UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
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 |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
THE PRINCETON REVIEW, 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.
|_| 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 was determined):
- --------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
5) Total fee paid:
- --------------------------------------------------------------------------------
|_| Fee paid previously with preliminary materials.
|_| 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:
- --------------------------------------------------------------------------------
[LOGO OF THE PRINCETON REVIEW]
April 28, 2003
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
(the "Annual Meeting") of The Princeton Review, Inc., which will be held on
Wednesday, June 11, 2003 at 9:00 a.m. at The Princeton Review, Inc., located at
2315 Broadway, New York, New York 10024.
Details of the business to be conducted at the Annual Meeting are given in
the attached Notice of Annual Meeting of Stockholders and the attached Proxy
Statement.
Whether or not you plan to attend the Annual Meeting, please complete,
sign, date and return the enclosed proxy promptly in the accompanying reply
envelope. If you decide to attend the Annual Meeting and wish to change your
proxy vote, you may do so automatically by voting in person at the Annual
Meeting.
We look forward to seeing you at the Annual Meeting.
Sincerely,
/s/ John S. Katzman
John S. Katzman
Chairman and Chief Executive Officer
New York, New York
THE PRINCETON REVIEW, INC.
2315 Broadway
New York, New York 10024
---------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
to be held on June 11, 2003
---------------
NOTICE IS HEREBY GIVEN that the 2003 Annual Meeting of Stockholders (the
"Annual Meeting") of The Princeton Review, Inc. ("The Princeton Review," "we,"
"us," or "our") will be held on Wednesday, June 11, 2003 at 9:00 a.m. at The
Princeton Review, Inc., located at 2315 Broadway, New York, New York 10024, for
the following purposes:
1. To elect two Class II directors to serve on our Board of Directors
until the 2006 Annual Meeting of Stockholders and until their
respective successors are duly elected and qualified;
2. To approve The Princeton Review, Inc. 2000 Stock Incentive Plan, as
amended and restated on March 24, 2003;
3. To ratify the selection of Ernst & Young LLP as our independent
auditors for the fiscal year ending December 31, 2003; and
4. To consider and act upon any other matters that may properly be
brought before the Annual Meeting and at any adjournments or
postponements thereof.
Any action may be taken on the foregoing matters at the Annual Meeting on
the date specified above, or on any date or dates to which, by original or later
adjournment, the Annual Meeting may be adjourned or to which the Annual Meeting
may be postponed.
The Board of Directors has fixed the close of business on April 23, 2003
as the record date for determining the stockholders entitled to notice of and to
vote at the Annual Meeting and at any adjournments or postponements thereof.
Only stockholders of record of our common stock, $.01 par value per share, at
the close of business on that date will be entitled to notice of and to vote at
the Annual Meeting and at any adjournments or postponements thereof. You are
requested to fill in and sign the enclosed form of proxy, which is being
solicited by the Board of Directors, and to mail it promptly in the enclosed
postage-prepaid envelope. Any proxy may be revoked by delivery of a later dated
proxy. Stockholders of record who attend the Annual Meeting may vote in person,
even if they have previously delivered a signed proxy.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Mark Chernis
Mark Chernis
Secretary
New York, New York
April 28, 2003
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND
PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE POSTAGE-PREPAID ENVELOPE
PROVIDED. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
THE PRINCETON REVIEW, INC.
2315 Broadway
New York, New York 10024
---------------
PROXY STATEMENT
---------------
FOR 2003 ANNUAL MEETING OF STOCKHOLDERS
to be held on June 11, 2003
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of The Princeton Review, Inc. ("The Princeton
Review," "we," "us," or "our") for use at the 2003 Annual Meeting of
Stockholders of The Princeton Review to be held on June 11, 2003, and at any
adjournments or postponements thereof (the "Annual Meeting"). At the Annual
Meeting, stockholders will be asked (1) to vote upon the election of two Class
II directors to our Board of Directors, (2) to vote upon the approval of The
Princeton Review, Inc. 2000 Stock Incentive Plan, as amended and restated on
March 24, 2003, (3) to ratify the selection of Ernst & Young LLP as our
independent auditors for the fiscal year ending December 31, 2003, and (4) to
act upon any other matters that may properly be brought before the Annual
Meeting and at any adjournments or postponements thereof.
This Proxy Statement and the accompanying Notice of Annual Meeting and
Proxy Card are first being sent to stockholders on or about April 30, 2003. The
Board of Directors has fixed the close of business on April 23, 2003 as the
record date for the determination of stockholders entitled to notice of and to
vote at the Annual Meeting (the "Record Date"). Only stockholders of record of
The Princeton Review's common stock, par value $.01 per share (the "Common
Stock"), at the close of business on the Record Date will be entitled to notice
of and to vote at the Annual Meeting. As of the Record Date, there were
27,275,122 shares of Common Stock outstanding and entitled to vote at the Annual
Meeting. Holders of Common Stock outstanding as of the close of business on the
Record Date will be entitled to one vote for each share held by them on the
Record Date.
The presence, in person or by proxy, of holders of at least a majority of
the total number of outstanding shares of Common Stock entitled to vote is
necessary to constitute a quorum for the transaction of business at the Annual
Meeting. The affirmative vote of the holders of a plurality of the shares of
Common Stock cast on the matter at the Annual Meeting (assuming a quorum is
present) is required for the election of Class II directors. The affirmative
vote of the holders of a majority of the shares of Common Stock cast on the
matter at the Annual Meeting (assuming a quorum is present) is required for each
of the approval of The Princeton Review, Inc. 2000 Stock Incentive Plan, as
amended and restated on March 24, 2003, the ratification of our auditors and the
approval of any other matters properly presented at the Annual Meeting. For the
purpose of determining whether the stockholders have approved matters other than
the election of directors under Delaware law, abstentions are treated as shares
present or represented and voting, so abstaining has the same effect as a
negative vote. Broker "non-votes," or proxies from brokers or nominees
indicating that such person has not received instructions from the beneficial
owner or other person entitled to vote such shares on a particular matter with
respect to which the broker or nominee does not have discretionary voting power,
are not counted or deemed to be present or represented for the purpose of
determining whether stockholders have approved that matter, but they are counted
as present for the purpose of determining the existence of a quorum at the
annual meeting.
Our stockholders are requested to complete, sign, date and promptly return
the accompanying Proxy Card in the enclosed postage-prepaid envelope. Shares
represented by a properly executed proxy received prior to the vote at the
Annual Meeting and not revoked will be voted at the Annual Meeting as directed
on the proxy. If a properly executed proxy is submitted and no instructions are
given, the proxy will be voted FOR the election of the two nominees for Class II
directors named in this Proxy Statement, FOR the approval of The Princeton
Review, Inc. 2000 Stock Incentive Plan, as amended and restated on March 24,
2003, and FOR ratification of the Board of Directors' selection of Ernst & Young
LLP as our independent auditors for the fiscal year ending December 31, 2003. It
is not anticipated that any matters other than those set forth in the Proxy
Statement will be presented at the Annual Meeting. If other matters are
presented, proxies will be voted in accordance with the discretion of the proxy
holders.
A stockholder of record may revoke a proxy at any time before it has been
exercised by filing a written revocation with the Secretary of The Princeton
Review at our address set forth above, by filing a duly executed proxy bearing a
later
date, or by appearing in person and voting by ballot at the Annual Meeting. Any
stockholder of record as of the Record Date attending the Annual Meeting may
vote in person whether or not a proxy has been previously given, but the
presence (without further action) of a stockholder at the Annual Meeting will
not constitute revocation of a previously given proxy.
The Princeton Review's 2002 Annual Report, including financial statements
for the fiscal year ended December 31, 2002, accompanies the proxy solicitation
materials. The Annual Report, however, is not part of the proxy solicitation
materials.
PROPOSAL 1: ELECTION OF DIRECTORS
Our Board of Directors currently consists of seven members and is divided
into three classes, Class I, Class II and Class III, with the directors in each
class serving for a term of three years and until their successors are duly
elected and qualified. The term of one class expires at each annual meeting of
stockholders.
At the Annual Meeting, two directors will be elected to serve until the
2006 Annual Meeting and until their successors are duly elected and qualified.
The Board of Directors has nominated Mr. Richard Katzman and Ms. Sheree T.
Speakman to serve as Class II directors (the "Nominees"). Each of the Nominees
is currently serving as a Class II director of The Princeton Review. The Board
of Directors anticipates that each of the Nominees will serve, if elected, as a
director. However, if any person nominated by the Board of Directors is unable
to accept election, the proxies will be voted for the election of such other
person or persons as the Board of Directors may recommend.
The Board of Directors recommends a vote FOR the Nominees.
Information Regarding Nominees and Directors
The following biographical descriptions set forth certain information with
respect to the two Nominees for election as Class II directors at the Annual
Meeting and the continuing directors whose terms expire at the annual meetings
of stockholders in 2004 and 2005, based upon information furnished to us by each
director.
Class II Nominees for Election at 2003 Annual Meeting -- Term to Expire in 2006
Richard Katzman, 46, has served as a director of our company since 1985.
Since 1997, Mr. Katzman has been the Chairman of the Board and Chief Executive
Officer of Kaz, Inc., a manufacturer of humidifiers, vaporizers and other
consumer appliances. From 1987 to 1997, Mr. Katzman served as President of Kaz,
Inc. Mr. Katzman is the brother of John S. Katzman, the Chairman and Chief
Executive Officer of our company. Mr. Katzman received a BA from Brown
University.
Sheree T. Speakman, 48, has served as a director of our company since
March 2000. Since 2001, Ms. Speakman has been Vice President of Services and
Support at EDmin.com, Inc., an enterprise solutions company focusing on K-12
education. Since December 2002, Ms. Speakman has been responsible for consulting
and professional development for EDmin.com. From 1998 to 2001, Ms. Speakman was
President and Chief Executive Officer of Fox River Learning, Inc., an education
consulting firm acquired by EDmin.com in 2001. From 1983 to 1998, Ms. Speakman
was a principal at Coopers & Lybrand LLP where she led their national efforts in
K-12 financial analysis and consulting. Ms. Speakman is also a director of
StandardsWork, Inc., an education consulting company that specializes in
standards-driven learning. Ms. Speakman received an AB from Albion College and
an MBA from the University of Chicago.
Class III Continuing Directors -- Term Expires in 2004
Richard Sarnoff, 44, has served as a director of our company since 1998.
Since 2000, Mr. Sarnoff has been President of the Corporate Development Group of
Random House, Inc. and in 2002 was elected to the Supervisory Board of Random
House's parent company, Bertelsman AG. From 1998 to 2000, Mr. Sarnoff was
Executive Vice President and Chief Financial Officer of Random House. From 1996
to 1998, Mr. Sarnoff served as Chief Financial Officer of Bantam Doubleday Dell,
a consumer book publisher, and from 1995 to 1998, he was Senior Vice President,
Corporate Development of Bantam Doubleday Dell. Mr. Sarnoff is also a director
of Audible, Inc., a company that provides spoken audio content, and a member of
several not-for-profit boards, including the Children's Museum of Manhattan, the
Center for Communications and the American Association of Publishers. Mr.
Sarnoff received a BA from Princeton University and an MBA from Harvard Business
School. Mr. Sarnoff was elected to our Board of Directors in accordance with the
terms of our stockholders' agreement which provided that, prior to our initial
public offering, Random House was entitled to have one representative serve on
our Board of Directors.
2
Howard A. Tullman, 57, has served as a director of our company since March
2000. Since September 2002, Mr. Tullman has served as President of Kendall
College, Evanston, Illinois. Since March 2000, Mr. Tullman has been the General
Manager of the Chicago High Tech Investors I, LLC, an Internet-oriented
investment fund. From September 2000 to July 2001, Mr. Tullman served as Chief
Executive Officer and director of Worldwide Xceed Group, Inc., an Internet
business consulting company. Mr. Tullman was hired by the Board of Directors of
Worldwide Xceed Group to reorganize the company. In May 2001, Worldwide Xceed
Group filed a voluntary petition for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code and was purchased by a third party in July 2001. From September
1996 to February 2000, Mr. Tullman was the Chief Executive Officer of Tunes.com,
Inc. and its predecessors, an Internet music site he helped found, which was
sold to EMusic.com, Inc. Mr. Tullman is the Chairman of the Board of The Cobalt
Group, a company that provides Internet services to automobile dealers and
manufacturers, and serves as a director of Showingtime.com, a company that
provides Internet services and software solutions to the real estate industry.
Mr. Tullman received a BA from Northwestern University and a JD from
Northwestern University School of Law.
Class I Continuing Directors -- Term Expires in 2005
John S. Katzman, 43, Chairman and Chief Executive Officer, founded our
company in 1981. Mr. Katzman has served as our Chief Executive Officer and
director since our formation. Mr. Katzman served as our President from 1981
until August 2000. Mr. Katzman is the brother of Richard Katzman, one of the
other members of the Board of Directors. Mr. Katzman received a BA from
Princeton University.
Dr. Frederick S. Humphries, 67, has served as a director of our company
since April 2002. Since January 1, 2002, Dr. Humphries has been President and
Chief Executive Officer of the National Association for Equal Opportunity in
Higher Education, an association of black colleges and universities that focuses
on increasing minority student enrollment. Dr. Humphries has served as a member
of the USDA Task Force of 1890 Land-Grant Institutions in addition to being
involved in various civic and community activities. From 1985 to 2001, Dr.
Humphries was the President of Florida Agricultural and Mechanical University in
Tallahassee, Florida. Dr. Humphries received a Ph.D. in physical chemistry from
the University of Pittsburgh, a BS from Florida A&M University, and has been
awarded honorary degrees from Vincennes University of Indiana, Thomas A. Edison
State College, Atlantic College & Theological Seminary (Nassau, Bahamas) and
Shaw University.
John C. Reid, 52, has served as a director of our company since March
2000. Since October 2001, Mr. Reid has been Executive-in-Residence at Cedar
Street Group, a venture capital company. From August 1999 to December 2001, Mr.
Reid was the Chief Executive Officer of Comet Systems.com, a company that
develops software for the Internet. From March until June of 2001, Mr. Reid also
served as an executive consultant to LearnNow, Inc., a professional education
management company acquired by Edison Schools, Inc., a private manager of public
schools. From 1996 to 1999, Mr. Reid served as Chief Operating Officer of Edison
Schools, Inc. From 1974 to 1996, Mr. Reid served in the Executive Management of
The Coca-Cola Company, including from 1985 to 1996 as Senior Vice President,
Coca-Cola USA and Chief Environmental Officer, The Coca-Cola Company. Mr. Reid
is also a member of the boards of directors of Tutor.com, Inc. and Eduneering,
Inc. Mr. Reid received a BA from Brandeis University and an MS from
Massachusetts Institute of Technology.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires our directors and executive officers, and persons who own more than 10%
of a registered class of our equity securities (collectively, "Section 16
reporting persons"), to file with the Securities and Exchange Commission ("SEC")
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of The Princeton Review. Section 16 reporting
persons are required by SEC regulations to furnish us with copies of all Section
16(a) forms they file. To our knowledge, based solely on a review of the copies
of such reports furnished to us and on written representations that no other
reports were required, during the fiscal year ended December 31, 2002, the
Section 16 reporting persons complied with all Section 16(a) filing requirements
applicable to them, except as follows: (i) Mr. Curtis Brown became Senior Vice
President, Chief Technology Officer on July 1, 2002 and filed a late Initial
Statement of Beneficial Ownership of Securities on Form 3 on July 22, 2002, and
(ii) Richard Katzman, John C. Reid, Richard Sarnoff, Sheree T. Speakman and
Howard A. Tullman each filed late Annual Statements of Changes in Beneficial
Ownership on Form 5 on February 26, 2003, each with respect to an option to
purchase 5,000 shares of our Common Stock granted on June 3, 2002.
3
The Board of Directors and Its Committees
The Board of Directors met four times during 2002. Each of the members of
the Board of Directors attended at least 75% of the meetings of the Board of
Directors and of the committees on which he or she served. The Board of
Directors has two standing committees: the audit committee and the compensation
committee. The Board of Directors does not have a standing nominating committee.
During 2002, the audit committee met four times and the compensation committee
met two times.
Audit Committee. On January 18, 2001, the Board of Directors adopted a
charter for the audit committee (the "Charter"). A copy of the Charter was
attached to the Proxy Statement for the 2002 Annual Meeting of Stockholders. The
Charter contains the audit committee's mandate, membership requirements and
duties and obligations. The audit committee oversees the company's financial
accounting and reporting processes on behalf of the Board of Directors. In
accordance with the Charter, the audit committee recommends an independent
accounting firm to audit our financial statements, reviews the scope and results
of audits with our independent auditors, considers the fees to be paid to our
auditors, reviews with management and our auditors our annual and interim
operating results, considers the adequacy of our internal accounting procedures
and controls and considers our auditors' independence. The audit committee
consists of John C. Reid, Sheree T. Speakman and Howard A. Tullman. Each member
of the audit committee is an "independent director" as defined in Rule 4200 of
the listing standards of the National Association of Securities Dealers, Inc.
Compensation Committee. The primary function of the compensation committee
is to determine management and executive compensation and establish fringe
benefit and other compensation policies. The compensation committee is also
responsible for the administration of our stock incentive plan, including
reviewing management recommendations with respect to grants of awards and taking
other actions as may be required in connection with our compensation and
incentive plans. The compensation committee consists of John C. Reid, Sheree T.
Speakman and Howard A. Tullman.
Our by-laws prescribe an advance notice procedure with regard to the
nomination, by a stockholder, of candidates for election as directors (the
"Nomination Procedure"). The by-laws provide that stockholders seeking to
nominate candidates for election as directors at an annual meeting of
stockholders must provide timely notice in writing. To be timely, a
stockholder's notice must be delivered to or mailed and received at our
principal executive offices not less than 60 days nor more than 90 days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders. However, in the event that the annual meeting is called for a date
that is not within 30 days before or after that anniversary date, notice by the
stockholder in order to be timely must be received not later than the close of
business on the tenth day following the date on which notice of the date of the
annual meeting was mailed to stockholders or made public, whichever first
occurs. Our by-laws also specify requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from making
nominations for directors at an annual meeting of stockholders. Any such
nomination should be mailed to: The Princeton Review, Inc., 2315 Broadway, New
York, New York 10024: Attn: Mark Chernis, Secretary.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 2002, John C. Reid, Sheree T.
Speakman and Howard A. Tullman served as the members of our compensation
committee. None of the members of our compensation committee is, or has been, an
officer or employee of ours or any of our subsidiaries. John Katzman, our
Chairman and Chief Executive Officer, serves as a director and member of the
compensation committee of Kaz, Inc. Richard Katzman, Chairman and Chief
Executive Officer of Kaz, Inc., serves as a director of our company.
Compensation of Directors
The Board of Directors believes that compensation for our independent
directors should be a combination of cash and equity-based compensation.
Employee directors are not paid for their service on the Board of Directors in
addition to their compensation as employees. Our independent directors do not
receive consulting, advisory or other compensatory fees from us in addition to
their compensation as directors.
In 2000, each of our non-employee directors, other than Dr. Humphries,
received an award of options to purchase 16,920 shares of Common Stock as
compensation for services as director. Richard Katzman received an additional
grant of options to purchase 25,380 shares of Common Stock in consideration for
past services as director. These options have an exercise price of $7.39 per
share. Each of these options vests as to 25% of the shares subject to the option
on the first anniversary
4
of the date of grant and as to an additional 6.25% of such shares each quarter
thereafter until fully vested, and each of the options has a term of 10 years,
subject to earlier termination in the event of termination of service as a
director.
In May 2002, the Board of Directors adopted The Princeton Review, Inc.
Non-Employee Director Compensation Plan (the "Director Compensation Plan"). The
Director Compensation Plan provides for annual compensation of our non-employee
directors comprised of cash and options granted under The Princeton Review, Inc.
2000 Stock Incentive Plan as set forth in the following table:
Option to purchase shares of our Common Stock granted on initial
appointment as director ...................................................... 15,000 shares
Annual director retainer (paid quarterly) .................................... $10,000
Additional annual retainer for committee chairs (paid quarterly) ............. $ 4,000
Option to purchase shares of our Common Stock in recognition of ongoing
service (granted each June 1 after the second anniversary
of appointment) .............................................................. 5,000 shares
Reimbursement of expenses related to board attendance ........................ Reasonable expenses
reimbursed as incurred
In accordance with the terms of the Director Compensation Plan, in May
2002, Dr. Humphries received an option to purchase 15,000 shares of Common Stock
in consideration for his appointment as director. This option has an exercise
price of $7.00 per share and vests as to 25% of the shares subject to the option
on the first anniversary of the date of grant and as to an additional 6.25% of
such shares each quarter thereafter until fully vested. This option has a term
of 10 years, subject to earlier termination in the event of termination of
service as a director.
In June 2002, each of our non-employee directors other than Dr. Humphries
received an option to purchase 5,000 shares of Common Stock in recognition of
their ongoing services as directors. These options have an exercise price of
$7.90 per share and vest as to 6.25% of such shares each quarter until fully
vested. Each of the options has a term of 10 years, subject to earlier
termination in the event of termination of service as a director.
We reimburse our directors for reasonable expenses they incur in attending
meetings of our Board of Directors and its committees.
5
REPORT OF THE AUDIT COMMITTEE
The information contained in this report shall not be deemed to be
"soliciting material" or "filed" or incorporated by reference in future filings
with the SEC, or subject to the liabilities of Section 18 of the Exchange Act,
except to the extent that we specifically incorporate it by reference into a
document filed under the Securities Act of 1933, as amended, or the Exchange
Act.
The audit committee has, among other activities, (i) reviewed and
discussed with management our audited annual financial statements for the fiscal
year ended December 31, 2002 and interim quarterly results, (ii) discussed with
Ernst & Young LLP, our independent auditors, the matters required to be
discussed by American Institute of Certified Public Accountants Auditing
Standards Board on Auditing Standards No. 61 "Communications with Audit
Committees," and (iii) considered the independence of Ernst & Young LLP, by
having discussions with representatives of Ernst & Young LLP, and received a
letter from them including disclosures required by the Independence Standards
Board Standard No. 1 "Independence Discussions with Audit Committees." On the
basis of the above, the audit committee has recommended to the Board of
Directors that our audited financial statements for the fiscal year ended
December 31, 2002 be included in our Annual Report on Form 10-K for the year
ended December 31, 2002.
Submitted by the audit committee of the Board of Directors
Sheree T. Speakman, Chairperson
John C. Reid
Howard A. Tullman
6
EXECUTIVE COMPENSATION
The following table shows the total compensation paid for the last three
fiscal years to our Chief Executive Officer and the other four most highly
compensated executive officers whose annual salary and bonus exceeded $100,000
in 2002. The individuals included in the following table are collectively
referred to as the "Named Executive Officers."
Summary Compensation Table
Long-Term
Compensation
Awards
----------------
Number of
Annual Compensation Securities
--------------------------------- Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation
- -------------------------------------- ------ ----------- ---------- ---------------- -------------------
John S. Katzman ...................... 2002 $400,000 -- -- --
Chairman and Chief 2001 400,000 $ 25,000 -- --
Executive Officer 2000 381,181 200,000 -- --
Mark Chernis ......................... 2002 305,347 -- 134,286(1) --
President, Chief Operating 2001 265,225 75,000 -- --
Officer and Secretary 2000 255,462 140,125 277,513 $ 4,654,550(2)
Stephen Quattrociocchi ............... 2002 269,315 -- 83,687(3) --
Executive Vice President, Test 2001 252,350 50,000 -- --
Preparation Services Division 2000 232,885 57,476 117,285 1,792,164(2)
Bruce Task ........................... 2002 279,292 -- 58,638(4) --
Executive Vice President, Princeton 2001 257,300 60,000 -- --
Review Ventures 2000 236,538 86,700 64,549 1,143,873(2)
Stephen Melvin ....................... 2002 250,687 -- 28,571(5) --
Chief Financial Officer and Treasurer 2001 210,000 55,000 100,000 --
2000 195,000 63,000 143,820 603,539(2)
- -----------
(1) Includes 34,286 options granted in lieu of a cash bonus for the 2002
fiscal year. These options were granted on March 31, 2003, are fully
vested and have an exercise price of $4.12 per share, the closing price of
our Common Stock on the date of grant.
(2) Represents the value of shares of our Common Stock, shares of common stock
of Student Advantage, Inc. and cash, all of which were issued to the
executives listed in the above table in exchange for outstanding phantom
stock units and stock appreciation rights in connection with the
termination of our phantom stock unit and stock appreciation rights plans
and the adoption of our 2000 Stock Incentive Plan as part of our
restructuring.
(3) Includes 33,687 options granted in lieu of a cash bonus for the 2002
fiscal year. These options were granted on March 31, 2003, are fully
vested and have an exercise price of $4.12 per share, the closing price of
our Common Stock on the date of grant.
(4) Includes 18,638 options granted in lieu of a cash bonus for the 2002
fiscal year. These options were granted on March 31, 2003, are fully
vested and have an exercise price of $4.12 per share, the closing price of
our Common Stock on the date of grant.
(5) These options were granted in lieu of a cash bonus for the 2002 fiscal
year on March 31, 2003, are fully vested and have an exercise price of
$4.12 per share, the closing price of our Common Stock on the date of
grant.
7
Option Grants in 2002
The following table shows grants of stock options to our Chief Executive
Officer and to the other Named Executive Officers during 2002. The exercise
price per share of each option was not less than the fair market value of the
Common Stock on the date of grant. All options shown in the following table vest
as to 6.25% of the total grant each quarter following the grant date until fully
vested. All of the options have a term of 10 years, subject to earlier
termination in the event of a termination of employment.
Potential realizable values are net of exercise price before taxes and are
based on the assumption that our Common Stock appreciates at the annual rate
shown, compounded annually, from the date of grant until the expiration of the
10-year term. These numbers are calculated based on the requirements of the SEC
and do not reflect our estimate of future stock price growth. Unless the market
price of the Common Stock appreciates over the option term, no value will be
realized from the option grants shown in the table below.
Individual Grants
---------------------------------------------------------
Potential Realizable
Value at Assumed
Percent of Annual Rates
Number of Total of Stock Price
Securities Options Appreciation
Underlying Granted to Exercise for Option
Options Employees in Price Expiration ---------------------------
Name Granted Fiscal Year per Share Date 5% 10%
- -------------------------------- ------------ -------------- ----------- ----------- ----------- -------------
John S. Katzman ................ -- -- -- -- -- --
Mark Chernis ................... 100,000 13.0% $ 7.65 4/23/12 $481,104 $1,219,213
Stephen Melvin ................. -- -- -- -- -- --
Stephen Quattrociocchi ......... 50,000 6.5% $ 7.65 4/23/12 $240,552 $ 609,606
Bruce Task ..................... 40,000 5.2% $ 7.65 4/23/12 $192,442 $ 487,685
Aggregated Option Exercises And Year-End Option Values
The following table provides information on options exercised during 2002,
and options held at year end, by the Named Executive Officers.
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at 2002 Year-End at 2002 Year-End
Acquired on Value ------------------------------- ------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------- ------------- ---------- ------------- --------------- ------------- --------------
John S. Katzman ................ -- -- -- -- -- --
Mark Chernis ................... -- -- 210,701 166,812 $75,188 --
Stephen Melvin ................. -- -- 123,876 119,944 -- --
Stephen Quattrociocchi ......... -- -- 115,160 52,125 $49,997 --
Bruce Task ..................... -- -- 56,992 47,557 $77,102 --
Employment Agreements
We have entered into employment agreements with each of our Named
Executive Officers. The specific material terms of each of these employment
agreements are set forth in the table below. Each of the agreements provides for
an annual base salary that increases by 3% each year and includes a performance
bonus calculated as a percentage of annual base salary. Each agreement provides
for an initial term ending February 14, 2004 with automatic renewal for
additional two-year periods on each termination date of the preceding term of
the agreement until the executive voluntarily terminates employment or until we
give written notice of non-renewal at least six months prior to the anniversary
date of the agreement.
Certain of the employment agreements grant the executive options to
purchase shares of our Common Stock at a price equal to the fair market value of
our Common Stock on the grant date. These stock options are subject to the
provisions of our stock incentive plan. The stock options granted to each
executive vest in equal quarterly installments until the fourth anniversary of
the date of the option grant. Regardless of these vesting provisions, the stock
options become 100% exercisable upon the occurrence of a "change in control," as
defined in our stock incentive plan.
8
Under these agreements, if we terminate the executive's employment without
cause or if we do not renew the agreement, we have agreed to pay the executive
his annual base salary, and, in certain cases, to reimburse the executive for
any payments he makes to maintain medical and dental insurance, for a specified
amount of time following termination.
Each executive has agreed not to compete with us in the business of
providing assistance with respect to preparation for standardized examinations
or the college, professional school, or graduate school admissions process for
18 months following the expiration or termination of his agreement. Each
executive has also agreed that for 18 months after the expiration or termination
of his agreement, he will not solicit the services of any of our employees or
our franchisees' employees, and he will not take any action that results, or
might reasonably result, in any employee ceasing to perform services for us or
any of our franchisees and then commencing services for the executive.
Certain Material Terms of Employment Agreements with Named Executive Officers
Performance Bonus
Initial As Percentage of Number of Duration of
Date of Annual Base Annual Base Options Severance
Executive Agreement Salary Salary Granted Payments
- ------------------------------ ----------- ------------- ------------------ ---------------- -------------
John S. Katzman .............. 4/11/02 $400,000 Up to 100% -- 18 months(3)
Mark Chernis ................. 4/10/02 320,000 Up to 50% 100,000(1) 18 months(3)
Stephen Melvin ............... 10/15/01 250,000 Up to 50% 100,000(2) 10 months
Steve Quattrociocchi ......... 4/10/02 275,000 Up to 50% 50,000(1) 12 months
Bruce Task ................... 4/15/02 265,225 7.5 - 60% 40,000(1) 12 months(4)
- -----------
(1) Stock option exercise price of $7.65 per share.
(2) Stock option exercise price of $5.20 per share.
(3) Severance to be paid on termination also includes reimbursement for
medical and dental insurance payments for the duration of the specified
period.
(4) Severance to be paid on termination also includes reimbursement for
medical and dental insurance payments for the number of weeks equal to
twice the number of years Mr. Task was employed by us. Additionally, if
Mr. Task voluntarily terminates his employment, we have agreed to pay him
his base salary for six months following such termination.
Report on Executive Compensation
The compensation committee (the "Compensation Committee") of the Board of
Directors sets the compensation of the Chief Executive Officer, considers the
design and effectiveness of the compensation program for the other executive
officers of the company and approves the final compensation package, employment
agreements and stock option grants for all executive officers. The Compensation
Committee is composed entirely of outside directors who have never served as
officers of The Princeton Review.
Executive Compensation Objectives and Philosophy. The objective of The
Princeton Review's executive compensation program is to attract, retain and
motivate talented executives who are critical for the continued growth and
success of the company and to align the interests of these executives with those
of our stockholders. In order to achieve this objective, in addition to annual
base salaries, the executive compensation program utilizes a combination of
annual incentives through cash bonuses and long-term incentives through
equity-based compensation. In establishing overall executive compensation
levels, the Compensation Committee considers a number of criteria, including the
executive's scope of responsibilities, prior and current period performance,
compensation levels for similar positions at companies in our industry and
attainment of individual and overall company performance objectives. The
Princeton Review's policy is to enter into employment agreements with all
executive officers. These employment agreements are typically for an initial
term of two years, renewing automatically for additional two-year periods, and
set forth initial base salary levels and bonus ranges, with minimum increases
provided for within a specified range.
Base Salary. In establishing base salaries, the Compensation Committee
primarily considers prior and current period performance, scope of
responsibilities and compensation levels for similar positions at companies
similar to The Princeton Review. Base salaries are generally specified under
employment agreements with executive officers, providing for minimum yearly
increases within a specified range. Each executive officer's base salary is
reviewed annually and adjusted based upon the specific terms of his or her
employment agreement and overall company and individual performance.
9
Annual Incentives. In addition to base salaries, executive officers are
eligible to receive annual cash bonuses. Cash bonuses payable to executives are
based primarily upon achievement of specified individual and company performance
objectives. Minimum annual bonus eligibility is generally set forth in the
executive's employment agreement and is expressed as a percentage of base
salary. For the 2002 fiscal year, executive officers of the company received a
bonus, which was determined after an evaluation of the level of attainment of
specified individual and company wide performance goals. None of the Named
Executive Officers accepted cash bonuses for the 2002 fiscal year in order to
maintain total company cash bonus payments for the 2002 fiscal year within
budget goals. In lieu of cash bonuses, certain of our executive officers agreed
to accept options. For the Named Executive Officers, theses option grants are
discussed above under "Summary Compensation Table."
Long-Term Equity-Based Incentive Awards. Long-term equity-based incentives
are provided by the company to executive officers through the granting of stock
options. Stock option grants are designed to align the executive's interests
with those of the stockholders and provide each executive officer with a
significant incentive to manage the company in a manner which maximizes
stockholder value. Stock options are granted pursuant to The Princeton Review,
Inc. 2000 Stock Incentive Plan, which also authorizes grants of restricted and
deferred stock awards. The Compensation Committee determines the size of the
stock option grants according to each executive's position with, and
contribution to, the company and sets a level it considers appropriate to create
a meaningful opportunity for stock ownership. In addition, the Compensation
Committee takes into account each individual's potential for future
responsibility and promotion, the levels of equity ownership of executives in
similar positions at comparable companies and the number of options held by that
individual at the time of the new grant. Mark Chernis, Steve Quattrociocchi and
Bruce Task received option grants during the 2002 fiscal year. The material
terms of these stock option grants are described above in "Option Grants in
2002."
Chief Executive Officer Compensation. The principal factors considered by
the Compensation Committee for Mr. Katzman's compensation package are generally
the same as those considered by the Compensation Committee in relation to the
compensation of the other executive officers, with the exception that Mr.
Katzman's compensation does not have a long term equity-based incentive
component, since Mr. Katzman already holds a large percentage of the company's
stock. Mr. Katzman's base salary for the fiscal year 2002 was $400,000, which
was consistent with the terms of his employment agreement and was set by the
Compensation Committee after an evaluation of the company's performance for the
2001 fiscal year. Mr. Katzman's employment agreement also provides that his
bonus for 2002 is to be calculated utilizing a formula that takes into account
the company's success in achieving certain statement of operations-based
performance objectives and the company's stock price. Notwithstanding the
provisions of his employment agreement, Mr. Katzman did not accept a bonus for
the 2002 fiscal year in order to maintain total company bonus payments for the
2002 fiscal year within the budget goals. The material terms of Mr. Katzman's
employment agreement are described above under "Employment Agreements."
Tax Deductibility of Executive Compensation. Section 162(m) of the
Internal Revenue Code of 1986, as amended, limits the deductibility on The
Princeton Review's tax return of compensation over $1 million to any of the
Named Executive Officers unless, in general, the compensation is paid pursuant
to a plan which is performance-related, non-discretionary and has been approved
by the company's stockholders. The Compensation Committee's policy with respect
to section 162(m) is to make every reasonable effort to ensure that compensation
is deductible to the extent permitted while simultaneously providing the
company's executives with appropriate compensation for their performance. The
Princeton Review did not pay any compensation during 2002 that would be subject
to the limitations set forth in section 162(m).
Submitted by the Compensation Committee of the Board of Directors
Howard A. Tullman, Chairman
John C. Reid
Sheree T. Speakman
10
STOCK PERFORMANCE GRAPH
The following graph provides a comparison of the cumulative total
stockholder return on our Common Stock for the period from June 19, 2001 (the
date upon which our Common Stock commenced trading on the Nasdaq National
Market) to December 31, 2002 with the cumulative total return for (i) the Nasdaq
Stock Market Composite Index (the "NASDAQ Index") and (ii) a peer group that we
selected that consists of companies that provide various educational services.
The peer group is composed of Lightspan, Inc. (LSPN), PLATO Learning, Inc.
(TUTR), Renaissance Learning, Inc. (RLRN), and Sylvan Learning Systems, Inc.
(SLVN) (the "Peer Index"). The Peer Index no longer includes Riverdeep Group
plc. We removed Riverdeep Group from the Peer Index because it was de-listed
from the Nasdaq National Market in 2002, and its stock is no longer publicly
traded in the United States. Sylvan Learning Systems remains in the Peer Index,
but in March 2003, Sylvan Learning Systems agreed to sell its tutoring business
and learning centers, and to disband its division focusing on online-learning
initiatives. Accordingly, we will not include Sylvan Learning Systems in the
Peer Index for future periods.
Total return values were calculated based on cumulative total return
assuming the investment, at the closing price on June 19, 2001, of $100 in each
of the Common Stock, the NASDAQ Index and the Peer Index.
[THE FOLLOWING WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
6/19/01 12/31/01 12/31/02
--------- ---------- -----------
The Princeton Review, Inc. .......... $100 $ 80.53 $ 52.11
Nasdaq .............................. $100 $ 97.88 $ 67.02
Peer Index .......................... $100 $ 82.47 $ 49.45
Notwithstanding anything to the contrary set forth in any of our previous
filings under the Securities Act of 1933 or the Exchange Act that might
incorporate future filings made by us under those statutes, the preceding
Compensation Committee Report on Executive Compensation and the Stock
Performance Graph will not be incorporated by reference into any of those prior
filings, nor will such report or graph be incorporated by reference into any
future filings made by us under those statutes.
11
OWNERSHIP OF SECURITIES
The following table shows, as of March 31, 2003, information with respect
to the beneficial ownership of shares of our Common Stock by each of our current
directors or Nominees, each of our Named Executive Officers, each person known
by us to beneficially own more than 5% of our Common Stock, and all of our
directors and executive officers as a group. Beneficial ownership is determined
under the rules of the SEC and includes voting or investment power with respect
to the securities.
Unless indicated otherwise below, the address for each listed director and
officer is The Princeton Review, Inc., 2315 Broadway, New York, New York 10024.
Except as indicated by footnote, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them. The number of shares of Common Stock outstanding
used in calculating the percentage for each listed person includes the shares of
Common Stock underlying options held by that person that are exercisable within
60 days following March 31, 2003, but excludes shares of Common Stock underlying
options held by any other person. Percentage of beneficial ownership is based on
27,275,122 shares of Common Stock outstanding as of March 31, 2003.
Percentage
Number of Shares Beneficially
Name of Beneficial Owner Beneficially Owned Owned
- -------------------------------------------------------------------------- -------------------- -------------
John S. Katzman(1) ................................................... 9,470,885 34.72%
SGC Partners II, LLC(2) .............................................. 2,478,016 9.09
1221 Avenue of the Americas
New York, NY 10020
Random House TPR, Inc.(3) ............................................ 2,221,631 8.15
1745 Broadway
New York, NY 10036
Mazama Capital Management, Inc.(4) ................................... 1,683,150 6.17
One S.W. Columbia, Suite 1860
Portland, OR 97258
Liberty Wanger Asset Management, L.P.(5) ............................. 1,400,000 5.13
227 W. Monroe Street, Suite 3000
Chicago, IL 60606
Mark Chernis(6) ...................................................... 696,090 2.53
Bruce Task(7) ........................................................ 308,196 1.13
Stephen Melvin(8) .................................................... 196,815 *
Stephen Quattrociocchi(9) ............................................ 243,681 *
Frederick S. Humphries(10) ........................................... 3,750 *
Richard Katzman(11) .................................................. 40,281 *
John C. Reid(12) ..................................................... 13,628 *
Richard Sarnoff(13) .................................................. 12,571 *
Sheree T. Speakman(12) ............................................... 13,628 *
Howard A. Tullman(12) ................................................ 24,316 *
All executive officers and directors as a group (16 persons)(14) ..... 11,712,413 41.44%
- -----------
* Less than one percent.
(1) Includes 102,160 shares held by Mr. Katzman's wife. Mr. Katzman disclaims
beneficial ownership of these shares, except to the extent of his
pecuniary interest. Also includes 1,246,748 shares held by Katzman
Business Holdings, L.P. and 130 shares held by Katzman Management, Inc.
Katzman Management is the general partner of Katzman Business Holdings and
is wholly owned by Mr. Katzman. Also includes 2,308,411 shares held by Mr.
Katzman that Mr. Katzman pledged to Reservoir Capital Partners, L.P. as
security in connection with Mr. Katzman's personal guaranty of debt
obligations of Student Advantage, Inc. to Reservoir Capital Partners and
other lending parties.
(footnotes continued on next page)
12
(footnotes continued from previous page)
(2) SGC Partners II is a wholly-owned subsidiary of SG Merchant Banking Fund,
L.P. The general partner of SG Merchant Banking Fund is SG Capital
Partners, LLC. The managing member of SG Capital Partners is SG Cowen
Securities Corporation. As a result of these relationships, SG Merchant
Banking Fund, SG Capital Partners and SG Cowen Securities Corporation may
each be deemed to share beneficial ownership of these shares. Each of
these entities disclaims beneficial ownership.
(3) Random House TPR, Inc. is a wholly-owned subsidiary of Random House, Inc.
(4) Mazama Capital Management, Inc. has sole voting power with respect to
1,454,150 shares and sole power to dispose of or direct the disposition of
1,683,150 shares.
(5) Liberty Wanger Asset Management, L.P. is a limited partnership whose
general partner is WAM Acquisition GP, Inc. Liberty Acorn Trust is a
discretionary client of Liberty Wanger Asset Management on whose behalf
certain of these shares were acquired. Liberty Wanger Asset Management,
WAM Acquisition GP and Liberty Acorn Trust share voting and dispositive
power over these shares and may each be deemed to share beneficial
ownership of these shares.
(6) Includes 279,243 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of March 31, 2003.
(7) Includes 83,142 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of March 31, 2003.
(8) Includes 173,937 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of March 31, 2003.
(9) Includes 163,473 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of March 31, 2003.
(10) Includes 3,750 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of March 31, 2003.
(11) Includes 32,663 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of March 31, 2003.
(12) Includes 13,628 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of March 31, 2003.
(13) Includes 12,571 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of March 31, 2003.
(14) Includes 991,461 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of March 31, 2003.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Random House, Inc.
During 2002, we derived a total of approximately $3.5 million in revenue
from royalties, marketing fees, advances, copy editing fees and other fees from
Random House, Inc. under a number of publication agreements. Random House,
through its subsidiary Random House TPR, Inc., beneficially owned approximately
8.15% of our Common Stock, as of March 31, 2003. Richard Sarnoff, President of
the Corporate Development Group of Random House, also serves on our Board of
Directors.
We believe that our transactions with Random House were in our best
interests and were made on terms no less favorable to us than could have been
obtained from unaffiliated third parties.
Acquisition of Princeton Review of Boston, Inc. and Princeton Review of New
Jersey, Inc.
On March 2, 2001, we acquired the assets comprising the businesses of two
of our former franchisees, Princeton Review of Boston, Inc. and Princeton Review
of New Jersey, Inc. Robert L. Cohen, who became our Executive Vice President,
K-12 Services division immediately following this transaction, is co-founder and
50% owner of Princeton Review of Boston and
13
co-founder and 47.5% owner of Princeton Review of New Jersey. Upon the
consummation of this acquisition, Mr. Cohen executed an employment agreement
with us. In addition, Joel Rubin, the spouse of Linda Nessim-Rubin, our
Executive Vice President, Communications, is an employee and 5% owner of
Princeton Review of New Jersey and is an employee of Princeton Review of Boston.
The total purchase price paid by us in connection with this acquisition
was approximately $13.8 million and was determined through arm's length
negotiations between us and the sellers, including Mr. Cohen. Approximately
$10,175,000 of the purchase price was paid in cash at the time of the closing
and the remaining $3,625,000 was paid by delivery of two subordinated promissory
notes. Mr. Cohen's interest in the consideration paid by us for the assets of
these businesses corresponds to his percentage ownership in Princeton Review of
Boston and Princeton Review of New Jersey. Mr. Cohen also received a payment
from us in the amount of $200,000 in consideration for the non-competition and
non-solicitation restrictions set forth in the asset purchase agreement relating
to the transaction.
Mr. Rubin's interest in the consideration paid by us for the assets of
Princeton Review of New Jersey corresponds to his 5% equity interest in that
company. Mr. Rubin's interest in the consideration paid by us for the assets of
Princeton Review of Boston is governed by a long-term employment agreement that
gives him a right to a bonus equal to 5% of the proceeds from the sale of the
assets of Princeton Review of Boston.
Other Transactions
Under an employment agreement with Mark Chernis, our President and Chief
Operating Officer, we agreed to lend Mr. Chernis on a fully non-recourse basis
up to an aggregate principal amount of $500,000. The loan is payable in four
consecutive, equal annual installments with the first payment to be made on the
earlier of the fourth anniversary of the loan or 60 days after termination of
employment, subject to earlier prepayment upon the occurrence of specified
events. The loan accrues interest at 7.3% per year and is secured by 178,316
shares of our Common Stock owned by Mr. Chernis. The loan is evidenced by a
promissory note and a pledge and security agreement entered into on November 27,
2001, and a second promissory note entered into on March 7, 2002. As of March
31, 2003, $500,000 had been advanced and was outstanding under the loan, and
$500,000 is the largest principal amount outstanding since the loan was made.
Under an employment agreement with Bruce Task, our Executive Vice
President, Princeton Review Ventures, we agreed to lend Mr. Task on a fully
non-recourse basis up to an aggregate principal amount of $500,000. The loan is
payable in four consecutive, equal annual installments with the first payment to
be made on the earlier of the fourth anniversary of the loan or 60 days after
termination of employment, subject to earlier prepayment upon the occurrence of
specified events. The loan accrues interest at 7.3% per year and is secured by
120,750 shares of our Common Stock owned by Mr. Task. The loan is evidenced by a
promissory note and a pledge and security agreement entered into on August 15,
2001. As of March 31, 2003, $500,000 had been advanced and was outstanding under
the loan, and $500,000 is the largest principal amount outstanding since the
loan was made.
Under an employment agreement with Steven Hodas, our Executive Vice
President, Strategic Development, we agreed to lend Mr. Hodas on a fully
non-recourse basis up to an aggregate principal amount of $250,000 for a
purchase of real estate. The loan had a three-year term subject to earlier
prepayment upon the occurrence of specified events, and accrued interest at 7.3%
per year. The loan was secured by 53,001 shares of our Common Stock owned by Mr.
Hodas and was evidenced by a promissory note and security agreement entered into
on September 19, 2000. In October 2002, Mr. Hodas paid the entire $85,000 of
principal outstanding under the loan and $13,204 in accrued interest. As of
March 31, 2003, there was no principal or accrued interest outstanding under the
loan.
On July 30, 2002, the Sarbanes-Oxley Act of 2002, a broad accounting and
corporate governance reform act, became law. Among other things, the
Sarbanes-Oxley Act prohibits us from entering into personal loans to or for any
of our directors or executive officers. We entered into the transactions
described above before the passage of the Sarbanes-Oxley Act. In accordance with
the Sarbanes-Oxley Act, we will not modify the terms of these existing
arrangements or enter into any new personal loans with any of our directors or
executive officers.
14
PROPOSAL 2: APPROVAL OF THE PRINCETON REVIEW, INC.
2000 STOCK INCENTIVE PLAN (AS AMENDED AND RESTATED ON MARCH 24, 2003)
The complete text of The Princeton Review, Inc. 2000 Stock Incentive Plan,
as amended and restated on March 24, 2003, is set forth in Exhibit A hereto. The
following summary of the material features of the plan is qualified in its
entirety by reference to Exhibit A.
On March 24, 2003, our Board of Directors approved amendments to The
Princeton Review, Inc. 2000 Stock Incentive Plan (as amended and restated, the
"Plan") to (1) increase the number of shares of Common Stock available for
issuance under the Plan from 3,595,500 shares to 4,595,500 shares (i.e., a
1,000,000 share increase), (2) provide for automatic annual increases in the
number of underlying shares of Common Stock available for issuance under the
Plan by an amount equal to the least of (i) 2.25% of the total shares of Common
Stock issued and outstanding as of the end of our prior fiscal year, (ii)
750,000 shares, or (iii) a lesser amount determined by the Board of Directors,
(3) change the termination date of the Plan from April 1, 2010 to March 24, 2013
(i.e., ten years after the date of adoption of the amended and restated Plan by
the Board of Directors), and (4) make other, non-material changes to certain
provisions of the Plan. At the Annual Meeting, stockholders are being asked to
approve the Plan, as amended and restated. Prior to the March 24, 2003 increase,
there were 210,568 shares of Common Stock available for issuance under the Plan.
General. On April 1, 2000, our Board of Directors adopted, and our
stockholders approved, the Plan, providing for the authorization and issuance of
up to 2,538,000 shares of Common Stock, as adjusted. In June 2000 and June 2001,
an additional 211,500 and 846,000 shares, respectively, were authorized by the
Board of Directors and approved by our stockholders in June 2001. The purpose of
the Plan is to enable us to attract and retain employees, directors and
consultants who contribute to our success by their ability, ingenuity and
industry, and to enable such individuals to participate in our long-term success
and growth by giving them an equity interest in our company.
The primary reason the Board of Directors decided to amend the Plan is to
increase the number of shares available for issuance under the Plan in order to
provide sufficient shares to allow us to continue to attract and retain highly
qualified personnel. With more shares available for issuance under the Plan, the
Board of Directors felt that it would also be appropriate to extend the term of
the Plan so that instead of terminating on April 1, 2010, the Plan would
terminate on March 24, 2013. The other changes to the Plan approved by the Board
of Directors represent non-material, clarifying changes.
Stockholders are being asked to approve the Plan, as currently amended and
restated, in order to meet the requirements of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), which governs the deductibility
of compensation paid to certain executive officers, and Section 422 of the Code,
which governs incentive stock options.
Eligibility. Awards may be granted under the Plan to our current and
prospective employees, non-employee directors and consultants who hold, or will
hold, positions of responsibility and whose performance can have a significant
effect on our success. As of March 31, 2003, we had approximately 164 employees,
6 non-employee directors and 23 consultants participating in the Plan.
Administration. The Plan is administered by the Compensation Committee
(or, if required by applicable securities or tax laws, by a sub-committee of the
Compensation Committee). The Compensation Committee may, subject to the
provisions of the Plan, determine the persons to whom awards will be granted,
determine the type of award to be granted, the number of shares to be made
subject to awards, the exercise price and other terms and conditions of the
awards, and interpret the Plan and adopt, alter and repeal rules, guidelines and
practices governing the Plan. The Compensation Committee may delegate to any of
our officers the authority to make grants of awards to our employees who are not
our executive officers or directors. To the extent necessary to comply with
applicable securities or tax laws with respect to a grant of an award under the
Plan or as otherwise determined advisable by the Compensation Committee, the
terms of the grant of awards under the Plan are subject to the prior approval of
our Board of Directors.
Awards. The Plan authorizes the Compensation Committee to grant awards in
the form of stock options (including both incentive stock options within the
meaning of Section 422 of the Code and non-qualified stock options), restricted
shares of Common Stock and deferred stock awards. The terms and conditions of
awards granted under the Plan are set out in an agreement between us and the
individuals receiving the awards. To date, only incentive stock options and
non-qualified stock options have been awarded under the Plan. Such stock options
expire, unless earlier terminated, ten years after the date of grant and may be
exercised by delivery of notice of exercise to us accompanied by full payment of
the exercise price. Payment of the exercise price may be made in such manner as
the Compensation Committee may provide in the award, which may
15
include cash, delivery of unrestricted shares of our Common Stock owned by the
optionee for at least six months or an approved "broker cashless exercise"
procedure or any other manner permitted by law as determined by the Compensation
Committee.
Restricted Stock. The Plan provides for awards of Common Stock that are
subject to restrictions on transferability and other conditions imposed by the
Compensation Committee. Except as provided under the award agreement relating to
the restricted stock, a participant granted restricted stock will have all of
the rights of a stockholder. The vesting of an award of restricted stock is
subject to the discretion of the Compensation Committee.
Deferred Stock. The Plan provides for awards of Common Stock, the receipt
of which may be conditioned on certain events or criteria or may be deferred for
a period of time as determined by the Compensation Committee. The receipt of
deferred stock at the end of the deferral period is subject to the discretion of
the Compensation Committee.
Adjustments. The Plan and any outstanding awards shall be subject to
adjustment, as determined by the Compensation Committee, in the event of any
change in our outstanding Common Stock due to a stock split, stock dividend,
combination or reclassification of shares, recapitalization, merger or similar
event. In the event of such changes, the Compensation Committee may make a
proportionate adjustment to, among other things, the number of shares of Common
Stock reserved under the Plan, the number of shares of Common Stock covered by
outstanding awards and the exercise price per share underlying each outstanding
award.
Change in Control. In the event of a change in control of our corporate
ownership or management (as described in the Plan), awards granted under the
Plan may be assumed by a successor or substituted by a successor with equivalent
awards. If not assumed or substituted with equivalent awards, awards will become
immediately vested and/or exercisable, and any restrictions and deferral
limitations applicable to all outstanding restricted stock awards and deferred
stock awards under the Plan will lapse and such awards will be deemed fully
vested immediately prior to the effective date of the change in control. If, in
connection with or within one year of, a change in control, a successor
terminates without cause or constructively terminates a participant, or we fail
to cause such successor to assume a participant's employment agreement or we
breach such participant's agreement, all awards granted to such participant will
become immediately vested and/or exercisable, and the restrictions and deferral
limitations applicable to any awards will lapse and such awards will be deemed
fully vested.
Amendment and Termination. The Board of Directors or the Compensation
Committee may, from time to time, to the extent permitted by applicable law,
amend or terminate the Plan without the consent of participants, except that an
amendment that requires stockholder approval in order for the Plan to continue
to comply with any law, regulation or stock exchange requirement will not be
effective unless approved by the requisite vote of our stockholders. Neither the
Board of Directors nor the Compensation Committee may amend or terminate the
Plan without the consent of the affected participants if such amendment or
termination would have an adverse effect on outstanding awards.
Shares Subject to the Plan. The aggregate number of shares of Common Stock
that may be issued under the Plan is 4,595,500, subject to annual increases as
described above. The maximum number of shares that may be issued with respect to
awards granted under the Plan to any one person during the term of the Plan may
not exceed 1,250,000 shares.
On April 23, 2003, the closing price of our Common Stock was $4.98 per
share. As of that date, there were 962,302 shares of Common Stock available for
issuance under the Plan.
Federal Income Tax Consequences. The federal income tax consequences of
non-qualified stock options (NQSOs), incentive stock options (ISOs), restricted
stock and deferred stock granted under the Plan are generally as follows:
NQSOs. The grant of an NQSO will have no federal income tax consequences
to us or to a participant. A participant will recognize taxable ordinary income
at the time of exercise of the option in an amount equal to the excess of the
fair market value of the stock acquired at the time of exercise over the option
price, and we will ordinarily be entitled to a deduction for federal income tax
purposes for such amount.
The holder of stock acquired upon exercise of an NQSO will, upon a
subsequent disposition of such stock, generally recognize a short-term or
long-term capital gain or loss, depending upon the holding period of the stock,
equal to the difference between the amount realized on the sale and the basis in
such stock (the sum of the option price and the amount taxed as ordinary income
at the time of exercise).
16
ISOs. Neither the grant nor exercise of an ISO will generally have any
federal income tax consequences for a participant. The amount by which the fair
market value of the stock acquired upon the exercise of any ISO exceeds the
option price as of the date of exercise, however, is an item of "tax preference"
for purposes of computing the alternative minimum tax on individuals. If a
participant disposes of the stock acquired on the exercise of an ISO at least
two years after the date of the grant of the option and at least one year after
the date of exercise, the participant will recognize taxable long-term capital
gain or loss upon the disposition of the stock. In such circumstances, we would
not be allowed to take a deduction for federal income tax purposes in connection
with the grant or exercise of the option or the transfer of stock acquired upon
such exercise.
If, however, the participant disposes of his or her stock within the
holding periods described above, (1) the participant will recognize ordinary
income in an amount equal to the difference between the fair market value of
such stock on the date of exercise and the option price, provided that, if the
disposition is a sale or exchange with respect to which a loss (if sustained)
would be recognized by the participant and the amount realized from such sale or
exchange is less than the fair market value on the exercise date, then the
ordinary income will be limited to the excess of the amount realized upon the
sale or exchange of the stock over the option price; (2) we will be entitled to
a deduction for federal income tax purposes for such year in the amount of the
ordinary income so recognized; and (3) the participant will recognize capital
gain or loss, as the case may be, in an amount equal to the difference between
the amount realized upon such sale or exchange of the stock and the sum of the
option price plus the amount of ordinary income, if any, recognized upon such
disposition.
Restricted Stock. The grant of restricted stock is not a taxable event to
a participant, absent an election under Section 83(b) of the Code. If no
election is made, the participant will recognize income, taxable for income tax
purposes at ordinary rates, upon the lapse of the restrictions governing the
stock. The amount of the income will equal the fair market value of the stock
when the restrictions lapse less any amount paid by the participant for the
stock. If the participant makes a Section 83(b) election within 30 days of the
date of grant, he or she will be deemed to have received ordinary income at the
time of the grant of the restricted stock equal to the fair market value at the
date of grant less any amount paid by the participant for the stock, determined
without regard to the restrictions imposed thereon. If the restricted stock is
subsequently forfeited after a Section 83(b) election and before the
restrictions lapse, the participant is not entitled to claim the loss for income
tax purposes.
Deferred Stock. A participant receiving deferred stock generally will
recognize ordinary income equal to the fair market value of the deferred stock
on the date that the deferred stock is distributed to the participant, and the
capital gain holding period for such stock will also commence on that date. We
generally will be entitled to a deduction in the same amount as the amount of
ordinary income recognized by the participant in the year that such income is
taxable.
We will be entitled to a deduction for income tax purposes when the
participant recognizes ordinary income, either as a result of a Section 83(b)
election or because of the lapse of the restrictions. The amount of the
deduction will equal the amount of ordinary income recognized by the
participant.
Equity Compensation Plan Information. Since the amount of benefits to be
received by any participant is determined by the Compensation Committee, the
amount of future benefits allocated to any participant or group of participants
in any particular year is not determinable. The following table sets forth
certain information about shares of our stock outstanding and available for
issuance under the Plan as of March 31, 2003. The table details the number of
securities to be issued upon exercise of outstanding options under the Plan, the
weighted average exercise price of outstanding options and the number of
securities remaining available for future issuance under the Plan.
Number of Weighted-
securities to be average exercise
issued upon price of Number of securities
exercise of outstanding remaining available
outstanding options, for future issuance
options, warrants warrants and under equity
Plan category and rights rights compensation plans*
- --------------------------------- ------------------- ----------------- ---------------------
Stock incentive plan ......... 2,685,993 $ 6.94 930,282
- -----------
* The number of securities remaining available for future issuance under our
equity compensation plan is subject to annual increases as described
above.
The Board of Directors recommends a vote FOR the approval of The Princeton
Review, Inc. 2000 Stock Incentive Plan, as amended and restated on March 24,
2003.
17
PROPOSAL 3: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Upon recommendation of the audit committee of the Board of Directors, the
Board of Directors has appointed Ernst & Young LLP as our independent auditors
for the year ending December 31, 2003 and hereby requests that the stockholders
ratify such appointment. Representatives of Ernst & Young LLP are not expected
to be present at the Annual Meeting.
Audit Fees
The aggregate fees billed by Ernst & Young LLP for professional services
rendered for the audit of our annual financial statements for the fiscal year
ended December 31, 2002 and for the reviews of the financial statements included
in our Quarterly Reports on Form 10-Q for that year were approximately $300,000.
Financial Information Systems Design and Implementation Fees
There were no fees billed by Ernst & Young LLP for professional services
rendered for information technology services relating to financial information
systems design and implementation for the fiscal year ended December 31, 2002.
All Other Fees
The aggregate fees billed by Ernst & Young LLP for services rendered to
us, other than the services described above under "Audit Fees" and "Financial
Information Systems Design and Implementation Fees," for the fiscal year ended
December 31, 2002 were approximately $17,850. These other services consisted
primarily of services rendered in connection with acquisitions made by us. The
audit committee has considered whether the provision of the non-audit services
described herein is compatible with maintaining the independence of Ernst &
Young LLP.
The Board of Directors recommends a vote FOR the ratification of the
appointment of Ernst & Young LLP as independent auditors.
OTHER MATTERS
Solicitation of Proxies
The cost of solicitation of proxies in the form enclosed herewith will be
paid by The Princeton Review. In addition to the solicitation of proxies by
mail, our directors, officers and employees may also solicit proxies personally
or by telephone without additional compensation for such activities. We will
also request persons, firms and corporations holding shares in their names or in
the names of their nominees, which are beneficially owned by others, to send
proxy materials to and obtain proxies from such beneficial owners. We will
reimburse such holders for their reasonable expenses.
Stockholder Proposals
For stockholder proposals to be included in our proxy materials relating
to our Annual Meeting of Stockholders to be held in 2004 (the "2004 Annual
Meeting"), all applicable requirements of Rule 14a-8 promulgated under the
Exchange Act ("Rule 14a-8") must be satisfied and such proposals must be
received by us at our principal executive offices no later than Tuesday,
December 30, 2003.
Stockholders who do not wish to submit a proposal for inclusion in our
proxy materials relating to our 2004 Annual Meeting in accordance with Rule
14a-8 may submit a proposal for consideration at the 2004 Annual Meeting in
accordance with our bylaws. Such stockholders must provide timely notice in
writing. To be timely, a stockholder's notice must be delivered to or mailed and
received at our principal executive offices not less than 60 days nor more than
90 days prior to the anniversary date of the Annual Meeting. Accordingly, for
our 2004 Annual Meeting, proposals must be received at our principal executive
offices not earlier than Saturday, March 13, 2004 and not later than Monday,
April 12, 2004. However, in the event that the 2004 Annual Meeting is called for
a date that is not within 30 days before or after the anniversary date of the
Annual Meeting, notice by the stockholder in order to be timely must be received
not later than the close of business on the tenth day following the date on
which notice of the date of the 2004 Annual Meeting is mailed to stockholders or
made public, whichever first occurs. Our bylaws also specify requirements as to
the form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders.
18
All notices of proposals by stockholders, whether or not to be included in
our proxy materials, should be mailed to: The Princeton Review, Inc., 2315
Broadway, New York, New York 10024, Attn: Mark Chernis, Secretary.
Other Matters
The Board of Directors does not know of any matters other than those
described in this Proxy Statement that will be presented for action at the
Annual Meeting. If other matters are presented, proxies will be voted in
accordance with the best judgment of the proxy holders.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Mark Chernis
Mark Chernis
Secretary
Dated: April 28, 2003
19
Exhibit A
THE PRINCETON REVIEW, INC.
2000 Stock Incentive Plan
(As Amended & Restated Effective March 24, 2003)
Section 1. Purpose
The purpose of the Plan is to enable the Company and any Related Company
to attract and retain employees who contribute to the Company's success by
their ability, ingenuity and industry, and to enable such employees to
participate in the long-term success and growth of the Company by giving
them an equity interest in the Company.
Section 2. Definitions
Most definitions used in this document may be found in The Princeton
Review Glossary, attached. In addition, though, we will use the following
terms:
2.1. "Plan" shall mean The Princeton Review, Inc. 2000 Stock Incentive
Plan.
2.2. "Restatement Effective Date" shall mean March 24, 2003.
Section 3. Types of Awards.
Awards under the Plan may be in the form of (a) Non-Qualified Stock
Options, (b) Incentive Stock Options, (c) Restricted Stock and (d)
Deferred Stock.
Section 4. Administration
4.1. Composition of Committee. The Plan shall be administered by the
Committee; provided, however, that to the extent determined
necessary to satisfy the requirements for exemption from Section
16(b) of the Exchange Act, with respect to the acquisition or
disposition of securities hereunder, action by the Committee may be
by a committee composed solely of two or more "non-employee
directors," within the meaning of Rule 16b-3 as promulgated under
Section 16(b) of the Exchange Act, appointed by the Board or by the
Compensation Committee of the Board, and provided further, that to
the extent determined necessary to satisfy the requirements for the
exception for "qualified performance-based compensation" under
Section 162(m) of the Code, with respect to awards hereunder, action
by the Committee may be by a committee comprised solely of two or
more "outside directors," within the meaning of Code Section 162(m),
appointed by the Board or by the Compensation Committee of the
Board. Members of the Committee shall serve at the pleasure of the
Board.
4.2. Power and Authority of Committee. The Committee shall have the
authority to grant awards to eligible employees under the Plan; to
adopt, alter and repeal such administrative rules, guidelines and
practices governing the Plan as it shall deem advisable; to
interpret the terms and provisions of the Plan and any award granted
under the Plan; and to otherwise supervise the administration of the
Plan. In particular, and without limiting its authority and powers,
subject to the terms of the Plan, the Committee shall have the
authority:
4.2.1. to determine whether and to what extent any award or
combination of awards will be granted hereunder;
4.2.2. to select the individuals to whom awards will be granted;
4.2.3. to determine the number of shares of Stock to be covered by
each award granted hereunder;
4.2.4. to determine the terms and conditions of any award granted
hereunder, including, but not limited to, any vesting or
other restrictions based on performance and such other
factors as the Committee may determine, and to determine
whether the terms and conditions of the award are satisfied;
4.2.5. to determine the treatment of awards upon an employee's
retirement, disability, death, termination for cause or
other termination of employment;
4.2.6. to determine that amounts equal to the amount of any
dividends declared with respect to the number of shares
covered by an award (including Stock Options) (i) will be
paid to the holder of the award
A-1
currently, (ii) will be deferred and deemed to be
reinvested, (iii) will otherwise be credited to the holder
of the award, or (iv) that the holder of the award has no
rights with respect to such dividends;
4.2.7. to amend the terms of any award, prospectively or
retroactively;
4.2.8. to substitute new Stock Options for previously granted Stock
Options, or for options or other awards granted under other
plans; but
4.2.9. to not impair the rights of the award holder without his or
her consent.
4.3 Determinations of Committee Final and Binding. All determinations
made by the Committee pursuant to the provisions of the Plan shall
be final and binding on all persons, including the Company and Plan
participants.
4.4. Delegation of Authority. The Committee may from time to time
delegate to one or more officers of the Company or any Related
Company any or all of its authorities granted hereunder except with
respect to awards granted to persons subject to Section 16 of the
Exchange Act. The Committee shall specify the maximum number of
shares that the officer or officers to whom such authority is
delegated may issue pursuant to awards made hereunder.
4.5. Board Approval. Notwithstanding anything in the Plan to the
contrary, and to the extent determined to be necessary to satisfy an
exemption under Rule 16b-3 with respect to the grant of an award
hereunder (and, as applicable, with respect to the disposition to
the Company of Stock hereunder), or as otherwise determined
advisable by the Committee, the terms of the grant of awards (and,
as applicable, any related disposition to the Company) under the
Plan shall be subject to the prior approval of the Board. Any prior
approval of the Board, as provided in the preceding sentence, shall
not otherwise limit or restrict the authority of the Committee to
grant awards under the Plan, including, but not limited to, the
authority of the Committee to grant awards qualifying for the
exception for qualified performance-based compensation under Section
162(m) of the Code and the treasury regulations thereunder.
Section 5. Stock Subject to Plan; Individual Limit.
5.1. Eligibility. Officers and other employees of the Company and Related
Companies are eligible to be granted awards under the Plan. In
addition, a director of or consultant to the Company or a Related
Company who is not also an employee of the Company or a Related
Company will also be eligible to be granted awards under the Plan.
The participants under the Plan shall be selected from time to time
by the Committee, in its sole discretion, from among those eligible.
5.2. Shares of Stock subject to Plan. Immediately prior to the
Restatement Effective Date, there were 3,595,500 shares of Stock
reserved and available for distribution under the Plan. Effective as
of the Restatement Effective Date, that total was increased by
1,000,000 shares to a total of 4,595,500 shares of Stock reserved
and available for distribution under the Plan. This total shall be
automatically increased on January 1 of each year the Plan is in
effect by the least of (i) 2.25% of the total number of shares of
Stock outstanding on the last day of the immediately preceding
December, (ii) 750,000 shares, or (ii) a lesser amount determined by
the Board. The shares of Stock hereunder may consist of authorized
but unissued shares or treasury shares. Shares of Stock reserved and
available for distribution under the Plan shall be subject to
further adjustment as provided below.
5.3. Cancellation, Surrender or Termination of Awards. To the extent a
Stock Option is surrendered, canceled or terminated without having
been exercised, or an award is surrendered, canceled or terminated
without the award holder having received payment of the award, or
shares awarded are surrendered, canceled, repurchased at less than
Fair Market Value or forfeited, the shares subject to such award
shall again be available for distribution in connection with future
awards under the Plan. Notwithstanding the foregoing, surrender,
cancellation, termination or forfeiture of a Stock Option, to the
extent provided under Code Section 162(m) and the treasury
regulations thereunder, shall not be disregarded for purposes of
applying the individual limit on available shares described in
Section 5.3. At no time will the overall number of shares issued
under the Plan plus the number of shares covered by outstanding
awards under the Plan exceed the aggregate number of shares
authorized under the Plan.
5.4. Individual Limit. Notwithstanding anything to the contrary above,
the maximum number of shares of Stock that may be subject to Stock
Options granted to any one employee under the Plan shall not exceed
1,250,000.
A-2
5.5. Capital and Corporate Changes. Subject to the provisions of Section
11.1, in the event of any merger, reorganization, consolidation,
sale of all or substantially all of the Company's assets,
recapitalization, stock dividend, stock split, spin-off, split-up,
split-off, distribution of assets (including cash) or other change
in corporate structure affecting the Stock, an equitable
substitution or adjustment, as may be determined to be appropriate
by the Committee in its sole discretion, shall be made to prevent
dilution or enlargement of the rights of participants under the Plan
with respect to the aggregate number of shares reserved for issuance
under the Plan, the maximum number of shares of Stock available
under the individual limit described in Section 5.3, the identity of
the stock or other securities to be issued under the Plan, the
number of shares subject to outstanding awards and the amounts to be
paid by award holders, the Company or any Related Company, as the
case may be, with respect to outstanding awards. Notwithstanding the
foregoing, none of the changes in corporate structure affecting the
Stock described above shall impair the rights of an then-existing
award holder without his or her consent.
Section 6. Stock Options.
6.1. Types of Stock Options. The Stock Options awarded under the Plan may
be of two types: (a) Non-Qualified Stock Options and (b) Incentive
Stock Options. To the extent that any Stock Option does not qualify
as an Incentive Stock Option, it shall constitute a Non-Qualified
Stock Option.
6.2. Terms of Stock Options Generally. Subject to the following
provisions, Stock Options awarded under the Plan shall be in such
form and shall have such terms and conditions as the Committee may
determine:
6.2.1. Option Price. The option price per share of Stock
purchasable under a Stock Option shall be determined by the
Committee.
6.2.2. Option Term. The term of each Stock Option shall be
determined by the Committee, but in no case shall the term
of a Stock Option exceed ten years and a day.
6.2.3. Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as
shall be determined by the Committee. If the Committee
provides that any Stock Option is exercisable only in
installments, the Committee may waive such installment
exercise provisions at any time in whole or in part.
6.2.4. Method of Exercise. Stock Options may be exercised in whole
or in part at any time during the option period by giving
written notice of exercise to the Company specifying the
number of shares to be purchased, accompanied by payment of
the purchase price. Payment of the purchase price shall be
made in such manner as the Committee may provide in the
award, which may include cash (including cash equivalents),
delivery of unrestricted shares of Stock owned by the
optionee for at least six months or subject to awards
hereunder, any other manner permitted by law as determined
by the Committee, or any combination of the foregoing. The
Committee may provide that all or part of the shares
received upon the exercise of a Stock Option which are paid
for using Restricted Stock or Deferred Stock shall be
restricted or deferred in accordance with the original terms
of the Restricted Stock or Deferred Stock so used.
6.2.5. No Stockholder Rights. An optionee shall have neither rights
to dividends (other than amounts credited in accordance with
Section 4.2.6 nor other rights of a stockholder with respect
to shares subject to a Stock Option until the optionee has
given written notice of exercise and has paid for such
shares.
6.2.6. Surrender Rights. The Committee may provide that options may
be surrendered for cash upon any terms and conditions set by
the Committee.
6.2.7. Non-transferability. No Stock Option shall be transferable
other than by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations
order as defined by the Internal Revenue Code or the
Employee Retirement Income Security Act. During the
optionee's lifetime, all Stock Options shall be exercisable
only by the optionee. Notwithstanding the above, the
Committee may, in its discretion and subject to such
limitations and conditions as the Committee deems
appropriate, grant Non-Qualified Stock Options on terms that
permit the optionee to transfer the option to the optionee's
spouse, children, siblings, parents, or a trust in which
these persons have more than fifty percent of the beneficial
interest.
A-3
6.2.8. Termination of Employment. If an optionee's employment with
the Company or a Related Company terminates by reason of
death, disability, retirement, voluntary or involuntary
termination or otherwise, the Stock Option shall be
exercisable to the extent determined by the Committee. The
Committee may provide that, notwithstanding the option term
determined pursuant to Section 6.2, a Stock Option which is
outstanding on the date of an optionee's death shall remain
outstanding for an additional period after the date of such
death.
6.3. Special Terms for Incentive Stock Options. Notwithstanding the
provisions of Section 6.2, no Incentive Stock Option shall (a) have
an option price which is less than 100% of the Fair Market Value of
the Stock on the date of the award of the Incentive Stock Option
(or, in the case of an employee who owns Stock possessing more than
10% of the total voting power of all classes of stock of the Company
(or its parent or subsidiary corporation) (a "10% shareholder"),
have an option price which is less than 110% of the Fair Market
Value of the Stock on the date of grant), (b) be exercisable more
than ten years (or, in the case of a 10% shareholder, five years)
after the date such Incentive Stock Option is awarded, or (c) be
awarded more than ten years after the date of the adoption of the
Plan. Notwithstanding anything to the contrary in this Plan, only
employees of the Company or a parent or subsidiary of the Company
(as defined in Code Sections 424(e) and 424(f)) shall be eligible to
receive awards of Incentive Stock Options. By accepting an Incentive
Stock Option granted under the Plan, each such optionee agrees, and
any agreement or letter evidencing such option grant shall so
provide, that he or she will notify the Company in writing
immediately after such optionee makes a "disqualifying disposition"
(as provided in Sections 421, 422 and 424 of the Code and the
treasury regulations thereunder) of any Stock acquired pursuant to
the exercise of an Incentive Stock Option granted under the Plan.
Section 7. Restricted Stock.
Subject to the following provisions, all awards of Restricted Stock shall
be in such form and shall have such terms and conditions as the Committee
may determine:
7.1. The Restricted Stock award shall specify the number of rights to
purchase and number of shares of Restricted Stock that may be
purchased, the price, if any, to be paid by the recipient of the
rights to purchase Restricted Stock (which shall in no event be less
than par value), and the date or dates on which, or the conditions
upon the satisfaction of which, the Restricted Stock will vest. The
vesting of Restricted Stock may be conditioned upon the completion
of a specified period of service with the Company or a Related
Company, upon the attainment of specified performance goals or upon
such other criteria as the Committee may determine.
7.2. Stock certificates representing the Restricted Stock awarded to an
employee shall be registered in the employee's name, but the
Committee may direct that such certificates be held by the Company
on behalf of the employee. Except as may be permitted by the
Committee, no share of Restricted Stock may be sold, transferred,
assigned, pledged or otherwise encumbered by the employee until such
share has vested in accordance with the terms of the Restricted
Stock award. At the time Restricted Stock vests, a certificate for
such vested shares shall be delivered to the employee (or his or her
designated beneficiary in the event of death) free of all
restrictions.
7.3. The Committee may provide that the employee shall have the right to
vote or receive dividends on Restricted Stock. The Committee may
provide that Stock received as a dividend on, or in connection with
a stock split of, Restricted Stock shall be subject to the same
restrictions as the Restricted Stock.
7.4. Except as may be provided by the Committee, in the event of an
employee's termination of employment before all of his or her
Restricted Stock has vested, or in the event any conditions to the
vesting of Restricted Stock have not been satisfied prior to any
deadline for the satisfaction of such conditions set forth in the
award, the shares of Restricted Stock which have not vested shall be
forfeited, and the Committee shall provide that (i) the purchase
price paid by the employee with respect to such shares shall be
returned to the employee or (ii) a cash payment equal to such
Restricted Stock's Fair Market Value on the date of forfeiture, if
lower, shall be paid to the employee.
7.5. The Committee may waive, in whole or in part, any or all of the
conditions to receipt of, or restrictions with respect to, any or
all of the employee's Restricted Stock.
A-4
Section 8. Deferred Stock Awards.
Subject to the following provisions, all awards of Deferred Stock shall be
in such form and shall have such terms and conditions as the Committee may
determine:
8.1. The Deferred Stock award shall specify the number of shares of
Deferred Stock to be awarded to any employee and the Deferral Period
during which, and the conditions under which, receipt of the Stock
will be deferred. The Committee may condition the award of Deferred
Stock, or receipt of Stock or cash at the end of the Deferral
Period, upon the attainment of specified performance goals or such
other criteria as the Committee may determine.
8.2. Except as may be permitted by the Committee, Deferred Stock awards
may not be sold, assigned, transferred, pledged or otherwise
encumbered during the Deferral Period.
8.3. At the expiration of the Deferral Period, the employee (or his or
her designated beneficiary in the event of death) shall receive (i)
certificates for the number of shares of Stock equal to the number
of shares covered by the Deferred Stock award, (ii) cash equal to
the Fair Market Value of such Stock or (iii) a combination of shares
and cash, as the Committee may determine.
8.4. Except as may be provided by the Committee, in the event of an
employee's termination of employment before the end of the Deferral
Period, his or her Deferred Stock award shall be forfeited.
8.5. The Committee may waive, in whole or in part, any or all of the
conditions to receipt of, or restrictions with respect to, Stock or
cash under a Deferred Stock award.
Section 9. Tax Withholding.
9.1. Tax Withholding. Each employee shall, no later than the date as of
which the value of an award (or portion thereof) first becomes
includible in the employee's income for applicable tax purposes, pay
to the Company, or make arrangements satisfactory to the Committee
regarding payment of, any federal, state, local or other taxes of
any kind required by law to be withheld with respect to the award
(or portion thereof). The obligations of the Company under the Plan
shall be conditional on such payment or arrangements, and the
Company (and, where applicable, any Related Company), shall, to the
extent required by law, have the right to deduct any such taxes from
any payment of any kind otherwise due to the employee including, but
not limited to, the right to withhold shares of stock otherwise
deliverable to the employee with respect to any awards hereunder.
9.2. Use of Stock to Satisfy Withholding Obligations. To the extent
permitted by the Committee, and subject to such terms and conditions
as the Committee may provide, an employee may irrevocably elect to
have the withholding tax obligation or any additional tax obligation
with respect to any awards hereunder satisfied by (a) having the
Company withhold shares of Stock otherwise deliverable to the
employee with respect to the award, (b) delivering to the Company
shares of unrestricted Stock, or (c) through any combination of
withheld and delivered shares of Stock, as described in (a) and (b).
Section 10. Amendments and Termination.
The Board or the Committee may discontinue the Plan at any time and may
amend it from time to time. No such action of the Board or the Committee
shall require the approval of the stockholders of the Company, unless such
stockholder approval is required by applicable law or by the rules or
regulations of any securities exchange or regulatory agency, or is
otherwise determined necessary or desirable, in the sole discretion of the
Committee, to enable transactions associated with grants of Stock Options,
Restricted Stock and Deferred Stock, and purchases of Restricted Stock to
qualify for an exemption from Section 16(b) of the Exchange Act or to
qualify for the exception for qualified performance-based compensation
under Section 162(m) of the Code. No amendment or discontinuation of the
Plan shall adversely affect any award previously granted without the award
holder's written consent.
A-5
Section 11. Change in Control.
11.1. Vesting or Assumption of Obligations. Unless otherwise determined by
the Committee at the time of grant or by amendment (with the
holder's consent) of such grant, in the event of a Change in Control
all outstanding Stock Option awards under the Plan shall become
fully vested and exercisable and the restrictions and deferral
limitations applicable to all outstanding Restricted Stock and
Deferred Stock Awards under the Plan shall lapse and such awards
shall be deemed fully vested immediately prior to the effective date
of the Change in Control unless the surviving, continuing, or
purchasing corporation, or a parent or subsidiary thereof, as the
case may be (the "surviving corporation"), assumes such awards or
substitutes equivalent awards therefor. Any Stock Options which are
neither assumed or substituted for by the surviving corporation in
connection with the Change in Control nor exercised as of the
effective date of the Change in Control shall terminate and cease to
be outstanding as of the effective date of the Change in Control.
11.2. Termination of Employment. If in connection with or within one year
following a Change in Control, an employee's employment is
terminated by the successor corporation without Cause, or if the
employee then terminates employment after being Reassigned, all
awards then held by the employee under the Plan shall become fully
vested and exercisable, and the restrictions and deferral
limitations applicable to any such awards shall lapse and such
awards shall be deemed fully vested.
Section 12. General Provisions.
12.1. Additional Requirements. Each award under the Plan shall be subject
to the requirement that, if at any time the Committee shall
determine that (a) the listing, registration or qualification of the
Stock subject or related thereto upon any securities exchange or
under any state or federal law, or (b) the consent or approval of
any government regulatory body or (c) an agreement by the recipient
of an award with respect to the disposition of Stock is necessary or
desirable (in connection with any requirement or interpretation of
any federal or state securities law, rule or regulation) as a
condition of, or in connection with, the granting of such award or
the issuance, purchase or delivery of Stock thereunder, such award
shall not be granted or exercised, in whole or in part, unless such
listing, registration, qualification, consent, approval or agreement
shall have been effected or obtained free of any conditions not
acceptable to the Committee.
12.2. Plan Not a Contract of Employment. The Plan is not an employment
contract and neither the Plan nor any action taken hereunder shall
be construed as giving to a Participant the right to be retained in
the employ of the Company or a Related Company. The Company or, as
applicable, the Related Company may terminate the Participant's
employment as freely and with the same effect as if the Plan were
not in existence. Nothing set forth in the Plan shall prevent the
Company or a Related Company from adopting other or additional
compensation arrangements.
12.3. Determinations Not Uniform. Determinations by the Committee under
the Plan relating to the form, amount, and terms and conditions of
awards need not be uniform, and may be made selectively among
persons who receive or are eligible to receive awards under the
Plan, whether or not such persons are similarly situated.
12.4. Indemnification. No member of the Board or the Committee, nor any
officer or employee of the Company or a Related Company acting on
behalf of the Board or the Committee, shall be personally liable for
any action, determination or interpretation taken or made with
respect to the Plan, and all members of the Board and the Committee,
and all officers or employees of the Company and Related Companies
acting on their behalf, shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any
such action, determination or interpretation.
12.5. Awards not Includable for Benefit Purposes. Income recognized by an
employee pursuant to the Plan shall not be included in the
determination of benefits under any other executive compensation or
employee benefit or other compensatory plan of the Company or a
Related Company, or any entity controlled by the Company or a
Related Company, except as specifically provided in any such other
plan or as otherwise provided by the Committee.
12.6. Severability. If any provision of the Plan is held to be void,
illegal, unenforceable or otherwise in conflict with the law
governing the Plan, such provision shall be deemed to be restated to
reflect as nearly as possible the
A-6
original intentions of the parties in accordance with applicable
law, and the other provisions of the Plan shall remain in full force
and effect.
12.7. Legal Interpretation/Governing Law. The text of the Plan shall
control and the headings to the Sections are for reference purposes
only and do not limit or extend the meaning of any of the Plan's
provisions. Except as to matters of federal law, the Plan and all
rights thereunder shall be governed by, and construed in accordance
with, the laws of the State of New York, without reference to the
principles of conflicts of law thereof.
Section 13. Effective Date and Duration.
The Plan shall be effective on April 1, 2000, subject, to the extent
required by law, to approval by the Company's stockholders. The Plan shall
be amended and restated effective as of the Restatement Effective Date,
subject, to the extent required by law, to approval by the Company's
stockholders. No awards of Stock Options, Restricted Stock or Deferred
Stock shall be made under the Plan after the date that is 10 years from
the Restatement Effective Date.
A-7
The Princeton Review Glossary
In many documents and agreements used by The Princeton Review, we use certain
terms. In order that all of those documents refer to the same things in the same
way, we have created this Glossary.
1. "Agreed Value" is the fair market value of the Company as determined by
the Company through the valuation committee set up in the Stockholder's
Agreement.
2. "Board" shall mean the Board of Directors of the Company.
3. "Cause" shall mean:
(a) dishonesty or the willful engaging by an employee in illegal
conduct, if such acts materially injure the company;
(b) the willful and continued failure of an employee to perform the
material duties of his or her employment (other than any such
failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is
delivered to the employee which identifies the manner in which the
employee has not substantially performed his or her duties;
(c) the willful engaging by an employee in gross misconduct in
connection with the performance of his or her duties which is
materially injurious to his or her employer; or
(d) disloyalty towards the Company which results in material harm to the
Company, which specifically shall include, but not be limited to,
actions which are inconsistent with the fiduciary duty owed TPR
arising by law from employment as an officer and agent of TPR;
(e) provided however, that prior to termination for cause, the employee
shall have a reasonable opportunity to be heard before a special
meeting of the Board of Directors.
4. A "Change in Control" shall mean:
(a) an acquisition or acquisitions of 30% or more of the Company's then
issued and outstanding voting stock, with preferred stock on an
as-converted basis, that results in a change in the CEO or Chairman
of the Board, by an outside entity or entities (as defined below);
(b) a merger or consolidation of the Company, unless (1) following the
transaction, former stockholders of the Company continue to hold at
least 50% of the voting stock of the surviving entity or (2) the
transaction is effected to implement a recapitalization in which no
outside entity or entities acquire control of 50% or more of the
Company's voting stock;
(c) during any period of two consecutive years, individuals who at the
beginning of such period were members of the Board cease for any
reason to constitute at least a majority thereof (unless the
election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at
least two-thirds of the directors then still in office who were
directors at the beginning of such period);
(d) a liquidation or dissolution of the Company, or sale of
substantially all of its assets to an outside entity or entities; or
(e) the execution of a binding agreement which, if consummated, would
result in a Change in Control as defined above;
(i) provided, that, notwithstanding anything to the contrary in
the foregoing, neither the initial public offering of the
common stock of the Company, nor the temporary holding of
Company securities by an underwriter pursuant to an offering
of such securities, shall be deemed to constitute, or
otherwise be treated as, a Change in Control.
(ii) For purposes of this definition, an "outside entity"
includes "person" or "group" within the meaning of Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934 as
of April 1, 2000. Notwithstanding anything to the contrary
in the foregoing, an "outside entity" shall not include SG
Capital Partners, L.L.C.
5. "Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
6. "Common Stock" shall mean the common stock of the Company.
A-8
7. "Committee" shall mean the Compensation Committee of the Board or such
other committee appointed either by the Board or by such Compensation
Committee to administer the Plan.
8. "Company" shall mean The Princeton Review, Inc.
9. "Deferral Period" shall mean the period during which receipt of an award
of Deferred Stock shall be deferred.
10. "Deferred Stock" shall mean an award of deferred stock granted to an
employee under the Stock Incentive Plan.
11. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
12. "Incentive Stock Option" shall mean a Stock Option that is an "incentive
stock option" within the meaning of Section 422 of the Code.
13. "Fair Market Value" shall mean the closing sale price of the Stock on a
given date as reported on the NASDAQ, or such other national securities
exchange as may be designated by the Company, or, in the event that the
Stock is not listed for trading on a national securities exchange but is
quoted on an automated system, on such automated system. Until the Company
is public, Fair Market Value shall be set to the Agreed Value.
14. "Non-Qualified Stock Option" shall mean a Stock Option which is not an
Incentive Stock Option.
15. "Reassigned" shall mean:
(a) a material detrimental change in an employee's duties, titles or
reporting responsibilities from those in effect;
(b) the relocation of the employee by more than 50 miles from the office
at which he or she was based, or, if the employee consents to
relocation, the failure by TPR to pay the Executive's reasonable
moving expenses and indemnify him or her against loss realized in
the sale of his or her principal residence in connection with the
relocation;
(c) TPR's failure to have any successor assume the Agreement; or
(d) any other material breach by TPR of the Agreement.
16. "Related Company" shall mean any affiliate of the Company designated as
such by the Committee.
17. "Restricted Stock" shall mean an award of shares of Stock granted to an
employee pursuant to the Stock Incentive Plan.
18. "Stock" shall mean the common stock of the Company.
19. "Stock Incentive Plan" shall mean The Princeton Review, Inc. 2000 Stock
Incentive Plan, or any successor plan thereto.
20. "Stock Option" shall mean an award to purchase shares of Stock granted to
an employee pursuant to The Princeton Review's Stock Incentive Plan, which
may be either a Non-Qualified Stock Option or an Incentive Stock Option.
A-9
THE PRINCETON REVIEW, INC.
This Proxy is Solicited on Behalf of The Board Of Directors
The undersigned stockholder of The Princeton Review, Inc. (the "Company"),
hereby appoints John S. Katzman, Mark Chernis and Stephen Melvin and each of
them, with power of substitution to each, true and lawful Proxies of the
undersigned and hereby authorizes them to represent and vote, as specified
herein, all shares of common stock of the Company held of record by the
undersigned as of the close of business on April 23, 2003 at the Annual Meeting
of Stockholders of the Company to be held on Wednesday, June 11, 2003 at 9:00
a.m., local time, at The Princeton Review, Inc., located at 2315 Broadway, New
York, New York 10024 (the "Annual Meeting"), and any adjournments or
postponements thereof.
The shares represented by this proxy will be voted in the manner directed. If no
direction is given, the shares will be voted FOR the two nominees of the Board
of Directors listed in Proposal 1, FOR Proposal 2 and FOR Proposal 3. In their
discretion, the Proxies are each authorized to vote upon such other matters as
may properly come before the Annual Meeting and any adjournments or
postponements thereof.
PROPOSAL 1. Election of Directors
|_| FOR all nominees listed below |_| WITHHOLD authority to vote
for all nominees listed below
To withhold authority to vote for any individual nominee, strike a line
through the nominee's name in the list below:
Richard Katzman Sheree T. Speakman
Our Board of Directors unanimously recommends a vote FOR each of the
nominees named above.
PROPOSAL 2. To approve the Amended and Restated The Princeton Review, Inc. 2000
Stock Incentive Plan.
|_| FOR PROPOSAL 2 |_| AGAINST PROPOSAL 2 |_| ABSTAIN ON PROPOSAL 2
Our Board of Directors unanimously recommends a vote FOR the approval of
Proposal 2.
PROPOSAL 3. To ratify and approve the appointment of Ernst & Young LLP as
independent auditors of the Company for the fiscal year ending December 31,
2003.
|_| FOR PROPOSAL 3 |_| AGAINST PROPOSAL 3 |_| ABSTAIN ON PROPOSAL 3
Our Board of Directors unanimously recommends a vote FOR the approval of
Proposal 3.
(see reverse side)
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement dated April 28, 2003.
Date: _________________________________
Signature: ____________________________
Signature: ____________________________
(This Proxy should be marked, dated,
signed by the stockholder(s) exactly as
his or her name appears hereon, and
returned promptly in the enclosed
envelope. Persons signing in a fiduciary
capacity should so indicate. If shares
are held by joint tenants or as
community property, both should sign.)
PLEASE SIGN, DATE AND RETURN IMMEDIATELY