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| VALU > SEC Filings for VALU > Form 10-Q on 14-Dec-2012 | All Recent SEC Filings |
14-Dec-2012
Quarterly Report
Cautionary Statement Regarding Forward-Looking Information
This report contains statements that are predictive in nature, depend upon or refer to future events or conditions (including certain projections and business trends) accompanied by such phrases as "believe", "estimate", "expect", "anticipate", "will", "intend" and other similar or negative expressions, that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, as amended. Actual results for Value Line, Inc. ("Value Line" or "the Company") may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to the following:
? dependence on key personnel;
? maintaining revenue from subscriptions for the Company's digital and print published products;
? protection of intellectual property rights;
? changes in market and economic conditions, including global financial issues;
? dependence on non-voting revenues and non-voting profits interests in EULAV Asset Management, a Delaware statutory trust ("EAM" or "EAM Trust"), which serves as an investment advisor to the Value Line Funds and engages in related distribution, marketing and administrative services;
? fluctuations in EAM's assets under management due to broadly based changes in the values of equity and debt securities, redemptions by investors and other factors, and the effect these changes may have on the valuation of EAM's intangible assets;
? competition in the fields of publishing, copyright data and investment management;
? the impact of government regulation on the Company's and EAM's business;
? availability of free or low cost investment data through discount brokers or generally over the internet;
? the risk that, while the Company believes that the restructuring transaction that closed on December 23, 2010, achieved compliance with the requirements of the order issued by the Securities and Exchange Commission (the "SEC") on November 4, 2009, the Company might be required to take additional steps which could adversely affect the Company's results of operations or the Company's financial condition;
? terrorist attacks, cyber security attacks and natural disasters;
? identifying and executing a suitable lease for replacement office space for the Company's principal offices prior to expiration in May 2013 of the current, non-renewable lease at the Company's current location;
? other risks and uncertainties, including but not limited to the risks described in Item 1A, "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended April 30, 2012 and in Part II, Item 1A of this Quarterly Report on Form 10-Q for the period ended July 31, 2012; and
? other risks and uncertainties arising from time to time.
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors which may involve external factors over which we may have no control, or changes in our plans, strategies, objectives, expectations or intentions, which may happen at any time at our discretion, could also have material adverse effects on future results. Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with the SEC pursuant to the SEC's rules, we have no duty to update these statements, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, current plans, anticipated actions, and future financial conditions and results may differ from those expressed in any forward-looking information contained herein.
In this report, "Value Line," "we," "us," "our" refers to Value Line, Inc. and the "Company" refers to Value Line and its subsidiaries unless the context otherwise requires.
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.
Restructuring of Asset Management and Mutual Fund Distribution Businesses
The business of EULAV Asset Management Trust, a Delaware business trust ("EAM") is managed by its trustees each owning 20% of the voting profits interest of EAM and by its officers subject to the direction of the trustees. The Company's non-voting revenues and non-voting profits interests in EAM entitle it to receive a range of 41% to 55% of EAM's revenues (excluding distribution revenues) from EAM's mutual fund and separate account business and 50% of the residual profits of EAM (subject to temporary increase in certain limited circumstances). The Voting Profits Interest Holders will receive the other 50% of residual profits of EAM.
Pursuant to the EAM Agreement, 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
During the six months ended October 31, 2012, the NASDAQ and the Dow Jones Industrial Average were up 4% and 2%, respectively. The severe downturn experienced in the September 2008 to March 2009 period and the volatility in the financial markets since then have resulted in many individual investors withdrawing money from equity investments, including equity mutual funds. 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.
Results of Operations for the Three and Six Months Ended October 31, 2012 and 2011
The following table illustrates the Company's key components of revenues and expenses.
Three Months Ended October 31, Six Months Ended October 31,
($ in thousands,
except
earnings per share) 2012 2011 Change 2012 2011 Change
Income from
operations $ 920 $ 1,518 -39.4 % $ 2,272 $ 3,156 -28.0 %
Revenues and profits
interests from EAM
Trust $ 1,529 $ 1,343 13.8 % $ 3,002 $ 2,915 3.0 %
Income from
operations plus
non-voting revenues
and non-voting
profits interests
from EAM Trust $ 2,449 $ 2,861 -14.4 % $ 5,274 $ 6,071 -13.1 %
Operating expenses $ 7,889 $ 7,622 3.5 % $ 15,475 $ 15,354 0.8 %
Income from
securities
transactions, net $ 30 $ 20 50.0 % $ 56 $ 31 80.6 %
Income before income
taxes $ 2,479 $ 2,881 -14.0 % $ 5,330 $ 6,102 -12.7 %
Net income $ 1,572 $ 1,915 -17.9 % $ 3,348 $ 3,991 -16.1 %
Earnings per share $ 0.16 $ 0.19 -15.8 % $ 0.34 $ 0.40 -15.0 %
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Total operating revenues
Three Months Ended October 31, Six Months Ended October 31,
($ in thousands) 2012 2011 Change 2012 2011 Change
Investment
periodicals and
related publications:
Print $ 4,735 $ 5,094 -7.0 % $ 9,635 $ 10,300 -6.5 %
Digital 3,092 3,233 -4.4 % 6,220 6,425 -3.2 %
Total investment
periodicals and
related publications 7,827 8,327 -6.0 % 15,855 16,725 -5.2 %
Copyright data fees 982 813 20.8 % 1,892 1,785 6.0 %
Total publishing
revenues $ 8,809 $ 9,140 -3.6 % $ 17,747 $ 18,510 -4.1 %
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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
Three Months Ended October 31,
2012 2011
Print Electronic Print Electronic
New Sales Orders 21.5% 25.3% 11.2% 26.3%
Renewal Sales Orders 78.5% 74.7% 88.8% 73.7%
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Total Gross Sales Orders 100.0% 100.0% 100.0% 100.0%
Six Months Ended October 31,
2012 2011
Print Electronic Print Electronic
New Sales Orders 17.8% 21.7% 11.4% 27.2%
Renewal Sales Orders 82.2% 78.3% 88.6% 72.8%
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Total Gross Sales Orders 100.0% 100.0% 100.0% 100.0%
As of October 31,
($ in thousands) 2012 2011 Change
Deferred subscription income
(current and long term
liabilities) $ 23,111 $ 24,195 -4.5 %
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Investment periodicals and related publications revenues
Investment periodicals and related publications revenues decreased $500,000, or 6.0% for the three months ended October 31, 2012 and $870,000, or 5.2%, for the six months ended October 31, 2012, as compared to the prior fiscal year. 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 October 31, 2012 was 4.6% lower than total product line circulation at October 31, 2011. Price increases recently instituted have been offset by reduced sales volume of renewals and new orders. Continuing 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. The Company is not adding enough new subscribers to offset the subscribers that choose not to renew their subscriptions. The Company has been successful in growing revenues from digitally-delivered investment periodicals within institutional sales. Gross institutional sales orders of $4,951,000 for the six months ended October 31, 2012, were $518,000 or 11.7% above comparable sales orders of $4,433,000, for the six months ended October 31, 2011. This increase continues a positive growth trend for Institutional Sales, but is not sufficient to wholly offset the lost revenues from retail subscribers.
Print publication revenues decreased $359,000 or 7.0% for the three months ended October 31, 2012 and $665,000, or 6.5%, for the six months ended October 31, 2012 from fiscal 2012 for the reasons described earlier. Earned revenues from institutional print publications increased $135,000 or 50.7% for the three months ended October 31, 2012 and $228,000 or 43.5%, for the six months ended October 31, 2012 as compared to the prior fiscal year. Print publications revenues from retail subscribers decreased $494,000 or 10.2% for the three months ended October 31, 2012 and $893,000 or 9.1% for the six months ended October 31, 2012, as compared to the prior fiscal year. Print circulation has fallen 8.3% as of October 31, 2012 as compared to print circulation at October 31, 2011, albeit the Company is realizing a higher average price level on new orders.
Digital publications revenues decreased $141,000 or 4.4%, for the three months ended October 31, 2012 and $205,000, or 3.2%, for the six months ended October 31, 2012 from the prior fiscal year. Earned revenues from institutional digital publications decreased $50,000 of 2.3%, for the three months ended October 31, 2012 and $67,000 or 1.6%, for the six months ended October 31, 2012, as compared to the prior fiscal year. Digital publications revenues from retail subscribers decreased $91,000 or 8.4%, for the three months ended October 31, 2012 and $138,000 or 6.3%, for the six months ended October 31, 2012, as compared to the prior fiscal year.
The Company has relied more on its institutional sales marketing efforts, and the increase in institutional combined print and digital 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, and to some extent the transition of certain users from the retail category to institutional, at higher prices.
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. A modest number of customers who do not qualify for retail prices have chosen to cancel their subscriptions, while the rest have converted to institutional services, at higher prices.
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 extensive interactive features.
The Company believes that the volatility of the equity market and the sluggish economic recovery have to some extent eroded retail investor interest in equities. The Company also believes that the negative trend in overall subscription revenue is likely to continue until new products 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 mobile 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, there were a number of technology advances which are building blocks to the planned launch of our new product offerings expected to begin in fiscal 2014. In December 2011, the new fulfillment system was placed in service that gives the Company the ability to perform real time order processing and grant immediate access to products on the web, all from one system, as well as offering multi-tiered entitlements which will come into play in fiscal 2014. In December 2011, a new eCommerce platform and a Single Sign On module were launched which directly leverage the new fulfillment system's capabilities for new web order entry and customer access to their products via a single username and password. Both of these services are a substantial progression from the previous solutions which were made up of multiple systems that previously had no ability to communicate with each other, requiring increased staff hours through manual double-keying. In January 2012, a website reskin was launched which served to modernize the look and feel of valueline.com.
In addition, the Company launched a new institutional sales website ValueLinePro.com. during March 2012. ValueLinePro.com provides a dedicated internet destination for investment advisers, portfolio managers, corporate professionals and library patrons who seek to learn how Value Line's proprietary research tools can help them research stocks, mutual funds, options, convertible securities and exchange traded funds ("ETFs"). The site thoroughly describes each of the Company's customized products available to institutions and investment professionals, coordinating with the Company's sales and marketing efforts to institutions, and has began to serve as a key generator of sales leads.
A major track of work is the creation of a centralized and active database for all of Value Line's finalized, post-calculated data. In order to serve up our data for a variety of uses (new products, different Institutional Sales channels, etc.) it became apparent that all data fields must be fully defined, and a new storage/retrieval mechanism developed which was built upon current "relational" protocols.
The adoption of a formal Software Development Lifecycle (SDLC) and project management system gives the Company a standard process for how development goals are pursued. Each project is planned with the creation of documentation for a formal architecture. In this way, the suitable resources are assigned with the overall business objectives in mind.
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. The Ranking System is designed to be predictive over a six to twelve month period. For the three months ended October 31, 2012, the combined Ranking System "Rank 1 & 2" stocks increased by 5.0%, allowing for weekly changes in Ranks, outperforming an increase of 1.9% in the S&P 500 Index during the same period. For the six month period ended October 31, 2012, the combined Ranking System "Rank 1 & 2" stocks declined 0.2%, underperforming the S&P 500 Index's increase of 1.0%, during the comparable period. For the twelve month period ended October 31, 2012, the combined Ranking System "Rank 1 & 2" stocks increased 11.4%, underperforming the S&P 500 Index's increase of 12.7%, during the comparable period.
During the three and six months ended October 31, 2012, copyright data fees increased $169,000 or 20.8% and $107,000, or 6.0%, respectively, as compared to the prior fiscal year. As of October 31, 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 $3.0 billion in assets at October 31, 2011, representing a 13.0% increase 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. Management is focusing on the copyright data selling cycle, while maintaining good communications with current third party sponsors.
Investment management fees and services - (unconsolidated)
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 and/or distributed by EAM at October 31, 2012, were $2.05 billion, which is $16 million or 0.8% above total assets of $2.03 billion in the Value Line Funds managed by EAM at October 31, 2011.
Value Line Mutual Funds
Total Net Assets
As of October 31,
($ in millions) 2012 2011 Change
Equity funds $ 1,780 $ 1,748 1.8 %
Fixed income funds 204 210 -2.9 %
U.S. Government Money Market Fund ("USGMMF") - 74 -100.0 %
Total EAM managed net assets 1,984 2,032 -2.4 %
Daily Income Fund managed by Reich & Tang Asset
Management LLC ("Reich & Tang") 64 - n/a
Total net assets $ 2,048 $ 2,032 0.8 %
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While equity assets under management did rise, the rise amalgamates a positive performance, with significant (comparable to last year) loss of accounts and the associated net asset outflows (redemptions less new sales). 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").
As of October 31,
($ in millions) 2012 2011 Change
Variable annuity assets (GIAC) $ 455 $ 463 -1.7 %
All other open end equity fund assets 1,325 1,285 3.1 %
Total equity fund net assets $ 1,780 $ 1,748 1.8 %
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EAM Trust - Results of operations before distribution to interest holders
The overall results of EAM's investment management operations during the six months ended October 31, 2012, before interest holder distributions, include total investment management fees earned from the Value Line Funds of $6,229,000 and 12b-1 fees of $1,876,000. For the same period, total investment management fee waivers were $346,000 and 12b-1 fee waivers were $1,088,000. During the six months ended October 31, 2012, EAM's net income was $388,000 after giving effect to Value Line's non-voting revenues interest of $2,808,000, but before distributions to voting profits interest holders and to the Company in respect of its 50% non-voting profits interest.
Total results of EAM's investment management operations during the six months ended October 31, 2011, before interest holder distributions, include total investment management fees earned from the Value Line Funds of $6,258,000, 12b-1 fees of $1,750,000 and other income of $9,000. For the same period, total investment management fee waivers were $457,000 and 12b-1 fee waivers were $1,166,000. During the six months ended October 31, 2011, EAM's net income was $188,000, after giving effect to Value Line's non-voting revenues interest of $2,821,000, but before distributions to voting profits interest holders and to the Company in respect of its 50% non-voting profits interest.
As of October 31, 2012, nine of the Value Line Funds have all or a portion of the 12b-1 fees being waived, two of the funds have partial investment management fee waivers in place and, effective June 16, 2011, 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.
As of October 31, 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. In August 2012, the Value Line Asset Allocation Fund was added to Schwab's prestigious OneSource Select List.
The Value Line fixed income fund assets (excluding USGMMF), represent 10.0% of total Fund assets under management ("AUM") at October 31, 2012, a slight decrease from 10.3% last fiscal year. The USGMMF assets represent 3.1% of the total Fund AUM at October 31, 2012, a decrease from 3.6% of the total Fund AUM at October 31, 2011. At October 31, 2012, fixed income AUM had decreased by . . .
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