % -28.6 %
Salaries and employee benefits 15,001 17,242 16,314 -13.0 % 5.7 %
Production and distribution 4,894 4,718 5,244 3.7 % -10.0 %
Office and administration 7,173 9,504 11,320 -24.5 % -16.0 %
Expenses related to restructuring - 3,764 - -100.0 % n/a
Provision for settlement - (1,767 ) 48,106 n/a -103.7 %
Total expenses $ 31,271 $ 40,134 $ 90,330 -22.1 % -55.6 %
Operating expenses of $31,271,000 for the twelve months ended April 30, 2012,
decreased $8,863,000, or 22%, as compared to the twelve months ended April 30,
2011. This reduction in operating expenses for fiscal 2012 as compared to fiscal
2011 resulted in part from the inclusion of $3,764,000 of expenses related to
the Restructuring Transaction in fiscal 2011, and the inclusion of $8,230,000 of
expenses in fiscal 2011 related to the investment management business which was
deconsolidated and discontinued on December 23, 2010.
Operating expenses of $40,134,000 for the twelve months ended April 30, 2011
were $50,196,000, or 56%, below operating expenses of $90,330,000 for fiscal
2010, which included a provision for the SEC Settlement of $48,106,000. During
the twelve months ended April 30, 2011, expenses included a reduction of
$1,767,000 in the estimated costs of administration of the Fair Fund claims and
increased administration expenses of $914,000 related to the Company's operating
lease exit obligation associated with the office space formerly occupied by EAM
LLC. The twelve months ended April 30, 2011 also include $3,764,000 of costs
associated with the Restructuring Transaction and an additional non-cash
post-employment compensation expense of $1,770,000 related to the grant of a
voting profits interest in EAM to a former employee of the Company.
Advertising and promotion
Advertising and promotion expenses during the twelve months ended April 30,
2012, decreased $2,470,000, or 37%, as compared to the twelve months ended April
30, 2011. Operating expenses for fiscal 2011 included $2,220,000 of expenses
related to the Company's investment management business which was deconsolidated
and discontinued on December 23, 2010; these expenses were primarily for
promotional payments to independent broker-dealers associated with the
distribution of the Value Line Funds. The remaining decrease of $250,000 for the
twelve months ended April 30, 2012, was mainly related to reduced media and
internet advertising and promotion expenses of $520,000 and a $109,000 reduction
in renewal solicitation costs, offset by increased direct marketing and sales
commissions costs.
Advertising and promotion expenses for fiscal 2011 decreased $2,673,000, or 29%,
as compared to fiscal 2010. As a result of the disassociation and
deconsolidation of the investment management business on December 23, 2010, the
Company discontinued advertising expenses associated with the distribution of
the Value Line Funds, resulting in a decline in expenses of $2,976,000, or 57%,
for fiscal 2011 as compared to fiscal 2010. Within the Publishing segment, costs
for fiscal 2011 associated with direct mail decreased 2% below fiscal 2010.
Media print advertising and promotional costs for fiscal 2011 increased $453,000
as compared to fiscal 2010, with the increase relating to the digital product
and software promotion project. There were also public relations cost increases
that were partially offset by declines in direct mail for print products and
renewal solicitation costs.
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Salaries and employee benefits
Salaries and employee benefits decreased by $2,241,000 or 13% during the twelve
months ended April 30, 2012, as compared to fiscal 2011. This decrease reflects
a reduction of $3,635,000 related to the deconsolidation and discontinuance of
the investment management business on December 23, 2010 including $1,049,000
related to direct overhead costs, $1,770,000 for non-cash post-employment
compensation expense, and $816,000 related to previously shared costs incurred
in order to provide the proprietary Ranking System information and overhead
salaries to the investment management business. Pursuant to the EAM Declaration
of Trust, the Company agreed to supply the proprietary Ranking System
information to EAM without charge or expense so that, for periods after December
23, 2010, these previously shared costs remain within the Publishing segment.
Salaries and employee benefits in the Publishing segment increased $1,394,000 as
a result of the aforementioned reallocation to the Publishing segment of
$816,000 for overhead costs previously shared with the Investment Management
segment. The increase in salaries and employee benefits related to additional
headcount in information technology, fulfillment, marketing and institutional
sales was partially offset by the capitalization of $1,346,000 for digital
project development costs. During the twelve months ended April 30, 2012 and
2011, the Company accrued profit sharing expenses of $447,000 and $500,000,
respectively.
Salaries and employee benefits increased by $928,000 during the twelve months
ended April 30, 2011 as compared to fiscal 2010, partly as a result of the
$1,770,000 non-cash post-employment compensation expense discussed above offset
partially by the elimination of approximately $1,300,000 related to the
deconsolidation of the investment management business. This increase in expenses
reflected an increase of $500,000 for accrued profit sharing expense and
$663,000 to support upgrades to the Company's digital and software products and
fulfillment system. Over the past several years, the Company has saved money by
combining the roles and responsibilities of various personnel and by selective
outsourcing. During fiscal 2010, salaries and employee benefits decreased by
$1,362,000 as a result of the consolidation of positions, outsourcing and cost
controls. There was no profit sharing contribution recorded for fiscal
2010. During fiscal years 2011 and 2010, the Company capitalized $402,000 and
$285,000 of internal costs of developing software for internal use,
respectively.
Production and distribution
Production and distribution expenses during the twelve months ended April 30,
2012, increased $176,000 or 4% above fiscal 2011. During the twelve months ended
April 30, 2012, an increase of $136,000 resulting from additional amortization
of internally developed software costs for our new fulfillment system
implemented in November 2011, and an increase of $157,000 related to the third
party costs to develop the new fulfillment system, which were not capitalized,
were partially offset by reduced data feed expenses of $122,000.
Production and distribution expenses for the twelve months ended April 30, 2011
were $526,000, or 10%, below fiscal 2010 primarily as a result of the
discontinuance of a third party fulfillment and distribution provider during the
latter part of fiscal 2010. In fiscal 2010 amortized software costs decreased
$325,000 from fiscal 2009 due to a reduction in prior years' expenditures for
capitalized costs. The remaining decline in expenses during fiscal 2011 and
fiscal 2010 were primarily due to volume reductions in paper, printing and
mailing that resulted from a decrease in circulation of the print products.
Office and administration
Office and administration expenses during the twelve months ended April 30,
2012, decreased $2,331,000 or 25% below fiscal 2011. This decrease reflects a
reduction of $2,375,000 related to the deconsolidation and discontinuance of the
investment management business, including $1,845,000 related to direct overhead
costs and $530,000 related to previously shared costs incurred in order to
provide the proprietary Ranking System information and related administrative
services to the investment management business. Pursuant to the EAM Declaration
of Trust, the Company agreed to supply the proprietary Ranking System
information to EAM without charge or expense so that, for periods after December
23, 2010, these previously shared costs remain within the Publishing
segment. Office and administration expenses in the Publishing segment increased
$44,000 as a result of the aforementioned reallocation to the Publishing segment
of $530,000 of overhead costs previously shared with the Investment Management
segment along with an increase of $200,000 in professional and legal fees and an
increase of $178,000 in office support related costs. These increased expenses
were offset by a decrease of $1,352,000 for office space rental, resulting from
the classification of a portion of the lease payments made during fiscal 2012 as
a reduction of the accrual made in the amount of $914,000 in fiscal 2011 for the
lease exit obligation related to EAM's relocation expensed in fiscal
2011. During the period from December 23, 2010 until May 28, 2011, EAM occupied
a portion of the premises that the Company leases from a third party. The
Company received $44,000 for the month of May 2011 for rent and certain
accounting and other administrative support services provided to EAM on a
transitional basis during such period.
35
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Office and administration expenses for the twelve months ended April 30, 2011 of
$9,504,000, which includes $914,000 of expenses for operating lease exit costs
associated with the office space formerly occupied by EAM LLC, were $1,816,000,
or 16.0%, lower than fiscal 2010. Exclusive of the operating lease exit costs,
office and administration expenses decreased primarily as a result of lower
professional fees related to regulatory matters, rent reimbursement of $189,000
received from EAM in fiscal 2011 and an expense of $727,000 recorded in fiscal
2010 for the write-down of capitalized development costs related to a software
production project that was determined to be no longer viable. Additionally,
office and administration expenses for fiscal 2011 declined by $608,000 as a
result of the elimination of expenses related to the deconsolidation of the
investment management business.
Expenses related to restructuring
In fiscal 2011, professional fees including the cost of the proxy solicitation
for the Value Line Funds, of $3,764,000 were associated with the Restructuring
Transaction that was completed on December 23, 2010. The Company's policy was to
expense these costs as incurred.
Provision for Settlement
In connection with the Settlement with the SEC (see Item 3, "Legal
Proceedings"), the Company recorded a provision for settlement during fiscal
2010 of $48,106,000 which included $4,400,000 of estimated expenses associated
with the Fair Fund administration and other costs which the Company was required
to pay, of which $43,706,000 was paid to the SEC in November 2009. During fiscal
2011, the administrator of the Fair Fund estimated that the remaining costs of
administration would be less than originally determined due to a modification in
the manner of administration and distribution of the Fair Fund. Accordingly, the
Company reduced its liability for the costs of administration of the Fair Fund
by $1,767,000 during the fourth quarter of fiscal 2011.
Segment Operating Profit
Prior to December 23, 2010, the Company's businesses consolidated into two
reportable business segments. The investment periodicals and related
publications (retail and institutional) and fees from copyright data, including
the Proprietary Ranking System information and other proprietary information,
consolidated into one segment called Publishing, and the investment management
services to the Value Line Funds and other managed accounts were consolidated
into a second business segment called Investment Management. Subsequent to
December 23, 2010, the date of the Restructuring Transaction, the Publishing
segment constitutes the Company's only reportable business segment. Accordingly,
the Investment Management segment information reported below reflects activity
only through the date of the Restructuring Transaction.
36
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Publishing
Investment Periodicals, Publishing & Copyright Data Investment Management
Fiscal Years Ended April 30, Fiscal Years Ended April 30,
2012 2011 2010 Change 2012 2011 2010 Change
(in thousands) 12 vs. 11 11 vs. 10 (1) 12 vs. 11 11 vs. 10
Segment revenues
from external
customers $ 36,609 $ 37,974 $ 39,208 -3.6 % -3.1 % $ - $ 10,693 $ 18,932 -100.0 % -43.5 %
Segment profit from
operations $ 5,338 $ 8,984 $ 10,425 -40.6 % -13.8 % $ - $ (448 ) $ (42,614 ) 100.0 % -98.9 %
Segment profit
margin from
operations 14.6 % 23.7 % 26.6 % -38.4 % -11.0 % - -4.2 % -225.1 % 100.0 % -98.1 %
(1) Period from May 1, 2010 through December 23, 2010.
Investment Periodicals, Publishing & Copyright Data
During fiscal 2012, Publishing revenues from investment periodicals and related
publications including copyright data fees were $36,609,000, which is $1,365,000
or 4% below the publishing revenues from fiscal 2011.
During fiscal 2012 and fiscal 2011, the decrease in the operating profit margin
and segment operating profits in the Publishing segment resulted primarily from
the decline in investment publication and periodicals revenues without a
proportionate decrease in expenses for production and administration, including
overhead costs. In fiscal 2012, copyright data's revenue increase was less than
1%. The 9.1% decline in the operating profit margin in the Publishing segment in
fiscal 2012, as compared to fiscal 2011 was due to decreased revenues in
addition to the reallocation to the Publishing segment of costs previously
shared with the Investment Management segment.
Segment revenues from the Company's Publishing business for fiscal 2012 and
fiscal 2011 continued to decline from fiscal 2010 levels primarily due to the
continual deterioration in circulation of the total product line while operating
profit and operating profit margins declined due to the relatively fixed costs
related to producing the Company's products and overhead costs classified as
Administrative expenses. The Company believes that competition in the form of
free or low cost investment research on the Internet and research provided by
brokerage firms at no cost to their clients contributed to the decline in
revenue in this segment. In fiscal 2011, the recession and continued volatility
in the markets also contributed to the decline in subscriptions, to the
Company's products, as individuals have reduced many forms of discretionary
spending. Also, some investors may have shifted from equity investments to fixed
income investments. The Company provides only limited research on fixed income
investments, and this is not a core aspect of Value Line's business. The 2.9%
decline in the operating profit margin in this segment in fiscal 2011, as
compared to fiscal 2010 was offset partially by the increase in revenues in
fiscal 2011 from copyright data fees, which are asset-based. Costs for the
Company's copyright data products are relatively fixed costs for the Company, so
that expenses do not increase proportionately to increases in revenue.
Investment Management
Negative operating margins for the investment management business conducted by
the Company during the period from May 1, 2010 through December 23, 2010
resulted primarily from the incurrence of expenses related to the Restructuring
Transaction and declines in certain asset based revenues with no offsetting
expense reductions. Lower management fees from the Value Line Funds for this
period resulted from lower average assets under management (through December 23,
2010) and fee waivers. The Company waived management fees of $352,000 for the
period from May 1, 2010 through December 23, 2010 in the USGMMF and, due to the
low interest rate environment and new regulations restricting investments, that
Fund generated insufficient portfolio income to cover its normalized expenses,
which were subsidized by the Company. Segment operating profit and the operating
profit margin for fiscal 2011 through December 23, 2010, the date of
consummation of the Restructuring Transaction, includes $3,764,000 of expenses
related to the Restructuring Transaction, $1,770,000 of post-employment
compensation expense related to the grant of the voting profits interest in EAM
to a former employee in connection with the Restructuring Transaction and
$914,000 of operating lease exit costs related to the office space formerly
occupied by EAM LLC. These expenses in fiscal 2011 were partially offset by a
reduction of $1,767,000 in the estimated cost to administer the Fair Fund. As
previously mentioned, the negative results for the investment management segment
in fiscal 2010 resulted primarily from the provision for the Settlement.
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Income from Securities Transactions, net
Fiscal Years Ended April 30,
Change
($ in thousands) 2012 2011 2010 12 vs. 11 11 vs. 10
Dividend income $ 68 $ 16 $ 3 325.0 % 433.3 %
Interest income 16 118 856 -86.4 % -86.2 %
Realized and gains (losses) on
equity and fixed income
securities available-for-sale (11 ) (68 ) 176 83.8 % -138.6 %
Realized and gains on trading
securities available-for-sale - - 243 n/a -100.0 %
Unrealized gains (losses) on
securities available-for-sale - 5 (377 ) 100.0 % 101.3 %
Interest expense - (2 ) (21 ) 100.0 % 90.5 %
Other (3 ) (4 ) (43 ) 25.0 % 90.7 %
Total income from securities
transactions, net $ 70 $ 65 $ 837 7.7 % -92.2 %
During the twelve months ended April 30, 2012, the Company's income from
securities transactions, net, of $70,000 was $5,000 or 8% above income from
securities transactions, net, of $65,000 during the twelve months ended April
30, 2011. Income from securities transactions, net, includes combined dividend
and interest income of $84,000 and $134,000 earned during the twelve months
ended April 30, 2012 and 2011, respectively. During the twelve months ended
April 30, 2012, realized capital gains, net of capital losses from sales of
equity securities were $11,000. There were no sales, or gains or losses from
sales of equity securities during the fiscal years ended April 30, 2011, and
2010. Realized capital losses, net of capital gains from the sales of fixed
income obligations, were $22,000 and $68,000 during the twelve months ended
April 30, 2012 and 2011, respectively.
During the twelve months ended April 30, 2011, the Company's income from
securities transactions, net, of $65,000 was $772,000 or 92% below income from
securities transactions, net, of $837,000 during fiscal 2010. Income from
securities transactions, net, includes dividend and interest income of $859,000
earned during the twelve months ended April 30, 2010. The declines in interest
income in fiscal 2011 reflect the lower level of the Company's invested assets
resulting from the Settlement payment of $43,706,100 in November 2009, payment
of a special $3 per share dividend (aggregating approximately $30,000,000) in
April 2010, and payment of a special $2 per share dividend (aggregating
approximately $20,000,000) in November 2010. The maturity of higher yielding
fixed income investments during fiscal 2010 also contributed to the decline in
investment income in fiscal 2011. Capital losses during the twelve months ended
April 30, 2011 were $63,000 primarily from the sale of fixed income obligations.
Net capital gains for fiscal 2010 were $42,000.
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Effective income tax rate
The overall effective income tax rate, as a percentage of pre-tax ordinary
income for the twelve months ended April 30, 2012 and April 30, 2011 was 38.71%
and 38.53%, respectively. The change in the effective income tax rate in fiscal
2012 is attributable to the alternative minimum tax on the limitation to the
Company's net operating loss carryforward in fiscal years 2012 and 2011, and a
slight decrease in state and local tax rate for fiscal 2012 primarily from EAM's
income allocation.
The overall effective income tax rate, as a percentage of pre-tax ordinary
income for the twelve months ended April 30, 2011 and April 30, 2010 was 38.53%
and 26.04%, respectively. The change in the effective income tax rate is
attributable to the non-deductible portion of the provision for the SEC
Settlement included in fiscal 2010, the alternative minimum tax on the Company's
net operating loss carry forward in fiscal 2011, and the change in the Company's
non-taxable investment income.
Liquidity and Capital Resources
The Company had negative working capital, defined as current assets less current
liabilities, of $8,067,000 as of April 30, 2012 and negative working capital of
$6,194,000 as of April 30, 2011. These amounts include short term unearned
revenue of $21,548,000 and $22,442,000 reflected in total current liabilities at
April 30, 2012 and April 30, 2011, respectively. Cash and short term securities
were $15,923,000 as of April 30, 2012 and $19,476,000 as of April 30, 2011. The
decrease in working capital and cash and short term securities in fiscal 2012
resulted primarily from the payment of $1,189,000 in settlement payments for the
Fair Fund. Negative working capital of $6,194,000 as of April 30, 2011 was
reduced from working capital of $21,262,000 as of April 30, 2010. In fiscal
2011, the Company paid $764,000 and $2,783,000 in settlement and restructuring
related expenses, respectively. The decrease in working capital for fiscal 2011
resulted primarily from the payment in November 2010 of a special $2.00 per
share dividend, aggregating approximately $20 million, in lieu of the Company's
regularly scheduled $.20 per share dividend. Also in fiscal 2011, in connection
with the Restructuring Transaction, the Company transferred cash and marketable
securities of $7,000,000 to EAM, and incurred professional expenses of
$3,764,000.
The Company's cash and cash equivalents include $10,848,000 and $6,158,000 at
April 30, 2012 and April 30, 2011, respectively, invested primarily in Money
Market Funds at brokers' accounts, which operate under Rule 2a-7 of the of the
1940 Act and invest primarily in short term U.S. government securities.
Cash from operating activities
The Company had cash inflows from operating activities of $2,376,000 during the
twelve months ended April 30, 2012, 78% below cash inflows from operations of
$10,660,000 during the twelve months ended April 30, 2011. The change in cash
flows from fiscal 2011 to fiscal 2012 was primarily due to the restructuring of
the Investment Management business that resulted in the cessation of this
operating activity and the inclusion of the Company's non-voting revenues and
non-voting profits interests in EAM as investing activities in fiscal
2012. Fiscal 2012 includes payments of $1,004,000 of federal, state and local
incomes taxes, $1,189,000 for obligations related to the Settlement with the
SEC, and a decrease of $439,000 in operating lease exit costs related to the
classification of a portion of the lease payments during fiscal 2012 as a
reduction of the accrued lease exit obligation of $914,000 related to EAM's
relocation expensed in fiscal 2011. Additionally, during fiscal 2012, the
Company paid accrued liabilities of $487,000 for the prior year capitalized
costs related to the Company's digital strategy. Fiscal 2011 includes cash
inflows from the receipt of $2,027,000 in federal, state and local income tax
refunds, and cash outflows related to the payment of settlement and
restructuring related expenses of $2,783,000 and $764,000, respectively,
including the payments made during fiscal 2011 for expenses incurred during
fiscal 2010.
Cash from investing activities
The Company's cash inflows from investing activities of $11,262,000 during the
twelve months ended April 30, 2012, were 200% above cash inflows from investing
activities of $3,753,000 for the twelve months ended April 30, 2011. Cash
inflows for the twelve months ended April 30, 2012, were higher due to the
Company's decision not to invest cash in short term, low yielding, fixed income
securities in fiscal 2012. During fiscal 2012, the Company received $5,876,000
from its non-voting revenues interest and non-voting profits interest
distributed by EAM, offset by the Company's investment of $3,383,000 in
capitalized software costs for upgrading its digital product capabilities and
overall digital strategy. The lower cash inflow in fiscal 2011 resulted from the
transfer of $5,484,000 of cash to EAM in connection with the Restructuring
Transaction and redeployment of cash into fixed income government debt
securities. The Company expects that investing activities will continue to
provide cash from continued receipts from its non-voting revenues and non-voting
profits interests distributions in EAM.
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Cash from financing activities
The Company's cash outflows from financing activities of $8,398,000 during the
twelve months ended April 30, 2012, were 65% below cash outflows from financing
activities of $24,046,000 for the twelve months ended April 30, 2011. During
fiscal 2012 and 2011, cash outflows for financing activities included $946,000
and $90,000, respectively, for the repurchase of the Company's common stock
under the board approved repurchase program. On January 20, 2011, the Company's
Board of Directors authorized the repurchase of shares of the Company's common
stock, up to an aggregate purchase price of $3,200,000. The repurchase
authorization extended through January 15, 2012, at which time the authorization
was not extended and expired. Dividend payments of $0.20 per share during the
first three quarters and $0.15 per share during the fourth quarter of fiscal
2012 aggregated $7,452,000 as compared to $23,956,000 in fiscal 2011, which
included payment of a special $2.00 per share dividend, aggregating
approximately $20 million, in November 2010. At the Company's Board of Directors
meeting held on January 19, 2012, the Board decreased the quarterly cash
dividend from $0.20 per share to $0.15 per share of common stock. The Company
expects financing activities to continue to include use of cash for dividend
payments 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. Management does not anticipate making any borrowings during
the next twelve months. As of April 30, 2012, retained earnings and liquid
assets were approximately $32 million and $16 million, respectively.
Seasonality
Our operations are minimally seasonal in nature. Our publishing revenues are
comprised of subscriptions which are generally annual subscriptions and/or
multi-year subscriptions. Our cash flows from operating activities are somewhat
seasonal in nature, primarily due to the timing of customer payments made for
subscription renewals, which generally occur more frequently in our fiscal third
quarter.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2011-05, Presentation of Comprehensive
Income ("ASU 2011-05"), which represents an update to ASC 220, Comprehensive
Income. ASU 2011-05 provides new disclosure guidance for comprehensive income,
requiring presentation of each component of net income along with total net
income, each component of other comprehensive income along with a total for
other comprehensive income and a total amount for comprehensive income. An
entity will have the option to present these items in one continuous statement
or two separate but consecutive statements. An entity will no longer be
permitted to present components of other comprehensive income as part of the
statement of changes in stockholders' equity. ASU 2011-05 is effective for
fiscal years and interim periods within those years beginning after December 15,
2011. Portions of ASU 2011-05 were amended in December 2011.
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting
Assets and Liabilities ("ASU 2011-11"), to improve reporting and transparency of
offsetting (netting) assets and liabilities and the related affects on the
financial statements. ASU 2011-11 is effective for fiscal years and interim
periods within those years beginning after January 1, 2013. The Company plans to
adopt this guidance effective May 1, 2013, and we do not currently believe that
its implementation will have a material effect on our consolidated financial
statements.
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In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date
for Amendments to the Presentation of Reclassifications of Items Out of
Accumulated Other Comprehensive Income in ASU No. 2011-05 ("ASU 2011-12"). ASU
2011-12 amends certain pending paragraphs from ASU 2011-05. This amendment
allows companies to defer the effective date of the change in presentation on
the face of the financial statements of reclassification adjustments for items
that are reclassified from other comprehensive income to net income in the
statements where the components of net income and the components of other
comprehensive income are presented. The effective date for all other amendments
put forth in ASU No. 2011-05 are unaffected by this update. This update is
effective for fiscal years and interim periods within those years beginning
after December 15, 2011. The Company will adopt this guidance effective May 1,
2012, and we do not currently believe that its implementation will have a
material impact on our consolidated financial statements.
Critical Accounting Estimates and Policies
The Company prepares its consolidated 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
Financial Statements:
? Revenue recognition
? Income taxes
? Reserve for settlement expenses
Revenue Recognition
The majority of the Company's revenues come from the sale of print and digital
subscriptions and fees for copyright proprietary information, and, prior to
December 23, 2010, investment management and 12b-1fees. The Company recognizes
subscription revenue, net of discounts, in equal amounts over the term of the
subscription, which generally ranges from three months to one year or longer,
varying based on the product or service. Copyright data fees are calculated
monthly based on market fluctuation and billed quarterly. Prior to the
Restructuring Date, December 23, 2010, investment management fee and 12b-1 fee
revenues for the Value Line Funds were recognized each month based upon the
daily net asset value of each Fund. The Company believes that the estimates
related to revenue recognition are critical accounting estimates, and to the
extent that there are material differences between its determination of revenues
and actual results, its financial condition or results of operations may be
affected.
Income Taxes
The Company's effective annual income tax expense rate is based on the U.S.
federal and state and local jurisdiction tax rates on income and losses that are
part of its Consolidated Financial Statements. Tax-planning opportunities and
the blend of business income, including income derived from the Company's
non-voting revenue and non-voting profits interests in EAM and income from
securities transactions, will impact the effective tax rate in the various
jurisdictions in which the Company operates. Significant judgment is required in
evaluating the Company's tax positions.
Tax law requires items to be included in the tax return at different times from
when these items are reflected in the Company's Consolidated Financial
Statements. As a result, the effective tax rate reflected in the Company's
Consolidated Financial Statements is different from the tax rate reported on the
Company's tax returns (the Company's cash tax rate). Some of these differences
are permanent, such as non-taxable income that is not includable in the
Company's tax return and expenses that are not deductible in the Company's tax
return and some differences reverse over time, such as depreciation and
amortization expenses. These timing differences create deferred tax assets and
liabilities. Deferred tax assets and liabilities are determined based on
temporary differences between the financial reporting and the tax basis of
assets and liabilities.
41--------------------------------------------------------------------------------
As of April 30, 2012 and 2011, the Company had $442,000 and $3,022,000,
respectively, of deferred tax assets, which included $141,000 and $2,494,000 of
short-term deferred Federal, State, and local taxes, respectively, related to
the net operating loss carryforwards of $360,000 and $6.4 million
respectively. In assessing the Company's deferred tax assets, the Company
considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible or utilized in
the Company's tax filings.
In assessing the need for a valuation allowance, the Company considers both
positive and negative evidence, including tax-planning strategies, projected
future taxable income, and recent financial performance. If after future
assessments of the realizability of the deferred tax assets the Company
determines a lesser allowance is required, the Company would record a reduction
to the income tax expense and to the valuation allowance in the period this
determination was made. This would cause the Company's income tax expense,
effective tax rate, and net income to fluctuate.
In addition, the Company establishes reserves at the time that it determines
that it is more likely than not that it will need to pay additional taxes
related to certain matters. The Company adjusts these reserves, including any
impact of the related interest and penalties, in light of changing facts and
circumstances such as the progress of a tax audit. A number of years may elapse
before a particular matter for which the Company has established a reserve is
audited and finally resolved. The number of years with open tax audits varies
depending on the tax jurisdiction. Such liabilities are recorded as income taxes
payable in the Company's Consolidated Balance Sheets. The settlement of any
particular issue would usually require the use of cash. Favorable resolutions of
tax matters for which the Company has previously established reserves are
recognized as a reduction to the Company's income tax expense when the amounts
involved become known.
Assessing the future tax consequences of events that have been recognized in the
Company's financial statements or tax returns requires judgment. Variations in
the actual outcome of these future tax consequences could materially impact the
Company's financial position, results of operations, or cash flows.
Reserve for settlement expenses
As of April 30, 2012 and 2011, the Company had $275,000 and $1,464,000,
respectively, reserved for expected expenses related to the SEC Settlement. The
amount of the reserve for expected expense is an estimate of the expected cost
of the administration of the Fair Fund established by the SEC to reimburse
shareholders who owned shares in the affected Value Line Funds in the period
covered by the Settlement and other related costs. Included in the estimate were
calculations for the third party administrator appointed in September 2010 by
the SEC, the tax advisor named in November 2009 by the SEC, legal fees, and
transfer agent fees, and communication expense required to identify and notify
eligible shareholders as well as other costs associated with the calculation and
distribution of the proceeds of the Fair Fund. These costs were estimated based
on the scope of the work and bids received from the third party vendors. Due to
the complexity of the Fair Fund distribution, these estimates were subject to
change. During fiscal 2011, as a result of modification in the manner of
administration of the Fair Fund, the Company reduced its estimate of the costs
required to administer the Fair Fund by $1,767,000. During the fourth quarter of
fiscal 2010, the Company had increased such estimate by $400,000.
Off-Balance Sheet Arrangements
The Company is not party to any off-balance sheet arrangements, other than
operating leases in the ordinary course of business, which is disclosed below in
the table of contractual obligations.
42
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Contractual Obligations
Below is a summary of certain contractual obligations of the Company ($ in
thousands):
Payments due by period
Less than More than 5
Total 1 year 1-3 years 3-5 years yearsLong-Term Debt Obligations $ - $ - $ - $
- $ -
Capital Lease Obligations - - - - -
Operating Lease Obligations 3,194 2,948 246 - -
Purchase Obligations - - - - -
Total $ 3,194 $ 2,948 $ 246 $ - $ -
