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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
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COMMISSION FILE NUMBER 0-28977
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VARSITY GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1876848
(STATE OF INCORPORATION) IRS EMPLOYER (IDENTIFICATION
NUMBER)
1130 CONNECTICUT AVE., SUITE 350 20036
WASHINGTON, D.C. (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 667-3400
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED, SINCE LAST
REPORT.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes___ No____
As of October 18, 2001, the registrant had 16,871,062 shares of common stock
outstanding.
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1
VARSITY GROUP INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated statements of operations for the three and 3
nine months ended September 30, 2000 and 2001
Condensed consolidated balance sheets as of December 31, 2000 and 4
September 30, 2001
Condensed consolidated statements of cash flows for the nine months 5
ended September 30, 2000 and 2001
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 6
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
2
PART I.
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
VARSITY GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
2000 2001 2000 2001
---- ---- ---- ----
Net Sales:
Product $ 9,999 $ 8,687 $ 23,085 $ 10,156
Shipping 622 659 1,665 835
Marketing Services 1,046 71 1,387 834
------------ ----------- ----------- -----------
Total net sales 11,667 9,417 26,137 11,825
------------ ----------- ----------- -----------
Operating Expenses
Cost of books - related party 8,230 6,188 20,432 7,452
Cost of shipping - related party 722 487 2,131 612
Cost of marketing services 203 2 203 41
Marketing and sales:
Non-cash compensation $1,026 $ 9 $ 2,046 $ 27
Other marketing and sales
(including $618 and $691 with
related party for three and nine
months ended September 30, 2001
respectively 6,176 7,202 933 942 22,832 24,878 1,479 1,506
------ ----- ---------- -----
Product development:
Non-cash compensation (117) (2) (141) (4)
Other product development 542 425 25 23 3,899 3,758 238 234
------ -- ---------- ---
General and administrative:
Non-cash compensation 49 156 2,233 623
Other general and
administrative 2,041 2,090 750 906 6,189 8,422 3,193 3,816
----- ------------ --- ----------- ---------- ----------- ----- -----------
Total operating expenses 18,872 8,548 59,824 13,661
------------ ----------- ----------- -----------
Profit / (Loss) from operations (7,205) 869 (33,687) (1,836)
------------ ----------- ----------- -----------
Other income (expense), net:
Interest income 315 155 1,032 524
Interest expense (68) -- (206) --
Other income -- 2 (58) 54
------------ ----------- ----------- -----------
Other income (expense), net 247 157 768 578
------------ ----------- ----------- -----------
Net Profit / (Loss) $ (6,958) $ 1,026 $ (32,919) $ (1,258)
============ =========== =========== ===========
Net loss per share:
Basic: Net Profit / (Loss) $ (0.44) $ 0.06 $ (2.43) $ (0.08)
============ =========== =========== ===========
Diluted: Net Profit / (Loss) $ (0.44) $ 0.06 $ (2.43) $ (0.08)
============ =========== =========== ===========
Weighted average shares:
Basic 15,759,308 16,614,721 13,524,403 16,684,012
============ =========== =========== ===========
Diluted 15,759,308 16,779,215 13,524,403 16,684,012
============ =========== =========== ===========
3
VARSITY GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
DECEMBER 31, 2000 SEPTEMBER 30, 2001
----------------- ------------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 15,446 $ 17,133
Restricted cash 264 --
Short-term investments 480 --
Accounts receivable, net of allowance of doubtful accounts of $236 at
December 31, 2000 and $195 at September 30, 2001 1,244 1,186
Other 715 501
--------------------- --------------------
Total current assets 18,149 18,820
Fixed assets, net 1,436 354
Other assets 396 146
--------------------- --------------------
Total assets $ 19,981 $ 19,320
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 910 $ 251
Accrued marketing expenses 44 3
Deferred revenue 201 27
Other accrued expenses and other current liabilities 301 340
Lease liability 368 --
Sales taxes payable 821 1,314
Accrued employee compensation and benefits 91 37
-------------------- --------------------
Total current liabilities 2,736 1,972
Long-term liabilities 131 --
-------------------- --------------------
Total liabilities 2,867 1,972
-------------------- --------------------
Stockholders' equity:
Preferred stock: $.0001 par value, 20,000,000 shares authorized;
0 shares issued and outstanding -- --
Common stock: $.0001 par value, 27,932,927 and 60,000,000 shares
authorized, 16,152,218 and 16,871,062 shares issued and
outstanding at December 31, 2000 and September 30, 2001,
respectively 2 2
Additional paid-in capital 87,287 87,326
Warrant subscription receivable and other (707) --
Notes receivable from stockholders (124) --
Deferred compensation (1,123) (502)
Accumulated deficit (68,221) (69,478)
-------------------- --------------------
Total stockholders' equity 17,114 17,348
-------------------- --------------------
Total liabilities and stockholders' equity $ 19,981 $ 19,320
==================== ====================
See accompanying notes to condensed consolidated financial statements.
4
VARSITY GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
2000 2001
-------------------- -------------------
Operating activities:
Net loss $ (32,919) $ (1,258)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 939 600
Bad debt expense -- (40)
Loss on disposal of fixed assets and write off of
underutilized assets 58 438
Non-cash compensation 4,138 710
Equity transactions with related party and interest expense
related to warrants 189 --
Changes in operating assets and liabilities:
Accounts receivable, net (1,264) 98
Prepaid marketing 4,424 5
Prepaid expenses - related party (1,111)
Deferred charge 1,024 --
Other current assets (921) 209
Accounts payable (530) (659)
Accrued marketing expenses (1,147) (41)
Lease liability -- (368)
Deferred revenue 297 (174)
Other accrued expenses and other current liabilities (131) 39
Sales taxes payable 649 493
Accrued employee compensation and benefits (190) (54)
Long term liabilities 45 (131)
Other assets --- 250
------------------- ------------------
Net cash used in operating activities (26,450) 117
------------------- ------------------
Investing activities:
Additions to fixed assets (1,249) (18)
Decrease in short-term investments -- 480
Proceeds from sale of fixed assets 100 62
------------------- ------------------
Net cash used in investing activities (1,149) 524
------------------- ------------------
Financing activities:
Proceeds from issuance of common stock 35,945 --
Proceeds from exercise of stock options -- 13
Proceeds from notes payable 2,500 --
Repayment of notes payable (2,500) --
Proceeds from note receivable, shareholder -- 62
Proceeds from warrant subscription receivable 500 707
------------------- ------------------
Net cash provided by financing activities 36,445 782
------------------- ------------------
Net increase in cash and cash equivalents 8,846 1,423
Cash and cash equivalents at beginning of period 7,813 15,710
Cash and cash equivalents at end of period $ 16,659 $ 17,133
=================== ==================
Supplemental disclosure of cash flow information:
Cash paid for income taxes and interest $ 17 $ 37
=================== ==================
Warrant subscription receivable and other $ 3,837 $ -
=================== ==================
See accompanying notes to consolidated financial statements
5
VARSITY GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF OPERATIONS
Varsity Group Inc., a leading online retailer of new textbooks and a provider of
marketing services for businesses interested in reaching the college and private
middle and high school markets, was incorporated on December 16, 1997 and
launched its Website in August 1998, at which time the Company began generating
revenues. In August 1999, the Company established two wholly owned subsidiaries,
CollegeImpact.com, Inc. and VarsityBooks.com, LLC (formerly CollegeOps.com LLC),
to assist in the overall management of its marketing and retailing activities,
respectively.
In February 2000, the Company issued 4,000,000 shares of Common Stock at an
initial public offering price of $10.00 per share. In March 2000, we sold an
additional 35,000 shares pursuant to the exercise of the underwriters'
over-allotment option at $10.00 per share. Total net proceeds were approximately
$35.9 million.
NOTE 2: BASIS OF PRESENTATION
The condensed consolidated financial statements of Varsity Group Inc. and
subsidiaries included herein have been prepared by the Company without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
and reflect all adjustments which are, in the opinion of management, necessary
for a fair presentation of the results for the interim period in conformity with
generally accepted accounting principles.
Certain information and footnote disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The interim financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000. Operating results for the interim periods are not necessarily
indicative of results for an entire year.
Certain reclassifications of prior year amounts have been made to conform with
the current year presentation.
NOTE 3: SUBSEQUENT EVENTS
On October 19, 2001 the Company purchased 957,063 previously issued and
outstanding shares of Varsity Group, Inc. Common Stock at price of $0.60 per
share in a private negotiated transaction. Total costs for this transaction were
$574,338.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "except," "plan," "anticipate," "expect," "believe," "estimate,"
"predict," "potential" or "continue," the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this report to conform such statements to actual results or to
changes in our expectations.
Readers are also urged to carefully review and consider the various disclosures
made by us that attempt to advise interested parties of the factors which affect
our business, including without limitation the disclosures made under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included herein and under the captions "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Risk
Factors" included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 and other reports and filings made with the Securities and
Exchange Commission.
6
OVERVIEW
We are a leading online retailer of new textbooks and we provide marketing
services to other businesses interested in reaching the nation's college
students and private middle and secondary school students.
We were incorporated in December 1997 and began offering books for sale on our
Web site on August 10, 1998. To date, our revenues have consisted primarily of
sales of new textbooks. In January 1999 we created eduPartners, whereby we
became the exclusive provider of new books and learning materials to a variety
of learning institutions. This program is a cost-effective method for us to
increase the number of customers to our Web site and generate book sales.
Through eduPartners, we provide an opportunity for educational institutions to
maximize their resources and offer increased convenience to their students by
outsourcing new textbook sales to us. We believe that for many schools,
including private middle and high schools, traditional colleges, distance
learning programs, and other continuing education programs the expense and
inconvenience of procuring and distributing textbooks and learning materials
exceed the schools' financial return. We provide an innovative solution for
schools and enable them to offer increased convenience and value to students,
their parents, and the entire school community.
With eduPartners, we create a personalized online bookstore for each school on
www.VarsityBooks.com. When students click on their school, they link directly to
a co-branded bookstore at our Web site. The student or parent proceeds through
the school bookstore, clicking on the appropriate grade, discipline and class to
select required and optional books. Partner schools benefit from decreased
costs, inconveniences and inefficiencies inherent in the seasonal procurement,
inventory management and distribution of learning materials directly to students
on campus. In addition, schools have access to our unique program administration
website that provides them with sales and inventory reports, among other
valuable features.
Presently, we are the exclusive new textbook supplier for approximately 90
educational institutions in our eduPartners program. At these institutions we
are endorsed as the school's official bookstore and gain direct access and
exposure to their students. Benefits of this business model include
significantly lower marketing and customer acquisition costs than our historical
college-focused retail book business, greater sales visibility, higher margins
and attractive sell-through or penetration per school account. We are able to
reduce the overhead associated with textbook sales because we do not maintain
individual on-site stores and we outsource our ordering, inventory, warehousing
and fulfillment needs with Baker & Taylor, a leading distributor of books,
videos and music products. In addition to providing new textbooks at competitive
prices, we are committed to providing top quality customer service and account
management support.
We have also generated revenues from online marketing agreements, as well as
offline marketing service agreements for which we use College Impact, our
student representative network. During the fourth quarter of fiscal 1999, we
began generating revenues from marketing programs. In the past eighteen months
we have executed marketing services agreements with a number of public and
private companies, including AT&T Wireless Services, Inc., Palm, Inc., Papa
John's International, Inc. and Ben & Jerry's Homemade, Inc. Consistent with our
commitment to building the eduPartners program, and balancing the realities of a
contracting advertising market against the significant costs associated with
maintaining a best-in-class student representative network, we have focused our
financial and operational resources on the growth of eduPartners and online
marketing services agreements. There were no significant new marketing services
contracts signed during the three months ending September 30, 2001. However, we
continue to promote the online properties associated with our website,
eduPartners program and customer database.
We base our current and future expense levels on our operating plans and
estimates of future revenues. In view of the rapidly evolving nature of our
business and our limited operating history, we have little experience
forecasting our revenues. Therefore, we believe that period-to-period
comparisons of our financial results might not necessarily be meaningful and you
should not rely on them as indication of future performance.
For the three months ended September 30, 2001 we earned a net profit of $1.0
million compared to a net loss of $6.9 million for the three months ended
September 30, 2000. Net loss for the nine months ended September 30, 2001 was
$1.3 million compared to a net loss of $32.9 million for the nine months ended
September 30, 2000. Prior to the three months ended September 30, 2001, we had
incurred losses from operations in every fiscal period since our inception. For
the year ended December 31, 1998, we incurred a loss from operations of
approximately $2.7 million and negative cash flows from operations of $1.2
million. For the year ended December 31, 1999, we incurred a loss from
operations of approximately $31.9 million and negative cash flows from
operations of $29.4 million. For the year ended December 31, 2000, we incurred a
loss from operations of approximately $34.6 million and negative cash flows from
operations of $27.5 million. As of December 31, 1998, 1999 and 2000 we had
accumulated deficits of approximately $2.7 million, $34.2 million and $68.2
million, respectively.
7
RESULTS OF OPERATIONS
The following table and discussion provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the condensed consolidated financial
statements and accompanying notes thereto-included elsewhere herein.
PERCENTAGE OF TOTAL NET SALES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------
2000 2001 2000 2001
--------- -------- ---------- ---------
Net Sales
Books 85.7 % 92.2 % 88.3 % 85.9 %
Shipping 5.3 7.0 6.4 7.1
Marketing services 9.0 0.8 5.3 7.1
--------- -------- ---------- ---------
Total net sales 100.0 100.0 100.0 100.0
--------- -------- ---------- ---------
Operating Expenses
Cost of books - related party 70.5 65.7 78.2 63.0
Cost of shipping - related party 6.2 5.2 8.2 5.2
Cost of marketing services 1.7 0.0 0.8 0.3
Marketing and sales 61.7 10.0 95.2 12.7
Product development 3.6 0.2 14.4 2.0
General and administrative 17.9 9.6 32.2 32.3
--------- -------- ---------- ---------
Total operating expenses 161.6 90.8 229.0 115.5
--------- -------- ---------- ---------
Profit / (Loss) from operations (61.6) 9.2 (129.0) (15.5)
Other income, net 2.1 1.7 2.9 4.9
--------- -------- ---------- ---------
Net profit / (loss) (59.5) % 10.9 % (126.1) % (10.6) %
========= ======== ========== =========
THREE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2000
NET SALES
Net sales decreased to $9.4 million for the three months ended September 30,
2001 from $11.7 million for the three months ended September 30, 2000. This
decrease was primarily attributable to the Company's focus on building core
revenues within the eduPartners program. Consistent with this eduPartner focus,
the Company significantly reduced marketing expenditures for non-eduPartner
sales, resulting in a decrease in traditional retail textbook sales and
marketing services revenues. Marketing services revenue totaled $71,000 for the
three months ended September 30, 2001, a decrease from the $1.0 million
recognized in the same period in 2000. This decrease was primarily attributable
to a contracting advertising climate and our decision to focus operational and
financial resources on the eduPartners program. No new significant marketing
services contracts were signed during the three months ending September 30,
2001.
OPERATING EXPENSES
Cost of Books -- Related Party (Baker & Taylor). Cost of books -- related party
consists of the cost of books sold to customers. Cost of books-related party
decreased to approximately $6.2 million for the three months ended September 30,
2001 from $8.2 million for the three months ended September 30, 2000. This
decrease was primarily attributable to our decreased sales volume.
Cost of Shipping -- Related Party (Baker & Taylor). Cost of shipping -- related
party consists of outbound shipping to the customer. Cost of shipping decreased
to approximately $0.5 million for the three months ended September 30, 2001 from
approximately $0.7 million for the three months ended September 30, 2000. This
decrease was primarily attributable to our decreased sales volume. Also for the
three months ended September 30, 2001, shipping revenue exceeded cost of
shipping--related party by approximately $0.2 or 26.1%. For the three months
ended September 30, 2000, cost of shipping--related party exceeded shipping
revenue by approximately $0.1 million, or 16.0%. This transition to shipping
profitability was
8
primarily attributable to an increase in the shipping rates charged to our
customers that was instituted in the second quarter of 2001.
Cost of Marketing Services. Cost of marketing services includes personnel costs
associated with the implementation of our on campus marketing programs and other
directly identifiable costs associated with our online advertising and on campus
promotions. Cost of marketing services totaled $2,000 for the three months ended
September 30, 2001. This decrease from approximately $0.2 million for the three
months ended September 30, 2000 was primarily attributable to our decreased
sales volume and greater concentration of revenues on higher margin online
services agreements.
Marketing and Sales. Marketing and sales expense consists primarily of
advertising and promotional expenditures and payroll and related expenses such
as the amortization of deferred compensation for personnel engaged in marketing
and expansion of eduPartners and management of our nationwide network of student
representatives. Marketing and sales expense decreased to $0.9 million for the
three months ended September 30, 2001 from $6.2 million for the three months
ended September 30, 2000. This decrease was primarily attributable to decreased
marketing with respect to the traditional college-focused retail book business
and decreased personnel and related expenses associated with our network of
student representatives. Included in marketing and sales is $9,000 and $1.0
million of non-cash charges for the three months ended September 30, 2001 and
2000, respectively.
Product Development. Product development expense consists of payroll and related
expenses such as the amortization of deferred compensation for development and
systems personnel and consultants. Product development expense decreased to
approximately $23,000 for the three months ended September 30, 2001 from $0.4
million for the three months ended September 30, 2000. This decrease was
primarily attributable to decreased web development, consulting and personnel
costs between periods.
General and Administrative. General and administrative expense consists of
payroll and related expenses for executive and administrative personnel such as
the amortization of deferred compensation, facilities expenses, professional
services expenses, travel and other general corporate expenses. General and
administrative expense decreased to $0.9 million for the three months ended
September 30, 2001 from $2.0 million for the three months ended September 30,
2000. This decrease was primarily attributable to decreased personnel and
professional services expenses between years. Included in general and
administrative expenses is approximately $0.2 million and $49,000 of non-cash
charges for the three months ended September 30, 2001 and 2000, respectively.
Reductions to non-cash charges for the three months ended September 30, 2000
included significant credits associated with the reduction of employees and the
adjustment of associated stock option expenses. The increase in non-cash charges
for the three months ended September 30, 2001 is largely attributable to the
absence of similar credits in this period.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income on our cash
and cash equivalents and investments and gains or losses associated with the
disposal of fixed assets. Other income was $0.2 million for the three months
ended September 30, 2001 compared to $0.2 million for the three months ended
September 30, 2000. Interest income decreased slightly largely due to lower
average cash, cash equivalent and short-term investment balances and lower rates
of return compared to the previous period.
INCOME TAXES
As of September 30, 2001, we had net operating loss carryforwards for federal
income tax purposes of approximately $55 million, which expire beginning in
2018. We have provided a full valuation allowance on the resulting deferred tax
asset because of uncertainty regarding its realizability. For the three months
ended September 30, 2001, no income tax expense was recognized because the
reduction in the deferred tax asset related to net operating losses was offset
by a related reduction in the valuation allowance.
NINE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2000
NET SALES
Net sales decreased to $11.8 million for the nine months ended September 30,
2001 from $26.1 million for the nine months ended September 30, 2000. This
decrease was primarily attributable to the reduction of marketing expenditures,
and corresponding revenues, associated with our traditional college-focused
retail book business. Marketing services sales totaled $0.8 million for the nine
months ended September 30, 2001, an increase from the $1.4 million recognized in
the same period in
9
2000. This decrease in marketing services revenue was primarily attributable to
a contracting advertising climate and our decision to focus operational and
financial resources on the eduPartners program.
OPERATING EXPENSES
Cost of Books -- Related Party (Baker & Taylor). Cost of books -- related party
consists of the cost of books sold to customers. Cost of books-related party
decreased to approximately $7.5 million for the nine months ended September 30,
2001 from $20.4 million for the nine months ended September 30, 2000. This
decrease was primarily attributable to our decreased sales volume.
Cost of Shipping -- Related Party (Baker & Taylor). Cost of shipping -- related
party consists of outbound shipping. Cost of shipping decreased to approximately
$0.6 million for the nine months ended September 30, 2001 from approximately
$2.1 million for the nine months ended September 30, 2000. This decrease was
primarily attributable to our decreased sales volume. Also for the nine months
ended September 30, 2001, shipping revenue exceeded cost of shipping--related
party by approximately $0.2 million or 26.7%. For the nine months ended
September 30, 2000, cost of shipping--related party exceeded shipping revenue by
approximately $0.5 million, or 28.0%. This transition to shipping profitability
was primarily attributable to an increase in the shipping rates charged to our
customers that was instituted in the second quarter of 2001.
Cost of Marketing Services. Cost of marketing services includes personnel costs
associated with the implementation of our on campus marketing programs and other
directly identifiable costs associated with our online advertising and on campus
promotions. Cost of marketing services totaled $41,000 for the nine months ended
September 30, 2001. Cost of marketing services totaled $0.2 million for the nine
months ended September 30, 2000. This decrease was primarily attributable to our
decreased sales volume and greater concentration of revenues on higher margin
online services agreements.
Marketing and Sales. Marketing and sales expense consists primarily of
advertising and promotional expenditures and payroll and related expenses such
as the amortization of deferred compensation for personnel engaged in the
marketing and expansion of eduPartners and management of our nationwide network
of student representatives. Marketing and sales expense decreased to $1.5
million for the nine months ended September 30, 2001 from $24.9 million for the
nine months ended September 30, 2000. This decrease was primarily attributable
to decreased marketing with respect to the traditional college-focused retail
book business and decreased personnel and related expenses associated with our
network of student representatives. Included in marketing and sales is $27,000
and $2.0 million of non-cash charges for the nine months ended September 30,
2001 and 2000, respectively.
Product Development. Product development expense consists of payroll and related
expenses such as the amortization of deferred compensation for development and
systems personnel and consultants. Product development expense decreased to
approximately $0.2 million for the nine months ended September 30, 2001 from
$3.8 million for the nine months ended September 30, 2000. This decrease was
primarily attributable to decreased web development, consulting and personnel
costs between periods.
General and Administrative. General and administrative expense consists of
payroll and related expenses for executive and administrative personnel such as
the amortization of deferred compensation, facilities expenses, professional
services expenses, travel and other general corporate expenses. General and
administrative expense decreased to $3.8 million for the nine months ended
September 30, 2001 from $8.4 million for the nine months ended September 30,
2000. This decrease was primarily attributable to decreased personnel and
professional services expenses between years. During the nine months ending
September 30, 2001 the Company recorded $0.5 million in fixed asset write off
expense associated with underutilized assets no longer critical to supporting
our business. Included in general and administrative expenses is approximately
$0.6 million and $2.2 million of non-cash charges for the nine months ended
September 30, 2001 and 2000, respectively. Non-cash charges decreased primarily
as a result of a reduction in the number of employees.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income on our cash
and cash equivalents and investments and gains or losses associated with the
disposal of fixed assets. Other income was $0.6 million for the nine months
ended September 30, 2001 compared to $0.8 million for the nine months ended
September 30, 2000. Interest income decreased due largely to lower average cash,
cash equivalent and short-term investment balances and lower rates of return
compared to the previous period.
INCOME TAXES
As of September 30, 2001, we had net operating loss carryforwards for federal
income tax purposes of approximately $55 million, which expire beginning in
2018. We have provided a full valuation allowance on the resulting deferred tax
asset because of uncertainty regarding its realizability.
10
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, we had $17.1 million of cash and cash equivalents. As
of that date, our principal commitments consisted of obligations outstanding,
accounts payable and accrued liabilities. Although we have no material
commitments for capital expenditures, we may experience increases in our capital
expenditures and lease commitments consistent with anticipated growth in
operations, infrastructure and personnel.
Net cash provided by operating activities was $0.1 million for the nine months
ended September 30, 2001 compared to $26.5 million net cash used in operations
for the nine months ended September 30, 2000. This increase was largely
attributable to significantly reduced operating losses adjusted for changes in
accounts receivable, accounts payable and accrued expenses.
Net cash provided by investing activities was $0.5 million for the nine months
ended September 30, 2001 compared to net cash used in investing activities of
$1.1 million the nine months ended September 30, 2000. This increase was largely
attributable to significantly lower additions to fixed assets and the conversion
of short-term investments into cash.
Net cash provided by financing activities was $0.8 million for the nine months
ended September 30, 2001 and $36.4 million the nine months ended September 30,
2000. Net cash provided by financing activities during the nine months ending
September 30, 2000, consisted primarily of net proceeds from the Company's
initial public offering. Net cash provided by financing activities during the
nine months ending September 30, 2001, consisted primarily of net proceeds from
warrant subscription receivables.
As part of the increased emphasis on eduPartners, we anticipate that costs and
expenses related to brand development, marketing and other promotional
activities associated with our traditional retail book business will continue to
decrease from previous levels associated with our original national
college-focused retail book business. Although this may result in decreased
revenues from the sales of new textbooks than would be the case if we continued
to spend at or above our historical levels, we believe, in the aggregate, that
this will reduce the losses and negative cash flows historically associated with
our sales of new textbooks. We intend to increase spending on the development of
eduPartners and relationships with other businesses. Our failure to generate
sufficient revenues, raise additional capital or, if necessary, reduce
discretionary spending could harm our results of operations and financial
condition.
We currently anticipate that our available funds will be sufficient to meet our
anticipated needs for working capital and capital expenditures until such time
as we achieve annual operating profitability. We may need to raise additional
funds prior to the expiration of such period if, for example, we pursue new
business, technology or intellectual property acquisitions or experience net
losses that exceed our current expectations. Any required additional financing
may be unavailable on terms favorable to us, or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to interest rate risk on its cash and cash equivalents,
short-term investments and credit facility. If market rates were to increase
immediately and uniformly by 10% from the level at September 30, 2001, the
change to the Company's interest sensitive assets and liabilities would have an
immaterial effect on the Company's financial position, results of operations and
cash flows over the next fiscal year.
PART II.
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not Applicable
ITEM 2: CHANGES IN SECURITIES
Not Applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
11
ITEM 5: OTHER INFORMATION
Not Applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
i) Restricted Stock Agreement dated as of July 17, 2001 by and
between Varsity Group, Inc. and Andrew J. Oleszczuk.
ii) Restricted Stock Agreement dated as of September 21, 2001 by
and between Varsity Group, Inc. and Allen Morgan.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 24, 2001
Varsity Group Inc.
By: /s/ ERIC J. KUHN
------------------------
Eric J. Kuhn
Chairman, Chief Executive
Officer and President
12
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT, dated as of July 17, 2001 (the "Award
Date"), is made by and between VARSITY GROUP INC., a Delaware corporation (the
"Corporation"), and Andrew Oleszczuk, a director of the Corporation (the
"Director"):
WHEREAS, the Corporation has established The Second Amended and
Restated 1998 Stock Plan of Varsity Group Inc., as amended (the "Plan");
WHEREAS, the Corporation wishes to carry out the Plan (the terms of
which are hereby incorporated by reference and made a part of this Agreement);
WHEREAS, the Plan provides for the issuance of shares of the
Corporation's Common Stock (as defined hereunder), subject to certain
restrictions thereon (hereinafter referred to as "Restricted Stock");
WHEREAS, the Corporation's Board of Directors has determined that it
would be to the advantage and best interest of the Corporation and its
stockholders to issue the shares of Restricted Stock provided for herein to the
Director in consideration of services to the Corporation and/or its
subsidiaries, and the Board of Directors of the Corporation has approved the
issuance of such shares of Restricted Stock to the Director upon the terms and
conditions set forth herein; and
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I.
DEFINITIONS
Whenever the following terms are used below in this Agreement, they
shall have the meaning specified below unless the context clearly indicates to
the contrary. Capitalized terms not otherwise defined herein shall have the
meanings set forth in the Plan. The masculine pronoun shall include the feminine
and neuter, and the singular the plural, where the context so indicates.
SECTION 1.1 CAUSE. "Cause" shall mean without limitation: (i)
conviction of, or the pleading of nolo contendere to, a felony, (ii) a material
breach of Director's duties, (iii) misconduct by Director which is of such a
serious and substantial nature that a reasonable likelihood exists that such
misconduct will materially injure the reputation of the Corporation if Director
was to remain on the Corporation's Board of Directors, and (v) proven gross
negligence.
SECTION 1.2 CHANGE OF CONTROL EVENT. "Change of Control Event" is
defined in Section 3.5.
SECTION 1.3 EXCHANGE ACT. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
SECTION 1.4 RESTRICTIONS. "Restrictions" shall mean the forfeiture
and transferability restrictions imposed upon Restricted Stock under this
Agreement.
SECTION 1.5 RESTRICTED STOCK. "Restricted Stock" shall mean Common
Stock of the Corporation issued under this Agreement and subject to the
Restrictions imposed hereunder.
SECTION 1.6 RULE 16B-3. "Rule 16b-3" shall mean that certain Rule
16b-3 under the Exchange Act, as such Rule may be amended from time to time.
SECTION 1.7 SECRETARY. "Secretary" shall mean the Secretary of the
Corporation.
SECTION 1.8 SECURITIES ACT. "Securities Act" shall mean the
Securities Act of 1933, as amended.
SECTION 1.9 REMOVAL OR RESIGNATION OF DIRECTOR. "Removal or
Resignation of Director" shall
13
mean the time when the relationship between the Director and the Corporation, a
Parent, or a Subsidiary is ended for any reason, including, but not by way of
limitation, a resignation, discharge, death, disability or retirement. The Board
of Directors, in its absolute discretion, shall determine the effect of all
other matters and questions relating to Removal or Resignation of Director,
including, but not by way of limitation, the question of whether a Removal or
Resignation of Director resulted from a discharge for Cause, and all questions
of whether a leave of absence constitutes a Removal or Resignation of Director.
SECTION 1.10 VESTED SHARES. "Vested Shares" is defined in Section
3.1.
ARTICLE II.
ISSUANCE OF RESTRICTED STOCK
SECTION 2.1 ISSUANCE OF RESTRICTED STOCK. For good and valuable
consideration which the Board of Directors has determined to be in excess of the
par value of its Common Stock, on the date hereof the Corporation issues to the
Director 166,667 shares of its Common Stock upon the terms and conditions set
forth in this Agreement.
SECTION 2.2 CONSIDERATION TO THE CORPORATION. As consideration for
the release of the restrictions on the Restricted Stock set forth herein, the
Director agrees to render faithful and efficient services to the Corporation, a
Parent, or a Subsidiary with such duties and responsibilities as the Corporation
shall from time to time prescribe for the remainder of Director's term.
ARTICLE III.
RESTRICTIONS
SECTION 3.1 REPURCHASE OF RESTRICTED STOCK. The Corporation may
repurchase the Restricted Stock from the Director upon the terms and conditions
hereinafter set forth within sixty (60) days after removal or resignation of the
Director by the Corporation for Cause.
In the event the Corporation exercises its right to repurchase, the
Corporation shall promptly pay to the Director an amount per share equal to the
original purchase price paid per share (i.e., $0.001 per share) by the Director
for the Restricted Stock shares, as adjusted from time to time for stock splits,
stock dividends, stock combinations and other recapitalizations.
In the event that Director is unable to, or for any reason does not,
promptly deliver the certificate or certificates evidencing the Restricted Stock
shares repurchased by the Corporation (or any assignment form) to the
Corporation in accordance with this Agreement, the Corporation may deposit the
purchase price for such repurchased shares (in cash or by good check) with any
bank doing business within a fifty (50) mile radius of the Corporation's
principal office, to be held by such bank in escrow until withdrawn by the
Director. Upon such deposit by the Corporation and upon delivery of written
notice of such deposit to the Director, such Restricted Stock shares shall at
such time be deemed to have been repurchased by the Corporation, the Director
shall have no further rights thereto and the Corporation shall record such
transfer in its stock transfer book. Notwithstanding the foregoing provisions of
this Section 3.1, the right to repurchase shall not apply to any "Vested Shares"
held by the Director. "Vested Shares" shall mean that number of shares of
Restricted Stock set forth in the table below:
Date of Removal or Number of Vested Shares
Resignation -----------------------
-----------
July 17, 2001 20,833
October 1, 2001 41,667
January 1, 2002 62,500
April 1, 2002 83,333
July 1, 2002 104,167
October 1, 2002 125,000
January 1, 2003 145,833
April 1, 2003 166,667
14
SECTION 3.2 HOLDING PERIOD. None of the shares of Restricted Stock
granted under this Agreement shall be sold, assigned or otherwise transferred
until at least six months have elapsed from (but excluding) the Award Date.
This Section 3.2 is not intended to affect the restrictions set forth
in Section 4.2.
SECTION 3.3 LEGEND. Certificates representing shares of Restricted
Stock issued pursuant to this Agreement shall, until all restrictions lapse and
new certificates are issued pursuant to Section 3.4, bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN VESTING REQUIREMENTS AND MAY BE SUBJECT TO FORFEITURE
UNDER THE TERMS OF THAT CERTAIN RESTRICTED STOCK AGREEMENT BY
AND BETWEEN VARSITY GROUP INC. AND THE HOLDER OF THE
SECURITIES. PRIOR TO VESTING OF OWNERSHIP IN THE SECURITIES,
THEY MAY NOT BE, DIRECTLY OR INDIRECTLY, OFFERED, TRANSFERRED,
SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
UNDER ANY CIRCUMSTANCES. COPIES OF THE ABOVE REFERENCED
AGREEMENT ARE ON FILE AT THE OFFICES OF THE CORPORATION AT
1130 CONNECTICUT AVE, SUITE 350 WASHINGTON, D.C., 20036.
SECTION 3.4 LAPSE OF RESTRICTIONS. Upon the vesting of the shares
of Restricted Stock as provided in Section 3.1, the Corporation shall cause new
certificates to be issued with respect to such Vested Shares and delivered to
the Director or his legal representative, free from the legend provided for in
Section 3.3 and any of the other Restrictions. Such Vested Shares shall cease to
be considered Restricted Stock subject to the terms and conditions of this
Agreement. Notwithstanding the foregoing, no such new certificate shall be
delivered to the Director or his legal representative unless and until the
Director or his legal representative shall have paid to the Corporation in cash
or by check the full amount of all federal, state and local withholding or other
employment taxes applicable to the taxable income of the Director resulting from
the lapse of the Restrictions.
SECTION 3.5 MERGER, CONSOLIDATION, ACQUISITION, LIQUIDATION OR
DISSOLUTION. Upon the merger or consolidation of the Corporation into another
corporation, the exchange of all or substantially all of the assets of the
Corporation for the securities of another corporation, the acquisition by
another corporation or person (excluding any employee benefit plan of the
Corporation or any trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation) of all or substantially all of the
Corporation's assets, the acquisition by another corporation or person of more
than 50% of the Corporation's then outstanding voting stock, or the liquidation
or dissolution of the Corporation (each a "Change of Control Event"), all shares
of Restricted Stock shall automatically vest and be exercisable beginning 30
days prior to the effective date of such Change of Control Event and all
Restrictions with respect to such shares of Restricted Stock shall immediately
expire.
15
SECTION 3.6 RESTRICTIONS ON NEW SHARES. In the event that the
outstanding shares of the Corporation's Common Stock are changed into or
exchanged for cash or a different number or kind of shares or other securities
of the Corporation, or of another corporation, by reason of reorganization,
merger, consolidation, recapitalization, reclassification, stock split-up, stock
dividend, or combination of shares (excluding any employee benefit plan of the
Corporation or any trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation), such new, additional or different
shares or securities which are held or received by the Director in his capacity
as a holder of Restricted Stock shall be considered to be Restricted Stock and
shall be subject to all of the Restrictions, unless the Board of Directors
provides, pursuant to Section 3.5, for the accelerated vesting and expiration of
the Restrictions on the shares of Restricted Stock underlying the distribution
of the new, additional or different shares or securities.
ARTICLE IV.
MISCELLANEOUS
SECTION 4.1 ADMINISTRATION. The Board of Directors shall have the
power to interpret the Plan, this Agreement and all other documents relating to
Restricted Stock and to adopt such rules for the administration, interpretation
and application of the Plan as are consistent therewith and to interpret, amend
or revoke any such rules. All actions taken and all interpretations and
determinations made by the Board of Directors in good faith shall be final and
binding upon the Director, the Corporation and all other interested persons. No
member of the Board of Directors shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan or
Restricted Stock and all members of the Board of Directors shall be fully
protected by the Corporation in respect to any such action, determination or
interpretation.
SECTION 4.2 RESTRICTED STOCK NOT TRANSFERABLE. No Restricted Stock
or any interest or right therein or part thereof shall be liable for the debts,
contracts or engagements of the Director or his successors in interest or shall
be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect; provided,
however, that this Section 4.2 shall not prevent transfers by will or by
applicable laws of descent and distribution.
SECTION 4.3 CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The
Corporation shall not be required to issue or deliver any certificate or
certificates for shares of stock pursuant to this Agreement prior to fulfillment
of all of the following conditions:
i. The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed;
ii. The completion of any registration or other qualification of
such shares under any state or Federal law or under rulings
or regulations of the Securities and Exchange Commission or
of any other governmental regulatory body, which the Board
of Directors shall, in its absolute discretion, deem
necessary or advisable;
iii. The obtaining of any approval or other clearance from any
state or Federal governmental agency which the Board of
Directors shall, in its absolute discretion, determine to be
necessary or advisable;
iv. The payment by the Director of all amounts required to be
withheld, under federal, state and local tax laws, with
respect to the issuance of Restricted Stock and/or the lapse
or removal of any of the Restrictions; and
v. The lapse of such reasonable period of time as the Board of
Directors may from time to time establish for reasons of
administrative convenience.
SECTION 4.4 ESCROW. The Secretary or such other escrow holder as
the Board of Directors may appoint shall retain physical custody of the
certificates representing Restricted Stock, including shares of Restricted Stock
issued pursuant to Section 3.6, until all of the Restrictions expire or shall
have been removed; provided, however, that in no event shall the Director retain
physical custody of any certificates representing
16
Restricted Stock issued to him.
SECTION 4.5 NOTICES. Any notice to be given under the terms of this
Agreement to the Corporation shall be addressed to the Corporation in care of
its Secretary, and any notice to be given to the Director shall be addressed to
him at the address given beneath his signature hereto. By a notice given
pursuant to this Section 4.5, either party may hereafter designate a different
address for notices to be given to it or him. Any notice which is required to be
given to the Director shall, if the Director is then deceased, be given to the
Director's personal representative if such representative has previously
informed the Corporation of his status and address by written notice under this
Section 4.5. Any notice shall have been deemed duly given when enclosed in a
properly sealed envelope or wrapper addressed as aforesaid, deposited (with
postage prepaid) in a post office or branch post office regularly maintained by
the United States Postal Service.
SECTION 4.6 RIGHTS AS STOCKHOLDER. Except as otherwise provided
herein, the Director, upon the issuance of a new share certificate pursuant to
Sections 3.3 and 4.3, shall have all the rights of a stockholder with respect to
his Restricted Stock, including the right to vote all of the shares whether
vested or unvested and the right to receive all dividends or other distributions
paid or made with respect to all of the shares whether vested or unvested. The
Director shall have all of the rights as a stockholder with respect to any
shares of Restricted Stock which have not vested.
SECTION 4.7 TITLES. Titles are provided herein for convenience only
and are not to serve as a basis for interpretation or construction of this
Agreement.
SECTION 4.8 CONFORMITY TO SECURITIES LAWS. This Agreement is
intended to conform to the extent necessary with all provisions of the
Securities Act and the Exchange Act and any and all regulations and rules
promulgated by the Securities and Exchange Commission thereunder, including
without limitation Rule 16b-3. Notwithstanding anything herein to the contrary,
this Agreement shall be administered, and the Restricted Stock shall be issued,
only in such a manner as to conform to such laws, rules and regulations. To the
extent permitted by applicable law, this Agreement and the Restricted Stock
issued hereunder shall be deemed amended to the extent necessary to conform to
such laws, rules and regulations.
SECTION 4.9 AMENDMENT. This Agreement may be amended only by a
writing executed by the parties hereto which specifically states that it is
amending this Agreement.
SECTION 4.10 GOVERNING LAW. The laws of the State of Delaware shall
govern the interpretation, validity, administration, enforcement and performance
of the terms of this Agreement regardless of the law that might be applied under
principles of conflicts of laws.
IN WITNESS HEREOF, this Agreement has been executed and delivered by the parties
hereto.
VARSITY GROUP INC.
By
--------------------------
Its
-------------------------
THE DIRECTOR
-------------------------
Name
-------------------------
Address
17
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT, dated as of September 21, 2001 (the
"Award Date"), is made by and between VARSITY GROUP INC., a Delaware corporation
(the "Corporation"), and Allen Morgan, a director of the Corporation (the
"Director"):
WHEREAS, the Corporation has established The Second Amended and
Restated 1998 Stock Plan of Varsity Group Inc., as amended (the "Plan");
WHEREAS, the Corporation wishes to carry out the Plan (the terms of
which are hereby incorporated by reference and made a part of this Agreement);
WHEREAS, the Plan provides for the issuance of shares of the
Corporation's Common Stock (as defined hereunder), subject to certain
restrictions thereon (hereinafter referred to as "Restricted Stock");
WHEREAS, the Corporation's Board of Directors has determined that it
would be to the advantage and best interest of the Corporation and its
stockholders to issue the shares of Restricted Stock provided for herein to the
Director in consideration of services to the Corporation and/or its
subsidiaries, and the Board of Directors of the Corporation has approved the
issuance of such shares of Restricted Stock to the Director upon the terms and
conditions set forth herein; and
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I.
DEFINITIONS
Whenever the following terms are used below in this Agreement, they
shall have the meaning specified below unless the context clearly indicates to
the contrary. Capitalized terms not otherwise defined herein shall have the
meanings set forth in the Plan. The masculine pronoun shall include the feminine
and neuter, and the singular the plural, where the context so indicates.
SECTION 1.1 CAUSE. "Cause" shall mean without limitation: (i)
conviction of, or the pleading of nolo contendere to, a felony, (ii) a material
breach of Director's duties, (iii) misconduct by Director which is of such a
serious and substantial nature that a reasonable likelihood exists that such
misconduct will materially injure the reputation of the Corporation if Director
was to remain on the Corporation's Board of Directors, and (v) proven gross
negligence.
SECTION 1.2 CHANGE OF CONTROL EVENT. "Change of Control Event" is
defined in Section 3.5.
SECTION 1.3 EXCHANGE ACT. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
SECTION 1.4 RESTRICTIONS. "Restrictions" shall mean the forfeiture
and transferability restrictions imposed upon Restricted Stock under this
Agreement.
SECTION 1.5 RESTRICTED STOCK. "Restricted Stock" shall mean Common
Stock of the Corporation issued under this Agreement and subject to the
Restrictions imposed hereunder.
SECTION 1.6 RULE 16B-3. "Rule 16b-3" shall mean that certain Rule
16b-3 under the Exchange Act, as such Rule may be amended from time to time.
SECTION 1.7 SECRETARY. "Secretary" shall mean the Secretary of the
Corporation.
SECTION 1.8 SECURITIES ACT. "Securities Act" shall mean the
Securities Act of 1933, as amended.
SECTION 1.9 REMOVAL OR RESIGNATION OF DIRECTOR. "Removal or
Resignation of Director" shall
18
mean the time when the relationship between the Director and the Corporation, a
Parent, or a Subsidiary is ended for any reason, including, but not by way of
limitation, a resignation, discharge, death, disability or retirement. The Board
of Directors, in its absolute discretion, shall determine the effect of all
other matters and questions relating to Removal or Resignation of Director,
including, but not by way of limitation, the question of whether a Removal or
Resignation of Director resulted from a discharge for Cause, and all questions
of whether a leave of absence constitutes a Removal or Resignation of Director.
SECTION 1.10 VESTED SHARES. "Vested Shares" is defined in Section
3.1.
ARTICLE II.
ISSUANCE OF RESTRICTED STOCK
SECTION 2.1 ISSUANCE OF RESTRICTED STOCK. For good and valuable
consideration which the Board of Directors has determined to be in excess of the
par value of its Common Stock, on the date hereof the Corporation issues to the
Director 250,000 shares of its Common Stock upon the terms and conditions set
forth in this Agreement.
SECTION 2.2 CONSIDERATION TO THE CORPORATION. As consideration for
the release of the restrictions on the Restricted Stock set forth herein, the
Director agrees to render faithful and efficient services to the Corporation, a
Parent, or a Subsidiary with such duties and responsibilities as the Corporation
shall from time to time prescribe for the remainder of Director's term.
ARTICLE III.
RESTRICTIONS
SECTION 3.1 REPURCHASE OF RESTRICTED STOCK. The Corporation may
repurchase the Restricted Stock from the Director upon the terms and conditions
hereinafter set forth within sixty (60) days after removal or resignation of the
Director by the Corporation for Cause.
In the event the Corporation exercises its right to repurchase, the
Corporation shall promptly pay to the Director an amount per share equal to the
original purchase price paid per share (i.e., $0.001 per share) by the Director
for the Restricted Stock shares, as adjusted from time to time for stock splits,
stock dividends, stock combinations and other recapitalizations.
In the event that Director is unable to, or for any reason does not,
promptly deliver the certificate or certificates evidencing the Restricted Stock
shares repurchased by the Corporation (or any assignment form) to the
Corporation in accordance with this Agreement, the Corporation may deposit the
purchase price for such repurchased shares (in cash or by good check) with any
bank doing business within a fifty (50) mile radius of the Corporation's
principal office, to be held by such bank in escrow until withdrawn by the
Director. Upon such deposit by the Corporation and upon delivery of written
notice of such deposit to the Director, such Restricted Stock shares shall at
such time be deemed to have been repurchased by the Corporation, the Director
shall have no further rights thereto and the Corporation shall record such
transfer in its stock transfer book. Notwithstanding the foregoing provisions of
this Section 3.1, the right to repurchase shall not apply to any "Vested Shares"
held by the Director. "Vested Shares" shall mean that number of shares of
Restricted Stock set forth in the table below:
Date of Removal or Number of Vested Shares
Resignation -----------------------
-----------
July 17, 2001 20,833
October 1, 2001 41,667
January 1, 2002 62,500
April 1, 2002 83,333
July 1, 2002 104,167
October 1, 2002 125,000
January 1, 2003 145,833
April 1, 2003 166,667
July 1, 2003 187,500
19
Date of Removal or Number of Vested Shares
Resignation -----------------------
-----------
October 1, 2003 208,333
January 1, 2004 229,167
April 1, 2004 250,000
SECTION 3.2 HOLDING PERIOD. None of the shares of Restricted Stock
granted under this Agreement shall be sold, assigned or otherwise transferred
until at least six months have elapsed from (but excluding) the Award Date.
This Section 3.2 is not intended to affect the restrictions set forth
in Section 4.2.
SECTION 3.3 LEGEND. Certificates representing shares of Restricted
Stock issued pursuant to this Agreement shall, until all restrictions lapse and
new certificates are issued pursuant to Section 3.4, bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN VESTING REQUIREMENTS AND MAY BE SUBJECT TO FORFEITURE
UNDER THE TERMS OF THAT CERTAIN RESTRICTED STOCK AGREEMENT BY
AND BETWEEN VARSITY GROUP INC. AND THE HOLDER OF THE
SECURITIES. PRIOR TO VESTING OF OWNERSHIP IN THE SECURITIES,
THEY MAY NOT BE, DIRECTLY OR INDIRECTLY, OFFERED, TRANSFERRED,
SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
UNDER ANY CIRCUMSTANCES. COPIES OF THE ABOVE REFERENCED
AGREEMENT ARE ON FILE AT THE OFFICES OF THE CORPORATION AT
1130 CONNECTICUT AVE, SUITE 350 WASHINGTON, D.C., 20036.
SECTION 3.4 LAPSE OF RESTRICTIONS. Upon the vesting of the shares
of Restricted Stock as provided in Section 3.1, the Corporation shall cause new
certificates to be issued with respect to such Vested Shares and delivered to
the Director or his legal representative, free from the legend provided for in
Section 3.3 and any of the other Restrictions. Such Vested Shares shall cease to
be considered Restricted Stock subject to the terms and conditions of this
Agreement. Notwithstanding the foregoing, no such new certificate shall be
delivered to the Director or his legal representative unless and until the
Director or his legal representative shall have paid to the Corporation in cash
or by check the full amount of all federal, state and local withholding or other
employment taxes applicable to the taxable income of the Director resulting from
the lapse of the Restrictions.
SECTION 3.5 MERGER, CONSOLIDATION, ACQUISITION, LIQUIDATION OR
DISSOLUTION. Upon the merger or consolidation of the Corporation into another
corporation, the exchange of all or substantially all of the assets of the
Corporation for the securities of another corporation, the acquisition by
another corporation or person (excluding any employee benefit plan of the
Corporation or any trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation) of all or substantially all of the
Corporation's assets, the acquisition by another corporation or person of more
than 50% of the Corporation's then outstanding voting stock, or the liquidation
or dissolution of the Corporation (each a "Change of Control Event"), all shares
of Restricted Stock shall automatically vest and be exercisable beginning 30
days prior to the effective date of such Change of Control Event and all
Restrictions with respect to such shares of Restricted Stock shall immediately
expire.
SECTION 3.6 RESTRICTIONS ON NEW SHARES. In the event that the
outstanding shares of the Corporation's Common Stock are changed into or
exchanged for cash or a different number or kind of shares or other securities
of the Corporation, or of another corporation, by reason of reorganization,
merger, consolidation, recapitalization, reclassification, stock split-up, stock
dividend, or combination of shares (excluding any employee benefit plan of the
Corporation or any trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation), such new, additional or different
shares or securities which are held or received by the
20
Director in his capacity as a holder of Restricted Stock shall be considered to
be Restricted Stock and shall be subject to all of the Restrictions, unless the
Board of Directors provides, pursuant to Section 3.5, for the accelerated
vesting and expiration of the Restrictions on the shares of Restricted Stock
underlying the distribution of the new, additional or different shares or
securities.
ARTICLE IV.
MISCELLANEOUS
SECTION 4.1 ADMINISTRATION. The Board of Directors shall have the
power to interpret the Plan, this Agreement and all other documents relating to
Restricted Stock and to adopt such rules for the administration, interpretation
and application of the Plan as are consistent therewith and to interpret, amend
or revoke any such rules. All actions taken and all interpretations and
determinations made by the Board of Directors in good faith shall be final and
binding upon the Director, the Corporation and all other interested persons. No
member of the Board of Directors shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan or
Restricted Stock and all members of the Board of Directors shall be fully
protected by the Corporation in respect to any such action, determination or
interpretation.
SECTION 4.2 RESTRICTED STOCK NOT TRANSFERABLE. No Restricted Stock
or any interest or right therein or part thereof shall be liable for the debts,
contracts or engagements of the Director or his successors in interest or shall
be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect; provided,
however, that this Section 4.2 shall not prevent transfers by will or by
applicable laws of descent and distribution.
SECTION 4.3 CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The
Corporation shall not be required to issue or deliver any certificate or
certificates for shares of stock pursuant to this Agreement prior to fulfillment
of all of the following conditions:
i. The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed;
ii. The completion of any registration or other qualification of
such shares under any state or Federal law or under rulings
or regulations of the Securities and Exchange Commission or
of any other governmental regulatory body, which the Board
of Directors shall, in its absolute discretion, deem
necessary or advisable;
iii. The obtaining of any approval or other clearance from any
state or Federal governmental agency which the Board of
Directors shall, in its absolute discretion, determine to be
necessary or advisable;
iv. The payment by the Director of all amounts required to be
withheld, under federal, state and local tax laws, with
respect to the issuance of Restricted Stock and/or the lapse
or removal of any of the Restrictions; and
v. The lapse of such reasonable period of time as the Board of
Directors may from time to time establish for reasons of
administrative convenience.
SECTION 4.4 ESCROW. The Secretary or such other escrow holder as
the Board of Directors may appoint shall retain physical custody of the
certificates representing Restricted Stock, including shares of Restricted Stock
issued pursuant to Section 3.6, until all of the Restrictions expire or shall
have been removed; provided, however, that in no event shall the Director retain
physical custody of any certificates representing Restricted Stock issued to
him.
SECTION 4.5 NOTICES. Any notice to be given under the terms of this
Agreement to the Corporation shall be addressed to the Corporation in care of
its Secretary, and any notice to be given to the Director shall be addressed to
him at the address given beneath his signature hereto. By a notice given
pursuant to this Section 4.5, either party may hereafter designate a different
address for notices to be given to it or him. Any notice which is required to be
given to the Director shall, if the Director is then deceased, be given to the
Director's personal
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representative if such representative has previously informed the Corporation of
his status and address by written notice under this Section 4.5. Any notice
shall have been deemed duly given when enclosed in a properly sealed envelope or
wrapper addressed as aforesaid, deposited (with postage prepaid) in a post
office or branch post office regularly maintained by the United States Postal
Service.
SECTION 4.6 RIGHTS AS STOCKHOLDER. Except as otherwise provided
herein, the Director, upon the issuance of a new share certificate pursuant to
Sections 3.3 and 4.3, shall have all the rights of a stockholder with respect to
his Restricted Stock, including the right to vote all of the shares whether
vested or unvested and the right to receive all dividends or other distributions
paid or made with respect to all of the shares whether vested or unvested. The
Director shall have all of the rights as a stockholder with respect to any
shares of Restricted Stock which have not vested.
SECTION 4.7 TITLES. Titles are provided herein for convenience only
and are not to serve as a basis for interpretation or construction of this
Agreement.
SECTION 4.8 CONFORMITY TO SECURITIES LAWS. This Agreement is
intended to conform to the extent necessary with all provisions of the
Securities Act and the Exchange Act and any and all regulations and rules
promulgated by the Securities and Exchange Commission thereunder, including
without limitation Rule 16b-3. Notwithstanding anything herein to the contrary,
this Agreement shall be administered, and the Restricted Stock shall be issued,
only in such a manner as to conform to such laws, rules and regulations. To the
extent permitted by applicable law, this Agreement and the Restricted Stock
issued hereunder shall be deemed amended to the extent necessary to conform to
such laws, rules and regulations.
SECTION 4.9 AMENDMENT. This Agreement may be amended only by a
writing executed by the parties hereto which specifically states that it is
amending this Agreement.
SECTION 4.10 GOVERNING LAW. The laws of the State of Delaware shall
govern the interpretation, validity, administration, enforcement and performance
of the terms of this Agreement regardless of the law that might be applied under
principles of conflicts of laws.
IN WITNESS HEREOF, this Agreement has been executed and delivered by the parties
hereto.
VARSITY GROUP INC.
By
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Its
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THE DIRECTOR
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Name
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Address
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