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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 000-32469
THE PRINCETON REVIEW, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3727603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2315 Broadway 10024
New York, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (212) 874-8282
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The Company had 27,258,479 shares of $0.01 par value common stock
outstanding at August 9, 2002.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)....................................................2
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001............................2
Consolidated Statements of Operations for the Three and Six Month Periods ended June 30, 2002
and 2001.........................................................................................3
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2002 and 2001............4
Notes to Unaudited Consolidated Financial Statements.............................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........11
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................17
Item 2. Changes in Securities and Use of Proceeds.......................................................17
Item 3. Defaults Upon Senior Securities.................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.............................................17
Item 5. Other Information...............................................................................18
Item 6. Exhibits and Reports on Form 8-K................................................................18
SIGNATURES .........................................................................................................19
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
June 30, December 31,
-------- ------------
2002 2001
-------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 12,428 $ 21,935
Accounts receivable, net 8,830 6,824
Notes receivable 1,060 1,841
Other receivables 1,272 792
Prepaid expenses 1,790 1,156
Securities, available for sale 199 1,002
Other assets 1,882 1,977
-------- --------
Total current assets 27,461 35,527
Furniture, fixtures, equipment and software development, net 10,444 10,161
Franchise costs, net 162 291
Territorial marketing rights, net 1,426 1,481
Publishing rights, net 1,260 1,296
Deferred income taxes 20,052 17,755
Investment in affiliates 764 516
Goodwill, net 36,642 35,887
Other assets 9,887 8,919
-------- --------
Total assets $108,098 $111,833
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,938 $ 7,502
Accrued expenses 6,378 5,330
Current maturities of long-term debt 1,988 2,132
Deferred income 13,608 9,005
Book advances 474 801
-------- --------
Total current liabilities 24,386 24,770
Long-term debt 5,991 6,830
Stockholders' equity
Common stock, $.01 par value; 100,000,000 shares authorized;
27,258,079 issued and outstanding at June 30, 2002 and
27,175,011 issued and outstanding at December 31, 2001 273 272
Additional paid-in capital 113,853 113,091
Accumulated deficit (36,168) (33,480)
Accumulated other comprehensive (loss) income (237) 350
-------- --------
Total stockholders equity 77,721 80,233
-------- --------
Total liabilities and stockholders' equity $108,098 $111,833
======== ========
See accompanying notes
-2-
THE PRINCETON REVIEW, INC AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
Three months ended June 30 Six months ended June 30
-------------------------- ------------------------
2002 2001 2002 2001
------- ------- ------- -------
(Unaudited) (Unaudited)
Revenue
Test Preparation Services $15,350 $12,379 $29,571 $22,624
Admissions Services 2,917 1,589 6,833 3,267
K-12 Services 2,782 1,476 4,042 2,672
------- ------- ------- -------
Total revenue 21,049 15,444 40,446 28,563
------- ------- ------- -------
Cost of revenue
Test Preparation Services 4,259 4,003 8,619 7,580
Admissions Services 921 635 1,844 966
K-12 Services 830 648 1,181 970
------- ------- ------- -------
Total cost of revenue 6,010 5,286 11,644 9,516
------- ------- ------- -------
Gross profit 15,039 10,158 28,802 19,047
------- ------- ------- -------
Operating expenses
Selling, general and administrative 15,756 13,510 33,324 26,284
Research and development 17 151 65 268
------- ------- ------- -------
Total operating expenses 15,773 13,661 33,389 26,552
------- ------- ------- -------
Loss from operations (734) (3,503) (4,587) (7,505)
Interest expense (157) (1,069) (309) (1,658)
Other income (expense) 4 100 261 167
------- ------- ------- -------
Loss before benefit for income taxes and extraordinary item (887) (4,472) (4,635) (8,996)
Benefit for income taxes 453 1,890 1,947 3,528
------- ------- ------- -------
Loss before extraordinary item (434) (2,582) (2,688) (5,468)
Extraordinary item - early extinguishment
of debt, net of taxes -- (1,824) -- (1,824)
------- ------- ------- -------
Net loss (434) (4,406) (2,688) (7,292)
Accreted dividends on Series A redeemable preferred stock -- (1,072) -- (2,309)
Accreted dividends on Class B non-voting common stock -- (819) -- (1,956)
------- ------- ------- -------
Net loss attributed to common stockholders $ (434) $(6,297) $(2,688) $(11,557)
======= ======= ======= ========
Net loss per share - basic and diluted:
Net loss per share - basic and diluted $(0.02) $(0.38) $(0.10) $(0.72)
======= ======= ======= ========
Weighted average basic and diluted shares used in
computing net loss per share 27,248 16,767 27,217 16,034
======= ======= ======= ========
See accompanying notes
-3-
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
For the Six Months Ended
June 30,
------------------------
2002 2001
------- --------
(Unaudited)
Cash flows from operating activities:
Net loss $(2,688) $(7,292)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 726 464
Amortization 2,321 2,368
Noncash interest expense -- 582
Loss on early extinquishment of debt -- 1,824
Bad debt expense 421 (348)
Loss on disposal of assets 64 --
Deferred income taxes (1,947) (3,684)
Deferred rent 48 70
Stock based compensation 148 81
Net change in operating assets and liabilities:
Accounts receivable (2,358) 2,735
Other receivables (433) 190
Notes receivable 732 --
Prepaid expenses (634) 178
Other assets 36 (1,006)
Accounts payable (5,565) (1,735)
Accrued expenses 925 (2,376)
Deferred income 4,483 872
Book advances (327) (870)
------- -------
Net cash used in operating activities (4,048) (7,947)
------- -------
Cash flows from investing activities:
Purchase of furniture, fixtures, equipment and software development (2,573) (1,242)
Investment in affiliates (270) (19,446)
Purchase of franchises and other businesses, net of cash acquired (263) --
Stockholder loan (435) --
Investment in other assets (1,190) (1,700)
------- -------
Net cash used in investing activities (4,731) (22,388)
------- -------
Cash flows from financing activites:
Borrowings under line of credit -- 24,691
Repayment of lines of credit -- (29,191)
Repayment term loan, net (1) (77)
Repayment loan payable, net (850) --
Capital leases payments (132) (11)
Notes payable related to franchises purchased -- 3,625
Proceeds from sale of common stock in initial public offering, net -- 54,477
Proceeds from exercise of options 255 --
------- -------
Net cash (used in) provided by financing activities (728) 53,514
------- -------
Net (decrease) increase in cash and cash equivalents (9,507) 23,179
Cash and cash equivalents, beginning of period 21,935 4,874
------- -------
Cash and cash equivalents, end of period $12,428 $28,053
======= =======
See accompanying notes.
-4-
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2002
1. Basis of Presentation
The accompanying unaudited interim consolidated financial statements of The
Princeton Review, Inc. (the "Company") include the accounts of the Company and
its wholly-owned subsidiaries, Princeton Review Products, LLC, Princeton Review
Management, LLC, Princeton Review Publishing, LLC, Princeton Review Operations,
LLC, and The Princeton Review of Canada Inc. This financial information has been
prepared in accordance with generally accepted accounting principles for interim
financial information and reflects all adjustments, consisting only of normal
recurring accruals, that are, in the opinion of management, necessary for a fair
presentation of the interim financial statements. The interim consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes for the year ended December 31, 2001
included in the Company's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission. The results of operations for the
three-month and six-month periods ended June 30, 2002 are not necessarily
indicative of the results to be expected for the entire fiscal year or any
future period.
Intangible Assets and Goodwill
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), effective for fiscal years beginning after
December 15, 2001. Under the new rules goodwill, and intangible assets deemed to
have indefinite lives, are no longer amortized, but are subject to annual
impairment tests in accordance with SFAS 142. Other intangible assets continue
to be amortized over their useful lives.
The Company applied the SFAS 142 rules in accounting for goodwill and
other intangible assets in the first quarter of 2002. During the second quarter
of 2002 the Company performed the required impairment tests on goodwill and
other intangible assets, and, based on the results, no charges were required
related to the adoption of SFAS 142. The following adjusts reported net loss and
earnings per share to exclude goodwill amortization:
-5-
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
-------------- --------------
Reported net loss $(6,297,000) $(11,557,000)
Goodwill amortization 425,000 588,000
----------- ------------
Adjusted net loss $(5,872,000) $(10,969,000)
=========== ============
Reported basic and diluted net loss per share $ (0.38) $ (0.72)
Goodwill amortization 0.03 0.04
----------- ------------
Adjusted basic and diluted net loss per share $ (0.35) $ (0.68)
=========== ============
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations for a Disposal of a
Segment of a Business. The Company adopted SFAS 144 as of January 1, 2002. The
adoption of the Statement did not have a significant impact on the Company's
financial position and results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections ("SFAS 145"). In most instances,
SFAS 145 will require gains and losses on extinguishments of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required under FASB Statement No. 4, Reporting
Gains and Losses from Extinguishment of Debt ("SFAS 4"). This provision of
SFAS 145 is effective for fiscal years beginning after May 15, 2002, with early
application encouraged. Upon adoption, any gain or loss on extinguishment of
debt previously classified as an extraordinary item in prior periods presented
that does not meet the criteria of APB Opinion No. 30 for such classification
should be reclassified to conform to the provisions of SFAS 145. The Company
will adopt SFAS 145 as of January 1, 2003.
Reclassification
Certain balances have been reclassified to conform with the current year
presentation.
Products and Services
The following table summarizes the Company's revenue and cost of revenue
for the three and six months ended June 30, 2002 and 2001:
-6-
Book, Software Web Based
Course Royalty and Publication Subscription and Other
Revenues Service Fees Income Processing Fees Income Total
-------- ------------ ------ --------------- ------ -----
Three Months Ended June 30, 2002
Revenue
Test Preparation Services $13,970,000 $1,098,000 -- -- $ 282,000 $15,350,000
Admissions Services -- -- $ 857,000 $1,559,000 501,000 2,917,000
K-12 Services -- -- 1,463,000 425,000 894,000 2,782,000
----------- ---------- ---------- ---------- ---------- -----------
Total $13,970,000 $1,098,000 $2,320,000 $1,984,000 $1,677,000 $21,049,000
=========== ========== ========== ========== ========== ===========
Cost of Revenue
Test Preparation Services $ 4,259,000 -- -- -- -- $ 4,259,000
Admissions Services -- -- $ 495,000 $ 426,000 -- 921,000
K-12 Services -- -- 346,000 163,000 $ 321,000 830,000
----------- ---------- ---------- ---------- ---------- -----------
Total $ 4,259,000 -- $ 841,000 $ 589,000 $ 321,000 $ 6,010,000
=========== ========== ========== ========== ========== ===========
Three Months Ended June 30, 2001
Revenue
Test Preparation Services $11,142,000 $ 841,000 -- -- $ 396,000 $12,379,000
Admissions Services -- -- $ 724,000 $ 468,000 397,000 1,589,000
K-12 Services -- -- 1,387,000 29,000 60,000 1,476,000
----------- ---------- ---------- ---------- ---------- -----------
Total $11,142,000 $ 841,000 $2,111,000 $ 497,000 $ 853,000 $15,444,000
=========== ========== ========== ========== ========== ===========
Cost of Revenue
Test Preparation Services $ 4,003,000 -- -- -- -- $ 4,003,000
Admissions Services -- -- $ 414,000 $ 221,000 $ -- 635,000
K-12 Services -- -- 506,000 122,000 20,000 648,000
----------- ---------- ---------- ---------- ---------- -----------
Total $ 4,003,000 -- $ 920,000 $ 343,000 $ 20,000 $ 5,286,000
=========== ========== ========== ========== ========== ===========
Six Months Ended June 30, 2002
Revenue
Test Preparation Services $26,868,000 $2,363,000 -- -- $ 340,000 $29,571,000
Admissions Services -- -- $1,635,000 $4,435,000 763,000 6,833,000
K-12 Services -- -- 2,121,000 684,000 1,237,000 4,042,000
----------- ---------- ---------- ---------- ---------- -----------
Total $26,868,000 $2,363,000 $3,756,000 $5,119,000 $2,340,000 $40,446,000
=========== ========== ========== ========== ========== ===========
Cost of Revenue
Test Preparation Services $ 8,619,000 -- -- -- -- $ 8,619,000
Admissions Services -- -- $769,000 $1,075,000 -- 1,844,000
K-12 Services -- -- 418,000 321,000 $ 442,000 1,181,000
----------- ---------- ---------- ---------- ---------- -----------
Total $ 8,619,000 -- $1,187,000 $1,396,000 $ 442,000 $11,644,000
=========== ========== ========== ========== ========== ===========
Six Months Ended June 30, 2001
Revenue
Test Preparation Services $20,228,000 $1,871,000 -- -- $525,000 $22,624,000
Admissions Services -- -- $1,200,000 $ 829,000 1,238,000 3,267,000
K-12 Services -- -- 2,544,000 68,000 60,000 2,672,000
----------- ---------- ---------- ---------- ---------- -----------
Total $20,228,000 $1,871,000 $3,744,000 $ 897,000 $1,823,000 $28,563,000
=========== ========== ========== ========== ========== ===========
Cost of Revenue
Test Preparation Services $ 7,580,000 -- -- -- -- $ 7,580,000
Admissions Services -- -- $ 568,000 $ 398,000 -- 966,000
K-12 Services -- -- 698,000 228,000 $ 44,000 970,000
----------- ---------- ---------- ---------- ---------- -----------
Total $ 7,580,000 -- $1,266,000 $ 626,000 $ 44,000 $ 9,516,000
=========== ========== ========== ========== ========== ===========
-7-
2. Segment Information
The Company's operations are aggregated into three reportable segments. The
operating segments reported below are the segments of the Company for which
separate financial information is available and for which operating income is
evaluated regularly by executive management in deciding how to allocate
resources and in assessing performance.
The following segment results include the allocation of certain information
technology costs, accounting services, executive management costs, office
facilities expenses, human resources expenses and other shared services which
are allocated based on consumption. Corporate consists of unallocated
administrative support functions. The Company operates its business through
three divisions. The majority of the Company's revenue is earned by the Test
Preparation Services division, which sells a range of services including test
preparation, tutoring and academic counseling. Test Preparation Services derives
its revenue from Company operated locations and from royalties from and product
sales to independently-owned franchises. The Admissions Services division earns
subscription, transaction and marketing fees from higher education institutions,
earns revenue from developing content for books, software and other publications
for third-party publishers and sells advertising and sponsorships. The K-12
Services division earns fees from its content development work, an
Internet-based subscription service for K-12 schools, professional training and
development services and K-12 print-based products. The table below includes
segment EBITDA, which represents earnings before interest, taxes, depreciation
and amortization, equity interest and extraordinary items.
-8-
Three Months Ended June 30, 2002
-------------------------------------------------------------------------------
Test Preparation Admissions
Services Services K-12 Services Corporate Total
-------- -------- ------------- --------- -----
Revenue $15,350,000 $2,917,000 $2,782,000 $ -- $ 21,049,000
Segment operating profit (loss) 2,464,000 (2,097,000) (717,000) (384,000) (734,000)
Segment EBITDA 2,977,000 (1,514,000) (422,000) (212,000) 829,000
Segment Assets 30,966,000 25,251,000 6,265,000 45,616,000 108,098,000
Three Months Ended June 30, 2001
-------------------------------------------------------------------------------
Test Preparation Admissions
Services Services K-12 Services Corporate Total
-------- -------- ------------- --------- -----
Revenue $12,379,000 $1,589,000 $1,476,000 -- $15,444,000
Segment operating profit (loss) 442,000 (1,749,000) (1,911,000) $ (285,000) (3,503,000)
Segment EBITDA 1,330,000 (1,518,000) (1,574,000) (113,000) (1,875,000)
Segment Assets 30,594,000 7,025,000 8,279,000 55,826,000 101,724,000
Six Months Ended June 30, 2002
-------------------------------------------------------------------------------
Test Preparation Admissions
Services Services K-12 Services Corporate Total
-------- -------- ------------- --------- -----
Revenue $29,571,000 $6,833,000 $4,042,000 -- $40,446,000
Segment operating profit (loss) 3,178,000 (3,674,000) (3,148,000) $ (943,000) (4,587,000)
Segment EBITDA 4,183,000 (2,520,000) (2,565,000) (637,000) (1,539,000)
Segment Assets 30,966,000 25,251,000 6,265,000 45,616,000 108,098,000
Six Months Ended June 30, 2001
-------------------------------------------------------------------------------
Test Preparation Admissions
Services Services K-12 Services Corporate Total
-------- -------- ------------- --------- -----
Revenue $22,624,000 $3,267,000 $2,672,000 -- $28,563,000
Segment operating profit (loss) 287,000 (3,389,000) (3,954,000) $ (449,000) (7,505,000)
Segment EBITDA 1,696,000 (2,861,000) (3,395,000) (113,000) (4,673,000)
Segment Assets 30,594,000 7,025,000 8,279,000 55,826,000 101,724,000
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Reconciliation to net loss
Total loss for reportable segments $(734,000) $(3,503,000) $(4,587,000) $(7,505,000)
Unallocated amounts:
Interest expense (157,000) (1,069,000) (309,000) (1,658,000)
Other income 4,000 100,000 261,000 167,000
Benefit for income taxes 453,000 1,890,000 1,947,000 3,528,000
Extraordinary item -- (1,824,000) -- (1,824,000)
--------- ----------- ----------- -----------
Net loss $(434,000) $(4,406,000) $(2,688,000) $(7,292,000)
========= =========== =========== ===========
-9-
3. Income (Loss) Per Share
Basic and diluted net income (loss) per share information for all periods is
presented under the requirements of SFAS No. 128, Earnings per Share. Basic net
income (loss) per share is computed by dividing net income (loss) applicable to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is determined in the same
manner as basic net income (loss) per share except that the number of shares is
increased assuming exercise of dilutive stock options, warrants and convertible
securities. The calculation of diluted net income (loss) per share excludes
potential common shares if the effect is antidilutive. During the periods
presented, certain shares of Series A preferred stock, warrants and stock
options were outstanding that would be dilutive, but were excluded because to
include them would have been antidilutive.
4. Comprehensive Income (Loss)
The components of comprehensive loss for the three and six-month periods ended
June 30, 2002 and 2001 are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net loss $ (434,000) $(4,406,000) $(2,688,000) $(7,293,000)
Foreign currency translation adjustment (38,000) 20,000 (133,000) 58,000
Unrealized loss on available-for-sale
securities, net of tax benefits (318,000) (209,000) (453,000) (1,122,000)
----------- ----------- ----------- -----------
Total comprehensive loss $ (790,000) $(4,595,000) $(3,274,000) $(8,357,000)
=========== =========== =========== ===========
-10-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
All statements in this Form 10-Q that are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
forward-looking statements may be identified by words such as "believe,"
"intend," "expect," "may," "could," "would," "will," "should," "plan,"
"project," "contemplate," "anticipate" or similar statements. Because these
statements reflect our current views concerning future events, these
forward-looking statements are subject to risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of many factors, including, but not limited to, demand
for our products and services, our ability to compete effectively, our ability
to increase revenue from our internet operations and the other factors described
under the caption "Risk Factors" in our Annual Report on Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange Commission. We
undertake no obligation to update publicly any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes included
in our Annual Report on Form 10-K for the year ended December 31, 2001, as well
as in conjunction with the consolidated financial statements and related notes
appearing elsewhere in this Form 10-Q.
Results of Operations
Three Months Ended June 30, 2002 Compared With Three Months Ended June 30, 2001
Revenue
Our total revenue increased from $15.4 million in 2001 to $21.0 million
in 2002, representing a 36% increase.
Test Preparation Services revenue increased from $12.4 million in 2001
to $15.4 million in 2002, representing a 24% increase, comprised primarily of an
increase of approximately $2.9 million in revenue from our company-owned
operations. The increased revenue from company-owned operations resulted from an
increase of approximately $2.3 million in revenue attributable to the operations
acquired from our former franchisees, Princeton Review of Boston, Inc.,
Princeton Review of New Jersey, Inc., Princeton Review Peninsula Inc., and
T.S.T.S., Inc. in 2001, and an increase of approximately $600,000 at our other
locations. Of the $600,000 increase at our other locations, approximately
$300,000 is attributable to enrollment increases and approximately $300,000 is
attributable to average price increases.
-11-
Admissions Services revenue increased from $1.6 million in 2001 to $2.9
million in 2002, representing an 84% increase. This increase resulted primarily
from an increase of approximately $1.1 million in Web-based subscription,
application and marketing fees, primarily attributable to our acquisition of the
business of Embark.com, Inc., and an increase of approximately $130,000 in
revenue earned on delivery of manuscripts to our publisher.
K-12 Services revenue increased from $1.5 million in 2001 to $2.8
million in 2002 representing an 89% increase. This increase resulted primarily
from an increase of approximately $1.2 million in revenue from schools for
Homeroom.com subscriptions, printed materials, professional development and
after school supplemental programs.
Cost of Revenue
Our total cost of revenue increased from $5.3 million in 2001 to $6.0
million in 2002, representing a 14% increase.
Test Preparation Services cost of revenue increased from $4.0 million
in 2001 to $4.3 million in 2002, representing a 6% increase. This increase
resulted primarily from an increase of approximately $500,000 in costs
associated with the operation of the businesses acquired from Princeton Review
of Boston, Princeton Review of New Jersey, Princeton Review Peninsula and
T.S.T.S. during 2001. These increased costs were partially offset by a $200,000
decrease in royalty expenses due to the consolidation of our advertising fund in
July 2001.
Admissions Services cost of revenue increased from $635,000 in 2001 to
$921,000 in 2002, representing a 45% increase. The increase is primarily
attributable to the cost of providing Web-based subscription and application
services relating to products acquired from Embark.
K-12 Services cost of revenue increased from $648,000 in 2001 to
$830,000 in 2002, representing a 28% increase. This increase is primarily
attributable to an increase in costs incurred to service the school contracts
for the Homeroom.com subscription service, printed materials and consulting
services.
Operating Expenses
Selling, general and administrative expenses increased from $13.5
million in 2001 to $15.8 million in 2002, representing a 17% increase. This
increase resulted primarily from an increase of approximately $250,000 incurred
as a result of our acquisitions of the businesses of our former franchisees, an
increase of approximately $840,000 incurred as a result of our acquisition of
the business of Embark and the following, which exclude expenses relating to
the foregoing acquired businesses:
o an increase of approximately $640,000 in salaries and payroll taxes
primarily due to increased headcount, salaries and bonus accruals;
o an increase of approximately $470,000 in reserves for bad debt;
o an increase of approximately $190,000 in professional fees; and
-12-
o an increase of approximately $160,000 attributable primarily to personnel
related costs, including office rent and expenses, travel and
entertainment, employee benefits and recruiting fees.
These increases were partially offset by a decrease of approximately $370,000 in
Web site technology and development expenses and a decrease of approximately
$310,000 in advertising expenses.
Interest Expense
Interest expense decreased from $1.1 million in 2001 to $157,000 in
2002. This decrease was due to the repayment of certain outstanding loan
balances in the second quarter of 2001.
Other Income (Expense)
Other income decreased from $100,000 in 2001 to $4,000 in 2002. This
decrease resulted primarily from interest earned on cash balances being offset
by an increase in miscellaneous expenses of approximately $100,000.
Six Months Ended June 30, 2002 Compared With Six Months Ended June 30, 2001
Revenue
Our total revenue increased from $28.6 million in 2001 to $40.4 million
in 2002, representing a 42% increase.
Test Preparation Services revenue increased from $22.6 million in 2001
to $29.6 million in 2002, representing a 31% increase, comprised primarily of an
increase of approximately $7.2 million in revenue from our company-owned
operations. The increased revenue from company-owned operations resulted from an
increase of approximately $5.9 million in revenue attributable to the operations
acquired from our former franchisees, Princeton Review of Boston, Inc.,
Princeton Review of New Jersey, Inc., Princeton Review Peninsula Inc., and
T.S.T.S., Inc. in 2001, and an increase of approximately $1.3 million at our
other locations. Of the $1.3 million increase at our other locations,
approximately $500,000 is attributable to enrollment increases and approximately
$800,000 is attributable to average price increases.
Admissions Services revenue increased from $3.3 million in 2001 to $6.8
million in 2002, representing a 109% increase. This increase resulted primarily
from an increase of approximately $3.6 million in Web-based subscription,
application and marketing fees, primarily attributable to our acquisition of the
business of Embark, and an increase of approximately $300,000 in advances and
development fees related to manuscripts delivered to our publisher and
approximately $150,000 in book royalty revenue. These increases were partially
offset by a $475,000 decrease in advertising revenue.
K-12 Services revenue increased from $2.7 million in 2001 to $4.0
million in 2002
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representing a 51% increase. This increase resulted primarily from an increase
of approximately $1.8 million in revenue from schools for Homeroom.com
subscriptions, printed materials, professional development and after school
supplemental programs. These increases were partially offset by a decrease of
approximately $420,000 in revenue from McGraw-Hill.
Cost of Revenue
Our total cost of revenue increased from $9.5 million in 2001 to $11.6
million in 2002, representing a 22% increase.
Test Preparation Services cost of revenue increased from $7.6 million
in 2001 to $8.6 million in 2002, representing a 14% increase. This increase
resulted primarily from an increase of approximately $1.5 million in costs
associated with the operation of the businesses acquired from Princeton Review
of Boston, Princeton Review of New Jersey, Princeton Review Peninsula and
T.S.T.S. during 2001. These increased costs were partially offset by a $375,000
decrease in royalty expenses due to the consolidation of our advertising fund in
July 2001.
Admissions Services cost of revenue increased from $966,000 in 2001 to
$1.8 million in 2002, representing a 91% increase. Approximately $680,000 of
this increase is attributable to the cost of providing Web-based subscription
and application services relating to products acquired from Embark and
approximately $200,000 is attributable to the cost of producing book
manuscripts.
K-12 Services cost of revenue increased from $970,000 in 2001 to $1.2
million in 2002, representing a 22% increase. This increase is primarily
attributable to an increase in costs of approximately $490,000 incurred to
service the school contracts for the Homeroom.com subscription service,
consulting and other services. This increase was partially offset by a decrease
of approximately $280,000 in costs associated with the McGraw-Hill contract.
Operating Expenses
Selling, general and administrative expenses increased from $26.3
million in 2001 to $33.3 million in 2002, representing a 27% increase. This
increase resulted primarily from an increase of approximately $2.0 million
incurred as a result of our acquisitions of the businesses of our former
franchisees, an increase of approximately $2.0 million incurred as a result of
our acquisition of the business of Embark and the following, which exclude
expenses relating to the foregoing acquired businesses:
o an increase of approximately $1.2 million in salaries and payroll taxes
primarily due to increased headcount, salaries and bonus accruals;
o an increase of approximately $800,000 attributable primarily to personnel
related costs, including office rent and expenses, travel and
entertainment, employee benefits and recruiting fees;
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o an increase of approximately $690,000 in reserves for bad debt; and
o an increase of approximately $570,000 in professional fees.
These increases were partially offset by a decrease of approximately $370,000 in
Web site technology and development expenses.
Interest Expense
Interest expense decreased from $1.7 million in 2001 to $309,000 in
2002. This decrease was due to the repayment of certain outstanding loan
balances in the second quarter of 2001.
Other Income (Expense)
Other income increased from $167,000 in 2001 to $261,000 in 2002. This
increase resulted primarily from interest on late royalty payments from one of
our franchisees.
Liquidity and Capital Resources
Net cash used in operating activities during the six months ended June
30, 2002 was $4.0 million, resulting primarily from the net loss from
operations. Net cash used in investing activities during the six months ended
June 30, 2002 was $4.7 million, resulting primarily from the purchase of fixed
assets and investment in software development projects. Net cash used in
financing activities during the six months ended June 30, 2002 was $728,000,
resulting primarily from payments made with respect to an outstanding loan.
At June 30, 2002, we had approximately $12.4 million of cash and cash
equivalents. We anticipate that our cash balances, together with cash generated
from operations, will be sufficient to meet our normal operating requirements
for at least the next 12 months. We may also seek to obtain a new credit
facility as a source of additional liquidity and to fund a portion of the
purchase price of any future acquisitions of the businesses of our franchisees.
Impact of Inflation
Inflation has not had a significant impact on our historical operations.
Seasonality in Results of Operations
We experience, and we expect to continue to experience, seasonal
fluctuations in our revenue because the markets in which we operate are subject
to seasonal fluctuations based on the scheduled dates for standardized
admissions tests and the typical school year. These fluctuations could result in
volatility or adversely affect our stock price. In addition, as our revenue
grows, these seasonal fluctuations may become more evident. We typically
generate the largest portion of
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our test preparation revenue in the third quarter. We also expect that the
electronic application revenue from the business we acquired from Embark will be
highest in the first and fourth quarters, corresponding with the busiest times
of year for submission of applications to academic institutions. Our
Homeroom.com subscription service may also experience seasonal fluctuations in
revenue, but we are not yet able to predict the impact of seasonal factors on
this business with any degree of accuracy.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our portfolio of marketable securities includes primarily short-term money
market funds. The fair value of our portfolio of marketable securities would not
be significantly impacted by either a 100 basis point increase or decrease in
interest rates due primarily to the short-term nature of the portfolio. Our
outstanding long-term debt bears interest at fixed rates. We do not currently
hold or issue derivative financial instruments.
Royalty payments from our international franchisees constitute an insignificant
percentage of our revenue. Accordingly, our exposure to exchange rate
fluctuations is minimal.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in legal proceedings incidental to
the conduct of our business. We are not currently a party to any legal
proceeding which, in the opinion of our management, is likely to have a material
adverse effect on us.
Item 2. Changes in Securities and Use of Proceeds
Initial Public Offering and Use of Proceeds from Sales of Registered
Securities
Our Registration Statement on Form S-1 (File No. 333-43874) related to
our initial public offering was declared effective by the Securities and
Exchange Commission on June 18, 2001. Through the end of the reporting period
covered by this report on Form 10-Q, we have used approximately $15.5 million of
the net proceeds from the initial public offering for working capital and other
general corporate purposes and $29.9 million of the net proceeds to repay
outstanding indebtedness, including accrued interest, under our previously
existing credit facilities.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Princeton Review held its Annual Meeting of Stockholders on June 11,
2002.
(b) Proxies for the meeting were solicited pursuant to Regulation 14 under the
Exchange Act; there was no solicitation in opposition to management's nominees
as listed in the Proxy Statement and all such nominees were elected.
Directors elected to the 2005 Class were John S. Katzman, Frederick S.
Humphries, and John C. Reid.
Election of Directors:
For Withheld
--- --------
John S. Katzman 21,826,588 1,212,959
Frederick S. Humphries 22,944,812 94,735
John C. Reid 22,933,127 106,420
Other directors whose terms continue after the meeting were Richard Katzman,
Richard Sarnoff, Sheree T. Speakman and Howard A. Tullman.
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(c) The appointment of Ernst & Young LLP, independent accountants, to audit the
consolidated financial statements of the company and its subsidiaries for the
year 2002 was ratified by the following vote:
For 22,585,318
Against 448,830
Abstain 5,399
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
-------------- -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by The Princeton Review during the
period covered by this report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Princeton Review, Inc.
By /s/ Stephen Melvin
---------------------------
Stephen Melvin
Chief Financial Officer and
Treasurer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
August 14, 2002
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