SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant x
Filed by a Party other than the Registrant o
Check the appropriate box:
o Preliminary Proxy Statement
| o | Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
x Definitive Proxy Statement
o Definitive Additional Materials
| o | Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 |
Varsity Group Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
x No fee required.
o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
| (1) | Title of each class of securities to which transaction applies: |
| (2) | Aggregate number of securities to which transaction applies: |
| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it is determined): |
| (4) | Proposed maximum aggregate value of transaction: |
| (5) | Total fee paid: |
| o | Fee paid previously with preliminary proxy materials. |
| o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. |
| (1) | Amount Previously Paid: |
| (2) | Form, Schedule or Registration Statement No.: |
| (3) | Filing Party: |
(4) Date Filed:
VARSITY GROUP INC.
1130 Connecticut Avenue, Suite 350
Washington, D.C. 20036
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held June 25, 2002
TO OUR STOCKHOLDERS:
Notice is hereby given that the 2002 annual meeting of stockholders of Varsity Group Inc. (the “Company”) will be held at the Monarch Hotel, 2401 M St., N.W., Washington, D.C. 20037, on June 25, 2002, at 10:30 a.m. local time, for the following purposes:
| 1. | to elect one director of the Company for a term expiring at the 2005 annual meeting of stockholders; | |
| 2. | to elect one director of the Company for a term expiring at the 2004 annual meeting of stockholders; | |
| 3. | to ratify the selection of PricewaterhouseCoopers LLP, as the Company’s independent auditors for 2002; and | |
| 4. | to transact such other business as may properly come before the meeting or any adjournment or postponement thereof. |
Only stockholders of record at the close of business on April 30, 2002 will be entitled to notice of, and to vote at, the annual meeting or any adjournment or postponement thereof. A list of such stockholders will be open for examination by any stockholder for any purpose germane to the annual meeting at the annual meeting and during normal business hours, for ten days prior to the annual meeting, at the offices of the Company, 1130 Connecticut Avenue, NW Suite 350, Washington, D.C. 20036.
| By Order of the Board of Directors, |
 |
| Jack Benson | |
| Secretary |
Dated: May 15, 2002
YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENVELOPE PROVIDED.
VARSITY GROUP INC.
1130 Connecticut Avenue, NW, Suite 350
Washington, D.C. 20036
Annual Meeting of Stockholders
June 25, 2002
PROXY STATEMENT
GENERAL INFORMATION
Proxy Solicitation
This proxy statement is furnished in connection with the solicitation of proxies by our Board of Directors for use at the 2002 annual meeting of stockholders to be held at the MONARCH HOTEL, 2401 M St., N.W. 20037, Washington, D.C., on June 25, 2002, at 10:30 a.m. local time. The purpose of the annual meeting and the matters to be acted upon are set forth in the accompanying notice of annual meeting.
We are mailing our annual report for the fiscal year ended December 31, 2001, together with this proxy statement and the enclosed proxy, to stockholders entitled to vote at the annual meeting. The annual report does not form any part of the material for the solicitation of proxies.
We will pay the cost of all proxy solicitation. In addition to the solicitation of proxies by use of the mails, our officers and other employees may solicit proxies by personal interview, telephone, facsimile and telegram. If any of these individuals are asked to perform these services, they will not receive compensation and the services will be performed in addition to their regular duties. We have also made arrangements with brokerage firms, banks, nominees and other fiduciaries to forward proxy solicitation material for shares held of record by them to the beneficial owners of the shares. We will reimburse any of these entities or people for their reasonable out-of-pocket expenses in forwarding the proxy solicitation materials.
This proxy statement and the enclosed proxy are first being mailed to our stockholders on or about May 15, 2002.
Voting and Revocability of Proxies
A proxy for use at the annual meeting and a return envelope are enclosed. Any shares of our common stock, par value $0.0001 per share (the “common stock”) which are represented by a properly executed proxy that is received in time and not revoked will be voted at the annual meeting in accordance with the instructions indicated in the proxy. If no instructions are indicated, the shares will be voted “FOR” the election of the two director nominees named in the proxy, and “FOR” the ratification of PricewaterhouseCoopers, LLP as the Company’s independent auditors. Discretionary authority is provided in the proxy as to any matters not specifically referred to therein. Neither our board nor our managers and officers are aware of any other matters that are likely to be brought before the annual meeting. If any other matters properly come before the annual meeting, however, the persons named in the proxy are fully authorized to vote on the matters in accordance with their judgment and discretion.
A stockholder who has given a proxy may revoke it at any time prior to its exercise at the annual meeting by (1) giving written notice of revocation to our Corporate Secretary, (2) properly submitting to us a duly executed proxy bearing a later date or (3) voting in person at the annual meeting. All written notices of revocation or other communications with respect to revocation of proxies should be addressed to our Corporate Secretary at our principal executive offices as follows: Varsity Group Inc., 1130 Connecticut Avenue, Suite 350, Washington, DC, 20036, Attn: Corporate Secretary.
Voting Procedure
All holders of record of our common stock at the close of business on April 30, 2002 will be eligible to vote at the annual meeting. Each common stockholder is entitled to one vote at the annual meeting for each share they hold. As of April 30, 2002 there were 16,114,416 shares of common stock outstanding.
The presence, in person or by proxy, of a majority of the outstanding shares of common stock entitled to vote will constitute a quorum for the transaction of business. Votes cast in person or by proxy, abstentions and broker non-votes (as defined below) will be tabulated by the inspectors of election and will be considered in the determination of whether a quorum is present at the annual meeting. The inspectors of election will treat shares represented by executed proxies that abstain as shares that are present and entitled to vote for purposes of determining the approval of such matter. If, with respect to any shares, a broker or other nominee submits a proxy indicating that instructions have not been received from the beneficial owners or the persons entitled to vote and that the broker or other nominee does not have discretionary authority to vote the shares (a “broker non-vote”) on one or more proposals, those shares will not be treated as present and entitled to vote for purposes of determining the approval of any proposal.
PROPOSAL NO. 1 & NO. 2
ELECTION OF DIRECTORS
Nominees for Election as Director
Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws provide that the members of the Board are to be elected at the annual meeting of the stockholders. Presently, there are seven board seats with two vacancies. One director is standing for re-election and one is standing for election. At the conclusion of the annual meeting, the number of directors that will constitute the entire Board is five.
The Board is divided into three classes, with the shareholders electing approximately one-third of the directors annually. The first class includes Andrew Oleszczuk and James Ulsamer whose terms expire in 2003. The second class includes Allen Morgan and John Kernan whose terms expire in 2004. The final class includes Eric Kuhn whose term, if reelected, will expire in 2005.
Proposal No. 1 nominates Eric J. Kuhn for election to a new term expiring in 2005.
Proposal No. 2 nominates John T. Kernan for election to a term expiring in 2004. The Board appointed Mr. Kernan to his seat on January 24, 2002 and he is now standing for election for the remaining term of the seat he filled.
Approval of the nominees requires the affirmative vote of a plurality of the votes of the shares present in person or represented by proxy at the annual meeting and entitled to vote on the election of directors. In the event that the nominee should become unable or unwilling to serve as a director, it is the intention of the persons named in the proxy to vote for the election of such substitute nominee for the office of director as the Board may recommend.
OUR BOARD UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE “FOR” THE ELECTION OF THE NOMINEES TO SERVE AS DIRECTOR.
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Set forth below is information with respect to our current directors and director nominees:
| Name | Age | Position | ||||
Nominee for Term Expiring in 2005 | ||||||
| Eric J. Kuhn | 31 | Chief Executive Officer, Chairman of the Board | ||||
Nominee for Term Expiring in 2004 | ||||||
| John T. Kernan | 56 | Director | ||||
Terms Expiring in 2003 | ||||||
| Andrew J. Oleszczuk (1)(2) | 46 | Director | ||||
| James S. Ulsamer (1) | 51 | Director | ||||
Term Expiring in 2004 | ||||||
| Allen L. Morgan (1)(2) | 49 | Director | ||||
(1) Member of the compensation and stock option committee.
(2) Member of the audit committee.
Eric J. Kuhnco-founded Varsity Group Inc. and has served as our Chief Executive Officer and Chairman of the Board since our inception. He has also served as our President since June 1999. From August 1997 to April 1998, Mr. Kuhn practiced law at Greenberg Traurig Hoffman Lippoff Rosen and Quentel P.A. in Miami, Florida, and from September 1996 to July 1997, practiced law at Kaye & Scholer L.L.P. in New York, New York. Mr. Kuhn received a B.A. with honors from Haverford College in 1993 and a J.D. with honors from The George Washington University Law School in 1996.
John T. Kernanhas served as Chairman and Chief Executive Officer of Lightspan Inc, a leading provider of curriculum-based educational software and Internet products and services used both in school and at home, since September 1993. Prior to co-founding Lightspan, Mr. Kernan served as Chairman and Chief Executive Officer of Jostens Learning Corporation, an educational software company. Mr. Kernan serves on the Board of Directors of TechNet. Mr. Kernan holds a Bachelor of Science from Loyola College.
Andrew J. Oleszczukhas served as a Director since September 1999. Since August 1998, Mr. Oleszczuk has been Senior Vice President, Corporate Development for Tribune Company. From November 1993 to July 1998, Mr. Oleszczuk served as Vice President of Development at Tribune Company. Mr. Oleszczuk received a B.A. from Northwestern University in 1978 and an M.B.A. from the Wharton Graduate School of Business in 1980.
James S. Ulsamerhas served as a Director since July 1998. Mr. Ulsamer has served as President of Baker & Taylor Retail, a division of Baker & Taylor Corporation, a distributor of books, music and videos, since July 1999 and as Executive Vice President of Baker & Taylor since June 1994. From June 1994 to July 1999, he also served as President of Baker & Taylor Books. Mr. Ulsamer earned a B.A. in Economics from Rutgers University in 1972.
Allen L. Morganhas served as a Director since February 1999. Since January 1999, Mr. Morgan has been a General Partner of the Mayfield Fund, a venture capital fund. From May 1997 to December 1998, Mr. Morgan was a partner in the corporate department of Latham & Watkins in Menlo Park, California. From November 1982 to May 1997, Mr. Morgan was an associate and a partner in the corporate department of Wilson, Sonsini, Goodrich & Rosati in Menlo Park, California. He received an A.B. from Dartmouth College in 1976, a B.A. and M.A. from Oxford University in 1978 and 1983, respectively, and a J.D. from the University of Virginia in 1981.
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Board of Directors and Committees of the Board
The Board held six meetings during the Company’s 2001 fiscal year. During fiscal year 2001, each director attended at least 75% of the aggregate of the total number of meetings of the Board held during the period he served as a director and the total number of meetings held by each committee of the Board on which he served (during the period for which he served).
The Board currently has a standing Audit Committee and a standing Compensation and Stock Option Committee. It does not currently have a standing nominating committee.
The Audit Committee currently consists of Andrew Oleszczuk and Allen Morgan. The Audit Committee reviews, acts on and reports to the Board with respect to various auditing and accounting matters, including the recommendation of our independent auditors, the scope of the annual audits, fees to be paid to our independent auditors, the performance of our independent auditors and our accounting practices. The Audit Committee held two meetings during the Company’s 2001 fiscal year. The Company has deemed that the members of the audit committee are independent based upon the definition of independence in Rule 4200(a)(14) of the NASD’s listing standards.
The Audit Committee reviewed and discussed the audited financial statements with management. Based on such review and discussions, the Audit Committee recommended to the Board that the audited financial statements be included in our annual report on Form 10-K for the fiscal year ended December 31, 2001, for filing with the Securities and Exchange Commission.
The Compensation and Stock Option Committee determines the salaries and benefits for our employees, consultants, directors and other individuals compensated by our company. In addition, the Compensation and Stock Option Committee administers our stock option plan. The Compensation and Stock Option Committee consists of Messrs. Morgan, Oleszczuk and Ulsamer. The Compensation and Stock Option Committee held four meetings during the Company’s 2001 fiscal year.
Director Compensation
Except for reimbursement for reasonable travel expenses relating to attendance at board meetings and the granting of stock options or restricted stock awards, directors are not compensated for their services as directors. Our directors are eligible to participate in our stock option plan.
On July 17, 2001, we sold 166,667 shares of our common stock at a price of $0.001 per share to Mr. Oleszczuk. These shares were issued with certain restrictions limiting or preventing their sale or transfer. We have deemed that the fair value of the underlying stock for the sale of common stock is in excess of the related sales or exercise price. As a result, we recorded deferred compensation expense of $59,983 in July 2001.
On September 21, 2001, we sold 250,000 shares of our common stock at a price of $0.001 per share to Mr. Morgan. These shares were issued with certain restrictions limiting or preventing their sale or transfer. We have deemed that the fair value of the underlying stock for the sale of common stock is in excess of the related sales or exercise price. As a result, we recorded deferred compensation expense of $104,975 in September 2001.
During 2001, we sold 150,000 shares of our common stock at a price of $0.001 per share to Mr. Kuhn. These shares were issued with certain restrictions limiting or preventing their sale or transfer. We have deemed that the fair value of the underlying stock for the sale of common stock is in excess of the related sales or exercise price. As a result, we recorded deferred compensation expense of $31,285 during 2001. On November 14, 2001, we granted to Mr. Kuhn an option to purchase 200,000 shares at an exercise price of $0.60 per share and vesting over two years.
To the Company’s knowledge, during the 2001 fiscal year all officers and directors filed the necessary ownership statements consistent with the requirements listed in Section 16 of the Securities Exchange Act of 1934.
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PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP has served as the Company’s independent auditors since October 1999 and has been appointed by the Board to continue as the Company’s independent auditors for the fiscal year ending December 31, 2002. In the event that ratification of this selection of auditors is not approved by a majority of the shares of Common Stock voting at the Annual Meeting in person or by proxy, the Board will reconsider its selection of auditors.
A representative of PriceWaterhouseCoopers LLP is expected to be present at the Annual Meeting. This representative will have an opportunity to make a statement and will be available to respond to appropriate questions.
OUR BOARD RECOMMENDS A VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2002.
SECURITY OWNERSHIP
Security Ownership of Directors, Executive Officers and Principal Stockholders
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of our common stock as of April 30, 2002, by:
| • | each person, or group of affiliated persons, who we know beneficially owns more than five percent in the aggregate of the outstanding shares of our common stock; | |
| • | each of our executive officers named in the Summary Compensation Table; | |
| • | each of our directors; | |
| • | director nominee; and | |
| • | all directors and executive officers as a group. |
Under the rules of the Securities and Exchange Commission, beneficial ownership includes voting or investment power with respect to securities and includes the shares issuable under stock options or warrants that are exercisable within 60 days of April 30, 2002. Shares issuable under stock options or warrants are deemed outstanding for computing the percentage of the person holding options but are not outstanding for computing the percentage of any other person. The percentage of beneficial ownership for the following table is based upon 16,114,416 shares of common stock outstanding as of April 30, 2002.
Unless otherwise indicated, the address for each listed stockholder is: c/o Varsity Group Inc., 1130 Connecticut Ave, NW Suite 350, Washington, D.C. 20036. To our knowledge, except as indicated in the
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footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting power and investment power with respect to all shares of common stock.
| Shares of | ||||||||
| Common Stock | ||||||||
| Beneficially Owned | ||||||||
| Name of | ||||||||
| Beneficial Owner | Number | Percentage | ||||||
| Mayfield Fund (1) | 2,342,894 | 13.9 | % | |||||
| Eric J. Kuhn (2) | 2,224,205 | 13.2 | ||||||
| The Carlyle Group (3) | 2,108,070 | 12.5 | ||||||
| Tribune Ventures (4) | 1,488,095 | 8.8 | ||||||
| Allen L. Morgan (5) | 2,610,334 | 15.5 | ||||||
| Andrew J. Oleszczuk (6) | 1,654,762 | 9.8 | ||||||
| Peter S. Lynch (7) | 1,430,000 | 8.5 | ||||||
| John Kernan (8) | 166,667 | 1.0 | ||||||
| James S. Ulsamer | — | — | * | |||||
| Directors and executive officers as a group (5 persons) | 6,693,468 | 39.6 | ||||||
| * | Represents less than 1% of the outstanding shares of common stock. |
| (1) | Includes 1,992,489 shares held by Mayfield IX, 104,868 shares held by Mayfield Associates Fund IV and 245,537 shares held by the Varsity Books Trust, a revocable trust. Mayfield IX Management LLC is the general partner of Mayfield IX and Mayfield Associates Fund IV both of which are Delaware limited partnerships. Mr. Morgan, one of our directors, is a nonmanaging member of Mayfield IX Management LLC. He has no management authority with respect to Mayfield IX Management and disclaims beneficial ownership of our shares held directly by Mayfield IX Management, Mayfield IX, and Mayfield Associates Fund IV except to the extent of any pecuniary interest therein. Mayfield Fund, L.P.’s address is 2800 Sand Hill Road, Menlo Park, California 94025. |
| (2) | Includes 434,988 shares subject to options exercisable within the next 60 days. This figure also includes 500,000 shares of restricted stock that were granted in 2000 and 2001 and the restrictions lapse monthly over two years. |
| (3) | The Carlyle Group includes 745,483 shares held by Carlyle Venture Partners, L.P., 155,625 shares held by C/ S Venture Investors, L.P., 116,092 shares held by Carlyle Venture Coinvestment L.L.C. and 98,870 shares held by Carlyle U.S. Venture Partners, L.P., as well as 712,836 shares currently outstanding and 279,164 shares issuable upon exercise of outstanding warrants, all of which are exercisable within the next 60 days at a weighted average exercise price of $1.48 per share held by B&T Enterprises, L.L.C., a limited liability company. TC Group, L.L.C., an affiliate of The Carlyle Group, is the manager of B&T Enterprises, L.L.C. and has sole control over the voting and disposition of the shares held by B&T Enterprises, L.L.C. TC Group, L.L.C. disclaims beneficial ownership of any of the shares held by B&T Enterprises, L.L.C. TCG Ventures, Ltd, an affiliate of The Carlyle Group, is the general partner of both Carlyle Venture Partners, L.P. and C/ S Venture Investors, L.P. TCG Ventures, L.L.C., an affiliate of The Carlyle Group, is the general partner of both Carlyle Venture Coinvestment L.L.C. and Carlyle U.S. Venture Partners, L.P. The Carlyle Group’s address is 1001 Pennsylvania Avenue, N.W., Suite 220 South, Washington, D.C. 20004. |
| (4) | Tribune Ventures is a division of Tribune Company and is located at 435 North Michigan Avenue, Chicago, Illinois 60611. |
| (5) | Includes 1,992,489 shares held by Mayfield IX, 104,868 shares held by Mayfield Associates Fund IV, 245,537 shares held by the Varsity Book Trust and 267,440 held directly by Mr. Morgan. Except for those shares held by Mr. Morgan, Mr. Morgan disclaims beneficial ownership of all other shares except to the extent of any pecuniary interest therein. |
| (6) | Includes 1,488,095 shares beneficially owned by Tribune Ventures, a division of Tribune Company, and 166,667 held directly by Mr. Oleszczuk. Mr. Oleszczuk is Senior Vice President, Corporate |
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| Development of Tribune Company, and, as such may be deemed to have voting and investment power over such shares. Mr. Oleszczuk disclaims beneficial ownership of these shares. | |
| (7) | Includes 660,000 shares to which Mr. Lynch has sole voting power and 770,000 with shared voting power. This includes shares beneficially owned by Mr. Lynch’s wife (Mrs. Lynch’s powers to vote or dispose are treated as if they belonged to Mr. Lynch for purposes of this statement), shares beneficially owned in two charitable lead trusts and a charitable remainder trust and shares beneficially owned in trust for Mr. Lynch’s children. Mr. Lynch’s principal offices are located at 82 Devonshire Street, S8A, Boston, Massachusetts 02109. |
| (8) | Mr. Kernan is the Chairman and Chief Executive Officer of Lightspan Inc. Their corporate offices are located at 10140 Campus Point Drive, San Diego, CA 92121. |
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation paid to the Chief Executive Officer of the Company and to each of the other executive officers (the “Named Executive Officers”) for fiscal years 1999, 2000, and 2001.
| Annual | Long Term | ||||||||||||||||||||||||||||
| Compensation | Compensation Awards | ||||||||||||||||||||||||||||
| # of | |||||||||||||||||||||||||||||
| Securities | |||||||||||||||||||||||||||||
| Other Annual | Restricted Stock | Underlying | All Other | ||||||||||||||||||||||||||
| Salary | Bonus | Compensation | Awards | Options | Compensation | ||||||||||||||||||||||||
| Name and Principal Position | Year | ($) | ($) | ($) | ($) | (#) | ($) | ||||||||||||||||||||||
| Eric J. Kuhn | 2001 | 180,000 | 280,000 | 62,123 | 31,285(1 | ) | 766,435 | 900 | |||||||||||||||||||||
| Chief Executive Officer | 2000 | 168,333 | — | — | 21,840(2 | ) | 591,435 | 2,000 | |||||||||||||||||||||
| 1999 | 127,000 | 50,000 | — | — | — | 2,000 | |||||||||||||||||||||||
| (1) | On January 29, 2001, we sold 50,000 shares of our common stock at a price of $0.001 per share to Mr. Kuhn. On March 22, 2001 we sold 100,000 shares of our common stock at a price of $0.001 per share to Mr. Kuhn. These shares were issued with certain restrictions limiting or preventing their sale or transfer. The fair value of the underlying stock for the sale of common stock is in excess of the related sales or exercise price. As a result, we recorded non-cash compensation expense of $31,285 during 2001. As of December 31, 2001, Mr. Kuhn held 264,583 restricted shares of common stock, valued at approximately $317,500 based upon the closing market price of $1.20 on December 31, 2001. Contingent upon Mr. Kuhn’s continued employment with the Company, the restrictions will lapse on 250,000 of these shares during 2002 and the remaining 14,583 shares during 2003. |
| (2) | On December 21, 2000, we sold 350,000 shares of our common stock at a price of $0.001 per share to Mr. Kuhn. These shares were issued with certain restrictions limiting or preventing their sale or transfer. The fair value of the underlying stock for the sale of common stock is in excess of the related sales or exercise price. As a result, we recorded non-cash compensation expense of $21,840 in December 2000. |
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Stock Option Grants In Fiscal Year 2001
| Potential Realizable Value at | ||||||||||||||||||||||||
| Assumed Annual Rate of | ||||||||||||||||||||||||
| Stock Price Appreciation | ||||||||||||||||||||||||
| Individual Grants | for Option Term (1) | |||||||||||||||||||||||
| Number of | % of Total | |||||||||||||||||||||||
| Securities | Options | |||||||||||||||||||||||
| Underlying | Granted to | Exercise | ||||||||||||||||||||||
| Options | Employees in | Price | Expiration | 5% | 10% | |||||||||||||||||||
| Name | Granted | 2001 | ($/SH) | Date | ($) | $ | ||||||||||||||||||
| Eric J. Kuhn | 200,000 | 10 | % | $ | 0.60 | 11/14/11 | 195,467 | 311,249 | ||||||||||||||||
| (1) | The dollar amounts under these columns are the result of calculations based on the market price on the date of grant at the 5% and 10% rates required applicable regulations of the Securities and Exchange Commission and, therefore, are not intended to forecast possible future appreciation, if any, of the Common Stock price. |
Option Exercise and Fiscal Year-End Option Values
None of the Named Executive Officers exercised options during 2001.
2001 Fiscal Year-End Option Values
| Number of Securities | Value of Unexercised | |||||||
| Underlying Unexercised | In-the-Money | |||||||
| Options at Fiscal | Options at Fiscal | |||||||
| Year-End (#) | Year-End ($) | |||||||
| Name | (Exercisable/Unexercisable) | (Exercisable/Unexercisable) | ||||||
| Eric J. Kuhn | 311,059/791,453 | 77,477/166,770 | ||||||
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Comparison of Five-Year Cumulative Total Returns
Performance Graph for
Varsity Group, Inc.
Produced on 04/24/2002 including data to 12/31/2001
| Notes: |
| A. The lines represent monthly index levels derived from compounded daily returns that include all dividends. | |
| B. The indexes are reweighted daily, using the market capitalization on the previous trading day. | |
| C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used. | |
| D. The index level for all series was set to $100.0 on 02/15/2000. | |
| E. Data for Varsity Group, Inc. from 01/2001 to 12/2001 was provided by the client. |
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Agreements Regarding Employment
We have entered into an agreement with Mr. Kuhn.
Compensation.The compensation of Mr. Kuhn is determined by the board of directors provided that, according to his employment agreement, Mr. Kuhn will receive a salary of not less than $160,000 per year. Effective November 2000 the board of directors determined that Mr. Kuhn would receive an annual salary of $180,000. In addition, Mr. Kuhn is eligible for cash performance bonuses.
Stock Option Grants. The board of directors may grant stock options to Mr. Kuhn.
Termination of Agreements. Mr. Kuhn’s agreement may be terminated with or without cause by either Mr. Kuhn or us. If we terminate the agreement of Mr. Kuhn with cause, or if he resigns without good reason, he is only entitled to his base salary through the date of termination. If we terminate the agreement of Mr. Kuhn without cause or if Mr. Kuhn resigns for good reason, he is entitled to his base salary through the date of termination, together with his pro-rata bonus. In lieu of any further salary or bonus payments to Mr. Kuhn, we will pay an amount equal to twelve months’ salary, payable in twelve equal installments after termination of his employment. If there is a change in control of the Company, and if at anytime thereafter the employment of Mr. Kuhn is terminated without cause, or if Mr. Kuhn terminates his employment with good reason, we will pay his base salary through the date of termination at the rate in effect at the time, together with a pro-rata bonus. In lieu of any further salary or bonus payments to Mr. Kuhn, we will pay a severance payment in an amount equal to 150% of his base salary as of termination.
Noncompetition and Confidentiality.Mr. Kuhn may not compete with us or solicit our employees for a period of twelve months immediately following the termination of his relationship with us for any reason, whether with or without cause.
Confidentiality and Assignment of Inventions.Mr. Kuhn is also bound by a confidential information and invention assignment agreement that prohibits him from, among other things, disseminating or using confidential information about our business or clients in any way that would be adverse to us. Mr. Kuhn agreed to assign the Company all inventions, which he may develop during his employment.
REPORT OF THE COMPENSATION COMMITTEE OF
THE BOARD OF DIRECTORS OF THE COMPANY ON EXECUTIVE COMPENSATION
Compensation Philosophy
The Compensation Committee reviews the performance and compensation levels for executive officers and sets salary and bonus levels and option grants under the Company’s incentive plans. The objectives of the Compensation Committee are to establish, review and modify as appropriate the compensation plan of the Chief Executive Officer of the Corporation, to review the recommendations of the Chief Executive Officer of the Corporation with respect to the compensation plan of all other executive officers, to grant options and any other rights under the Corporation’s Second Amended and Restated 1998 Stock Option Plan, and to perform such other duties as may be delegated by the Board.
Base Salary
Base salaries of the executive officers are established by evaluating the requirements of the position and the contribution of the executive with respect to Company performance and the executive’s responsibilities. In determining executive officer salaries, the Compensation Committee generally sets base salaries at or below competitive levels, with total potential compensation (including bonuses and stock options) targeted at or above competitive levels. The Compensation Committee relies on, among other things, recommendations from the Chief Executive Officer in making such determinations.
The base salary received by Mr. Kuhn, our Chief Executive Officer, in 2001 was $180,000.
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Bonus Compensation
The Company paid annual cash bonuses to some of its executive officers based on several factors that the Compensation Committee considered relevant including performance. During fiscal year 2001, the Company awarded Mr. Kuhn cash bonuses totaling $280,000 for his ongoing services and performance. The Company may make additional cash bonuses to executive officers from time-to-time based on performance and other factors it considers relevant.
Long-Term Incentives
The Compensation Committee believes that equity ownership provides significant motivation to executive officers to maximize value for the Company’s stockholders and, therefore, periodically grants stock options under the Company’s incentive plans. The Compensation Committee determines the size and frequency of option grants for executive officers after consideration of recommendations of the Chief Executive Officer. Such recommendations are based upon the relative position and responsibilities of each executive officer, previous and expected contributions of each executive officer to the Company and previous option grants to such executive officers. Stock options granted to executive officers are generally incentive stock options with exercise prices that equal the fair market value of the Company’s Common Stock on the date of grant and vest in increments over a two-year period.
Section 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally sets a limit of $1 million on the amount of compensation paid to executive employees (other than enumerated categories of compensation, including performance-based compensation) that may be deducted by a publicly-held company. The Committee’s policy is to seek to qualify executive compensation for deductibility to the extent that such policy is consistent with the Company’s overall objectives and executive compensation policy. Compensation attributable to stock options granted under the Company’s stock incentive plans currently is excluded from the $1 million limit as “qualified performance-based compensation” under the rules contained in applicable Treasury regulations. None of the Company’s executive officers received compensation in 1999 in excess of the limits imposed under Section 162(m). The Compensation Committee intends to continue to qualify compensation attributable to stock options as “qualified performance-based compensation” within the meaning of Section 162(m).
COMPENSATION COMMITTEE
Allen Morgan
Andrew Oleszczuk
James Ulsamer
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION AND CERTAIN TRANSACTIONS
No interlocking relationship exists between our board of directors and the board of directors and compensation committee of any other company, nor have such interlocking relationships existed in the past.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the 2001 fiscal year, we made certain restricted stock awards to members of our board of directors. For a more detailed discussion of these awards, see the Director Compensation section included with the Election of Directors Proposal No.1 and No. 2.
Transactions with Baker & Taylor
On July 10, 1998, we entered into an Equity Investment and Operating Agreement, and other related agreements, with Baker & Taylor, Inc., our principal supplier of textbooks, fulfillment, shipping and handling services and a supplier of promotional, customer service and data base management services. In consideration for Baker & Taylor’s fulfillment and drop-ship services and assistance in developing our
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product and customer base, we sold Baker & Taylor 535,714 shares of our common stock at par value and granted a warrant to purchase an additional 107,143 shares of our common stock at a weighted average exercise price of $2.33 per share. In accordance with this agreement, James S. Ulsamer was elected to our board.
In February 1999, we issued a warrant to Baker & Taylor, Inc. to purchase 5,950 shares of our common stock at an exercise price of $2.33 per share. In February 1999, we issued to Baker & Taylor a warrant to purchase 62,500 shares of our common stock at an exercise price of $0.22 per share. In addition, we converted a bridge loan note in the amount of $500,000 issued in December 1998 into 173,611 shares of our Series B preferred stock. In August 1999, Baker & Taylor transferred its ownership interest in the Company to B&T Enterprises, L.L.C., a limited liability company owned by some of the stockholders of Baker & Taylor.
Effective October 1, 1999, we entered into a new Operating Agreement with Baker & Taylor and amended the other agreements governing our operating relationship. Baker & Taylor has agreed for a period of 18 months not to provide direct to consumer fulfillment services for any online textbook retailer serving students at colleges and universities, distance learning programs and high schools located in the United States that require students to purchase their textbooks, with the exception of any retailers who were existing customers of Baker & Taylor as of July 10, 1998, the date we initially contracted with Baker & Taylor. In return, we have agreed to use Baker & Taylor as our principal supplier. The exclusivity is automatically extended each semester to remain at 18 months as long as we agree with Baker & Taylor on the amount of inventory they need to acquire for the upcoming semester. The agreement provides that Baker & Taylor would provide its services initially for three years, subject to automatic annual extensions after the initial period.
We believe the terms of our agreements with Baker & Taylor were on terms no more favorable than those that would have been agreed upon by third parties on an arm’s-length basis.
In connection with our business, Baker & Taylor billed the Company an aggregate of $10,112,260 for Fiscal Year 2001, exclusive of freight costs.
Indebtedness of Management
On August 24, 1999, we sold to Mr. Kuhn and Mr. Levy shares of our common stock at a purchase price of $0.30 per share. Both Mr. Kuhn and Mr. Levy paid for these shares with full recourse promissory notes. The notes bear interest at a floating rate equal to the current Applicable Federal Rate, which was 5.74% for December 1999, and are due August 1, 2001. On December 31, 1999, the outstanding principal balance on each of these promissory notes was $62,123, which was also the highest outstanding balance during 1999. The shares purchased by Mr. Kuhn are subject to forfeiture based on conditions relating to his continued employment. These conditions lapse with respect to 82,831 shares on August 1, 2000 and with respect to 124,246 shares on August 1, 2001. Mr. Levy’s shares accelerated upon his separation, which was effective March 15, 2000. The terms of the sale of the shares of common stock to Mr. Kuhn and Mr. Levy and the terms of the promissory notes executed by Mr. Kuhn and Mr. Levy were negotiated on our behalf by the board of directors, excluding Mr. Kuhn and Mr. Levy. We believe the terms of these transactions with Mr. Kuhn and Mr. Levy were fair to us, but we are not certain if these transactions were on terms no more favorable than those that would have been agreed upon by third parties on an arm’s length basis.
On March 22, 2001, in recognition of his continuing and past contributions, the board voted to forgive the promissory note between the Company and Eric Kuhn dated August 1, 1999 in the amount of $62,123. Pursuant to the terms of his agreement, in August 2001 Mr. Levy paid the Company the full outstanding principal and interest balance on his promissory note.
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INDEPENDENT ACCOUNTANTS
The Company has selected PricewaterhouseCoopers LLP to continue as its independent accountants for the fiscal year ending December 31, 2002. PricewaterhouseCoopers LLP has informed the Company that it has no material direct or indirect interest in the Company. Our board of directors appointed PricewaterhouseCoopers LLP as our independent accountants on October 8, 1999.
Audit Fees
PricewaterhouseCoopers LLP billed the Company an aggregate of $56,790 in fees for professional services rendered in connection with the audit of the Company’s financial statements for the most recent fiscal year and the reviews of the financial statements included in each of the Company’s Quarterly Reports on Form 10-Q during Fiscal 2001.
Financial Information Systems Design and Implementation Fees
Pricewaterhouse Coopers LLP did not bill the Company for any professional services rendered to the Company and its affiliates for Fiscal 2001 in connection with financial information systems design or implementation, the operation of the Company’s information system or the management of its local area network.
All Other Fees
PricewaterhouseCoopers LLP did not bill the Company for any other services rendered to the Company and its affiliates for Fiscal 2001.
Audit Committee Report
The Audit Committee reviews the Company’s financial reporting process on behalf of the Board. Management is responsible for the Company’s internal controls and the financial reporting process. The independent auditors are responsible for expressing an opinion on the conformity of the Company’s audited financial statements to generally accepted accounting principles.
In this context, the Audit Committee has met and held discussions with management and the independent accountants. Management represented to the Audit Committee that the Company’s consolidated financial statements were prepared in accordance with the generally accepted accounting principles. The Audit Committee has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees).
The Audit Committee has received the written disclosures and letter from the independent accountants required by Independence Standards Board Standard No. 1 (Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees) and has discussed and confirmed the independence of the independent accountant.
Following the reviewed and discussions referred to above, the Audit Committee recommended to the Board that the Audited Financial Statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, for filing with the Securities and Exchange Commission.
| The Audit Committee | |
| Allen Morgan | |
| Andrew Oleszczuk |
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STOCKHOLDER PROPOSALS FOR 2003 ANNUAL MEETING
Pursuant to rules of the Securities and Exchange Commission, in order for stockholder proposals to be included in the Company’s proxy statement and proxy for the 2002 annual meeting of stockholders, such proposals must be received by the Secretary of the Company at the Company’s principal office in Washington, D.C. no later than January 15, 2003.
Any stockholder proposal not included in the proxy materials disseminated by the management of the Company for the Company’s 2002 annual meeting in accordance with Rule 14a-8 under the Exchange Act will be considered untimely for the purposes of Rules 14a-4 and 14a-5 under the Exchange Act if notice of the proposal is received after March 31, 2003. Management proxies will be authorized to exercise discretionary voting authority with respect to any stockholder proposal not included in such proxy materials for the Company’s annual meeting unless (a) the Company receives notice of such proposal by the date set forth above and (b) the conditions set forth in Rule 14a-4(c)(2)(i)-(iii) under the Exchange Act are met.
| By Order of the Board of Directors, |
|
| Jack Benson | ||
| Secretary |
Dated: May 15, 2002
STOCKHOLDERS ARE REMINDED TO SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE PROVIDED.
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VARSITY GROUP INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR
THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JUNE 25, 2002.
The undersigned hereby appoints Eric Kuhn, attorney and proxy, with power of substitution and revocation, to vote, as designated below, all shares of Common Stock that the undersigned is entitled to vote, with all powers that the undersigned would possess if personally present at the Annual Meeting (including all adjournments thereof) of Stockholders of Varsity Group Inc. to be held at 10:30 am local time on June 25, 2002, at the MONARCH HOTEL, 2401 M St., N.W. 20037, Washington, D.C.
EVERY PROPERLY SIGNED PROXY WILL BE VOTED IN THE MANNER SPECIFIED HEREON. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR EACH NOMINEE FOR DIRECTOR NAMED ON THE REVERSE SIDE AND FOR THE OTHER MATTERS DESCRIBED ON THE REVERSE SIDE.
PLEASE VOTE, DATE, AND SIGN ON THE OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
(CONTINUED AND TO BE DATED AND SIGNED ON THE REVERSE SIDE.)
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSALS.
SEE REVERSE SIDE
[X] PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE
PROPOSAL 1: ELECTION OF DIRECTORS — Nominee: Eric J. Kuhn
| [ ] FOR all nominees | [ ] WITHHOLD AUTHORITY for the nominee |
PROPOSAL 2: ELECTION OF DIRECTORS — Nominee: John T. Kernan
| [ ] FOR all nominees | [ ] WITHHOLD AUTHORITY for the nominee |
PROPOSAL 3: RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
| [ ] FOR | [ ] AGAINST | [ ] ABSTAIN |
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
CHANGE OF ADDRESS AND/OR COMMENTS MARK HERE [ ]
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK.
| SIGNATURE: | SIGNATURE: | DATE: |
NOTED: Please sign as name appears hereon. Joint owners EACH must sign. When signing as attorney, trustee, executor, administrator or guardian, please give your FULL title. If a corporation, please provide the full name of the corporation and the signature of the authorized officer signing on its behalf. If a partnership, please sign in partnership name by an authorized person.