SOURCE: Varsity Group Inc.

November 14, 2006 16:34 ET

Varsity Group Inc. Reports Third Quarter Results

WASHINGTON, DC -- (MARKET WIRE) -- November 14, 2006 -- Varsity Group Inc. (NASDAQ: VSTY) today reported its financial results for the third quarter of 2006. Revenues for the three months ended September 30, 2006 were $47.2 million, a 9.6% increase from revenues of $43.0 million for the same period in 2005. Pre-tax income was $2.4 million, a 64.6% decrease from the pre-tax income of $6.9 million recorded for the third quarter of 2005. Revenue growth was driven by the continued expansion of the Company's textbook and uniform programs. The decrease in pre-tax income reflects both increased costs involved in managing through the peak operational season and additional costs incurred to secure and grow our current business segments and introduce complementary products and services.

Net loss was $15.6 million, or $0.86 per diluted share, for the three months ended September 30, 2006, compared to net income of $14.2 million, or $0.80 per diluted share, for the three months ended September 30, 2005. Included in the net loss for the three months ended September 30, 2006 is a non-cash charge of approximately $18.0 million, representing the amount necessary to reserve fully all of the Company's deferred tax assets. Included in net income for the 2005 period was a non-cash income tax benefit of $7.3 million, also related to the Company's deferred tax assets.

During the financial close for the quarter ended September 30, 2006, the Company performed its quarterly assessment of its net deferred tax assets. SFAS No. 109 limits the ability to use future taxable income to support the realization of deferred tax assets when a company has experienced recent losses. After considering the Company's pre-tax losses for the nine months ended September 30, 2006 and the expectation of a pre-tax loss for the full year of 2006, the Company concluded that it could not rely on future taxable income as the basis for realization of its net deferred tax asset. Accordingly, the Company recorded a non-cash charge in the third quarter of 2006 of approximately $18.0 million to increase the valuation allowance against its deferred tax assets. With this increase, the Company has a full valuation allowance against its deferred tax assets. This non-cash charge has been recorded in the provision for income taxes in the Company's consolidated statement of income.

Varsity Group President and CEO Mark Thimmig commented, "We are disappointed with our earnings performance for the third quarter and are pursuing an aggressive series of actions to reduce our cost structure."

A conference call is scheduled at 5:00 P.M. EST today to discuss results. The participant dial-in number for the conference call is 877.704.5391. The participant code is 4869738. This conference call will be recorded and available for replay from the Investors section of our website located at http://www.varsity-group.com.

ABOUT VARSITY GROUP INC.

Varsity Group Inc. is an outsource solution provider to education institutions nationwide. Under the brands Varsity Books, Campus Outfitters, Varsity Solutions, and Varsity Finance, Varsity provides solutions that enable schools to focus on their core educational mission. Varsity Group's solutions include online textbook, school supply and office supply procurement, full-service school uniform, athletic uniform and sporting goods outsourcing, scholastic marketing and branding, student aid financing, educational fundraising and online course development and delivery services.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding Varsity Group's business that are not historical facts are "Forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2005.

                            VARSITY GROUP INC.
        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                  (in thousands, except per share data)


                                    Three Months          Nine Months
                                       Ended                 Ended
                                    September 30,         September 30,
                                ---------------------  --------------------
                                   2006       2005      2006        2005
                                ---------  ---------- ---------  ----------
Net sales:
     Textbooks                  $  38,564  $   35,584 $  40,721  $   38,831
     Uniforms                       5,131       4,274     6,740       4,821
     Solutions                        126          --       217          --
     Shipping                       3,344       3,179     3,659       3,457
                                ---------  ---------- ---------  ----------
         Total net sales           47,165      43,037    51,337      47,109
                                ---------  ---------- ---------  ----------

Operating expenses:
     Cost of textbooks             25,998      24,672    27,506      26,789
     Cost of uniforms               3,004       1,868     3,736       2,087
     Cost of solutions                 68          --       104          --
     Cost of shipping               3,294       2,397     3,675       2,620
     Sales and marketing            9,064       5,619    12,617       7,711
     General and administrative     3,282       1,689     7,373       3,481
     Amortization of acquired
      intangibles                      66          35       163          47
                                ---------  ---------- ---------  ----------
         Total operating
          expenses                 44,776      36,280    55,174      42,735
                                ---------  ---------- ---------  ----------

Income (loss) from operations       2,389       6,757    (3,837)      4,374
                                ---------  ---------- ---------  ----------

Other income, net:
     Interest income, net              48          84       265         348
     Other (expense) income,
      net                              (8)         20        (7)         14
                                ---------  ---------- ---------  ----------
     Other income, net                 40         104       258         362
                                ---------  ---------- ---------  ----------

Income (loss) before income
 taxes                              2,429       6,861    (3,579)      4,736

Income tax benefit                (18,031)      7,311   (15,574)      8,119
                                ---------  ---------- ---------  ----------

Net (loss) income               $ (15,602) $   14,172 $ (19,153) $   12,855
                                =========  ========== =========  ==========

Net (loss) income per share:
    Basic                       $   (0.86) $     0.84 $   (1.09) $     0.75
                                =========  ========== =========  ==========
    Diluted                     $   (0.86) $     0.80 $   (1.09) $     0.71
                                =========  ========== =========  ==========

Weighted average shares:
    Basic                          18,254      16,895    17,646      17,050
                                =========  ========== =========  ==========
    Diluted                        18,254      17,808    17,646      18,175
                                =========  ========== =========  ==========



                            CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                                        (in thousands)


                                         -------------  -------------
                                         September 30,  December 31,
                                             2006           2005
                                         -------------  -------------
ASSETS
Current Assets:
     Cash and cash equivalents           $       1,695  $       2,733
     Short-term investments                      2,485          3,336
     Accounts receivable, net of
      allowance for doubtful accounts of
      $93 at September 30, 2006 and $80
      at December 31, 2005, respectively         4,426          2,188
 Inventory                                      12,982          4,476
     Deferred income taxes                          --            367
     Other                                         470          5,211
                                         -------------  -------------
           Total current assets                 22,058         18,311

 Property, plant and equipment, net of
 depreciation                                    1,521            495
Software developed for internal use, net
 of amortization                                 2,259          1,188
Intangible assets, net of amortization             717            719
Goodwill                                         3,110          2,427
Deferred income taxes                               --         15,157
Long-term investments                            3,945          6,406
Other assets                                       170            101
                                         -------------  -------------
          Total assets                   $      33,780  $      44,804
                                         =============  =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Accounts payable                    $       5,924  $       1,874
     Deferred revenue                              243             61
     Other accrued expenses and other
      current liabilities                        3,186          1,452
     Taxes payable                               1,270            336
                                         -------------  -------------
          Total current liabilities             10,623          3,723
                                         -------------  -------------
Long-term liabilities:
     Other non-current liabilities                 154             30
                                         -------------  -------------
          Total liabilities                     10,777          3,753
                                         -------------  -------------

 Commitments and contingencies
Stockholders' equity:
     Preferred stock:  $.0001 par value,
      20,000 shares authorized; 0 shares
      issued and outstanding at
      September 30, 2006 and December
      31, 2005, respectively                        --             --
     Common stock, $.0001 par value,
      60,000 shares authorized, 19,732
      and 18,353 shares issued and
      18,517 and 17,138 shares
      outstanding at September 30, 2006
      and December 31, 2005,
      respectively                                   2              2
Additional paid-in capital                      90,373         89,307
Accumulated unrealized loss on
 securities                                        (70)          (107)
Accumulated deficit                            (65,569)       (46,418)
Treasury stock, $.0001 par value, 1,215
 shares at September 30, 2006 and
 December 31, 2005, respectively                (1,733)        (1,733)
                                         -------------  -------------
Total stockholders' equity                      23,003         41,051
                                         -------------  -------------
Total liabilities and stockholders'
 equity                                  $      33,780  $      44,804
                                         =============  =============

Contact Information

  • Contact:
    Jim Craig
    Chief Financial Officer
    Email Contact
    202-667-3400