SOURCE: Varsity Group Inc.

November 14, 2005 16:31 ET

Varsity Group Inc. Reports Record Third Quarter

WASHINGTON, DC -- (MARKET WIRE) -- November 14, 2005 -- Varsity Group Inc. (NASDAQ: VSTY) today reported record financial results for the third quarter of 2005 highlighted by pre-tax income of $6.9 million, a 25.6% increase from the pre-tax income of $5.5 million recorded for the third quarter of 2004. Revenue increased 34.2% to $43.0 million from $32.1 million for the three months ended September 30, 2005. Revenue growth was driven by the continued expansion of the Company's textbook program and the acquisition of uniform provider Campus Outfitters.

Net income increased to $14.2 million, or $0.80 per diluted share, for the three months ending September 30, 2005, compared to the $7.3 million, or $0.41 per diluted share, for the three months ending September 30, 2004. Included in net income for the three months ended September 30, 2005 is a net tax benefit of $7.3 million compared to the net tax benefit of $1.9 million for the third quarter of 2004. The net tax benefit is a product of a reduction in the deferred tax asset valuation allowance of $10.0 million, offset by an income tax provision of $2.7 million related to earnings recorded during the three months ended September 30, 2005.

"This record quarter is significant not only for the continued expansion of our flagship eduPartners program, but also the successful integration of our recent Campus Outfitters acquisition," said Eric Kuhn, Chairman and Chief Executive Officer of Varsity Group Inc. "In addition to our rapid revenue growth this quarter, we continued to make strides toward our goal of delivering the most innovative and compelling solutions to our growing roster of school, parent, and student customers."

"We look toward 2006 with great optimism. We have a robust product offering to address the sizeable market of schools continuing to express an interest in outsourcing their textbook and uniform fulfillment needs. We are excited and committed to achieving substantial growth of our book and uniform programs by leveraging our growing base of school customers, considerable cash reserves, and strong balance sheet."

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 800.434.1335 for domestic calls and +1.404.920.6620 for international calls. The participant code is 754425. 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 a leading provider of online bookstore solutions for educational institutions, and through its Campus Outfitters subsidiary, is a leading provider of uniform needs for private schools. Varsity Group's eduPartners program offers educational institutions a comprehensive eCommerce solution for their textbook procurement operations. Varsity Group today comprises a nationwide network of hundreds of educational institutions that have chosen to outsource their bookstore or uniform operations through its innovative and convenient outsource model.

"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 fiscal year ended December 31, 2004.

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

                              Three Months Ended      Nine Months Ended
                                 September 30,           September 30,
                               2005        2004        2005        2004
                             --------    --------    --------    --------
Net sales:
  Textbooks                  $ 35,584    $ 29,275    $ 38,831    $ 31,967
  Uniforms                      4,274          --       4,821          --
  Shipping                      3,179       2,797       3,457       3,029
                             --------    --------    --------    --------
    Total net sales            43,037      32,072      47,109      34,996
                             --------    --------    --------    --------

Operating expenses:
  Cost of textbooks            24,672      19,599      26,789      21,431
  Cost of uniforms              1,868          --       2,087          --
  Cost of shipping              2,397       2,108       2,620       2,294
  Sales and marketing           5,619       3,744       7,711       4,994
  Product development             146          98         370         158
  General and
   administrative               1,543       1,153       3,111       2,178
  Amortization expense             35          --          47          --
  Non-cash stock
   compensation                    --           9          --          40
                             --------    --------    --------    --------
    Total operating
     expenses                  36,280      26,711      42,735      31,095
                             --------    --------    --------    --------

Income from operations          6,757       5,361       4,374       3,901
                             --------    --------    --------    --------

Other income, net:
  Interest income, net             84          98         348         212
  Other income (expense), net      20           4          14          (5)
                             --------    --------    --------    --------
  Other income, net               104         102         362         207
                             --------    --------    --------    --------

Income before income taxes      6,861       5,463       4,736       4,108

Income tax benefit (1)          7,311       1,882       8,119       3,406
                             --------    --------    --------    --------

Net income                   $ 14,172    $  7,345    $ 12,855    $  7,514
                             ========    ========    ========    ========

Net income per share:
  Basic                      $   0.84    $   0.44    $   0.75    $   0.45
                             ========    ========    ========    ========
  Diluted                    $   0.80    $   0.41    $   0.71    $   0.43
                             ========    ========    ========    ========

Weighted average shares:
  Basic                        16,895      16,760      17,050      16,703
                             ========    ========    ========    ========
  Diluted                      17,808      17,894      18,175      17,652
                             ========    ========    ========    ========

(1)  The Company accounts for income taxes in accordance with Statement
     of Financial Accounting Standards No. 109, ("SFAS 109") "Accounting
     for Income Taxes." Under SFAS No. 109, deferred tax assets and
     liabilities are determined based on differences between the financial
     reporting and tax basis of assets and liabilities and are measured
     using the enacted tax rates and laws that will be in effect when the
     differences are expected to reverse. A deferred tax benefit is
     recorded during interim periods when we have an expectation of
     earnings for the annual period. A valuation allowance is established
     when necessary to reduce deferred tax assets to the amount expected
     to be realized. In determining the need for a valuation allowance,
     management reviews both positive and negative evidence pursuant to
     the requirements of SFAS No. 109, including current and historical
     results of operations, the annual limitation on utilization of net
     operating loss carry forwards pursuant to Internal Revenue Code
     section 382, future income projections and the overall prospects
     of our business. Accordingly, the Company released $10.0 million
     of its deferred tax asset valuation allowance the third quarter of
     fiscal 2005 which resulted in an income tax benefit for the three
     and nine months ended September 30, 2005.


               VARSITY GROUP INC. AND SUBSIDIARIES
         CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                        (in thousands)
                                                 September 30, December 31,
                                                       2005         2004
                                                     --------     --------
Assets
Current Assets:
  Cash and cash equivalents                          $  2,573     $  4,865
  Short-term investments                                3,979        7,000
  Accounts receivable, net of allowance for
   doubtful accounts of $143 at September 30, 2005
   and $15 at December 31, 2004, respectively           8,213        1,251
  Inventory                                             9,385        2,463
  Other                                                   519        1,248
                                                     --------     --------
    Total current assets                               24,669       16,827
Property, plant and equipment, net of depreciation        550          252
Software developed for internal use, net of
 amortization                                           1,140          708
Intangible assets, net of amortization                    803           --
Goodwill                                                2,392           --
Deferred income taxes                                  14,035        5,901
Long term investments                                   6,427        6,993
Other assets                                               76           31
                                                     --------     --------
    Total assets                                       50,092       30,712
                                                     ========     ========

Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable                                   $  4,055     $    696
  Other accrued expenses and other current
   liabilities                                          3,290        1,569
  Taxes payable                                           964          459
                                                     --------     --------
    Total current liabilities                           8,309        2,724
Long-term liabilities:
  Other non current liabilities                            27           --
                                                     --------     --------
    Total liabilities                                   8,336        2,724
                                                     --------     --------
Commitments and contingencies
Stockholders' equity
  Preferred stock: $.0001 par value, 20,000
   shares authorized; 0 shares issued and
   outstanding at September 30, 2005 and
   December 31, 2004, respectively                         --           --
  Common stock, $.0001 par value, 60,000
   shares authorized, 18,274 and 17,969 shares
   issued and  17,059 and 16,754 shares outstanding
   at September 30, 2005 and December 31, 2004,
    respectively                                            2            2
  Additional paid-in capital                           89,273       88,273
  Unrealized loss                                         (94)          (7)
  Accumulated deficit                                 (45,692)     (58,547)
  Treasury stock, $.001 par value, 1,215
   shares at September 30, 2005 and
   December 31, 2004, respectively                     (1,733)      (1,733)
                                                     --------     --------
  Total stockholders' equity                           41,756       27,988
                                                     --------     --------
  Total liabilities and stockholders' equity         $ 50,092     $ 30,712
                                                     ========     ========

Contact Information

  • Contact:
    Jack Benson
    Chief Financial Officer
    Email Contact
    202-667-3400