VSTY had a poor third quarter. For the first nine month of the year, sales and marketing and general and administrative expenses are running 78.6% above last year's levels.
Varsity Group Inc. Reports Third Quarter Results
Tuesday November 14, 4:33 pm ET
WASHINGTON, DC--(MARKET WIRE)--Nov 14, 2006 -- Varsity Group Inc. (VSTY - News) 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 varsity-group.com.
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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:
Contact:
Jim Craig
Chief Financial Officer
Email Contact
202-667-3400
--------------------------------------------------------------------------------
Source: Varsity Group Inc.
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