<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE PRINCETON REVIEW, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8299 22-3727603
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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2315 BROADWAY
NEW YORK, NEW YORK 10024
(212) 874-8282
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN S. KATZMAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
THE PRINCETON REVIEW, INC.
2315 BROADWAY
NEW YORK, NEW YORK 10024
(212) 874-8282
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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JOHN P. SCHMITT, ESQ. MORTON A. PIERCE, ESQ.
PETER J. SCHAEFFER, ESQ. DENISE A. CERASANI, ESQ.
PATTERSON, BELKNAP, WEBB & TYLER LLP DEWEY BALLANTINE LLP
1133 AVENUE OF THE AMERICAS 1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036-6710 NEW YORK, NEW YORK 10019
(212) 336-2000 (212) 259-8000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
---------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
---------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
---------------
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE REGISTRATION FEE(1)
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<S> <C> <C>
Common Stock, $.01 par value................................ $ 65,000,000 $ 17,160
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</TABLE>
(1) Determined pursuant to Rule 457(o) under the Securities Act of 1933.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS
TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST , 2000
PROSPECTUS
----------------
SHARES
[LOGO]
COMMON STOCK
This is the initial public offering of common stock by The Princeton
Review, Inc. We are selling shares of our common stock. We estimate
that the initial public offering price will be between $ and $ per
share.
------------------
Prior to this offering, there has been no public market for our common
stock. We intend to apply to have the shares of common stock approved for
quotation on the Nasdaq National Market under the symbol REVU.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to The Princeton Review, before expenses........... $ $
</TABLE>
The underwriters may also purchase up to additional shares of
common stock from us at the initial public offering price, less the underwriting
discounts and commissions, within 30 days from the date of this prospectus to
cover over-allotments.
------------------
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
FIRST UNION SECURITIES, INC.
, 2000
<PAGE> 3
[A DESCRIPTION OF INSIDE COVER PAGE ART WORK WILL BE PROVIDED HERE]
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Forward-Looking Statements.................................. 19
Our Restructuring........................................... 19
Recent Developments......................................... 20
Use of Proceeds............................................. 22
Dividend Policy............................................. 22
Capitalization.............................................. 23
Dilution.................................................... 25
Unaudited Pro Forma Consolidated Financial Data............. 26
Selected Consolidated Historical Financial Data............. 31
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 33
Business.................................................... 45
Management.................................................. 60
Related Party Transactions.................................. 72
Principal Stockholders...................................... 75
Description of Capital Stock................................ 77
Shares Eligible for Future Sale............................. 80
Underwriting................................................ 82
Legal Matters............................................... 83
Experts..................................................... 84
Change in Accountants....................................... 84
Where You Can Find More Information......................... 84
Index to Financial Statements............................... F-1
</TABLE>
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all the information you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" and the financial statements,
before making an investment decision. In this prospectus, unless the context
indicates otherwise, "The Princeton Review," "we," "us," and "our" refer to The
Princeton Review, Inc. and its subsidiaries and predecessors.
THE PRINCETON REVIEW
We have built a well-known and trusted brand on our 19 years of experience
and proven success in raising students' standardized test scores and providing
quality academic information. We provide integrated online, print and
classroom-based products and services that address the needs of students,
parents, educators and educational institutions. We are the leading provider of
SAT preparation courses and are among the leading providers of test preparation
courses for most of the other major post-secondary and graduate admissions
tests. In addition, we operate one of the most widely used educational Web sites
dedicated to post-secondary academic opportunities. We recently launched an
online service designed to help primary school students maximize their academic
potential and prepare for state-mandated assessments. Finally, we author over
150 print and software titles on test preparation and college selection. Our
business is divided into the following three divisions:
- Instruction and Guidance delivers a range of services, including
standardized test preparation for the SAT, GMAT, MCAT, LSAT, GRE and
other admissions tests, both online and in a classroom setting. In 1999,
our Instruction and Guidance division and our franchisees provided
courses to over 90,000 students in more than 500 locations. Instruction
and Guidance also offers admissions counseling directly to students and
through institutional relationships with high schools.
- Review.com operates a leading educational Web site that brings together
potential applicants and their families, guidance counselors and colleges
and graduate schools to exchange information and facilitate the
recruitment, application and admissions processes. Review.com also
authors over 150 print and software titles that are published by Random
House, Inc., TIME Magazine and other publishers.
- Homeroom.com offers an online subscription service for schools and
families that provides academic assessment, remediation and enrichment
services to children in grades three through eight. Our Homeroom.com Web
site recently completed its pilot program to 6,000 users in Texas, and we
expect to offer its services in 24 additional states by the fourth
quarter of 2000. Homeroom.com also creates Princeton Review branded
content for use in textbooks and workbooks published by The McGraw-Hill
Companies, Inc.
THE MARKET OPPORTUNITY
The education market is the second largest sector of the U.S. economy. The
U.S. Department of Education estimates that approximately $372 billion was spent
in the United States during the 1998-1999 school year on kindergarten through
twelfth grade, or K-12, education. However, increased public concern over the
effectiveness of K-12 schools in teaching basic academic skills has increased
the pressure on educators to improve overall student performance. Over the past
several years, a majority of states have begun to implement high-stakes testing
programs that hold teachers, principals and superintendents accountable for
student achievement. In response, educators are increasingly looking for a means
to improve measurable academic performance on these high-stakes assessments. In
addition, parents are seeking a convenient and time-efficient way to participate
in their children's education.
1
<PAGE> 6
At the same time, students, parents and teachers are increasingly
recognizing the Internet as a valuable educational resource. International Data
Corporation estimates that instructional technology spending in the U.S. K-12
public school market will increase from $2.9 billion in 1998 to $6.8 billion in
2003. According to a 1999 survey, the U.S. Department of Education found that
99% of full-time public school teachers have access to computers or the Internet
in their schools, and 66% of those teachers use computers or the Internet for
classroom instruction. The U.S. Department of Education estimates that in 1999,
95% of public schools were connected to the Internet. As for the higher
education market, Market Data Retrieval reports that in 1999 virtually every
college offered Internet access to its students. An International Data
Corporation survey also indicates that almost 39% of U.S. households currently
subscribe to an online service.
As students make the transition to higher education, families discover that
the college selection and admissions process can be competitive, costly and
complex. We estimate that more than $250 million was spent on test preparation
courses in 1999. As a growing number of students seek guidance through the
testing and application process, many high schools find it increasingly
difficult to provide students with effective college and career counseling and
are looking for ways to improve academic counseling services. To address these
challenges, students, parents and schools are increasingly seeking a
comprehensive, one-stop source of information and assistance in the application
and admissions process. In addition, colleges and graduate schools are competing
to reach and enroll greater numbers of the most desirable prospects in a
cost-effective and efficient manner.
OUR SOLUTION
We provide integrated online, print and classroom-based educational
products and services that, we believe, offer the following benefits:
Benefits to Students
- improved admissions test scores;
- convenient and centralized resource for college selection and application
services;
- quality individual and institutional admissions counseling and advisory
services; and
- enhanced academic achievement and improved outcomes on state-mandated
assessments.
Benefits to Parents
- increased involvement in the educational and admissions processes in an
easy and time-efficient manner;
- trusted resource for guidance through educational transitions; and
- access to active community discussions with other parents and educational
experts.
Benefits to Educators and Educational Institutions
- improved college guidance programs in high schools;
- cost-effective way for colleges and graduate schools to reach and enroll
prospective students;
- improved student performance on state-mandated assessments; and
- more efficient use of classroom time through effective academic
diagnosis.
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<PAGE> 7
OUR STRATEGY
We intend to build upon the Princeton Review brand and expertise in our
existing and related education and testing markets. The key elements of this
strategy include:
- defining and securing the next generation of test preparation;
- building presence in the K-12 market;
- capitalizing on the network effect among students, parents, educators and
schools on our Review.com Web site;
- expanding institutional relationships;
- increasing the cross-marketing of our products and services; and
- broadening e-commerce and advertising initiatives.
RECENT DEVELOPMENTS
On May 30, 2000, we entered into an option agreement to acquire the assets
comprising the businesses of Princeton Review of Boston, Inc. and Princeton
Review of New Jersey, Inc. Each of these entities provides test preparation
courses under The Princeton Review name through one or more franchise agreements
with us. This option becomes effective upon the completion of this offering and
remains in effect until December 31, 2000. The combined purchase price under
this option is approximately $12.5 million, subject to adjustments specified in
the agreement. For a more detailed description of this option agreement, see
"Recent Developments -- Option Agreement to Purchase Two of Our Independent
Franchises."
On June 15, 2000, we entered into a distribution agreement with
bigchalk.com, inc., an education destination for the K-12 learning community.
Under this agreement, bigchalk.com serves as the exclusive third party
distributor of our Homeroom.com online subscription service to K-12 educational
institutions and also has the right to sell Homeroom.com subscriptions to users
of bigchalk.com's Web sites on a nonexclusive basis. For a more detailed
description of this distribution arrangement, see "Recent
Developments -- bigchalk.com Distribution Agreement."
On August , 2000, we acquired the operations of Princeton Review of
Hawaii, Inc. and Princeton Review of Quebec, Inc. for a combined purchase price
of approximately $320,000 in cash. Each of these entities had previously
operated a Princeton Review franchise.
------------------------
Our executive offices are located at 2315 Broadway, New York, NY 10024. Our
telephone number is (212) 874-8282. The Princeton Review, Inc. was incorporated
in March 2000 and is the successor to a number of affiliated entities operating
under The Princeton Review name, the first of which was formed in 1981. Our
corporate Web site address is www.princetonreview.com. Information contained on
our Web sites is not part of this prospectus. Each trademark, trade name or
service mark appearing in this prospectus is the property of its holder.
3
<PAGE> 8
THE OFFERING
Common stock offered by The Princeton
Review.................................... shares
Common stock to be outstanding after this
offering.................................. shares
Use of proceeds........................... We intend to use the net proceeds
from this offering for product
development, expansion of our
sales and marketing efforts,
working capital and general
corporate purposes. If we acquire
franchises currently under option,
we expect to use a portion of the
net proceeds from this offering to
consummate the acquisition. We
also may use a portion of the net
proceeds to acquire or invest in
complementary businesses or
technologies and to repurchase our
other independent franchises. See
"Use of Proceeds" for a more
detailed description of the
possible use of the net proceeds
from this offering.
Proposed Nasdaq National Market symbol.... REVU
The number of shares to be outstanding after this offering is based on
shares outstanding as of , 2000 and does not include the following:
- shares of common stock underlying options granted under
our stock incentive plan and outstanding as of , 2000 at a
weighted average exercise price of $ per share;
- additional shares of common stock reserved for future
issuance under our stock incentive plan as of , 2000;
- 1,000,000 additional shares of common stock that will be reserved for
future issuance under our stock incentive plan upon the completion of
this offering; and
- assuming an initial public offering price of $ per share, up to
shares of common stock issuable under warrants outstanding as of ,
2000, with an exercise price equal to the initial public offering price
of our common stock in this offering.
------------------------
Unless we indicate otherwise, all information in this prospectus assumes
the following:
- no exercise by the underwriters of their over-allotment option to
purchase up to additional shares of common stock;
- the automatic conversion of our shares of outstanding preferred stock on
a one-for-one basis into shares of common stock immediately prior to the
completion of this offering;
- the automatic conversion, on a one-for-one basis, of our shares of Class
B non-voting common stock and our shares of Class A common stock into
shares of common stock concurrently with the completion of this offering;
and
- amendments to our certificate of incorporation and by-laws to be
effective upon completion of this offering.
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<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables present:
- our summary historical consolidated financial data as of June 30, 2000
and for the years ended December 31, 1997, 1998 and 1999 and for the six
months ended June 30, 1999 and 2000;
- our summary unaudited pro forma consolidated financial data as of June
30, 2000 and for the year ended December 31, 1999 and for the six months
ended June 30, 2000, giving effect to our proposed acquisition of
Princeton Review of Boston, Inc. and Princeton Review of New Jersey,
Inc., as described in "Recent Developments -- Option Agreement to
Purchase Two of Our Independent Franchises," as if this transaction had
occurred on January 1, 1999, in the case of the unaudited pro forma
statement of operations data, and June 30, 2000, in the case of the
unaudited pro forma balance sheet data; and
- our summary unaudited pro forma as adjusted consolidated financial data
giving further effect to the conversion of all of our outstanding
preferred stock, Class A common stock and Class B non-voting common stock
into common stock upon the completion of this offering and the issuance
of shares of common stock offered by this prospectus at an assumed
initial public offering price of $ per share, after deducting
underwriting discounts and commissions and estimated offering expenses
payable by us.
The summary unaudited pro forma and pro forma as adjusted consolidated
financial data is not necessarily indicative of the operating results or the
financial condition that would have been achieved if we had completed these
transactions as of the dates indicated and should not be construed as
representative of our future operating results or financial condition. The
financial data as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is derived from our unaudited consolidated financial statements
included elsewhere in this prospectus. In the opinion of our management, these
unaudited consolidated financial statements were prepared by us on a basis
consistent with our annual audited consolidated financial statements and include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of our financial position and results of operations for these
unaudited periods. The summary historical and unaudited pro forma consolidated
financial data is qualified by reference to and should be read in conjunction
with the financial statements and related notes, "Unaudited Pro Forma
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
prospectus. We have calculated the weighted average shares used in computing net
income (loss) per share as described in Note 1 to our consolidated financial
statements.
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- ---------------------------------------
1999 2000
1997 1998 1999 PRO FORMA 1999 2000 PRO FORMA
------- ------- ------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................ $32,514 $33,746 $40,303 $49,246 $17,277 $20,118 $ 24,508
Gross profit................... 19,222 21,846 27,132 32,518 11,689 13,528 16,254
Operating income (loss) from
continuing operations........ 290 (1,358) (2,561) (809) (486) (16,015) (15,210)
Income (loss) from continuing
operations before (provision)
benefit for income taxes..... 269 (1,200) (2,095) (1,188) (503) (8,071) (7,665)
Net income (loss).............. $(2,043) $ 2,109 $(2,044) $(1,155) $ (515) $(2,210) $ (1,819)
Net income (loss) per share --
basic and diluted............ $ (0.17) $ 0.17 $ (0.17) $ (0.09) $ (0.04) $ (0.15) $ (0.12)
Weighted average basic and
diluted shares used in
computing net income (loss)
per share.................... 12,298 12,298 12,298 12,298 12,298 15,191 15,191
</TABLE>
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<CAPTION>
AS OF JUNE 30, 2000
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $15,490 $14,875
Working capital............................................. 16,351 14,622
Total assets................................................ 45,841 57,060
Long-term debt, net of current portion...................... 538 10,034
Series A redeemable convertible preferred stock............. 25,505 25,505
Class B redeemable non-voting common stock.................. 6,989 6,989
Stockholders' equity (deficit).............................. (1,450) (1,450)
</TABLE>
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RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could harm our business, financial condition and results of
operations and could result in a complete loss of your investment.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY WITH SEVERAL OF OUR KEY PRODUCTS OVER THE INTERNET.
We have limited experience in offering several of our key products over the
Internet. Our Homeroom.com Web site recently completed its pilot program and our
Internet-based Princeton Review Online test preparation courses were launched in
July 2000. There is no operating history on which you can base your evaluation
of the business and prospects of these operations. Before investing, you should
evaluate the risks, uncertainties, expenses and difficulties frequently
encountered by companies seeking to significantly increase their presence in new
and rapidly evolving Internet markets.
BECAUSE WE HAVE INCREASED OUR OPERATING EXPENSES SIGNIFICANTLY, WE EXPECT TO
INCUR LOSSES FOR THE FORESEEABLE FUTURE. IF WE DO NOT ACHIEVE PROFITABILITY, OUR
FINANCIAL CONDITION AND STOCK PRICE COULD BE MATERIALLY AND ADVERSELY AFFECTED.
If we fail to achieve profitability at all or within the timeframe expected
by investors, it could materially and adversely affect the market price of our
stock. We have significantly increased our operating expenses in order to grow
our existing Internet operations through Review.com and expand into new lines of
Internet-based businesses with Homeroom.com and our Princeton Review Online
products. Because of our increased operating expenses, we may not be able to
generate enough additional revenue to achieve profitability. Consequently, we
expect to sustain operating losses for the foreseeable future and may never
achieve profitability. If we do achieve profitability, we cannot be certain that
we will be able to sustain or increase our profitability in the future.
IF WE ARE UNABLE TO SUBSTANTIALLY INCREASE OUR REVENUE FROM OUR INTERNET
OPERATIONS, OUR GROWTH WILL SUFFER AND WE MAY NOT BE PROFITABLE.
If we are unable to substantially increase our revenue from our Internet
businesses, we will be unable to execute our current business plan and we may
not be profitable. In order to grow as currently contemplated, we will need to
derive an increasing portion of our revenue from our Internet-based businesses,
including Review.com, Homeroom.com and Princeton Review Online. We have limited
experience with generating revenue from Internet-based businesses and their
results are largely uncertain. In order to increase revenue from these sources
we must, among other things, successfully:
- attract a large number of students, parents and educators to our Web
sites;
- continue to grow our revenue from educational institutions subscribing
to our Review.com application services;
- achieve market acceptance by students, parents and educators of our
Homeroom.com Web-based subscription service;
- achieve market acceptance of our Princeton Review Online courses,
while maintaining growth in our classroom-based courses;
- grow the subscriber base of Homeroom.com while increasing subscription
fees and renewal rates; and
- increase sponsorships and banner advertisement sales.
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<PAGE> 12
Many of these factors are beyond our control and difficult to predict. In
addition, our ability to grow the subscriber base of Homeroom.com is dependent,
in part, on the success of our distribution relationship with bigchalk.com. If
bigchalk.com is not successful in distributing Homeroom.com to K-12 educational
institutions, our growth and revenue could suffer.
IF COLLEGES AND UNIVERSITIES REDUCE THEIR RELIANCE ON STANDARDIZED ADMISSIONS
TESTS OR STATES REDUCE THEIR USE OF MANDATED ASSESSMENTS, OUR BUSINESS WILL BE
MATERIALLY ADVERSELY AFFECTED.
The success of our test preparation and Homeroom.com businesses depends on
the continued use of standardized tests. If the use of standardized tests
declines or falls out of favor with educational institutions or state and local
governments, the markets for many of our products and services will deteriorate
and our business will be materially adversely affected.
WE FACE INTENSE COMPETITION THAT COULD ADVERSELY AFFECT OUR REVENUE,
PROFITABILITY AND MARKET SHARE.
The markets for our products and services are highly competitive, and we
expect increased competition in the future that could adversely affect our
revenue, profitability and market share. Barriers to entry into some of the
markets in which we compete are relatively low, and existing and new competitors
could potentially offer competitively priced services and products similar or
superior to ours. Our current competitors include but are not limited to:
Test preparation companies. Our test preparation business faces
competition on a national level primarily from one other established
company with substantially greater resources than ours. This company has
experience in our industry and may be positioned, or position itself in the
future, to increase its market share. We also face competition from the
many local and regional companies that provide test preparation, career
counseling and application assistance to students. We expect that
competition will increase as our national competitor seeks to maintain or
grow substantial national and local market share and as emerging companies
enter our market.
Companies offering Internet-based college information services and
products. Our Review.com division faces competition from several companies
that currently provide Internet-based products and services similar to ours
for the higher education market.
Companies offering Internet-based products and services and software
to the K-12 education market. Our Homeroom.com division faces competition
from many companies that provide student assessment, tutoring and
remediation software and Internet-based services to schools and students in
the increasingly competitive K-12 education market.
Print media companies. We face competition from traditional print
media companies that publish standardized test preparation materials,
college and education guidebooks and K-12 assessment and remediation
materials, and that offer admissions information and services to students
and schools. Several of these companies have their own Web sites or have
established partnerships with Internet companies with the intention of
providing their products and services over the Internet. We expect that all
of our primary competitors in this area will expand into Internet delivery
if they have not already done so. In addition, it is possible that some of
our customers in this area could expand into Internet delivery and become
our competitors.
Non-profit and membership organizations. We also face competition
from several non-profit and other organizations that offer both personal
and Internet-based products and services to assist individuals and
educational organizations with counseling, marketing and applications.
These organizations also provide information and advice to students through
the Internet.
Some of our competitors have more resources than we do. Our competitors may
be able to respond more quickly than we can to new technologies or changes in
Internet user preferences and devote greater resources than we can to the
development, promotion and sale of their services. We
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may not be able to maintain our competitive position against current or future
competitors, especially those with significantly greater resources.
THE PROPOSED ACQUISITION OF TWO INDEPENDENT FRANCHISES THAT ARE INCLUDED IN
"UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA" MAY NOT BE COMPLETED.
Our "Unaudited Pro Forma Consolidated Financial Data" gives effect to the
completion of this offering and the proposed acquisition of Princeton Review of
Boston, Inc. and Princeton Review of New Jersey, Inc. We have entered into an
agreement that provides us with the option, exercisable from the date of this
offering until December 31, 2000, to acquire these franchises. However, the
completion of this transaction is subject to a number of conditions, including
the fulfillment or waiver of the conditions to closing included in the agreement
and related documentation. We cannot assure you that these conditions will be
fulfilled or that this acquisition will be completed. Additionally, we are not
required to exercise the option and purchase these franchises. We may decide to
delay this acquisition or abandon it altogether. Moreover, even if this
acquisition is completed, the "Unaudited Pro Forma Consolidated Financial Data"
is for illustrative purposes only and is not necessarily indicative of the
financial results that would have been achieved if the acquisition had been
completed and should not be viewed as indicative of results of operations or
financial position in future periods.
WE RELY AND WILL CONTINUE TO RELY ON STATISTICAL STUDIES TO DEMONSTRATE THE
EFFECTIVENESS OF SEVERAL OF OUR PRODUCTS. OUR REPUTATION AND SALES AND MARKETING
EFFORTS COULD BE HARMED IF THE RESULTS OF THESE STUDIES ARE NOT REPRESENTATIVE
OR IF THEIR INTEGRITY IS QUESTIONED, WHICH COULD RESULT IN LOWER REVENUE.
We rely, and will continue to rely, on independent and internal statistical
studies to demonstrate that our test preparation products raise students'
admissions test scores. Further, our ability to gain market share in the K-12
market may depend on our ability to demonstrate improved outcomes on
state-mandated assessments through the use of our Homeroom.com Web site. We
expect to do this through the use of independent and internal statistical
studies. Our sales and marketing efforts, as well as our reputation, are
affected by the results of these statistical studies. If the public, including
existing and potential customers, perceives these studies to be biased or if the
results of these studies are not representative, our revenue could decline and
our business could suffer materially. These studies present the following risks:
- limited sample sizes may produce results that are not representative
of the general population of students who use our products;
- the methods used to gather the information upon which these studies
are based depend on cooperation from students and other participants
and inaccurate or incomplete responses could distort results; and
- as states modify and refine their mandated assessments, our historical
results may not provide an accurate indicator of the future success of
students using our Homeroom.com product.
NEGATIVE DEVELOPMENTS IN SCHOOL FUNDING COULD REDUCE OUR INSTITUTIONAL REVENUE.
We expect to derive a growing portion of our revenue from sales of our
products and services to educational institutions, including subscriptions to
Homeroom.com and our admissions counseling services. Our ability to generate
revenue from these sources may be adversely affected by decreased government
funding of education. Public school funding is heavily dependent on support from
federal, state and local governments and is sensitive to government budgets. In
addition, the government appropriations process is often slow and unpredictable.
Funding difficulties also could cause schools to be more resistant to price
increases in our products, compared to other businesses that might be better
able to pass on price increases to their customers.
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IF ADVERTISING OVER THE INTERNET IN EDUCATIONAL SETTINGS IS UNPOPULAR WITH
SPONSORS, THE PUBLIC OR GOVERNMENT ENTITIES, OUR SPONSORSHIP REVENUE MAY NOT
GROW AS ANTICIPATED.
If government or private action discourages or prevents businesses from
advertising in schools or other educational settings or we are not able to offer
potential sponsors access to our Web sites, our sponsorship revenue will be
significantly less than we expect and our overall revenue may grow more slowly
or decline. We hope to increase our revenue from the sale of sponsorships and
advertisements on our Web sites. However, advertisements in educational settings
may not be accepted by the educational community or by parents and policy
makers. Third parties that oppose corporate sponsorships in schools have engaged
in publicity campaigns to encourage boycotts of businesses that advertise in
schools, and have sought legislation to curb such advertising. Some colleges and
universities are becoming increasingly wary of businesses that market products
and services to their students, and many are seeking to reduce or eliminate such
marketing.
OUR BUSINESS IS SUBJECT TO SEASONAL FLUCTUATIONS, WHICH MAY CAUSE OUR OPERATING
RESULTS TO FLUCTUATE FROM QUARTER TO QUARTER. THIS MAY RESULT IN VOLATILITY OR
ADVERSELY AFFECT OUR STOCK PRICE.
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 majority of our test preparation revenue and revenue from
Review.com's sales of admissions marketing packages to colleges in the third
quarter. Since Homeroom.com's Internet-based subscription service has not yet
generated revenue, it is difficult for us to predict the impact of seasonal
factors on this business.
OUR QUARTERLY REVENUE AND OPERATING RESULTS ARE NOT INDICATIVE OF FUTURE
PERFORMANCE AND ARE DIFFICULT TO FORECAST.
Our quarterly revenue and operating results may not meet expectations of
public market analysts or investors, which could cause our stock price to
decline. In addition to the seasonal fluctuations described above, our revenue,
expenses and operating results may vary from quarter to quarter in response to a
variety of other factors beyond our control, including:
- our customers' spending patterns;
- the timing of school districts' funding sources and budget cycles;
- the timing of expirations and renewals of educational institution
subscriptions;
- the timing of corporate sponsorships and advertising; and
- non-recurring charges incurred in connection with acquisitions or
other extraordinary transactions.
Due to these factors, we believe that quarter-to-quarter comparisons of our
operating results may not be indicative of our future performance and you should
not rely on them to predict the future performance of our stock price. In
addition, our past results may not be indicative of future performance because
of our new businesses.
WE ARE HEAVILY DEPENDENT ON OUR RELATIONSHIPS WITH MCGRAW-HILL AND RANDOM HOUSE,
AND TERMINATION OR INTERRUPTION OF THESE RELATIONSHIPS COULD SIGNIFICANTLY
REDUCE OUR REVENUE.
Any termination of, or difficulties with, our relationships with
McGraw-Hill or Random House could significantly reduce our revenue. We derive
significant revenue from our services rendered to McGraw-Hill. These services
consist of developing content for their K-12 textbooks and workbooks and other
ancillary services. Revenue from McGraw-Hill represented 12% of our revenue in
1999 and 3% of our revenue in 1998. We rely on Random House as the publisher and
distributor of all of the books we write. Royalties and other fees from books
authored by us and published and distributed by Random House represented 7% of
our revenue in 1999 and 9% of our revenue in 1998.
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IF WE ARE NOT ABLE TO CONTINUALLY ENHANCE OUR INTERNET PRODUCTS AND SERVICES AND
ADAPT THEM TO CHANGES IN TECHNOLOGY, OUR FUTURE REVENUE GROWTH AND PROFITABILITY
COULD BE ADVERSELY AFFECTED.
If our improvement and adaptation of our Web sites and their related
technology is delayed, results in systems interruptions or is not aligned with
market expectations or preferences, our revenue growth and profitability could
be adversely affected. The Internet is a rapidly evolving environment, and the
technology used in Internet-related products changes rapidly. As Internet-based
industries continue to experience rapid technological changes, we must quickly
modify our solutions to adapt to emerging Internet standards and practices,
technological advances, and changing user and sponsor preferences. Ongoing
enhancement of our Web sites and related technology will entail significant
expense and technical risk. We may use new technologies ineffectively or fail to
adapt our Web sites and related technology on a timely and cost-effective basis.
IF WE FAIL TO RENEW OUR SUBSCRIPTION AGREEMENTS WITH HIGHER EDUCATION
INSTITUTIONS, WE COULD EXPERIENCE A DECLINE IN REVENUE.
The term of our Review.com subscription agreements with higher education
institutions is typically one year. If we fail to continually renew these
agreements, we may experience unanticipated declines in revenue. A decrease in
revenue could cause variations in operating results from quarter to quarter and
could adversely affect our stock price.
WE EXPECT TO INCREASE OUR RELIANCE ON RELATIONSHIPS WITH THIRD PARTY WEB SITES
TO ATTRACT VISITORS TO OUR WEB SITES. THESE RELATIONSHIPS MAY NOT DEVELOP, MAY
TERMINATE OR MAY NOT PRODUCE A SIGNIFICANT NUMBER OF VISITORS, WHICH COULD
ADVERSELY AFFECT OUR BUSINESS AND OUR ABILITY TO INCREASE OUR REVENUE.
As we expand our Internet-based businesses, we expect to increase our
reliance on contractual relationships with third party Web sites to attract a
portion of the user traffic on our Web sites. These relationships may not
develop, may terminate or may not produce a significant number of visitors,
which could adversely affect our business and our ability to increase our
revenue. We have entered into agreements with Student Advantage, Inc., Microsoft
Corporation, Bolt, Inc. and the providers of other third party Web sites to
either redirect their users to our Web sites or to display our branded content
and tools in order to drive co-registration on our Web sites. In order to
attract traffic to our Web sites, we will need to enter into additional similar
relationships. There can be no assurance that we will be able to maintain and
modify, if necessary, any existing agreements or enter into new agreements. Our
failure to maintain existing relationships, establish additional relationships
or fully capitalize on these relationships could reduce, or prevent us from
increasing, the number of visitors to our Web sites, which could make it more
difficult for us to market our products, attract corporate sponsors and generate
subscription, transaction and e-commerce revenue.
IF WE DO NOT ADEQUATELY PROTECT THE INTELLECTUAL PROPERTY RIGHTS TO OUR PRODUCTS
AND SERVICES, WE MAY LOSE THESE RIGHTS AND OUR BUSINESS MAY SUFFER MATERIALLY.
Failure to protect our intellectual property could materially adversely
affect our business. We depend on our ability to protect our brand, our products
and services and the systems that deliver those products and services to our
customers. We rely on a combination of copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
protect these products. These intellectual property rights distinguish our
products and services from those of our competitors. If others are able to copy,
use and market these products and delivery systems, then we may not be able to
maintain our competitive position. Despite our best efforts, we cannot assure
you that our intellectual property rights will not be infringed, violated or
legally imitated. Existing laws do not provide complete protection and policing
the unauthorized use of our products and services requires significant
resources.
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IF OUR USE OF "THE PRINCETON REVIEW" SERVICE MARK AND TRADEMARK WERE
SUCCESSFULLY CHALLENGED, OUR BUSINESS WOULD BE SIGNIFICANTLY HARMED.
We have used "The Princeton Review" as our principal service mark since
1982. Although we have registered the mark, our application for registration was
opposed by an educational institution and the validity of our registration is
uncertain. No one has objected to our use, as distinguished from federal
registration, of "The Princeton Review" as a service mark during the 18 years we
have used it. It is possible, however, that a third party could object to our
continued use of the mark. Litigation involving our rights to "The Princeton
Review" marks could be costly and we cannot predict with any certainty its
outcome. If we were prevented from using "The Princeton Review" as our service
mark or trademark and licensing the mark to our franchisees, our business would
be significantly harmed.
IF OUR PRODUCTS AND SERVICES INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF
OTHERS, THIS MAY RESULT IN COSTLY LITIGATION OR THE LOSS OF OUR OWN INTELLECTUAL
PROPERTY RIGHTS, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
Competitors and others may claim that we have infringed their current or
future intellectual property rights. The defense of any lawsuit, whether with or
without merit, could be time-consuming and costly. If a lawsuit against us is
successful, we may lose, or be limited in, the rights to offer our products and
services. Any proceedings or claims of this type could materially adversely
affect our business.
WE MAY BE HELD LIABLE FOR THE CONTENT OF MATERIALS THAT WE AUTHOR, CONTENT
AVAILABLE ON OUR WEB SITES OR PRODUCTS SOLD THROUGH OUR WEB SITES.
We may be subject to claims for defamation, negligence, copyright or
trademark infringement or other legal theories based on the content of materials
that we author, and content that is published on or downloaded from our Web
sites, accessible from our Web sites through links to other Web sites or posted
by our users in chat rooms or bulletin boards. These types of claims have been
brought, sometimes successfully, against online services as well as other print
publications in the past. Although we carry general liability insurance, our
insurance may not cover potential claims of this type, such as trademark
infringement or defamation, or may not be adequate to cover all costs incurred
in defense of potential claims or to indemnify us for all liability that may be
imposed. In addition, these claims, with or without merit, would result in
diversion of our management personnel and financial resources. Further, if print
publications that we author contain material that customers find objectionable,
these publications may have to be recalled, which could result in lost revenue
and adverse publicity.
THE LOSS OF OUR SENIOR MANAGEMENT OR OTHER KEY PERSONNEL COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
We depend on the continued service of our senior management and other key
personnel. The loss of any of our senior management or other key personnel could
materially adversely affect our future operating results. In particular, the
loss of the services of John Katzman, our founder, Chairman and Chief Executive
Officer, could materially adversely affect our business.
IF WE FAIL TO ATTRACT AND RETAIN QUALIFIED PERSONNEL IN A COMPETITIVE LABOR
MARKET, OUR BUSINESS COULD BE HARMED.
Our success depends on the employment of skilled management, technology,
sales and marketing and product development personnel. We must attract, retain
and motivate highly skilled employees. We face significant competition for
individuals with the skills required to develop, market and support our products
and services, especially those that are technology-based. If we fail to recruit
and retain sufficient numbers of these highly skilled employees, our business
could be harmed.
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OUR BUSINESS MAY BE HARMED BY ACTIONS TAKEN BY OUR FRANCHISEES THAT ARE OUTSIDE
OUR CONTROL.
Approximately 8% of our 1999 revenue was derived from royalties paid to us
by independent businesses that operate under franchise agreements with us and
from sales of our course and marketing materials to these franchisees. In North
America, 15 franchisees operate approximately 90 offices under the Princeton
Review name. The quality of franchised test preparation operations may be
diminished by any number of factors beyond our control. Franchisees may not
successfully provide test preparation services in a manner consistent with our
standards and requirements, or may not hire and train qualified managers or
instructors. If they do not, our image and reputation may suffer and our revenue
could decline.
FEDERAL AND STATE FRANCHISE REGULATION COULD LIMIT OUR ABILITY TO TERMINATE OR
REPLACE UNPRODUCTIVE FRANCHISES, WHICH COULD ADVERSELY AFFECT OUR RESULTS OR
OPERATIONS, AND FRANCHISE REGULATION COULD MAKE IT MORE DIFFICULT FOR US TO
EXPAND INTERNATIONALLY THROUGH FRANCHISING.
Applicable laws may delay or prevent us from terminating an unproductive
franchise or withholding consent to renewal or transfer of a franchise, which
could have an adverse effect on franchise royalties. We are subject to both
federal and state laws regulating the offer and sale of franchises. These laws
also frequently apply substantive standards to the relationship between
franchisor and franchisee and limit the ability of a franchisor to terminate or
refuse to renew a franchise. In addition, some foreign countries have laws
affecting the offer and sale of franchises within their borders and to their
citizens and U.S. federal and state franchise regulation may be applicable to
our efforts to establish franchises abroad. Failure to comply with these laws
could limit or preclude our ability to expand internationally through
franchising. Compliance with federal, state and international franchise laws can
be costly and time consuming, and we cannot assure you that we will not
encounter delays, expenses or other difficulties in this area. Further, the
nature and effect of any future legislation or regulation of our franchise
operations cannot be predicted.
OUR CORPORATE STRUCTURE MAY LIMIT OUR ACCESS TO THE CASH FLOW OF OUR OPERATING
SUBSIDIARIES.
We conduct our business through our subsidiaries. Accordingly, we have no
cash flow other than from dividends and other distributions from these
subsidiaries. Our right to any distribution of earnings or assets is subject to
the prior claims of the creditors of these subsidiaries.
IF WE NEED BUT ARE UNABLE TO OBTAIN ADDITIONAL CAPITAL TO EXPAND OUR OPERATIONS
AND INVEST IN NEW PRODUCTS AND SERVICES, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
The growth of our business requires substantial capital expenditures. We
expect that the net proceeds from this offering, together with currently
available funds, will be sufficient to meet our immediate working capital and
capital expenditure needs. However, in the future we may require substantial
additional capital to finance ongoing operations and future growth. To the
extent that our existing sources of liquidity and cash flow from operations are
insufficient to fund our activities, we may need to raise additional funds. We
cannot be certain that we will be able to obtain additional financing on
favorable terms. If we fail to raise additional funds, we may need to sell debt
or additional equity securities or to reduce our growth to a level that can be
supported by our cash flow. Without additional capital, we may not be able to:
- further develop or enhance our services and products;
- acquire necessary technologies, products or businesses;
- expand operations in the United States or internationally;
- hire, train and retain employees;
- market our services and products; or
- respond to competitive pressures or unanticipated capital
requirements.
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WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DILUTE THE EQUITY INTEREST OF
OUR STOCKHOLDERS, INCREASE OUR DEBT OR CAUSE US TO ASSUME CONTINGENT
LIABILITIES, ALL OF WHICH MAY HAVE A DETRIMENTAL EFFECT ON THE PRICE OF OUR
COMMON STOCK. IF ANY FUTURE ACQUISITIONS ARE NOT SUCCESSFULLY INTEGRATED WITH
OUR BUSINESS, OUR ONGOING OPERATIONS COULD BE NEGATIVELY AFFECTED.
While we have no current agreements or negotiations underway with respect
to any acquisitions, other than with respect to our franchises, we may acquire
businesses, products or technologies in the future. To facilitate future
acquisitions, we may take actions that could have a detrimental effect on our
results of operations or the price of our common stock, including:
- issuing equity securities or convertible debt securities, which would
dilute current stockholders' percentage ownership;
- incurring substantial debt; or
- assuming contingent liabilities.
Acquisitions also entail numerous business risks, including:
- difficulties in assimilating acquired operations, technologies or
products;
- unanticipated costs that could materially adversely affect our results
of operations;
- negative effects on our reported results of operations from
acquisition related charges and amortization of acquired technology
and other intangibles;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets in which we have no or limited prior
experience; and
- the potential inability to retain and motivate key employees of
acquired businesses.
OUR GROWTH STRATEGY WILL STRAIN OUR RESOURCES, AND IF WE FAIL TO MANAGE OUR
GROWTH, OUR ABILITY TO OPERATE OUR BUSINESS MAY BE HARMED.
Our failure to effectively manage our growth could disrupt our operations
and ultimately prevent us from generating the revenue we expect. We expect that
significant expansion of our operations will be required to successfully
implement our business strategy. For example, the expansion of our Internet
businesses continues to require increased development efforts, sales, marketing
and promotion expenditures. This expansion will place significant demands on our
management, and strain our operational, financial and technological resources,
as well as our Web sites and services infrastructure.
WE COULD BE LIABLE FOR EVENTS THAT OCCUR AT OUR TEST PREPARATION FACILITIES.
We could become liable for the actions of instructors and other personnel
at the facilities we use to provide our classroom-based test preparation
courses. In the event of on-site accidents, injuries or other harm to students,
we could face claims alleging that we were negligent, provided inadequate
supervision or were otherwise liable for the injuries. Although we maintain
liability insurance, this insurance coverage may not be adequate to protect us
fully from these claims. In addition, we may not be able to obtain liability
insurance in the future at reasonable prices or at all. A successful liability
claim could adversely affect our reputation and our financial results. Even if
unsuccessful, such a claim could cause unfavorable publicity, entail substantial
expense and divert the time and attention of key management personnel.
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RISKS RELATED TO THE INTERNET INDUSTRY
IF THE USE OF THE INTERNET DOES NOT GROW AS ANTICIPATED, OUR REVENUE COULD
DECLINE AND OUR BUSINESS WOULD BE HARMED.
We depend, in part, on the increased acceptance and use of the Internet by
consumers and educational institutions, particularly students, parents,
colleges, universities and elementary and secondary schools. Rapid growth in the
use of the Internet is a recent occurrence, and if the use of the Internet does
not grow as anticipated, our revenue could decline and our business would be
harmed. The market for Internet-based products and services is characterized by
rapid technological change and product innovation, unpredictable product life
cycles and unpredictable user preferences. Acceptance and use of the Internet
may not continue to develop at historical rates and a sufficiently broad base of
customers may not adopt or continue to use the Internet as a medium of commerce.
Demand and market acceptance for recently introduced products and services over
the Internet are subject to a high level of uncertainty, and we, therefore,
cannot predict whether the market for Internet-based educational products will
continue to grow.
IF WE EXPERIENCE SYSTEM FAILURES, OUR REPUTATION MAY BE HARMED AND USERS MAY
SEEK ALTERNATE SERVICE PROVIDERS CAUSING US TO LOSE REVENUE.
If our computer systems were to fail or be disrupted, our services could be
interrupted and we may lose revenue and future business. We depend on the
efficient and uninterrupted operation of our computer and communications
hardware and software systems. These systems and operations are vulnerable to
damage or interruption from floods, fires and power loss and similar events, as
well as computer viruses, break-ins, sabotage, intentional acts of vandalism and
other misconduct and disruptions or delays occurring throughout the Internet
network infrastructure. Substantially all of the computer hardware for operating
our Web sites is currently located at a third party hosting facility.
Accordingly, our Internet operations are also dependent on this third party's
ability to maintain its systems in effective working order and to protect them
from disruptive events. Not all of our systems are fully redundant, and we do
not have a formal disaster recovery plan. Our insurance policies may not
adequately compensate us for any losses that may occur due to failures of or
interruptions in our systems.
In addition, the system failures of third party Internet service providers,
online service providers and other Web site operators could produce
interruptions in our service for those users who access our services through
these third party providers. Service interruptions could reduce our revenue and
our future revenue will be harmed if our users believe that our system is
unreliable.
IF OUR COMPUTER SYSTEMS ARE UNABLE TO ACCOMMODATE A HIGH VOLUME OF TRAFFIC ON
OUR WEB SITES, THE GROWTH OF OUR REVENUE COULD BE REDUCED OR LIMITED.
If the volume of traffic on our Web sites increases beyond our capacity,
customers may experience delays and interruptions in service. As a result, they
may seek the products and services of our competitors and the growth of our
revenue could be reduced or limited. Because we seek to generate a high volume
of traffic and accommodate a large number of customers on our Web sites, the
satisfactory performance, reliability and availability of our Web sites,
processing systems and network infrastructure are critical to our reputation and
our ability to serve our customers. If the volume of traffic on our Web sites
continues to increase, we will need to expand and upgrade our technology,
transaction processing systems and network infrastructure. Our Web sites have in
the past and may in the future experience slower response times due to increased
traffic.
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FUTURE REGULATIONS PERTAINING TO THE INTERNET COULD DECREASE THE DEMAND FOR OUR
PRODUCTS OR INCREASE THE COST OF DOING BUSINESS.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could increase our cost of doing business,
decrease the demand for our products and services, or otherwise harm our
business. Future laws or regulations may relate to information retrieved from or
transmitted over the Internet, consumer protection, online content, user
privacy, taxation and the quality of products and services. Compliance with
future laws and regulations could be expensive, time consuming, impractical or
impossible.
WE MAY BE LIABLE FOR INVASION OF PRIVACY OR MISAPPROPRIATION BY OTHERS OF OUR
USERS' INFORMATION, WHICH COULD ADVERSELY AFFECT OUR REPUTATION AND FINANCIAL
RESULTS.
Some of our services require the disclosure of sensitive information by the
user. We rely on a number of security systems for our services to protect this
information from unauthorized use or access. We cannot predict whether new
technological developments could circumvent these security measures. If the
security measures that we use to protect personal information or credit card
information are ineffective, we may be subject to liability, including claims
for invasion of privacy, impersonation, unauthorized purchases with credit card
information or other similar claims. In addition, the Federal Trade Commission
and several states have investigated the use of personal information by certain
Internet companies. We could incur significant expenses if new regulations
regarding the use of personal information are introduced or if our privacy
practices are investigated.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY LOSE ALL OR A PART OF YOUR
INVESTMENT.
The market prices of the securities of Internet-related companies have been
volatile, and have experienced fluctuations that often have been unrelated to or
disproportionate to the operating performance of these companies. These broad
market fluctuations could adversely affect the market price of our stock. In
addition, our stock price is likely to be volatile as a result of one or more of
the following factors, most of which are beyond our control:
- variations in our quarterly operating results;
- changes in securities analysts' estimates of our financial
performance;
- loss of a major customer or failure to complete significant
transactions;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- changes in market valuations of similar companies;
- the discussion of our company or stock price in online investor
communities such as chat rooms;
- additions or departures of key personnel; and
- fluctuations in stock market price and volume.
Our investors may not be able to sell their shares at or above the initial
public offering price. In the past, following periods of volatility in the
market price for a company's securities, stockholders often have instituted
securities class action litigation. If a lawsuit were to be filed against us, it
could result in substantial costs and the diversion of our management's
attention and resources, which could seriously harm our financial results or
result in a decline in the market price of our common stock.
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THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE COULD CAUSE THE MARKET PRICE FOR OUR COMMON STOCK TO DECLINE.
Sales of substantial amounts of shares of our common stock in the public
market following this offering, or the perception that those sales will occur,
could cause the market price of our common stock to decline. Those sales also
might make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate because investors could purchase
shares in the public market instead of directly from us. After the completion of
this offering, we will have a large number of shares of common stock outstanding
and available for resale beginning at various times in the future. Some of the
holders of our common stock also have demand and piggyback registration rights
enabling them to register their shares for sale under the Securities Act. For
more detailed information, see "Shares Eligible for Future Sale."
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF YOUR SHARES.
The initial public offering price is substantially higher than the net
tangible book value per share of our common stock. You will, therefore, incur
immediate dilution of $ in pro forma net tangible book value per share
of common stock from the price you pay for our common stock, based on an assumed
public offering price of $ per share. You will incur additional
dilution upon the exercise of outstanding stock options or if the underwriters
exercise their over-allotment option. For more detailed information, see
"Dilution."
OUR SECURITIES HAVE NO PRIOR PUBLIC MARKET, AND OUR STOCK PRICE MAY DECLINE
AFTER THIS OFFERING.
After this offering, the market price of our common stock may decline below
the initial public offering price. In addition, an active public market for our
common stock may not develop or be sustained after this offering. Before this
offering, there has not been a public market for our common stock. The initial
public offering price will be determined by negotiations between us and
representatives of the underwriters. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.
WE HAVE ANTI-TAKEOVER PROTECTIONS, WHICH MAY DISCOURAGE OR PREVENT A TAKEOVER OF
US, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Certain provisions of our certificate of incorporation and bylaws, as well
as provisions of Delaware law, could make it more difficult for another company
to acquire us, even if a takeover would benefit our stockholders. The provisions
in our corporate documents permit us to:
- authorize the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares, making a takeover more difficult and expensive;
- prohibit cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
- limit the ability of stockholders to call special meetings of
stockholders;
- prohibit stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
- establish advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon
by stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law and the terms
of our stock option plans may discourage, delay or prevent a change in our
control, which may depress the market price of our common stock.
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WE MAY SEEK TO RAISE ADDITIONAL FUNDS, FINANCE ACQUISITIONS OR DEVELOP STRATEGIC
RELATIONSHIPS BY ISSUING CAPITAL STOCK, WHICH WOULD REDUCE THE PERCENTAGE
OWNERSHIP OF EXISTING STOCKHOLDERS.
We may seek to raise additional funds, finance acquisitions or develop
strategic relationships by issuing equity or convertible debt securities, which
can be done without stockholder approval, thereby reducing the percentage
ownership of existing stockholders. Furthermore, any new securities could have
rights, preferences or privileges senior to those of our common stock.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION IN THE USE OF THE PROCEEDS FROM THIS
OFFERING AND YOU MAY NOT AGREE WITH THESE USES.
We plan to use the net proceeds from this offering for product development,
expansion of our sales and marketing efforts, working capital and general
corporate purposes. If we acquire the franchises currently under option, we
expect to use a portion of the net proceeds from this offering to consummate the
acquisition. We may also use a portion of the net proceeds from this offering to
acquire or invest in complementary businesses or technologies and to repurchase
other franchises currently held by our independent franchisees. We will have
broad discretion in determining how we apply the proceeds from this offering,
and stockholders may not agree with these uses. We may not be successful in
investing the proceeds from this offering in our operations or external
investments to yield a favorable return.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS AND MAY PREVENT A CHANGE OF CONTROL.
Upon completion of this offering, our present directors and executive
officers, holders of more than 5% of our common stock and their affiliates will
beneficially own approximately % of our outstanding common stock. As a
result, these stockholders, if they act as a group, will be able to control all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This control may have the effect
of delaying, preventing or deterring a change in control of our company and
could deprive our stockholders of an opportunity to receive a premium for their
common stock as part of any sale or acquisition.
18
<PAGE> 23
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about us and our industry.
We generally identify forward-looking statements in this prospectus using words
such as "believe," "intend," "expect," "may," "could," "would," "will,"
"should," "plan," "project," "contemplate," "anticipate" or similar statements.
These statements are based on our beliefs as well as assumptions we made using
information currently available to us. Because these statements reflect our
current views concerning future events, these forward-looking statements involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors, as
more fully described in "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere in this
prospectus. 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.
OUR RESTRUCTURING
Until March 31, 2000, we operated as an S corporation with four
majority-owned limited liability company subsidiaries. On April 1, 2000, we
completed a corporate restructuring. As part of our restructuring, all
stockholders of the S corporation and all minority holders of the equity
interests in our subsidiaries contributed their interests to a newly formed
holding company. In exchange for these interests, we issued to these holders a
total of 14,848,681 shares of Class A common stock and 2,151,317 shares of Class
B non-voting common stock of the holding company. As a result of this
restructuring, our status as an S corporation terminated.
Immediately prior to our restructuring, we distributed to the stockholders
of the S corporation and the minority interest holders of one of our limited
liability company subsidiaries a total of 742,876 shares of common stock of
Student Advantage held by the subsidiary. The public market value of this stock
on the date of distribution was approximately $7,429,000.
Prior to our restructuring, we maintained a Phantom Stock Unit, or PSU,
Plan and a Stock Appreciation Rights, or SAR, Plan for the benefit of our
employees. In connection with our restructuring, we adopted our 2000 Stock
Incentive Plan and terminated the PSU and SAR plans. In exchange for
relinquishing their interests in PSUs and SARs, the participants in these plans
received a total of 1,084,132 shares of Class B non-voting common stock, options
under our stock incentive plan exercisable for a total of 1,562,922 shares of
Class B non-voting common stock and cash payments totaling approximately $5.6
million. Participants in the PSU and SAR plans also received on April 18, 2000 a
total of 32,168 shares of common stock of Student Advantage with a total public
market value of approximately $168,000 on the date of distribution.
Persons who participated in various aspects of these restructuring
transactions include a number of our executive officers and directors and Random
House TPR, Inc., a holder of approximately 15% of our common stock. The
interests of these parties in the restructuring transactions are further
described in this prospectus under "Related Party Transactions."
19
<PAGE> 24
RECENT DEVELOPMENTS
OPTION AGREEMENT TO PURCHASE TWO OF OUR INDEPENDENT FRANCHISES
On May 30, 2000, we entered into an option agreement to acquire the assets
comprising the businesses of Princeton Review of Boston and Princeton Review of
New Jersey. Each of these entities provides test preparation courses under The
Princeton Review name through one or more franchise agreements with us.
Under this option agreement, we have the option to acquire the operations
of Princeton Review of Boston and Princeton Review of New Jersey for a total
purchase price of approximately $12.5 million, payable in cash and a note,
subject to adjustment in accordance with the purchase agreement. If we exercise
this option, we will be required to purchase the operations of both of these
entities. This option becomes effective upon the completion of this offering and
remains in effect until December 31, 2000. If we exercise the option, we must
sign a definitive purchase agreement within 30 days of exercise and consummate
the purchase within 90 days of exercise. The option agreement also restricts us,
subject to a number of limited exceptions, from consummating the acquisition of
any entity holding a Princeton Review franchise for Los Angeles, California,
Denver, Colorado, Westport, Connecticut or the State of Texas, for one year from
the date of the agreement, unless we complete the acquisition contemplated by
the option agreement.
If we exercise our option to purchase these operations, 75% of the purchase
price will be payable in cash at the time of closing and 25% of the purchase
price will be paid by delivery of a convertible five-year promissory note. The
promissory note will be payable in 20 equal quarterly installments beginning
with the 17th calendar quarter following the closing date of the acquisition and
will bear interest at the rate of 8.25% per year. The promissory note will be
convertible into our common stock at the price per share at which shares of our
common stock are sold in this initial public offering for a period of 60 days,
beginning on the first anniversary date of the closing of the acquisition.
During this period, the holder of the note may convert 100% or any percentage
between 0% and 33% of the unpaid principal amount due under the note into common
stock.
For the year ended December 31, 1999, Princeton Review of Boston and
Princeton Review of New Jersey had combined revenue of approximately $10.3
million.
bigchalk.com DISTRIBUTION AGREEMENT
On June 15, 2000, we entered into a distribution agreement with
bigchalk.com, an education destination for the K-12 learning community. Under
this agreement, bigchalk.com serves as the exclusive third party distributor of
our Homeroom.com online subscription service to K-12 educational institutions
and also has the right to sell Homeroom.com subscriptions to users of
bigchalk.com's Web sites on a nonexclusive basis. We also will sell Homeroom.com
subscriptions to these markets. The version of Homeroom.com to be distributed
either by us or by bigchalk.com to K-12 educational institutions will be
co-branded. If bigchalk.com fails to generate sales of subscriptions to
Homeroom.com that meet prescribed benchmarks, its exclusivity will terminate.
The agreement provides that we and bigchalk.com will share revenue based on
actual gross cash receipts from our and bigchalk.com's sales of Homeroom.com
subscriptions to K-12 educational institutions and bigchalk.com's sales of
Homeroom.com subscriptions through its Web sites. After June 1, 2001, either
party may terminate the agreement upon 12 months notice. After termination of
the agreement other than for breach by bigchalk.com, bigchalk.com may continue
to sell subscriptions to Homeroom.com on a nonexclusive basis for two years from
the date of termination, so long as bigchalk.com does not develop, promote, sell
or give away a product competitive with Homeroom.com. For two years after
termination of the agreement, bigchalk.com will also continue to receive its
proportionate share of revenue from renewals of subscribers originated by
bigchalk.com.
20
<PAGE> 25
ACQUISITION OF TWO OF OUR INDEPENDENT FRANCHISES
On August , 2000, we acquired the operations of Princeton Review of
Hawaii and Princeton Review of Quebec, each of which provided test preparation
courses under The Princeton Review name through franchise agreements with us.
The total purchase price for this acquisition was approximately $320,000 in
cash. For the year ended December 31, 1999, Princeton Review of Hawaii and
Princeton Review of Quebec had combined revenue of approximately $405,000.
21
<PAGE> 26
USE OF PROCEEDS
We will receive net proceeds of approximately $ from the sale of
shares of common stock at an assumed initial public offering price of
$ per share, after deducting underwriting discounts and commissions of
$ million and estimated offering expenses of approximately $ . If
the underwriters exercise their over-allotment option in full, we will receive
net proceeds of approximately $ million.
We expect to use the net proceeds from this offering for product
development, expansion of our sales and marketing efforts, working capital and
general corporate purposes. We may also use a portion of the net proceeds from
this offering to acquire or invest in complementary businesses or technologies
and to repurchase franchises currently held by our independent franchisees. We
have entered into an option agreement allowing us to acquire two of our
independent franchises. This agreement is described under "Recent
Developments -- Option Agreement to Purchase Two of Our Independent Franchises"
in this prospectus. If we acquire these franchises, we expect to use a portion
of the net proceeds from this offering to consummate the acquisition. We have no
present commitments or agreements with respect to any material acquisition or
investment or with respect to the repurchase of any of our franchises, other
than those described above. Pending such uses, we intend to invest the net
proceeds from this offering in short-term, interest-bearing, investment-grade
securities.
The above description represents our present intentions based on our
current plans and business conditions. Unforeseen events or changed business
conditions, however, could result in the application of the net proceeds from
this offering in a manner other than as described in this prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities and we do not intend to pay any cash dividends with respect to
our common stock in the foreseeable future. We intend to retain any earnings for
use in the operation of our business and to fund future growth.
22
<PAGE> 27
CAPITALIZATION
The following table describes our capitalization as of June 30, 2000:
- on an actual basis;
- on a pro forma basis giving effect to our proposed acquisition of
Princeton Review of Boston and Princeton Review of New Jersey, as
described under "Recent Developments -- Option Agreement to Purchase Two
of Our Independent Franchises," as if such transactions had occurred on
June 30, 2000; and
- on a pro forma as adjusted basis giving further effect to the conversion
of all of our outstanding preferred stock, Class B non-voting common
stock and Class A common stock into common stock upon completion of this
offering and our sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share,
after deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
You should read this table together with our consolidated financial
statements and the related notes "Unaudited Pro Forma Consolidated Financial
Data" and the other information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Long-term debt, net of current portion...................... $ 538 $ 10,034
Series A redeemable convertible preferred stock, $0.01 par
value; 5,000,000 shares authorized, 3,748,548 issued and
outstanding actual and pro forma; no shares authorized,
issued or outstanding pro forma as adjusted............... 25,505 25,505
Class B redeemable non-voting common stock, $.01 par value;
10,000,000 shares authorized and 3,235,449 shares issued
and outstanding actual and pro forma; no shares
authorized, issued or outstanding pro forma as adjusted... 6,989 6,989
Stockholders' equity (deficit):
Class A common stock, $.01 par value; 25,000,000 shares
authorized, 14,848,681 shares issued and outstanding
actual and pro forma; no shares authorized, issued or
outstanding pro forma as adjusted....................... 148 148
Additional paid-in capital................................ 4,567 4,567
Accumulated deficit....................................... (9,545) (9,545)
Accumulated other comprehensive income.................... 3,379 3,379
----------- --------
Total stockholders' equity (deficit).................... (1,450) (1,450)
----------- --------
Total capitalization.................................... $ 31,582 $ 41,078
=========== ========
</TABLE>
23
<PAGE> 28
Outstanding share information is based on our shares outstanding as of June
30, 2000. This information excludes:
- 1,734,429 shares of common stock underlying options granted under our
stock incentive plan and outstanding as of July 31, 2000 at a weighted
average exercise price of $5.81 per share;
- 181,441 additional shares of common stock reserved for future issuance
under our stock incentive plan as of July 31, 2000;
- 1,000,000 additional shares of common stock that will be reserved for
future issuance under our stock incentive plan upon the completion of
this offering; and
- assuming an initial public offering price of $ per share, up to
shares of common stock issuable under warrants outstanding as
of , 2000, with an exercise price equal to the initial
public offering price of our common stock in this offering.
24
<PAGE> 29
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was approximately
$ million, or $ per share of common stock. Pro forma net tangible book
value per share is equal to our total net tangible book value, which is total
tangible assets less total liabilities, giving effect to our proposed
acquisition of Princeton Review of Boston and Princeton Review of New Jersey
divided by the pro forma number of shares of common stock outstanding, giving
effect to the conversion of our outstanding preferred stock into common stock.
At an assumed initial public offering price of $ per share and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us, our pro forma net tangible book value as of June 30, 2000 would
have been $ million, or $ per share. This represents an immediate
increase in pro forma net tangible book value to existing stockholders of $
per share and an immediate dilution to new investors of $ per share. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $
Pro forma net tangible book value per share as of June 30,
2000................................................... $
Increase per share attributable to this offering..........
Pro forma as adjusted net tangible book value per share.....
---
Dilution per share to new investors......................... $
===
</TABLE>
Assuming the underwriters' over-allotment option is exercised in full, our
adjusted pro forma net tangible book value as of June 30, 2000 would have been
approximately $ per share, representing an immediate increase in pro forma
net tangible book value of $ per share to our existing stockholders and an
immediate dilution of $ per share to new investors.
The following table illustrates on a pro forma basis, as of June 30, 2000,
the difference between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid or to be paid
by our existing stockholders and by new investors at an assumed initial public
offering price of $ per share and before deducting underwriting discounts
and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.........
New investors.................
---------- -------- ----------- --------
Total.............
========== ======== =========== ========
</TABLE>
The above computations exclude 1,734,429 shares of common stock issuable
upon the exercise of options outstanding as of July 31, 2000 at a weighted
average exercise price of $5.81 per share. To the extent any of these options
are exercised, there will be further dilution to new investors. The above
computations also exclude 181,441 shares of common stock reserved for issuance
under our stock incentive plan, 1,000,000 additional shares of common stock that
will be reserved for future issuance under our stock incentive plan upon the
completion of this offering and, assuming an initial public offering price of
$ per share, up to shares of common stock issuable under warrants
outstanding as of , 2000, with an exercise price equal to the
initial public offering price of our common stock in this offering.
25
<PAGE> 30
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Our unaudited pro forma consolidated financial data as of June 30, 2000 and
for the year ended December 31, 1999 and for the six months ended June 30, 2000
includes:
- our summary historical consolidated financial data;
- summary historical combined financial data of Princeton Review of Boston
and Princeton Review of New Jersey;
- pro forma adjustments made to the historical financial data presented;
- our summary unaudited pro forma consolidated financial data, giving
effect to the proposed acquisition of Princeton Review of Boston and
Princeton Review of New Jersey as if it had been completed January 1,
1999, in the case of the statement of operations data, and June 30, 2000,
in the case of the balance sheet data; and
- our summary unaudited pro forma as adjusted consolidated financial data
giving further effect to the conversion of all of our outstanding
preferred stock, Class A common stock and Class B non-voting common stock
into common stock upon the completion of this offering and the issuance
of shares of common stock offered by this prospectus at the
initial public offering price of $ per share, after deducting
underwriting discounts and estimated offering expenses payable by us.
The summary unaudited pro forma and pro forma as adjusted consolidated
financial data is not necessarily indicative of the operating results or the
financial condition that would have been achieved if we had acquired these
businesses as of the dates indicated and should not be construed as
representative of our future operating results or financial condition. The
summary historical and unaudited pro forma consolidated financial data is
qualified by reference to and should be read in conjunction with the financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. Our financial data as of and for the six months ended June 30, 2000
is derived from our unaudited consolidated financial statements included
elsewhere in this prospectus. In the opinion of our management, these unaudited
consolidated financial statements have been prepared by us on a basis consistent
with our annual audited consolidated financial statements which appear elsewhere
in this prospectus and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of our financial position
and results of operations for these unaudited periods.
26
<PAGE> 31
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------
COMBINED
PRINCETON REVIEW OF
BOSTON AND
PRINCETON PRINCETON REVIEW OF PRO FORMA
REVIEW NEW JERSEY ADJUSTMENTS PRO FORMA
--------- ------------------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue
Instruction and Guidance......................... $29,901 $10,345 $(1,401)(1) $38,845
Review.com....................................... 5,289 -- -- 5,289
Homeroom.com..................................... 5,112 -- -- 5,112
------- ------- ------- -------
Total revenue............................. 40,302 10,345 (1,401) 49,246
------- ------- ------- -------
Cost of revenue
Instruction and Guidance......................... 9,759 4,959 (1,401)(1) 13,317
Review.com....................................... 1,469 -- -- 1,469
Homeroom.com..................................... 1,942 -- -- 1,942
------- ------- ------- -------
Total cost of revenue..................... 13,170 4,959 (1,401) 16,728
------- ------- ------- -------
Gross profit.............................. 27,132 5,386 -- 32,518
Operating expenses
Selling, general and administrative.............. 28,815 3,851 (217)(2)(3) 32,449
Research and development......................... 878 -- -- 878
------- ------- ------- -------
Total operating expenses.................. 29,693 3,851 (217) 33,327
------- ------- ------- -------
Operating income (loss)............................ (2,561) 1,535 217 (809)
Gain (loss) on distribution/sale of securities and
other assets..................................... 1,049 (6) -- 1,043
Interest expense................................... (88) -- (898)(4) (986)
Other income....................................... 90 59 -- 149
------- ------- ------- -------
Income (loss) before minority interests and
(provision) benefit for income taxes............. (1,510) 1,588 (681) (603)
Minority interests' share of income in
subsidiaries..................................... (585) -- -- (585)
Income (loss) before (provision) benefit for income
taxes............................................ (2,095) 1,588 (681) (1,188)
(Provision) benefit for income taxes............... 51 (18) -- 33
------- ------- ------- -------
Net income (loss).................................. $(2,044) $ 1,570 $ (681) $(1,155)
======= ======= ======= =======
Net income (loss) per share -- basic and diluted... $ (0.17) $ (0.09)
======= =======
Weighted average basic and diluted shares used in
computing net income (loss) per share............ 12,298 12,298
</TABLE>
See the accompanying notes to our unaudited pro forma consolidated financial
data.
27
<PAGE> 32
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
---------------------------------------------------------
COMBINED
PRINCETON REVIEW OF
BOSTON AND
PRINCETON PRINCETON REVIEW OF PRO FORMA
REVIEW NEW JERSEY ADJUSTMENTS PRO FORMA
--------- ------------------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue
Instruction and Guidance......................... $16,279 $ 5,151 $ (761)(1) $20,669
Review.com....................................... 1,950 -- -- 1,950
Homeroom.com..................................... 1,889 -- -- 1,889
------- ------- ------- -------
Total revenue............................. 20,118 5,151 (761) 24,508
------- ------- ------- -------
Cost of revenue
Instruction and Guidance......................... 5,656 2,425 (761)(1) 7,320
Review.com....................................... 575 -- -- 575
Homeroom.com..................................... 359 -- -- 359
------- ------- ------- -------
Total cost of revenue..................... 6,590 2,425 (761) 8,254
------- ------- ------- -------
Gross profit.............................. 13,528 2,726 -- 16,254
Operating expenses
Selling, general and administrative.............. 29,173 1,915 6(2)(3) 31,094
Research and development......................... 370 -- -- 370
------- ------- ------- -------
Total operating expenses.................. 29,543 1,915 6 31,464
------- ------- ------- -------
Operating income (loss).......................... (16,015) 811 (6) (15,210)
Gain on distribution/sale of securities and other
assets........................................... 7,597 -- -- 7,597
Interest expense................................... (70) -- (449)(4) (519)
Other income....................................... 271 50 -- 321
------- ------- ------- -------
Income (loss) before minority interests, equity
interest in operations of affiliates and
(provision) benefit for income taxes............. (8,217) 861 (455) (7,811)
Minority interests' share of income in
subsidiaries..................................... (50) -- -- (50)
Equity interest in operations of affiliates........ 196 -- -- 196
Income (loss) before (provision) benefit for income
taxes............................................ (8,071) 861 (455) (7,665)
(Provision) benefit for income taxes............... 5,861 (15) -- 5,846
------- ------- ------- -------
Net income (loss).................................. $(2,210) $ 846 $ (455) $(1,819)
======= ======= ======= =======
Net income (loss) per share -- basic and diluted... $ (0.15) $ (0.12)
======= =======
Weighted average basic and diluted shares used in
computing net income (loss) per share............ 15,191 15,191
</TABLE>
See the accompanying notes to our unaudited pro forma consolidated financial
data.
28
<PAGE> 33
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-------------------------------------------------------------------
COMBINED
PRINCETON
REVIEW OF
BOSTON AND
PRINCETON
PRINCETON REVIEW OF PRO FORMA PRO FORMA
REVIEW NEW JERSEY ADJUSTMENTS PRO FORMA AS ADJUSTED
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
ASSETS
Current assets:
Cash and cash equivalents................................. $15,490 $2,385 $(3,000)(5) $14,875
Accounts receivable, net.................................. 3,817 -- 3,817
Accounts receivable -- related parties.................... 2,019 156 (160)(6) 2,015
Other receivables......................................... 74 74
Other receivables -- related parties...................... 329 329
Inventories............................................... 528 528
Prepaid expenses.......................................... 92 80 172
Securities, available for sale............................ 5,813 5,813
Other assets.............................................. 2,446 534 2,980
------- ------ ------- -------
Total current assets.................................... 30,608 3,155 (3,160) 30,603
Furniture, fixtures and equipment, net...................... 3,908 205 4,113
Franchise costs, net........................................ 191 141 332
Territorial marketing rights, net........................... 1,647 1,647
Publishing rights, net...................................... 1,406 1,406
Deferred income taxes....................................... 6,089 6,089
Investments in affiliates................................... 1,196 1,196
Other assets................................................ 796 228 10,650(7) 11,674
------- ------ ------- -------
Total assets............................................ $45,841 $3,729 $ 7,490 $57,060
======= ====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 935 $ 7 $ 942
Accrued expenses and taxes payable........................ 4,912 222 5,134
Accrued expenses -- related parties....................... 149 4 $ (160)(6) (7)
Current maturities of long-term debt...................... 355 355
Deferred income........................................... 4,582 1,650 6,232
Book advances............................................. 930 930
Book advances -- related parties.......................... 493 493
Deferred income taxes..................................... 1,902 1,902
------- ------ ------- -------
Total current liabilities............................... 14,258 1,883 (160) 15,981
Long-term debt.............................................. 538 9,496(8) 10,034
Minority interest........................................... -- --
Series A redeemable convertible preferred stock, $.01 par
value; 5,000,000 shares authorized, 3,748,548 shares
issued and outstanding.................................... 25,505 25,505
Class B redeemable non-voting common stock, $01 par value;
10,000,000 shares authorized, 3,235,449 shares issued and
outstanding............................................... 6,989 6,989
Stockholders' equity (deficit):
Class A common stock $.01 par value; 25,000,000 shares
authorized, 14,848,681 shares issued and outstanding...... 148 1 (1) 148
Additional paid-in capital.................................. 4,567 675 (675) 4,567
Retained earnings (accumulated deficit)..................... (9,545) 1,010 (1,010) (9,545)
Accumulated other comprehensive income...................... 3,379 160 (160) 3,379
------- ------ ------- -------
Total stockholders' equity (deficit).................... (1,450) 1,846 (1,846)(9) (1,450)
------- ------ ------- -------
Total liabilities and stockholders' equity.............. $45,841 $3,729 $ 7,490 $57,060
======= ====== ======= =======
</TABLE>
See the accompanying notes to our unaudited pro forma consolidated financial
data.
29
<PAGE> 34
---------------
(1) Represents the elimination of royalty payments and payments for course and
marketing materials and other products received by us from these entities
during the periods presented.
(2) Represents the elimination of $927,000 for the year ended December 31, 1999
and $349,000 for the six months ended June 30, 2000 in salaries of the
principals of these entities who will no longer be employed.
(3) Represents amortization of goodwill, over a 15-year period, of $710,000 for
the year ended December 31, 1999 and $355,000 for the six months ended June
30, 2000 arising from the transaction.
(4) Represents interest expense related to anticipated borrowings to finance
this acquisition consisting of an approximately $3.1 million convertible
note to the sellers and expected bank debt of $6.5 million. The sellers'
note would bear interest at the rate of 8.25% per year. Interest on the bank
indebtedness is estimated using a 10% rate of interest. This adjustment
assumes that the note is not converted into common stock during the periods
presented.
(5) Represents the cash portion of the purchase price of the acquisition, net of
expected indebtedness.
(6) Represents the elimination of $160,000 receivable due from these entities.
(7) Represents goodwill resulting from the acquisition of these businesses of
approximately $10.7 million.
(8) Represents our anticipated incurrence of indebtedness in connection with the
financing of this acquisition as described in Note 3 above.
(9) Represents the elimination of stockholders' equity of approximately $1.8
million.
30
<PAGE> 35
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The consolidated statement of operations data for each of the years ended
December 31, 1997, 1998 and 1999 and for the six months ended June 30, 1999 and
2000, and the consolidated balance sheet data as of December 31, 1998 and 1999
and June 30, 2000 has been derived from our consolidated financial statements
appearing elsewhere in this prospectus. The consolidated statement of operations
data for the years ended December 31, 1995 and 1996 and the consolidated balance
sheet data as of December 31, 1995, 1996 and 1997 has been derived from our
consolidated financial statements which are not included in this prospectus.
Deloitte & Touche LLP, independent auditors, have audited the consolidated
financial statements for the years ended December 31, 1995, 1996 and 1997 and
Ernst & Young LLP, independent auditors, have audited the consolidated financial
statements for the years ended December 31, 1998 and 1999. The consolidated
statement of operations data for the six months ended June 30, 1999 and 2000 and
the consolidated balance sheet data as of June 30, 2000 is unaudited. In the
opinion of our management, the unaudited consolidated financial statements have
been prepared on a basis consistent with the annual audited consolidated
financial statements which appear elsewhere in this prospectus, and include all
adjustments, consisting only of normal recurring adjustments necessary for a
fair statement of our financial position and results of operations for these
unaudited periods. The information shown below is qualified by reference to and
should be read together with our consolidated financial statements and their
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. We have calculated
the weighted average shares used in computing net income (loss) per share as
described in Note 1 to our consolidated financial statements.
31
<PAGE> 36
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue
Instruction and Guidance............................. $24,075 $23,242 $27,380 $28,323 $29,901 $13,711 $16,279
Review.com........................................... 2,910 3,238 5,134 4,464 5,289 1,847 1,950
Homeroom.com......................................... -- -- -- 959 5,112 1,718 1,889
------- ------- ------- ------- ------- ------- -------
Total revenue...................................... 26,985 26,480 32,514 33,746 40,303 17,277 20,118
------- ------- ------- ------- ------- ------- -------
Cost of revenue
Instruction and Guidance............................. 9,458 7,941 10,575 9,844 9,759 5,053 5,656
Review.com........................................... 1,307 2,587 2,717 1,672 1,469 237 575
Homeroom.com......................................... -- -- -- 384 1,942 297 359
------- ------- ------- ------- ------- ------- -------
Total cost of revenue.............................. 10,765 10,528 13,292 11,900 13,170 5,587 6,590
------- ------- ------- ------- ------- ------- -------
Gross profit....................................... 16,220 15,952 19,222 21,846 27,132 11,689 13,528
Operating expenses
Selling, general and administrative.................. 13,918 19,205 17,919 22,030 28,815 11,911 29,173
Research and development............................. 780 493 1,013 1,174 878 264 370
------- ------- ------- ------- ------- ------- -------
Total operating expenses........................... 14,698 19,698 18,932 23,204 29,693 12,175 29,543
------- ------- ------- ------- ------- ------- -------
Operating income (loss) from continuing operations..... 1,522 (3,746) 290 (1,358) (2,561) (486) (16,015)
Gain on distribution/sale of securities and other
assets............................................... -- -- 523 732 1,049 -- 7,597
Interest expense....................................... (33) (45) (157) (148) (88) (35) (70)
Other income........................................... 162 98 86 79 90 58 271
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations before
minority interests, equity interest in operations of
affiliates and (provision) benefit for income
taxes................................................ 1,651 (3,693) 742 (695) 1,510 (463) (8,217)
Minority interests' share of income in subsidiaries.... 214 1,112 (473) (505) (585) (40) (50)
Equity interest in operations of affiliates............ -- -- -- -- -- -- 196
Income (loss) from continuing operations before
(provision) benefit for income taxes................. 1,865 (2,581) 269 (1,200) (2,095) (503) (8,071)
(Provision) benefit for income taxes................... (105) 172 188 (215) 51 (12) 5,861
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing operations............... 1,760 (2,409) 457 (1,415) (2,044) (515) (2,210)
Discontinued operations:...............................
Loss from operations of discontinued software
division......................................... -- -- (1,846) (644) -- -- --
Loss from operations of discontinued student loan
division......................................... -- -- (655) (706) -- -- --
Income on disposal of discontinued software
division......................................... -- -- -- 4,874 -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) from discontinued operations............. -- -- (2,501) 3,524 -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)...................................... $ 828 $(4,515) $(2,043) $ 2,109 $(2,044) $ (515) $(2,210)
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share -- basic and diluted:
Income (loss) from continuing operations............. 0.07 (0.37) 0.03 (0.12) (0.17) (0.04) (0.15)
Income (loss) from discontinued operations........... -- -- (0.20) 0.29 -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss) per share -- basic and diluted....... $ 0.07 $ (0.37) $ (0.17) $ 0.17 $ (0.17) $ (0.04) $ (0.15)
======= ======= ======= ======= ======= ======= =======
Weighted average basic and diluted shares used in
computing net income (loss) per share................ 11,944 12,094 12,298 12,298 12,298 12,298 15,191
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 5,868 $ 1,524 $ 680 $ 1,519 $ 2,658 $15,490
Total assets............................................... 16,958 12,186 13,230 13,459 53,698 45,841
Long-term debt, net of current portion..................... 58 3 251 264 538 538
Series A redeemable convertible preferred stock............ -- -- -- -- -- 25,505
Class B redeemable non-voting common stock................. 257 257 257 257 257 6,989
Stockholders' equity (deficit)............................. 7,975 3,050 973 2,809 33,524 (1,450)
</TABLE>
32
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and the related notes included elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of many
factors, including, but not limited to, those described under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
We develop, market and sell integrated online, print and classroom-based
products and services to students, parents, educators and educational
institutions. We help students and families achieve their educational and career
goals, elementary and secondary schools maximize their effectiveness, and
colleges and graduate schools attract greater numbers of qualified applicants at
lower cost. Our range of products and services includes online and
classroom-based instruction, admissions counseling, creation of content for
print and software publishers and marketing services for colleges and graduate
schools.
We operate our business through three divisions. The majority of our
revenue is earned by the Instruction and Guidance division, which sells a range
of services including test preparation, tutoring and admissions counseling.
Instruction and Guidance derives its revenue from our company-owned operations
and from independently-owned franchises. Additionally, Instruction and Guidance
recently launched its Princeton Review Online courses. Our Review.com division
earns the majority of its revenue from authoring books and developing content
for software for third party publishers. Review.com also sells advertising and
sponsorships on our Review.com Web site and collects marketing fees from higher
education institutions. Our newest division, Homeroom.com, currently earns fees
from content development services and recently launched an Internet-based
subscription service for K-12 schools and parents.
Revenue
Historically, we have derived the majority of our revenue from the services
provided by our Instruction and Guidance division, which had $29.9 million in
revenue and $20.1 million in gross profit in 1999. Profits from the Instruction
and Guidance division have been used to fund much of the costs of the new media
initiatives of our Review.com and Homeroom.com divisions. In the future, we
expect that revenue from these initiatives will represent a greater percentage
of our overall revenue, as we expand our newer products and services.
Instruction and Guidance. Instruction and Guidance derives revenue from:
- test preparation courses, which consists of tuition paid to our
company-operated sites and royalty fees paid by our
independently-owned franchises. These royalties are 8% of our
franchisees' cash receipts from all revenue collected by them under
The Princeton Review name. Our franchise contracts have an average
term of 10 years and automatically renew with the payment of a renewal
fee and satisfaction by the franchisees of requirements for renewal.
We recognize revenue from tuition paid for our courses over the life
of the course, which is usually from five to 10 weeks depending on the
course type. We recognize revenue from franchise royalties on a
monthly basis.
- sales of course and marketing materials and other products to our
independent franchisees. This revenue is recognized upon the transfer
of title to our customers, which occurs on the shipment dates of these
materials.
- tutoring services offered by all of our offices. This revenue is based
on an hourly fee and is recognized as the services are delivered.
33
<PAGE> 38
- admissions counseling services, including Princeton Review 121
services and our institutional contract with Edison Schools, Inc.
Princeton Review 121, launched in New York City in 1999, offers
high-end college admissions counseling and tutoring to individual
students and families. This revenue is recognized over the period the
service is provided. Revenue from our contract to provide Edison
Schools with admissions counseling services is recognized annually
over the school year.
Review.com. Review.com derives revenue from:
- authoring books published by Random House and providing content for
software published by The Learning Company Properties, Inc. This
revenue consists of performance-based fees, including royalties and
marketing fees from sales of books and software. We recognize these
fees based on estimated sales of the books and software and later
adjust to reflect actual sales. Additionally, we earn delivery-based
fees from Random House in the form of advances and copy editing fees
for books written by us. We recognize these fees as the products are
delivered.
- annual marketing fees from colleges to promote their programs on our
Web site and in our co-branded publications, and to include their
admissions applications on our Web site and APPLY! CD-ROM.
Historically, we have recognized this revenue during the third and
fourth quarters as the products were delivered. Partially as a result
of the introduction of our Web-based admissions application feature,
in future periods we will recognize this revenue ratably over the
course of the year.
- sales of advertising and sponsorships on our Review.com Web site.
Advertising and sponsorship revenue is recognized each month based on
contractual terms.
Homeroom.com. Homeroom.com currently derives revenue from our agreement
with McGraw-Hill through:
- royalties for Princeton Review branded content that we provide for
their textbooks, which we recognize based on estimated sales of the
textbooks and later adjust to reflect actual sales;
- an annual branding fee, which we recognize pro rata over the entire
year;
- development fees for the production of workbook manuscripts, which we
recognize as the products are delivered; and
- an annual fee for preparing questions for an electronic database in
various subjects and grade levels, which we recognize as the questions
are completed.
These fees are based on rates and other terms specified in our contract
with McGraw-Hill, which has an initial term that expires in 2002 and renews
automatically for additional one-year periods unless terminated by either party.
All of the revenue generated by this division to date has been generated from
services rendered under our agreement with McGraw-Hill. We expect that, with the
launch of Homeroom.com's Internet-based subscription service this year, this
division will also earn annual subscription fees from schools and families as
well as sponsorship and e-commerce revenue.
Cost of Revenue
Instruction and Guidance. Cost of revenue consists of course expenses of
our company-owned operations and cost of materials sold. Course expenses consist
of costs incurred to deliver test preparation courses, tutoring and admissions
counseling services, including rent of classroom space, teacher salaries, credit
card fees, costs of course materials purchased from third party vendors and a
fee of 2% of our cash receipts paid to a national advertising fund contributed
to by us and our
34
<PAGE> 39
franchisees. Costs of materials sold are comprised of the costs to manufacture
and distribute the course and marketing materials and other products.
Review.com. Cost of revenue consists primarily of the costs to author,
develop, edit and produce the content for books, software, our Review.com Web
site and other products.
Homeroom.com. Cost of revenue consists of costs to author and produce the
workbooks, develop content for textbooks and our Homeroom.com Web site and
develop our question pool.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for all business segments
include primarily advertising expenses, office expenses, payroll and related
expenses for executive and administrative personnel as well as overhead
allocations from corporate service centers, including accounting, human
resources, executive, information technology, communications and office
services. Selling, general and administrative expenses also include compensation
expense associated with the PSU and SAR plans formerly maintained by us. As the
value of our company increased, we recorded an expense for the increase in the
value of vested PSUs and SARs. As part of our restructuring, these plans were
replaced by our 2000 Stock Incentive Plan. As a result of the termination of
these PSU and SAR plans, holders of PSUs and SARs under these plans relinquished
their rights to these PSUs and SARs in exchange for a combination of cash,
common stock, stock options and shares of stock of Student Advantage. For a more
detailed description of our restructuring and the termination of our PSU and SAR
plans, see "Our Restructuring."
Research and Development
Research and development expense consists of expenses incurred by our
Instruction and Guidance division to develop, update and enhance course
materials and curriculum and to develop instructors' training methods.
Minority Interests
Minority interest expense consists of the share of the profits attributed
to the holders of minority interests in our subsidiaries. As a result of our
restructuring, all minority interests have been eliminated.
(Provision) Benefit for Income Taxes
Until March 31, 2000, we operated as an S corporation with ownership
interests in limited liability company subsidiaries. Prior to that time our,
earnings were included in the taxable income of our stockholders for federal and
some state income tax purposes. We generally have not been subject to income tax
on our earnings, other than with respect to state and local jurisdictions that
do not recognize the S corporation or LLC structure. State and local taxes were
accrued for those jurisdictions that do not recognize the S corporation or LLC
structure, at rates reflective of those state and local jurisdictions. As a
result of our restructuring from an S corporation to a C corporation, we have
become subject to federal, state and local taxes. Accordingly, we will record
future tax benefits and deferred tax liabilities and a corresponding tax benefit
or tax expense in our statement of income.
Loss from Discontinued Operations and Income on Disposal of Discontinued
Software Division
Loss from discontinued operations represents the net revenue and expenses
relating to our Student Loan and Software Manufacturing and Distribution
divisions, which were discontinued in 1998. Income from disposal of discontinued
operations represents income from the sale of our Software Manufacturing and
Distribution division to The Learning Company in 1998 and the one-time licensing
fee we received as part of that transaction.
35
<PAGE> 40
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, selected data from
our statements of operations as a percentage of total revenue. We have derived
our statements of operations data for 1997, 1998 and 1999 periods from our
audited financial statements. This information should be read together with our
consolidated financial statements and related notes included elsewhere in this
prospectus. The operating results in any period are not necessarily indicative
of the results that may be expected for any future period.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
----------------------- --------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue
Instruction and Guidance.................................. 84.2% 83.9% 74.2% 79.4% 80.9%
Review.com................................................ 15.8 13.2 13.1 10.7 9.7
Homeroom.com.............................................. -- 2.9 12.7 9.9 9.4
----- ----- ----- ----- -----
Total revenue........................................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue
Instruction and Guidance.................................. 32.5 29.2 24.2 29.3 28.1
Review.com................................................ 8.4 5.0 3.6 1.3 2.9
Homeroom.com.............................................. -- 1.1 4.8 1.7 1.8
----- ----- ----- ----- -----
Total cost of revenue................................... 40.9 35.3 32.6 32.3 32.8
----- ----- ----- ----- -----
Gross profit............................................ 59.1 64.7 67.4 67.7 67.2
Operating expenses
Selling, general and administrative....................... 55.1 65.2 71.5 69.0 145.0
Research and development.................................. 3.1 3.5 2.2 1.5 1.8
----- ----- ----- ----- -----
Total operating expenses................................ 58.2 68.7 73.7 70.5 146.8
----- ----- ----- ----- -----
Operating income (loss) from continuing operations.......... 0.9 (4.0) (6.3) (2.8) (79.6)
Gain on distribution/sale of securities and other assets.... 1.6 2.1 2.6 -- 37.8
Interest expense............................................ (0.5) (0.4) (0.2) (0.2) (0.3)
Other income................................................ 0.3 0.2 0.2 0.3 1.3
----- ----- ----- ----- -----
Income (loss) from continuing operations before minority
interests, equity interest in operations of affiliates and
(provision) benefit for income taxes...................... 2.3 (2.1) (3.7) (2.7) (40.8)
Minority interests' share of income in subsidiaries......... (1.5) (1.5) (1.5) (0.2) (0.2)
Equity interest in operations of affiliates................. -- -- -- -- 0.9
Income (loss) from continuing operations before (provision)
benefit for income taxes.................................. 0.8 (3.6) (5.2) (2.9) (40.1)
(Provision) benefit for income taxes........................ 0.6 (0.6) 0.1 (0.1) 29.1
----- ----- ----- ----- -----
Income (loss) from continuing operations.................... 1.4 (4.2) (5.1) (3.0) (11.0)
Discontinued operations:
Loss from discontinued operations......................... (7.7) (4.0) -- -- --
Income on disposal of discontinued software division...... -- 14.4 -- -- --
----- ----- ----- ----- -----
Income (loss) from discontinued operations.................. (7.7) 10.4 -- -- --
----- ----- ----- ----- -----
Net income (loss)........................................... (6.3)% 6.2% (5.1)% (3.0)% (11.0)%
===== ===== ===== ===== =====
</TABLE>
36
<PAGE> 41
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenue
Our total revenue increased from $17.3 million in 1999 to $20.1 million in
2000, representing a 16% increase.
Instruction and Guidance revenue increased from $13.7 million in 1999 to
$16.3 million in 2000, representing an 19% increase. This increase resulted
primarily from increased student enrollment and price increases at both our
company-operated and franchise locations. Tuition revenue from our company-owned
operations increased by $1.9 million, and royalties from independent franchises
increased by $150,000. Additionally, revenue from sales of materials to our
independent franchises increased by $311,000 in 2000 over the same period in
1999.
Review.com's revenue increased from $1.8 million in 1999 to $2.0 million in
2000, representing a 6% increase. This increase resulted primarily from an
increase of approximately $370,000 in revenue derived from our contracts with
Random House and an increase of approximately $166,000 in our Internet-based
advertising revenue. These increases were partially offset by lower royalties on
our software products received from The Learning Company.
Homeroom.com's revenue increased from $1.7 million in 1999 to $1.9 million
in 2000, representing a 10% increase. This increase resulted from an increase of
approximately $347,000 in royalties and question pool development fees from
McGraw-Hill and was partially offset by lower development fees for workbooks
delivered to McGraw-Hill. The decline in development fees for workbooks is due
to a decrease in the number of manuscript pages delivered.
Cost of Revenue
Our total cost of revenue increased from $5.6 million in 1999 to
$6.6 million in 2000, representing a 18% increase.
Instruction and Guidance cost of revenue increased from $5.1 million in
1999 to $5.7 million in 2000, representing a 12% increase. This increase
resulted from an increase of approximately $335,000 in the cost of delivering
our courses, due in part to increased enrollment, and an increase of
approximately $380,000 in the cost of materials sold to our independent
franchises, resulting from increased sales of these materials.
Review.com's cost of revenue increased from $237,000 in 1999 to $575,000 in
2000, representing a 143% increase. Approximately $175,000 of this increase
resulted from costs associated with increased revenue from Random House. The
remaining increase resulted from costs related to content development for our
Review.com Web site.
Homeroom.com cost of revenue increased from $297,000 in 1999 to $359,000 in
2000, representing a 21% increase. This increase was primarily attributable to
increased question pool development costs associated with services rendered to
McGraw-Hill.
Operating Expenses
Selling, general and administrative expenses increased from $11.9 million
in 1999 to $29.2 million in 2000, representing a 145% increase. The largest
component of this increase was the cost associated with the termination of our
PSU and SAR plans and the related distribution of our stock and stock of Student
Advantage to our employees in April 2000. These events resulted in a non-
recurring charge of $10.3 million in 2000. The remaining increase of $7.0
million was caused by the following:
- an increase of $2.0 million in salaries and payroll taxes primarily
related to new product development and sales efforts for Homeroom.com,
Princeton Review Online and Review.com;
- a $1.4 million increase in advertising and marketing expenses;
37
<PAGE> 42
- increased legal expenses of approximately $800,000 and settlement costs
of $1.1 million related to a lawsuit against us;
- a $1.3 million increase attributable primarily to personnel related
costs, including office rent, travel and entertainment, employee benefits and
recruiting fees; and
- an increase in Web site technology and development expenses of
approximately $300,000, resulting from the development of our Homeroom.com and
Review.com Web sites.
Research and development costs increased from $264,000 in 1999 to $371,000
in 2000, representing a 41% increase. This increase was primarily due to the
development of course materials for Princeton Review Online, which was launched
in July 2000.
Gain on Distribution/Sale of Securities and Other Assets
We recorded a gain of $7.6 million in the first quarter of 2000, related to
the distribution of Student Advantage stock to our stockholders and employees in
connection with our restructuring.
Interest Expense
Interest expense increased from $35,000 in 1999 to $70,000 in 2000,
representing a 97% increase. This increase resulted from increases in both
equipment lease balances and balances outstanding under our credit facility.
Other Income
Other income increased from $59,000 in 1999 to $271,000 in 2000,
representing a 360% increase. This represents interest income earned on our cash
balances, which increased substantially in the second quarter of 2000 as a
result of proceeds received from the sale of our Series A preferred stock.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenue
Our total revenue increased from $33.7 million in 1998 to $40.3 million in
1999, representing a 19% increase.
Instruction and Guidance revenue increased from $28.3 million in 1998 to
$29.9 million in 1999, representing a 6% increase. This increase resulted from
an increase in student enrollment at our company-operated and franchise
locations. Tuition revenue from our company-owned operations increased by
$672,000, and royalties from independent franchises increased by $668,000.
Enrollment at all locations increased by a total of more than 10,000 students in
1999.
Review.com's revenue increased from $4.5 million in 1998 to $5.3 million in
1999, representing an 18% increase. This increase resulted primarily from fees
charged to colleges for various marketing services and our electronic student
application, APPLY! CD-ROM. These fees increased from $300,000 in 1998 to
$980,000 in 1999, representing a 227% increase.
Homeroom.com's revenue increased from $959,000 in 1998 to $5.1 million in
1999, representing a 433% increase. This increase resulted from a full year of
rendering services to McGraw-Hill in 1999, as compared with a partial year in
1998.
Cost of Revenue
Our total cost of revenue increased from $11.9 million in 1998 to $13.2
million in 1999, representing an 11% increase.
Instruction and Guidance cost of revenue remained relatively constant
during this period.
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<PAGE> 43
Review.com's cost of revenue decreased from $1.7 million in 1998 to $1.5
million in 1999, representing a 12% decrease. This decrease resulted from a
$200,000 decrease in content development costs primarily due to lower costs
resulting from the delivery of fewer manuscripts in 1999 compared to 1998.
Homeroom.com's cost of revenue increased from $384,000 in 1998 to $1.9
million in 1999, representing a 406% increase. This increase resulted from a
$1.4 million increase in expenditures for developing content for McGraw-Hill.
Operating Expenses
Selling, general and administrative expenses increased from $22.0 million
in 1998 to $28.8 million in 1999, representing a 31% increase. This increase
resulted primarily from personnel and related cost increases during 1999 and
compensation expense relating to the PSU and SAR plans. Most of the personnel
and related cost increases were attributable to staffing for new initiatives,
such as Homeroom.com's Internet-based product, Princeton Review Online and
Review.com's selling and marketing efforts. Additionally, in 1999, we booked
$3.0 million of compensation expense related to the PSU and SAR plans, compared
to $18,000 for compensation expense booked in 1998. This increase resulted
primarily from increased vesting of outstanding PSUs and an increase in the
value of the PSUs, which was based on the value of our company at that time.
Research and development expense decreased from $1.2 million in 1998 to
$878,000 in 1999, representing a 25% decrease. This decrease resulted from cost
cutting efforts implemented during this period.
Gain on Distribution/Sale of Securities and Other Assets
Gain from the sale of assets increased from $732,000 in 1998 to $1.0
million in 1999, representing a 43% increase. This increase was primarily due to
increased proceeds from sales of Student Advantage stock in 1999.
Interest Expense
Interest expense decreased from $148,000 in 1998 to $88,000 in 1999,
representing a 40% decrease. This decrease was due to lower average loan
balances during 1999 compared to 1998.
Other Income
Other income increased from $79,000 in 1998 to $90,000 in 1999,
representing a 14% increase. This increase resulted primarily from an increase
in interest income caused by a higher average cash balance during 1999 compared
to 1998.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenue
Our total revenue increased from $32.5 million in 1997 to $33.7 million in
1998, representing a 4% increase.
Instruction and Guidance revenue increased from $27.4 million in 1997 to
$28.3 million in 1998, representing a 3% increase. This increase resulted from
an increase in student enrollment at our company-operated and franchise
locations. Tuition revenue from our company-owned operations increased by $1.3
million, and royalties from independent franchises increased by $124,000.
Enrollment in all locations increased by a total of more than 5,000 students in
1998. This increase was partially offset by a decrease of $480,000 in the sale
of course materials and other products, resulting primarily from a decrease in
the per-unit prices charged by us for many of these materials reflecting lower
costs to us to manufacture and assemble these materials.
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<PAGE> 44
Review.com's revenue decreased from $5.1 million in 1997 to $4.5 million in
1998, representing a 13% decrease. This decrease resulted from a $1.5 million
decrease in content development revenue due primarily to a decrease in the
number of book manuscripts delivered to Random House during 1998 compared to
1997. This decrease was partially offset by an increase of $800,000, primarily
from fees charged to colleges and Internet-based advertising revenue. Fees from
colleges were first earned by this division in 1998, when we recorded $300,000
of such fees.
Homeroom.com's revenue was $959,000 in 1998. This division was started in
the latter half of 1998 when we began rendering services to McGraw-Hill's
textbook publishing companies.
Cost of Revenue
Our total cost of revenue decreased from $13.3 million in 1997 to $11.9
million in 1998, representing a 10% decrease.
Instruction and Guidance cost of revenue decreased from $10.6 million in
1997 to $9.8 million in 1998, representing a 7% decrease. This decrease resulted
from an $800,000 decrease in costs of the course materials sold due to lower
costs to print and assemble the materials, which was partially offset by a
$100,000 increase in the cost of delivering courses.
Review.com's cost of revenue decreased from $2.7 million in 1997 to $1.7
million in 1998, representing a 38% decrease. This decrease resulted from a
$700,000 decrease in content development costs, which was primarily due to lower
costs resulting from the delivery of fewer manuscripts in 1998 compared to 1997,
and a $300,000 decrease in costs primarily related to lower manufacturing costs
for our APPLY! CD-ROM.
Homeroom.com's cost of revenue was $384,000 in 1998 as a result of
commencing operations in the second half of 1998.
Operating Expenses
Selling, general and administrative expenses increased from $17.9 million
in 1997 to $22.0 million in 1998, representing a 23% increase. This increase
resulted from an approximately $2.5 million increase in salaries due to
increased staff and adjustment of salaries to competitive levels in many areas
of the company, including service centers such as accounting, information
technology and human resources, which had been experiencing high employee
turnover, as well as increases in other related expenses such as office rent,
travel and entertainment, payroll taxes and health insurance, which increased
proportionately as headcount increased. In addition, in 1998, we incurred
$550,000 of legal expenses related to the defense of a lawsuit against us.
Research and development expense increased from $1.0 million in 1997 to
$1.2 million in 1998, representing a 16% increase. This increase was primarily
due to the development of new materials for courses, which were restructured to
be shorter in length and accommodate smaller classes.
Gain on Distribution/Sale of Securities and Other Assets.
Gain from the sale of assets increased from $523,000 in 1997 to $732,000 in
1998, representing a 40% increase. The increase resulted primarily from
increased proceeds from sales of Student Advantage stock in 1998.
Interest Expense
Interest expense decreased from $157,000 in 1997 to $148,000 in 1998,
representing a 6% decrease. This decrease was due to lower average loan balances
during 1998 compared to 1997.
Other Income
Other income decreased from $86,000 in 1997 to $79,000 in 1998,
representing an 8% decrease. This decrease resulted primarily from a decrease in
interest income caused by lower cash balances during 1998 compared to 1997.
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QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited statement of operations data for
each of the eight quarters in the period ended June 30, 2000. This information
has been derived from our historical consolidated financial statements. You
should read this information in conjunction with our historical consolidated
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Instruction and Guidance............. $ 9,617 $ 5,121 $6,729 $6,982 $ 9,933 $ 6,257 $ 7,857 $ 8,421
Review.com........................... 1,787 672 677 1,170 2,046 1,395 795 1,155
Homeroom.com......................... -- 959 555 1,163 1,416 1,979 686 1,204
------- ------- ------ ------ ------- ------- ------- --------
Total revenue...................... 11,404 6,752 7,961 9,315 13,395 9,631 9,338 10,780
------- ------- ------ ------ ------- ------- ------- --------
Cost of revenue
Instruction and Guidance............. 2,763 2,066 2,344 2,709 2,285 2,420 2,584 3,071
Review.com........................... 695 343 4 233 580 652 81 493
Homeroom.com......................... -- 384 92 206 504 1,141 195 165
------- ------- ------ ------ ------- ------- ------- --------
Total cost of revenue.............. 3,458 2,793 2,440 3,148 3,369 4,213 2,860 3,729
------- ------- ------ ------ ------- ------- ------- --------
Gross profit....................... 7,946 3,959 5,521 6,167 10,026 5,418 6,478 7,051
Operating expenses
Selling, general and
administrative..................... 5,287 6,786 6,064 5,847 6,836 10,068 9,328 19,845
Research and development............. 334 187 114 150 255 359 165 206
------- ------- ------ ------ ------- ------- ------- --------
Total operating expenses........... 5,621 6,973 6,178 5,997 7,091 10,427 9,493 20,051
------- ------- ------ ------ ------- ------- ------- --------
Operating income (loss) from
continuing operations................ 2,325 (3,014) (657) 170 2,935 (5,009) (3,015) (13,000)
------- ------- ------ ------ ------- ------- ------- --------
Gain on distribution/sale of
securities and other assets.......... -- 583 -- -- -- 1,049 7,597 --
Interest expense...................... (29) (50) (14) (22) (9) (43) (33) (37)
Other income.......................... -- 61 24 6 12 48 42 229
------- ------- ------ ------ ------- ------- ------- --------
Income (loss) from continuing
operations before minority interests,
equity interest in operations of
affiliates and (provision) benefit
for income taxes..................... 2,296 (2,420) (647) 154 2,938 (3,955) 4,591 (12,808)
------- ------- ------ ------ ------- ------- ------- --------
Minority interests' share of income in
subsidiaries......................... (429) 76 (93) 52 (472) (72) (50) --
Equity interest in operations of
affiliates........................... -- -- -- -- -- -- 165 31
------- ------- ------ ------ ------- ------- ------- --------
Income (loss) from continuing
operations before (provision) benefit
for income taxes..................... 1,867 (2,344) (740) 206 2,466 (4,027) 4,706 (12,777)
------- ------- ------ ------ ------- ------- ------- --------
(Provision) benefit for income
taxes................................ (39) (177) 16 (4) (71) 110 (364) 6,225
------- ------- ------ ------ ------- ------- ------- --------
Income (loss) from continuing
operations........................... 1,828 (2,521) (724) 202 2,395 (3,917) 4,342 (6,552)
------- ------- ------ ------ ------- ------- ------- --------
Loss from discontinued operations..... (410) (91) -- -- -- -- -- --
Income on disposal of discontinued
software division.................... 9 267 -- -- -- -- -- --
------- ------- ------ ------ ------- ------- ------- --------
Net income (loss)..................... $ 1,427 $(2,345) $ (724) $ 202 $ 2,395 $(3,917) $ 4,342 $ (6,552)
======= ======= ====== ====== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Instruction and Guidance................. 84.3% 75.8% 84.5% 75.0% 74.2% 65.0% 84.2% 78.1%
Review.com............................... 15.7 10.0 8.5 12.5 15.3 14.5 8.5 10.7
Homeroom.com............................. 0.0 14.2 7.0 12.5 10.5 20.5 7.3 11.2
----- ----- ----- ----- ----- ----- ----- ------
Total revenue.......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- ------
Cost of revenue:
Instruction and Guidance................. 24.2 30.6 29.4 29.1 17.1 25.1 27.7 28.5
Review.com............................... 6.1 5.1 0.1 2.5 4.3 6.8 0.8 4.6
Homeroom.com............................. 0.0 5.7 1.2 2.2 3.8 11.8 2.1 1.5
----- ----- ----- ----- ----- ----- ----- ------
Total cost of revenue.................. 30.3 41.4 30.7 33.8 25.2 43.7 30.6 34.6
----- ----- ----- ----- ----- ----- ----- ------
Gross profit........................... 69.7 58.6 69.3 66.2 74.8 56.3 69.4 65.4
Operating expenses:
Selling, general and administrative...... 46.4 100.5 76.2 62.8 51.0 104.5 99.9 184.1
Research and development................. 2.9 2.8 1.4 1.6 1.9 3.7 1.8 1.9
----- ----- ----- ----- ----- ----- ----- ------
Total operating expenses............... 49.3 103.3 77.6 64.4 52.9 108.2 101.7 186.0
----- ----- ----- ----- ----- ----- ----- ------
Operating income (loss) from continuing
operations............................... 20.4 (44.6) (8.3) 1.8 21.9 (52.0) (32.3) (120.6)
----- ----- ----- ----- ----- ----- ----- ------
Gain on distribution/sale of securities
and other assets......................... (0.3) 8.6 -- -- -- 10.9 81.4 --
Interest expense.......................... -- 0.9 0.3 0.1 0.1 0.5 0.7 2.1
Other income.............................. -- (0.7) (0.2) (0.2) (0.1) (0.4) ( 0.3) (0.3)
----- ----- ----- ----- ----- ----- ----- ------
Income (loss) from continuing operations
before minority interests, equity
interest in operations of affiliates and
(provision) benefit for income taxes..... 20.1 (35.8) (8.2) 1.7 21.9 (41.1) 49.2 (118.8)
----- ----- ----- ----- ----- ----- ----- ------
Minority interests' share of income to
subsidiaries............................. (3.8) 1.1 (1.2) 0.6 (3.5) (0.7) (0.5) --
----- ----- ----- ----- ----- ----- ----- ------
Equity interest in operations of
affiliates............................... -- -- -- -- -- -- 1.8 0.3
----- ----- ----- ----- ----- ----- ----- ------
Income (loss) from continuing operations
before (provision) benefit for income
taxes.................................... 16.3 (34.7) (9.4) 2.3 18.4 (41.8) 50.5 (118.5)
----- ----- ----- ----- ----- ----- ----- ------
(Provision) benefit for income taxes...... (0.3) (2.6) 0.2 -- (0.5) 1.1 (3.9) 5 7.7
----- ----- ----- ----- ----- ----- ----- ------
Income (loss) from continuing
operations............................... 16.0 (37.3) (9.2) 2.3 17.9 (40.7) 46.6 ( 60.8)
----- ----- ----- ----- ----- ----- ----- ------
Loss from discontinued operations......... (3.6) (1.3) -- -- -- -- -- --
Income on disposal of discontinued
software division........................ 0.1 4.0 -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ------
Net income (loss)......................... 12.5% (34.6)% (9.2)% 2.3% 17.9% (40.7)% 46.6% (60.8)%
===== ===== ===== ===== ===== ===== ===== ======
</TABLE>
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<PAGE> 46
Our Instruction and Guidance revenue increased during the third quarter of
each of 1998 and 1999, reflecting student preferences to take test preparation
courses at the beginning of the traditional school year or in the summer.
Traditionally, Instruction and Guidance revenue decreases in the fourth quarter,
due to holiday and school vacations. Review.com's advertising and marketing fees
experience similar trends. However, Review.com's content development revenue is
dependent on Random House's publishing and sales schedules, which may not
correlate with the beginning of the school year. Homeroom.com's content
development revenue is based on our contract with McGraw-Hill, and is therefore
more dependent on production requests than the school calendar. We expect
Homeroom.com's Internet-based subscription sales to be greater in the third and
fourth quarters, corresponding to the beginning of the school year, with revenue
from these sales being recognized ratably over the contract term.
Cost of revenue for the last four quarters in the Instruction and Guidance
division has decreased as a percentage of revenue from the same period in the
prior year. The only exception to this trend has been the first quarter of 2000
in which there were increased expenses relating to the launch of Princeton
Review Online. Cost of revenue for Review.com is dependent on the production
schedules for our books, which are published by Random House. Additionally, the
costs related to producing the APPLY! CD-ROM'S have traditionally been expensed
in the third and fourth quarters. We expect to phase out the CD-ROM product in
favor of Web-based applications in the future. Homeroom.com's cost of revenue is
currently based on the volume of workbook pages and questions written for
McGraw-Hill. This cost of revenue is expected to fluctuate based on the volume
of work produced by third party contractors as compared to the volume produced
by our full-time editorial staff, whose salaries are recorded in general and
administrative expense.
Operating expenses have increased every quarter since the beginning of 1999
primarily as a result of increased personnel and related expenses. Each of the
last four quarters, ending June 30, 2000, included significant costs related to
PSU, SAR or stock compensation expense.
As a result of the foregoing and other factors, we believe that
quarter-to-quarter comparisons of our results are not necessarily meaningful,
and these comparisons should not be relied upon as indications of future
performance. Fluctuations in operating results may also result in volatility in
the price of the shares of our common stock.
LIQUIDITY AND CAPITAL RESOURCES
Prior to 1995, our primary source of funding had been cash flow from
operations. Since 1995, we have supplemented cash flow from operations by
generating cash from periodic sales of our stock of Student Advantage.
Additionally, in 1995, we sold a minority interest in our subsidiaries to Random
House for approximately $8.0 million. In 1998, we received approximately $5.1
million from the sale of our software division. In April 2000, we received
approximately $27.3 million in proceeds from the sale of our Series A preferred
stock. The expansion of our Internet-based business has required increased
amounts of expenditures in 1998, 1999 and the first six months of 2000 and is
expected to require significant additional capital to fund operating losses,
capital expenditures and working capital needs. We expect our operating losses
to continue and to increase for the foreseeable future. At June 30, 2000, we had
approximately $15.5 million of cash and cash equivalents.
Net cash used by operating activities during the six months ended June 30,
2000 was $10.0 million, resulting primarily from the net loss for the period
offset primarily by the increase in deferred tax benefits. Net cash used in
investing activities during the six months ended June 30, 2000 was $2.7 million
resulting primarily from the purchase of equipment and software and investment
in affiliates. Net cash provided by financing activities was $25.6 million
during the six months ended June 30, 2000 resulting primarily from proceeds
received from the sale of Series A preferred stock.
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<PAGE> 47
Net cash provided by operating activities during 1999 was $1.9 million,
resulting primarily from advances on books to be delivered and an increase in
accrued expenses, partially offset by the increase in accounts receivable and
operating losses net of depreciation and amortization. Net cash used in
investing activities during 1999 was $1.4 million and was primarily attributable
to the purchase of furniture, fixtures and equipment and investment in other
assets, totaling $2.5 million, partially offset by proceeds from the sale of
marketable securities of $1.0 million. Net cash provided by financing activities
during 1999 was $656,000, resulting primarily from proceeds from a line of
credit and capital leases of $1.2 million, partially offset by distributions to
stockholders of $540,000.
Net cash used in operating activities during 1998 was $2.5 million,
resulting primarily from an operating loss net of the gain on the sale of our
software division. Net cash provided by investing activities during 1998 was
$4.8 million and was primarily attributable to proceeds received from the sale
of our software division. Net cash used in financing activities during 1998 was
$1.4 million, resulting primarily from repayment of borrowings under our line of
credit of $1.4 million and distributions to stockholders of $378,000, partially
offset by net proceeds from capital equipment leases of $279,000.
Net cash used in operating activities during 1997 was $373,000, resulting
primarily from an operating loss net of depreciation and amortization and gains
from the sale of securities and an increase in accounts receivable, partially
offset by an increase in accrued expenses. Net cash used in investing activities
during 1997 was $975,000 and was primarily attributable to the purchase of
furniture, fixtures and equipment, investment in other assets and purchase of
non-marketable securities, totaling $1.5 million, partially offset by proceeds
from the sale of non-marketable securities of $505,000. Net cash provided by
financing activities during 1997 was $503,000, resulting primarily from
borrowings under credit facilities.
We currently have a discretionary line of credit with a financial
institution providing for borrowings of up to $1.5 million. This line of credit
bears interest at the bank's prime rate plus 0.5% and expires September 30,
2000. As of June 30, 2000, we had no borrowings outstanding under this facility.
Our future capital requirements will depend on a number of factors,
including market acceptance of our products and services and the resources we
devote to developing, marketing, selling and supporting our products. We expect
to experience significant increases in our operating expenses for the
foreseeable future in order to execute our business plan. We expect to devote
substantial capital resources to:
- continued development and expansion of our Internet-based offerings;
- advertising, marketing and promotional activities;
- hiring additional personnel in sales, marketing, Internet systems,
product development and other areas; and
- the acquisition of our independent franchises currently under option.
We may also devote substantial capital resources to the repurchase of our
other independently-owned franchises and to strategic acquisitions and
relationships.
We believe that the net proceeds from this offering, together with our line
of credit, current cash and cash equivalents and any cash generated from
operations, will be sufficient to fund our operations for at least the next 12
months. Despite these expectations, we may need to raise additional capital
before the end of the next 12 months.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in Financial
Statements, which provides guidance on the
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<PAGE> 48
accounting for revenue recognition. We are currently evaluating the
applicability of SAB 101 to our existing agreements. If we conclude that our
approach is different from the approach described in SAB 101, we will change our
method of accounting to comply with the provisions of SAB 101. For companies
with fiscal years beginning between December 16, 1999 and March 15, 2000, SAB
101, as amended, is required to be implemented no later than the fourth fiscal
quarter of 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new accounting and
reporting standards for derivative financial instruments and for hedging
activities. SFAS 133 requires us to measure all derivatives at fair value and to
recognize them in the balance sheet as an asset or liability, depending on our
rights or obligations under the applicable derivative contract. We will adopt
SFAS 133 no later than the first quarter of fiscal year 2001. As we do not
currently engage in derivatives or hedging transactions, SFAS 133 is not
expected to have an impact on our consolidated results of operations, financial
position or cash flows.
YEAR 2000
The year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, certain
computer programs that have time-sensitive software may recognize a date ending
in "00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations.
To date, we have not experienced any material problems as a result of the
year 2000 issue. Costs to ensure that our systems and networks are year 2000
compliant have not been, and are not expected to be, material. We do, however,
continue to monitor our systems for year 2000 compliance, including testing of
the compatibility of all new systems that we introduce into our existing
infrastructure.
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<PAGE> 49
BUSINESS
OVERVIEW
We help students and families achieve their educational and career goals,
elementary and secondary schools maximize their effectiveness, and colleges and
graduate schools attract greater numbers of qualified applicants at lower cost.
We leverage our well-known and trusted Princeton Review brand and our 19 years
of experience in providing students, parents and educators with innovative, high
quality educational products and services. We believe that we are one of the few
branded education companies able to deliver its products and services to
multiple audiences through a variety of channels.
Our business is divided into the following three divisions:
- Instruction and Guidance delivers a range of services, including
standardized test preparation for the SAT, GMAT, MCAT, LSAT, GRE and
other admissions tests, both online and in a classroom setting.
Instruction and Guidance also offers admissions counseling directly to
students and through institutional relationships with high schools.
- Review.com operates a leading educational Web site that brings
together potential applicants and their families, guidance counselors
and colleges and graduate schools to exchange information and
facilitate the recruitment, application and admissions processes.
Review.com also authors over 150 print and software titles that are
published by Random House, TIME Magazine and other publishers.
- Homeroom.com offers an online subscription service for schools and
families that provides academic assessment, remediation and enrichment
services to children in grades three through eight. Our Homeroom.com
Web site recently completed its pilot program to 6,000 users in Texas,
and we expect to offer its services in 24 additional states by the
fourth quarter of 2000. Homeroom.com also creates Princeton Review
branded content for use in McGraw-Hill's textbooks and workbooks.
The Princeton Review was founded in 1981 by our Chairman and Chief
Executive Officer, John Katzman, as an SAT preparation course. Today, we are the
leading provider of SAT preparation courses and are among the leading providers
of test preparation courses for most of the other major post-secondary and
graduate admissions tests. In 1999, we and our franchisees provided courses to
more than 90,000 students in over 500 locations in the United States and abroad,
and launched the first of our Princeton Review Online courses in July 2000. In
1994, recognizing the potential of the Internet, we launched our Review.com Web
site. Today, it is one of the most widely used educational Web sites dedicated
to post-secondary academic opportunities.
INDUSTRY BACKGROUND
The Traditional Education Industry
The education market is the second largest sector of the U.S. economy. In
the United States, an estimated $700 billion, or approximately 10% of the gross
domestic product, was spent on education in 1998. According to the U.S.
Department of Education, approximately $372 billion was spent in the United
States during the 1998-1999 school year in the K-12 sector. The U.S. Department
of Education also estimates that during the 1999-2000 school year 53.5 million
students were enrolled in over 111,000 public and private K-12 schools in more
than 15,000 school districts.
The higher education market in the United States consists of over 15
million full-time and part-time undergraduate and graduate students at more than
4,000 university and college campuses. During the 1998-1999 school year,
institutions of higher education spent approximately $247 billion. On average,
college graduates can expect to earn over 50% more income and have an employment
rate that is nearly 7% higher than those without college degrees. Recognizing
that higher education
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<PAGE> 50
leads to greater rewards in the workforce, more people are choosing to continue
their education, with enrollment in higher education projected to increase by
14% by the year 2009.
Convergence of Internet Growth and Education
The Internet is becoming an increasingly important part of American
education as students, parents and educators recognize its potential as a
powerful learning, communication and information resource. International Data
Corporation estimates that instructional technology spending in the U.S. K-12
public school market will increase from $2.9 billion in 1998 to $6.8 billion in
2003. According to a 1999 survey, the U.S. Department of Education found that
99% of full-time public school teachers have access to computers or the Internet
in their schools, and 66% of those teachers use computers or the Internet for
classroom instruction. The U.S. Department of Education estimates that in 1999,
95% of public schools were connected to the Internet. As for the higher
education market, Market Data Retrieval reports that in 1999 virtually every
college offered Internet access to its students. An International Data
Corporation survey also indicates that almost 39% of U.S. households currently
subscribe to an online service.
Market Opportunity
Increased public concern over the effectiveness of K-12 schools in teaching
basic academic skills has increased the pressure on educators to improve overall
student performance. As a result, over the past several years, a majority of
states have begun to implement high-stakes testing programs that hold teachers,
principals and superintendents accountable for student performance. Twenty-two
states now publicize the performance of individual schools or reward them for
high scores, and 32 states require students to score above a certain level in
order to advance to the next grade or to graduate. As a result, educators are
increasingly looking for a means to improve measurable academic performance and
prepare students for these high-stakes assessments. In addition, parents are
seeking a convenient and time-efficient way to participate in their children's
education.
As students make the transition from high school to college, families
discover that the college selection and admissions process can be competitive,
costly and complex. We estimate that more than $250 million was spent on test
preparation courses in 1999. As an increasing number of students seek guidance
through the testing and application process, many high schools find it
increasingly difficult to provide students with effective college and career
counseling and are looking for ways to improve academic counseling services.
According to the National Center for Education Statistics, in 1997, the national
student to counselor ratio in U.S. public schools was 508:1. As students are
devoting an increasing amount of resources to compete with one another for a
limited number of places at select institutions, colleges and graduate schools
are also competing with one another to reach and enroll greater numbers of the
most desirable prospects. To address these challenges, students, parents and
schools are increasingly seeking a comprehensive, one-stop source of information
and assistance in the application and admissions process.
THE PRINCETON REVIEW SOLUTION
We provide integrated online, print and classroom-based products and
services that address the needs of students, parents, educators and educational
institutions. We have a well-known and trusted brand name founded on our
experience and proven success in raising students' standardized test scores and
providing quality academic information. Instruction and Guidance provides
intensive online and classroom-based test preparation courses for the SAT, GMAT,
MCAT, LSAT, GRE and other standardized tests, and also provides tutoring and
admissions counseling services. Review.com provides students and counselors with
valuable information and assistance in the application process and colleges and
graduate schools with more effective ways to reach and enroll qualified
applicants. Homeroom.com offers an online subscription service designed to help
primary school students and teachers prepare for state-mandated assessments by
providing them with real-time
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feedback that connects them to targeted preparation, remediation and enrichment
materials. Finally, we work with Random House, McGraw-Hill, TIME Magazine and
others to provide content for guidebooks, textbooks, magazines and software.
Through our complementary products and services, we believe we offer the
following benefits:
Benefits to Students
Improved admissions test scores. We enable prospective college and
graduate school students to increase their scores on admissions tests through
our online and classroom-based courses and test preparation books and software.
Using our proven test preparation materials, we help our students increase their
attractiveness to the institutions of their choice by improving scores on
entrance exams, including the SAT, GMAT, MCAT, LSAT and GRE. According to a
study performed by Roper Starch Worldwide in 1994, the average student taking a
Princeton Review SAT preparation course improved his or her score by 140 points.
Convenient resource for college selection and application services.
Through Review.com, we provide students with a central source for comprehensive
college and graduate school information and tools for managing the application
process. Using our unique database of school information, potential applicants
can research school rankings, admissions requirements, student opinions and
financial aid. In 1999, we provided students with access to over 580 college
applications online and on CD-ROM.
Quality admissions counseling and advisory services. We provide college
counseling services to students through our individual and institutional
programs. Princeton Review 121 is a one-to-one counseling and tutoring service
that gives students personal attention in the admissions process. We also offer
high schools the opportunity to outsource or supplement existing admissions
counseling services with our highly trained counselors and tools, which we
believe offers students better service and enhanced admissions outcomes.
Enhanced academic achievement. We work with schools' existing curricula to
enable primary school students to maximize their academic potential and prepare
for state-mandated assessments through our Web-based Homeroom.com. Students can
review materials taught in school and improve on areas of weakness based on our
individualized assessment. By leveraging our experience in standardized test
preparation, we can help students avoid the negative consequences of poor
academic performance such as summer school or grade repetition.
Benefits to Parents
Increased involvement in educational and admissions processes. Our online
services enable parents to increase their involvement in their children's
education and college selection process in an easy and time-efficient manner.
Homeroom.com allows parents to directly monitor their children's academic
performance and access resources customized for their children's academic needs
at their convenience. Using Review.com, parents can access information on
specific colleges, the selection and admissions process, financial aid, student
loans and scholarships.
Trusted educational resource. Based on our 19 years as a leading provider
of standardized test preparation courses, software and publications, we believe
that The Princeton Review is one of the most trusted brands in educational
products and services. We believe that parents view us as a trusted resource to
guide them and their children through important educational transitions and feel
confident in trusting their children's performance on standardized tests to our
courses and our admissions counseling and tutoring services.
Access to active community discussions. We provide focused, active
discussion areas for parents to communicate and exchange information with one
another and with educational experts on a variety of topics related to academic
and admissions issues.
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Benefits to Educators and Educational Institutions
Improved college guidance programs in high schools. We help high schools
improve their admissions counseling programs by supplying quality online and
offline resources. Review.com allows counselors to easily collect, review and
communicate information and monitor the progress of each application from a
central place. In addition, through our institutional counseling program, we
provide support services directly to counselors or enable high schools to
completely outsource their guidance programs to us.
Cost effective way for colleges and graduate schools to reach and enroll
applicants. With hundreds of thousands of users accessing Review.com for
information, we enable colleges and graduate schools to reach and enroll a
broader audience of potential students in a more targeted, direct and
cost-effective manner than other means currently available.
Improved performance on state-mandated assessments. Through Homeroom.com,
we assist schools in improving student and school performance on state-mandated
assessments. In an increasing number of states, poor performance can lead to
reduced school funding and diminished career opportunities for teachers and
administrators, while higher scores can result in commendations, bonus pay and
career enhancement.
More efficient use of classroom time. We believe Homeroom.com is an
efficient and effective tool for teachers to assess their students' progress and
to identify and correct areas of weakness. Homeroom.com provides an easy way to
individualize instruction and ensure that it is aligned with state standards
while decreasing the time spent preparing for state-mandated assessments.
OUR STRATEGY
Our objective is to build upon the Princeton Review brand and expertise in
our existing and related education and testing markets. The key elements of our
strategy include:
Defining and securing the next generation of test preparation. We plan to
continue to expand our online test preparation services to provide our students
with a flexible, fully integrated package of online and classroom-based course
offerings. This approach will permit our students to choose the optimal mix of
online and offline learning for their specific needs. This will also allow us to
expand our proven test preparation services to students who currently are unable
to attend classroom-based courses due to geographic, time or social constraints,
as well as deploy a range of products and services at more flexible and
aggressive price points.
Building presence in the K-12 market. We intend to build the user base of
Homeroom.com in the K-12 market by demonstrating measurable improvement on high
stakes state-mandated assessments. We plan to increase Homeroom.com usage by
targeting schools and districts through a combination of our strategic
partnership with bigchalk.com, direct mail and our sales force, as well as
marketing Homeroom.com directly to parents. Because Homeroom.com is designed to
become a part of daily academic routine, we believe that teachers, students and
parents will grow to rely on it, increasing the likelihood of subscription
renewals.
Capitalizing on the network effect among students, parents, educators and
schools on our Review.com Web site. We intend to capitalize on our position as
a leading provider of information and services for the college and graduate
school admissions process to attract greater numbers of students, parents,
educators and schools to Review.com. By attracting additional students and
parents, we create more opportunities for educators and schools to reach this
audience. In turn, by drawing more educators and schools to Review.com, we
create additional resources and information for students and parents. We believe
that this network effect will increase Review.com's value to each participant
and allow us to take advantage of additional revenue-generating opportunities,
including increased revenue from educational institutions, higher price points
for advertising and sponsorship and greater ability to cross-sell our products.
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Expanding institutional relationships. We seek to develop long-term
relationships with educational institutions through our K-12 assessment,
institutional admissions counseling, test preparation and admissions marketing
services. We intend to target both public and private educational institutions
through a directed marketing effort. We believe that development of long-term
relationships with educational institutions will create high switching costs for
our customers, encourage others to subscribe to our services and provide a
renewable revenue stream.
Increasing the cross-marketing of our products and services. We intend to
more aggressively cross-market our products and services to existing customers
in order to more fully address their varied needs. For example, Homeroom.com
will allow us to form relationships with students and families that could later
become users of our Review.com Web site and customers of our test preparation
courses when they begin the college selection process. Similarly, an educational
institution that has purchased Homeroom.com would be a targeted customer for our
institutional counseling services. We believe that increased cross-marketing
efforts will lead to greater retention of customers and increased use of our new
products by existing customers.
Broadening e-commerce and advertising initiatives. We intend to further
leverage our large audience to generate additional sources of online revenue. We
believe that the demographics of students and their parents make them attractive
to advertisers and e-commerce partners since many significant purchases, such as
cars, computers and furnishings, are made immediately prior to enrolling in
college. We intend to aggressively market to corporate sponsors and advertisers
and to increase the number of educational products available through our Web
sites by forming additional e-commerce relationships.
OUR PRODUCTS AND SERVICES
Instruction and Guidance
In 1999, we and our franchisees provided test preparation courses and
tutoring services to over 90,000 students in over 500 course locations in 41
states and more than 12 countries. We provide test preparation courses to
students taking the following major U.S. standardized tests:
<TABLE>
<S> <C>
SAT LSAT (Law School Admissions Test)
GMAT (Graduate Management Admissions MCAT (Medical College Admissions Test)
Test)
GRE (Graduate Record Examination) ACT (American College Test)
TOEFL (Test of English as a Foreign PSAT
Language)
USMLE (United States Medical SAT II
Licensing Examination)
</TABLE>
We recently launched Princeton Review 121, a one-to-one, high-end
admissions counseling and tutoring service. Through this service, we provide
individual customers specific and concentrated assistance with test preparation
and the college admissions process. We have recently expanded our SAT, SAT II
and ACT test preparation services to the institutional educational market by
entering into contracts with high schools and school districts to provide test
preparation services to their students. We provided these services in more than
80 high schools in 1999.
Our Classroom-Based Course Offerings
Our test preparation courses focus on customer service and quality
instruction. Our experienced teachers and tutors work with groups of no more
than 12 students in our SAT classes and eight students in most of our graduate
school classes. Our courses are intensive and typically run five to 10 weeks in
length. Every course consists of classes, workshops and practice tests. We teach
students basic skills and test-taking strategies during class and reinforce
concepts taught in
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class and review homework during workshops. We offer practice tests, taken under
actual testing conditions, which we use to chart students' progress as they
begin to apply our techniques.
We believe that an important part of our test preparation courses is the
high quality study materials and the advanced diagnostic analysis that our
students receive. We spend significant resources on research and development to
enhance the supplemental materials used in our courses. As a result, each of our
students receives in-depth analytical materials, sample questions, testing
drills, model exams and diagnostic analysis of their progress as they take the
course.
Our classroom-based courses are provided through company-operated locations
and through our independent franchisees. Under our franchise agreements, our
franchisees pay us a royalty of 8% of their cash receipts from all of their
revenue collected under the Princeton Review name. They also purchase our course
and marketing materials, which they use in conducting and promoting their
classes. Royalties collected from our independent franchisees and revenue from
their purchases of course and marketing materials accounted for approximately 8%
of our 1999 revenue and approximately 9% of our revenue for the six-month period
ending June 30, 2000. In North America, 15 franchisees operate approximately 40
offices under the Princeton Review name.
Our Online Course Offerings
We have developed the following online products to supplement our
classroom-based courses and to serve as fully functional stand-alone online test
preparation courses:
- Tester. Tester is a computer adaptive testing engine we developed for
offering online testing and diagnostic services. Students taking our
courses can log on to our Review.com Web site, review sample questions
and take full-length preparatory exams that simulate actual exams.
Tester also analyzes the students' results and tracks their progress.
- Online tools integrated into classroom-based courses. Our traditional
test preparation courses offer students the option to complete drills
and answer sample questions online as well as take model exams over
the Internet through the Tester service. Students can also communicate
with us directly through the Internet.
- Princeton Review Online courses. In July 2000, we launched Princeton
Review Online to provide an online alternative to our classroom-based
courses. We expect that these Internet-based test preparation services
will be most valuable to those who are unable to attend our live
courses because of geographic, time or social constraints. Princeton
Review Online courses follow the classroom-based course syllabus and
include asynchronous and on-demand synchronous interactive "classes,"
scheduled small-class real time workshops with our instructors, live
customer service available 24 hours per day, seven days per week and
our Tester service. Princeton Review Online courses are currently
available for the SAT and GMAT, with additional courses expected to
follow.
Our Institutional Counseling Services
We provide individuals experienced in counseling high school students about
post-secondary academic choices to high schools on an outsourced or supplemental
basis. We provided these college counseling services in four high schools
operated by Edison Schools in the 1999-2000 school year and intend to provide
these services to three additional Edison high schools during the 2000-2001
school year. Our services in this area include college admissions expertise,
applications and record-keeping, student and parent seminars and increased
access to college admissions officers. We expect to expand our institutional
counseling program to a total of approximately 10 high schools in the fall of
2000.
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Review.com
Review.com is one of the most widely used educational Web sites dedicated
to post-secondary academic opportunities. Review.com helps students, parents and
educational institutions by providing a comprehensive source of information on
colleges and graduate schools, the school selection and admissions process,
financial aid, student loans, scholarships and careers. Review.com also offers a
number of interactive tools designed to assist students in finding a school,
submitting an application and researching financing options. At the site,
prospective college and graduate school students can also participate in a
discussion group or order one of our more than 150 print and software titles.
According to PC Data Online, for the month of June 2000 Review.com had
approximately 394,000 unique users and nearly 9.0 million total page views.
The following are some of the major services and tools available to the
various users of Review.com:
Students
- Search. Our search engine allows students to evaluate colleges and
graduate schools based on different criteria, from average admissions
test scores to our quality-of-life ratings. The result is a list of
the schools that match their needs and detailed information about
each, including, in many cases, students' opinions of their schools'
faculty, workload, social life, sports and more. Each college or
graduate school's profile includes links to its Web site.
- College and graduate school admissions discussion. We allow students
to share college and graduate school admissions experiences and obtain
advice from Princeton Review moderators.
- Counselor-O-Matic. With this tool, students can assess their chances
of admission to colleges they are interested in. They complete a
profile from which we create three custom lists of schools based on
their responses: "safety schools," "ballpark schools" and "reach
schools." They can also use this tool to rate their own statistics
against the average for each school.
- My Schools. Students can use this personalized portfolio to help them
track the colleges or graduate schools they are interested in and the
numerous dates and deadlines that characterize the admissions process.
An e-mail reminder feature is available to notify students of
significant events. Students can also allow counselors, advisers and
parents access to their personalized account.
- APPLY Online. We enable students to access hundreds of
college-specific admissions applications, including instructions to
financial aid forms, teacher recommendations and counselor reports.
APPLY Online allows students to enter personal information once and
automatically repeats common information in each application they
choose. Students complete applications on their computers and either
print and mail them to the college or transmit them electronically.
We are currently in the process of enhancing our Counselor-O-Matic and
APPLY Online tools, with the goal of making them available by September 2000 to
students interested in applying to graduate schools.
Counselors
With the launch of APPLY Online, we introduced our first set of online
counselor tools. Students are able to allow their counselors to be actively
involved in their application management process. Counselors are able to view
the progress of all of their students, send targeted messages to individuals or
groups and suggest customized lists of colleges.
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Colleges
Review.com sells a number of marketing, recruiting, and application
products and services to colleges. We allow them to tie their applications to
the centralized databases of the Review.com Web site and the APPLY! CD-ROM. This
allows students to reduce repetitive data entry and makes it easier to apply.
Colleges may also include a customized profile in our books and in a section of
our Web site entitled "school says." They may list themselves in the TIME
Magazine/The Princeton Review's co-branded newsstand guide, The Best College For
You. Finally, colleges may update their information online and monitor the
progress of student interest in them and their applications.
Content Development
Review.com also develops content and authors more than 150 print and
software titles under The Princeton Review brand. Our books are sold primarily
through Random House, from which we collect fees from advances, royalties, and
editing and marketing arrangements. We also provide content to The Learning
Company for use in its software and collect royalties on its sales. Examples of
the books, magazines and educational software products developed by the
Review.com division include the following:
<TABLE>
<CAPTION>
TOPIC TITLES
----- ------
<S> <C>
Test Preparation Books Cracking the SAT
Cracking the GMAT
Cracking the GRE
College and Graduate School Guides TIME Magazine/The Princeton Review's
The Best College For You
The Best 331 Colleges
The Complete Guide to Business
Schools
General Reference Publications WordSmart
WordSmart, Jr.
MathSmart
The Anatomy Coloring Workbook
Test Preparation and Educational The Princeton Review: Inside the
Software SAT,
ACT and PSAT 2000 Edition
</TABLE>
Homeroom.com
Homeroom.com, our new Web-based subscription service, is designed to help
primary and secondary school students improve outcomes on state-mandated
assessments and maximize their overall academic performance. Homeroom.com, which
is currently focusing on math and reading in grades three through eight, was
launched in the fourth quarter of 1999 and recently completed its pilot program
with 6,000 users in Texas. We are in the process of offering Homeroom.com to a
wider audience, and expect to make it available in 24 states by the fourth
quarter of 2000. Thereafter, we intend to make Homeroom.com available in
additional states and add content for other grade levels.
Homeroom.com enables teachers and parents to quickly assess students'
academic strengths and weaknesses and provides immediate feedback and tailored
educational resources for improving performance. Homeroom.com is aligned to
state standards and works with existing curricula and lesson plans, thereby
allowing teachers to focus more on curriculum and less on specific test
preparation. Homeroom.com offers a large and growing library of practice test
questions written to correspond to the requirements of applicable state
proficiency exams. The questions are also designed to correspond to the
student's grade level, the curriculum being taught and the primary textbook
being used.
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In addition to a large pool of test questions and drills, Homeroom.com
offers its users various educational resources that can be used for both general
enrichment and targeted remediation. These resources include:
- links directly to relevant, targeted content on other educational Web
sites; and
- original Homeroom.com lessons designed specifically to address areas
of weakness identified in the testing and assessment phase and to
reinforce curriculum objectives.
Homeroom.com offers the following services to three distinct groups of
users:
Student.homeroom.com allows students to:
- view and keep track of the status of their assignments;
- practice skills being covered by their curriculum through
individualized assignments created by their teachers or existing
drills designed to correspond to state-mandated assessments;
- assess their understanding of the material and areas of weakness;
- focus on areas that need improvement by doing more drills or accessing
Homeroom.com's database of skill-based exercises, including
proprietary Homeroom.com lessons, and direct links to Web-based
resources specific to the problems identified;
- access a variety of resources for learning, including Web links,
books, CD-ROMs and proprietary Homeroom.com lessons; and
- communicate with other students in the class and their teachers
through e-mail.
Parent.homeroom.com allows parents to:
- see what their child is learning in school and at home in one
convenient location;
- view recent assignments and skills that are covered by their child's
curriculum;
- explore suggested resources and other learning materials that they and
their child can investigate together;
- access a database of teaching tips when they and their child identify
a skill that needs improvement; and
- purchase a broad range of products that can benefit their child's
educational development.
Teacher.homeroom.com allows teachers to:
- create assignments and tests online, assign projects on a group or an
individualized basis and keep track of the status of their
assignments;
- assess how their students are progressing as a class or individually;
- suggest remediation and enrichment strategies based on identified
weaknesses;
- access professional development resources; and
- access a variety of resources for teaching their material, including
Web links, books, CD-ROMs, and proprietary Homeroom.com lessons for
teachers, students and parents that reinforce their curriculum
objectives.
In addition, through our Homeroom.com division, we develop content and
provide editorial review services for McGraw-Hill's educational publishing
units. Through this exclusive arrangement, our Princeton Review branded content
is placed in McGraw-Hill's textbooks and workbooks and distributed to K-12
schools throughout the country.
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STRATEGIC INVESTMENTS AND ACQUISITIONS
We have made a number of strategic investments to facilitate the growth of
our business and expand our presence on the Internet. We currently maintain
ownership interests in the following companies:
- Student Advantage, Inc. We invested in Student Advantage, a publicly
owned college marketing company, in 1995 and owned approximately 2.5%
of its outstanding stock, as of April 28, 2000. In addition, we
maintain a strategic relationship with Student Advantage, which gives
us the right to use some of its content on our Review.com Web site and
to serve as its exclusive test preparation provider. Under a recent
agreement, Student Advantage will also sell advertising space on
Review.com.
- Student Monitor, L.L.C. We currently own approximately 20% of Student
Monitor, a privately held company that is a surveyor of college
students' lifestyles and attitudes. We also participate in joint
surveys with Student Monitor and use its survey information for
product development and marketing efforts.
- Tutor.com, Inc. Tutor.com, a privately held company we co-founded in
1998, matches students with tutors, both online and offline, through
its database of tutor backgrounds and references. We currently own
approximately 20% of Tutor.com and engage in various joint marketing
arrangements, including banner advertisements and mutual graphical
links between our Web sites. We use our relationship with Tutor.com to
facilitate our own online admissions counseling and tutoring services.
In addition, Tutor.com has agreed not to enter into an agreement or
transact business with any entity that is involved in our principal
lines of business.
From time to time, we will seek to make additional investments in
businesses with which we want to build strategic relationships. We also intend
to pursue strategic acquisitions that will help us continue to increase our
Internet presence, expand our product offerings or grow geographically. We
expect our acquisition focus to be on companies with complementary products or
services. With the exception of our option contract and discussions with our
independent franchisees, we have no specific current plans to engage in any such
acquisitions or investments.
We recently completed the acquisition of two of our independent franchises
and have entered into an option agreement allowing us to purchase two additional
franchises. For a description of the terms of this agreement, see "Recent
Developments -- Option Agreement to Purchase Two of Our Independent Franchises."
We are also in the process of negotiating with a number of our other independent
franchise holders regarding our potential acquisition of their franchises. If we
acquire franchises currently under option, we expect to use a portion of the
proceeds from this offering to consummate the acquisition. We may also use a
portion of the net proceeds from this offering to purchase additional franchises
if we are able to negotiate favorable terms. We anticipate that purchases of
other franchises, if consummated, would involve some combination of cash, debt
and the issuance of our stock. Currently, we do not have any agreements or
commitments to purchase any of our independently operated franchises other than
those described under "Recent Developments -- Option Agreement to Purchase Two
of Our Independent Franchises."
SALES AND MARKETING
The majority of our students and their parents choose our test preparation
programs based on the recommendations of other students, other parents, teachers
and counselors. We also build awareness of our brand and promote our products
through relationships with other companies that publish and distribute our
products. These include:
- TIME Magazine, which co-brands, publishes and distributes our The Best
College For You newsstand guides;
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- Random House, which publishes and distributes our test preparation
books and trade books;
- McGraw-Hill, which publishes K-12 textbooks and workbooks that contain
our branded materials; and
- The Learning Company, which publishes and distributes our content
within its software.
We also maintain an institutional sales force and engage in some national
and local advertising.
We expect to increase our sales and marketing efforts substantially in
order to market our new offerings in the Instruction and Guidance division,
increase traffic on Review.com and promote and support the launch of our
Homeroom.com Web site. Our current and planned sales and marketing activities by
division are as follows:
Instruction and Guidance. Nationally, we use mass print media,
conferences, direct mail and electronic media to market our products and
services to students, parents and educators. Locally, we and our franchisees
primarily advertise in local and school newspapers, distribute posters and
sponsor school activities. We also conduct extensive free information sessions
and practice tests to expose our products to our markets. Virtually everyone in
our regional offices is part of the sales force. They and our regional phone
centers counsel students and parents regarding specific courses. Our Princeton
Review 121 admissions counseling and tutoring initiative will be marketed to
high-end customers utilizing a distinctive message and dedicated marketing
resources. Our Princeton Review Online products will be marketed through
electronic media and e-commerce partnerships, as well as through our classroom
course marketing efforts. We are presently building a national sales force to
conduct sales of our test preparation and counseling services to schools and
other educational institutions. We expect that marketing to educational
institutions will constitute a major focus of the marketing activities of the
Instruction and Guidance division.
Review.com. Review.com has a sales and marketing force of 10 people
actively soliciting colleges and graduate schools to subscribe to our APPLY
Online and APPLY! CD-ROM application services. We have built our user base and
volume through branding in other media and word-of-mouth. To attract users, we
expect to increase marketing to students, parents, counselors and admissions
officers through offline and online direct mail, sponsorships, keyword buys and
syndicated licensing of content. Additionally, we will seek to expand our
current strategic relationships with MSN, Student Advantage, Bolt and Vault.com
and create new relationships with portals and online communities.
Homeroom.com. We expect to market Homeroom.com to K-12 schools and school
districts through a number of channels, including national conferences, direct
mail, electronic media and telemarketing. We have also entered into a
distribution agreement with bigchalk.com, a company with a broad national
distribution network in the K-12 educational market. Under this agreement,
bigchalk.com will serve as our exclusive outside distributor of Homeroom.com to
the K-12 educational market. We also plan to sell Homeroom.com subscriptions
directly to parents through distribution agreements with other Web sites and
through electronic and print media.
PRODUCT DESIGN AND DEVELOPMENT
We believe that successful product design, development and enhancement has
been, and will continue to be, essential to the success of our business. We
believe that the strength of our reputation and brand name is directly
attributable to the quality of our products, and expect to continue to devote
significant resources to enhancing our current products and offering additional
high-quality products and services that are responsive to our customers' needs.
Instruction and Guidance. We rely on our development staff, teachers and
other education experts to create and refine the materials used in our
Instruction and Guidance division. Our goal is to design and improve our
products in such a way as to offer our students the best and most
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productive overall experience, while addressing their preferences and fitting
within their lifestyles. We seek to accomplish this by:
- continually updating and enhancing our test preparation materials and
our teaching methods;
- ensuring that our designated personnel take virtually every major
standardized test for which we offer courses, so that our techniques
and materials remain current;
- performing quantitative and qualitative research into the preferences
and needs of our customers;
- regularly soliciting and reviewing feedback from students taking our
courses; and
- enhancing the services and functionality of our online test
preparation tools and content.
Our current focus in the Instruction and Guidance division is to develop
and refine new products for our classroom courses, Princeton Review 121
counseling and tutoring, Princeton Review Online and institutional counseling
initiatives. Overall, we seek to provide a complementary mix of online and
offline offerings that students can choose from to best fit their needs and
achieve their goals.
Review.com. Since launching our Review.com Web site in 1994, we have
continually expanded the material available and made improvements to its content
and functionality. The informational materials and tools available on Review.com
are developed and enhanced by our authors and design engineers, through
strategic partnerships with third parties and through feedback from guidance and
admissions counselors. We regularly modify and enhance our Web site to provide
students, parents and guidance counselors with additional interactive tools
designed to assist them with the college selection and admissions process. We
also continually strive to provide our educational institution subscribers with
more effective ways to reach potential applicants. Currently, we are focused on
providing more tools for potential graduate school applicants and adding
graduate programs as subscribers to our application services.
Homeroom.com. We rely on a team of teachers, educational experts and
developers to research, design and enhance our Homeroom.com educational
products. We believe that the following product design traits differentiate our
Homeroom.com products from those of our competitors:
- unique combination of assessment tools and in-depth individualized
remediation resources provides students and teachers with an efficient
means of identifying specific weaknesses and then correcting them;
- a large question pool aligned with the skills tested on state-mandated
assessments based on the state in which the user resides, and tools to
further build and refine the question pool; and
- designed to work with the existing curriculum rather than alter or
supplant it.
Our current focus in the Homeroom.com division is to enhance functionality
and partner with additional educational Web sites to expand our targeted
enrichment and remediation resources. We also plan to continue to expand our
question pool and make Homeroom.com available in more states and grades.
TECHNOLOGY
The purpose of our technology platform is to provide systems that help
distinguish us in the marketplace, operate cost-effectively and accommodate
future growth. We currently use a combination of commercially available and
custom developed software and hardware systems. These systems are located at our
Internet hosting facility, our corporate headquarters and at our
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regional offices. We use a Microsoft/Linux/Intel platform that provides us with
the ability to scale both capacity and functionality.
One of our ongoing primary objectives is to maintain reliable systems. We
have implemented performance monitoring for all key Web and business systems to
enable us to respond quickly to potential problems. Our Web sites, along with
regional office replica data sets, are hosted at Frontier Global Center, a third
party facility in New York City. This facility provides redundant utility
systems, a backup electric generator and 24-hour a day server support. All
servers have uninterruptible power supplies and redundant file systems to
maximize system and data availability. We regularly back up our data to minimize
the impact of data loss due to system failure. The servers at our regional sites
also have the capability of supporting multiple offices so that in the event of
service interruptions on one server we are able to reroute processing to the
servers in other offices.
SIGNIFICANT CUSTOMERS
Royalties, advances and other fees from services rendered by us to
McGraw-Hill represented 12% of our revenue in 1999 and 3% of our revenue in
1998. Royalties, advances and other fees from books authored by us and published
and distributed by Random House represented 7% of our revenue in 1999 and 9% of
our revenue in 1998.
COMPETITION
The markets for our online and offline educational products and services
are fragmented and highly competitive. Companies in our offline educational
markets are well established, and we believe they will expand their offerings
into our online markets. As a result, we expect competition from both new and
established companies to intensify in the future across all of our target
markets. We compete directly and indirectly with the following types of
companies:
- providers of online and offline test preparation, admissions
assistance and career counseling to prospective higher education
students;
- companies that provide prospective students with Internet-based
information about higher education institutions as well as companies
that provide these institutions with access to the student market;
- companies that provide software and Internet-based educational
assessment and remediation products and services to students, parents,
educators and educational institutions;
- traditional print media companies that publish books and magazines
about standardized test preparation and college and graduate schools,
and offer admissions information and services to students and
educational institutions; and
- non-profit and membership educational organizations that offer both
personal and Internet-based products and services to assist
individuals and educational organizations with counseling, marketing
and student applications.
We believe that the principal competitive factors in our online and offline
markets include the following:
- brand recognition;
- ability to demonstrate measurable results;
- availability of integrated online and offline solutions;
- ability to achieve a critical mass of students, parents and
educational institutions on our Web site;
- quality of overall user experience;
- speed in the introduction of new services;
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- quality of materials and teachers;
- alignment of offerings with specific needs of students, parents and
educators; and
- value and availability of products and services.
We believe that we are well positioned to compete in these areas and that
our well-known and trusted Princeton Review brand combined with our 19 years of
experience in providing students, parents and educators with innovative,
high-quality educational products and services provide us with important
competitive advantages in our target markets. We also believe that our ability
to attract students, parents and educators to our highly trafficked Review.com
Web site offers sponsors and merchandisers an attractive source of potential
consumers. Finally, we believe that none of our competitors currently offers the
breadth of educational products and services through the variety of channels
that we provide. However, some of our competitors have more resources than we
do, and they may be able to respond more quickly than we can to new technologies
or changes in the education market. As a result, we may not be able to maintain
our competitive advantages over current or future competitors, and our business
could suffer materially.
INTELLECTUAL PROPERTY AND PROPERTY RIGHTS
Our copyrights, trademarks, service marks, trade secrets, proprietary
technology and other intellectual property rights distinguish our products and
services from those of our competitors, and contribute to our competitive
advantage in our target markets. To protect our brand, products and services and
the systems that deliver those products and services to our customers we rely on
a combination of copyright, trademark and trade secret laws as well as
confidentiality agreements and licensing arrangements with our employees,
customers, independent contractors, sponsors and others.
We strategically pursue the registration of our intellectual property
rights. However, effective patent, trademark, service mark, copyright and trade
secret protection may not always be available. Existing laws do not provide
complete protection, and monitoring the unauthorized use of our intellectual
property requires significant resources. We cannot be sure that our efforts to
protect our intellectual property rights will be adequate or that third parties
will not infringe or misappropriate these rights. In addition, there can be no
assurance that competitors will not independently develop similar intellectual
property. If others are able to copy and use our products and delivery systems,
we may not be able to maintain our competitive position. If litigation is
necessary to enforce our intellectual property rights or determine the scope of
the proprietary rights of others, we may have to incur substantial costs or
divert other resources, which could harm our business.
In addition, competitors and others may claim that we have infringed their
intellectual property rights. Defending any such lawsuit, whether with or
without merit, could be time-consuming, result in costly litigation or prevent
us from offering our products and services, which could harm our business. If a
lawsuit against us is successful, we may lose the rights to use our products or
be required to modify them, or we may have to pay financial damages. We have
been subject to infringement claims in the past and expect to be subject to
legal proceedings and claims from time to time in the ordinary course of
business, including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties.
We have used "The Princeton Review" as our principal service mark since
1982. Although we have registered the mark, our application for registration was
opposed by an educational institution and the validity of our registration is
uncertain. We believe we have acquired intellectual property rights in "The
Princeton Review" service mark and trademark due to our long-term use of the
mark; and no one has objected to this use of the mark, as distinguished from
federal registration, during the 18 years we have used it.
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In order to develop, improve, market and deliver new products and services,
we may be required to obtain licenses from others. There can be no assurance
that we will be able to obtain licenses on commercially reasonable terms or at
all or that rights granted under any licenses will be valid and enforceable.
GOVERNMENT REGULATION
We must comply with regulations adopted by the Federal Trade Commission and
with several state laws that regulate the offer and sale of franchises. The
FTC's Trade Regulation Rule on Franchising, or the FTC Rule, and various state
laws require that we furnish prospective franchisees with a franchise offering
circular containing information prescribed by the FTC Rule and applicable state
laws and regulations.
We also must comply with a number of state laws that regulate substantive
aspects of the franchisor-franchisee relationship, including:
- those governing the termination or non-renewal of a franchise without
good cause;
- requirements that a franchisor deal with its franchisees in good
faith;
- prohibitions against interference with the right of free association
among franchisees; and
- those regulating discrimination among franchisees in charges,
royalties or fees.
Some foreign countries also have laws affecting the offer and sale of
franchises within their borders and to their citizens and U.S. federal and state
franchise regulation may be applicable to our efforts to establish franchises
abroad. Failure to comply with these laws could limit or preclude our ability to
expand internationally through franchising.
To date, these laws have not precluded us from seeking franchisees in any
given area and have not had a material adverse effect on our operations.
However, compliance with federal, state and international franchise laws can be
costly and time consuming, and we cannot assure you that we will not encounter
delays, expenses or other difficulties in this area.
EMPLOYEES
As of June 30, 2000, we had 278 full-time employees and 1,480 part-time
employees. None of our employees is covered by a collective bargaining
agreement. We consider our employee relations to be good.
FACILITIES
Our headquarters are located in New York, New York, where we lease
approximately 26,000 square feet of office space under a lease that expires on
August 31, 2010. We also lease an aggregate of approximately 106,500 square feet
of office space for additional operations in New York, New York and our 14
regional offices located in California, Georgia, Illinois, New York, Ohio,
Pennsylvania, Washington, Washington D.C. and Canada.
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.
SEGMENT INFORMATION
For financial information relating to our operating divisions by business
segment, see Note 14 to our consolidated financial statements included elsewhere
in this prospectus.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to our current
executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John S. Katzman................ 40 Chairman and Chief Executive Officer
Mark Chernis................... 33 President and Chief Operating Officer
Stephen Melvin................. 48 Chief Financial Officer
Stephen Quattrociocchi......... 37 Executive Vice President, Instruction and Guidance Division
Evan Schnittman................ 37 Executive Vice President, Review.com Division
Linda Nessim-Rubin............. 33 Executive Vice President, Communications
Bruce Task..................... 50 Executive Vice President, Princeton Review Ventures
Steven Hodas................... 40 Executive Vice President, Strategic Development
Peter Taylor................... 37 Senior Vice President, Technology
Richard Katzman................ 43 Director
V. Frank Pottow................ 36 Director
John C. Reid................... 49 Director
Richard Sarnoff................ 41 Director
Sheree T. Speakman............. 45 Director
Howard A. Tullman.............. 55 Director
</TABLE>
------------------------------
John S. Katzman, 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 is also a director of Student Advantage. Mr.
Katzman received a BA from Princeton University.
Mark Chernis, President and Chief Operating Officer, joined us in 1984. Mr.
Chernis has served as Chief Operating Officer since 1995 and became President in
August 2000. From 1989 to 1995, Mr. Chernis served as our Vice President,
Operations. From 1984 to 1989, Mr. Chernis served as a systems analyst. Mr.
Chernis received a BA from Vassar College.
Stephen Melvin, Chief Financial Officer, joined us in 1998. From 1996 to
1998, he served as Vice President of Solow Realty Company where he was
responsible for overseeing the property management business. From 1987 to 1996,
Mr. Melvin was Chief Financial Officer of Western Heritable Investment
Corporation, a real estate investment and management company. From 1983 to 1987,
Mr. Melvin served as Controller of Private Satellite Network, Inc. From 1978 to
1983, Mr. Melvin was Assistant Corporate Controller of Paramount Pictures Corp.
From 1974 to 1978, Mr. Melvin was a Certified Public Accountant at Deloitte &
Touche LLP. Mr. Melvin received a BA from the University of Virginia and an MS
from New York University.
Stephen Quattrociocchi, Executive Vice President, Instruction and Guidance
division, joined us in 1988. Since 1997, he has served as Executive Vice
President of our Instruction and Guidance division. From 1991 to 1997, Mr.
Quattrociocchi served as Vice President of Course Operations. Mr. Quattrociocchi
received a BS from the Massachusetts Institute of Technology and an MBA from The
Wharton School.
Evan Schnittman, Executive Vice President, Review.com division, joined us
in 1996. Since 1998, Mr. Schnittman has served as Executive Vice President,
Review.com division. From 1996 to 1998, Mr. Schnittman was Editor-in-Chief,
responsible for our editorial and production departments.
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<PAGE> 65
Before joining us, Mr. Schnittman was a Senior Editor at Little, Brown & Company
from 1993 to 1996. Mr. Schnittman received a BA from the University of Iowa.
Linda Nessim-Rubin, Executive Vice President, Communications, joined us in
1990. Ms. Nessim-Rubin has served in her current capacity since 1998. She
manages the Princeton Review brand and oversees communications and marketing, as
well as human resources. From 1995 to 1998, she was Vice President, Marketing
Operations. Prior to joining us, Ms. Nessim-Rubin worked as an Account Executive
for Hakahudo Advertising. Ms. Nessim-Rubin received a BFA from Parsons School of
Design.
Bruce Task, Executive Vice President, Princeton Review Ventures, joined us
in 1987. From 1997 to early 2000, he served as Executive Vice President of
Strategic Planning. From 1996 to 1997, he served as Vice President of Research
and Development, and from 1988 to 1995 he served as our Chief Financial Officer.
From 1987 to 1988, Mr. Task was director of our Washington, D.C. office. Mr.
Task received a BS from C.W. Post College.
Steven Hodas, Executive Vice President, Strategic Development, joined us in
1995. From 1995 to 1999, Mr. Hodas served as our Vice President, Online
Services. From 1993 to 1995, Mr. Hodas served as Project Manager for the NASA
K-12 Internet Initiative where he was responsible for advising the White House
and federal and state agencies on school technology policy. Mr. Hodas received a
BA from Sarah Lawrence College.
Peter Taylor, Senior Vice President of Technology, joined us in 1999. From
1998 to 1999, Mr. Taylor was Custom Application Solution Director at
Whittman-Hart, Inc., a computer consulting firm. From 1997 to 1998, he served as
Distributed Computing Practice Manager at Automated Concepts, Inc., a computer
consulting firm. From 1996 to 1997, he served as Regional Manager at CGS
Computer Associates, Inc., a computer consulting firm, and from 1993 to 1996,
Mr. Taylor was Director of Consulting at Computer Generated Solutions, Inc., a
computer consulting firm. Mr. Taylor received a BS from the Illinois Institute
of Technology.
Richard Katzman 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.
V. Frank Pottow has served as a director of our company since April 2000.
Mr. Pottow has been a Managing Director of SG Capital Partners LLC, the American
merchant banking affiliate of French bank Societe Generale, since 1997. From
1996 to 1997, he served as Managing Director of Thayer Capital Partners, L.P., a
private equity manager. From 1992 to 1996, he was a Principal at Odyssey
Partners L.P., a private investment partnership. He is also a member of the
board of directors of Bargo Energy Company. Mr. Pottow received a BS from the
Wharton School and an MBA from Harvard Business School.
John C. Reid has served as a director of our company since March 2000.
Since 1999, Mr. Reid has been the Chief Executive Officer of CometSystems.com, a
company that develops software for the Internet. 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, Marketing, Coca-Cola USA and Chief
Environmental Officer, The Coca-Cola Company. Mr. Reid is also a member of the
board of directors of Funderstanding, Inc., Giftworld.com, Inc. and Magnetic
Data Technologies, L.L.C. Mr. Reid received a BA from Brandeis University and an
MA from Massachusetts Institute of Technology.
Richard Sarnoff has served as a director of our company since 1998. Since
1998, Mr. Sarnoff has been Executive Vice President and Chief Financial Officer
of Random House, Inc. From 1996 to 1998, Mr. Sarnoff served as Chief Financial
Officer of Bantam Doubleday Dell, a consumer book
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publisher, and from 1995 to 1998, he was Senior Vice President, Corporate
Development of Bantam Doubleday Dell. Mr. Sarnoff is also a member of the board
of the Children's Museum of Manhattan. Mr. Sarnoff received a BA from Princeton
University and an MBA from Harvard Business School.
Sheree T. Speakman has served as a director of our company since March
2000. Since 1998, Ms. Speakman has been President and Chief Executive Officer of
Fox River Learning, Inc., an education consulting firm. 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 a BA from Albion
College and an MBA from the University of Chicago.
Howard A. Tullman has served as a director of our company since March 2000.
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 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. From October 1993 to October 1996, Mr. Tullman was the
President and Chief Executive Officer of Imagination Pilots, Inc., a multimedia
software developer he founded in 1993. Mr. Tullman serves as a director of
EMusic.com, Inc. and is the Chairman of the Board of The Cobalt Group. Mr.
Tullman received a BA from Northwestern University and a JD from Northwestern
University School of Law.
BOARD COMPOSITION
We currently have seven directors. Under our restated certificate of
incorporation, which will become effective upon the closing of this offering,
the terms of office of our directors will be divided into the following three
classes:
- Class I, whose term will expire at the annual meeting of stockholders
to be held in 2001;
- Class II, whose term will expire at the annual meeting of stockholders
to be held in 2002; and
- Class III, whose term will expire at the annual meeting of
stockholders to be held in 2003.
The Class I directors will be John S. Katzman, V. Frank Pottow and John C.
Reid, the Class II directors will be Richard Katzman and Sheree T. Speakman and
the Class III directors will be Richard Sarnoff and Howard A. Tullman. At each
annual meeting of stockholders after the initial classification or special
meeting held in place of an annual meeting, the successors to directors whose
terms will then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election or similar
special meeting. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one third of the directors. This
classification of our board of directors may have the effect of delaying or
preventing changes in control or management of The Princeton Review.
COMMITTEES OF THE BOARD OF DIRECTORS
In June 2000, our board of directors established an audit committee and a
compensation committee.
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Audit Committee. The audit committee assists the board of directors in
fulfilling its responsibilities of ensuring that management is maintaining an
adequate system of internal controls to assure:
- that assets are safeguarded and that financial reports are properly
prepared;
- consistent application of generally accepted accounting principles;
and
- compliance with management's policies and procedures.
In performing these functions, the audit committee meets periodically with
the independent auditors and management to review their work and confirm that
they are properly discharging their responsibilities. The audit committee also:
- recommends an independent audit firm to audit financial statements and
to perform services related to audits;
- reviews the scope and results of audits with independent accountants;
- reviews with management and independent accountants our annual
operating results;
- considers the adequacy of our internal accounting control procedures;
and
- considers our accountants' independence.
The audit committee currently consists of V. Frank Pottow (Chairman), John
C. Reid and Sheree T. Speakman.
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 currently consists of V. Frank
Pottow, Richard Sarnoff and Howard A. Tullman (Chairman).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During our last completed fiscal year, we did not have a compensation
committee. John S. Katzman, Mark Chernis and Linda Nessim-Rubin participated in
deliberations of our board of directors concerning executive officer
compensation. On June 15, 2000, our board of directors formed a compensation
committee. None of our officers or other employees serves as a member of our
compensation committee. None of our executive officers serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or compensation
committee.
DIRECTOR COMPENSATION
Each of our non-employee directors received an award of options to purchase
20,000 shares of common stock as one-time compensation for services as a
director. Richard Katzman received an additional grant of options to purchase
30,000 shares in consideration for past services as our director. These options
have an exercise price of $6.25 and vest 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. All of the
options have a term of 10 years, subject to earlier termination in the event of
termination of service as our director.
We reimburse our directors for reasonable expenses they incur in attending
meetings of our board of directors and its committees.
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EXECUTIVE COMPENSATION
The following table shows the total compensation paid for the year ended
December 31, 1999 for our Chief Executive Officer and the other four most highly
compensated executive officers whose annual salary and bonus exceeded $100,000
in 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
John S. Katzman........................................ $368,433 -- --
Chairman and Chief Executive Officer
Mark Chernis........................................... 228,462 $47,273 $5,000,000
President and Chief Operating Officer
Stephen Quattrociocchi................................. 200,000 -- 1,250,000
Executive Vice President, Instruction and Guidance
Division
Bruce Task............................................. 196,250 25,000 625,000
Executive Vice President, Princeton Review Ventures
Stephen Melvin......................................... 165,096 30,000 625,000
Chief Financial Officer
</TABLE>
Amounts listed above under "All Other Compensation" represent the value, as
of December 31, 1999, of PSUs awarded to each of the persons listed in the table
above during the year then ended. Of the amounts of PSUs listed in the table
above, $625,000 of Mr. Chernis', $104,167 of Mr. Quattrociocchi's, $20,833 of
Mr. Task's and $156,250 of Mr. Melvin's PSUs were vested as of December 31,
1999. All of the PSUs shown in the table above have been relinquished in
connection with the termination of the PSU Plan and the adoption of the 2000
Stock Incentive Plan as part of our restructuring. The consideration received by
the persons listed in the table above with respect to their relinquishment of
these and other PSUs held by them is described under "Related Party
Transactions."
OPTION GRANTS IN 2000, AS OF JULY 31, 2000
The following table shows grants of stock options to our Chief Executive
Officer and to the other executive officers named in the Summary Compensation
Table above during 2000, as of July 31, 2000. Our stock incentive plan was
adopted on March 31, 2000 as a replacement for our previous PSU and SAR plans.
Accordingly, there were no options granted in 1999.
The percentages in the table below are based on options to purchase an
aggregate of 1,734,429 shares of common stock granted under our stock option
plan through July 31, 2000 to our employees, consultants and directors. 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 as determined by the board of
directors, except for 165,288 options granted to replace previously outstanding
SARs which were granted with exercise prices equal to the exercise price of the
SARs they replaced. All options, other than Mr. Quattrociocchi's, shown in the
following table with an exercise price of $6.25 per share vest as to 6.25% of
these shares each quarter following the grant date until fully vested. Mr.
Quattrociocchi's options with an exercise price of $6.25 per share vest as to
8.33% of these shares each quarter following the grant date until fully vested.
All options shown in the following table with exercise prices below $6.25 per
share are fully vested. All of the options have a term of 10 years, subject to
earlier termination in the event of a termination of employment.
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Potential realizable values are net of exercise price before taxes and are
based on the assumption that our common stock appreciates at the annual rate
shown, compounded annually, from the date of grant until the expiration of the
10-year term. These numbers are calculated based on the requirements of the
Commission and do not reflect our estimate of future stock price growth.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL
-------------------------------------------------------- RATES OF STOCK
NUMBER OF PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO EXERCISE OPTION
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR(%) SHARE($) DATE 5% 10%
---- ---------- ------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John S. Katzman...... -- -- -- -- -- --
Mark Chernis......... 300,000 0.17% $6.25 4/1/10 $1,179,000 $2,988,188
23,100 0.01 1.46 4/1/10 21,222 53,787
4,928 * 1.70 4/1/10 5,262 13,336
Stephen Melvin....... 170,000 0.10 6.25 4/1/10 668,100 1,693,306
Stephen
Quattrociocchi..... 120,000 0.07 6.25 4/1/10 471,600 1,195,275
15,400 0.01 1.46 4/1/10 14,148 35,858
3,234 * 1.70 4/1/10 3,453 8,752
Bruce Task........... 47,500 0.03 6.25 4/1/10 186,675 473,130
23,100 0.01 1.46 4/1/10 21,222 53,787
5,698 * 1.70 4/1/10 6,084 15,420
</TABLE>
---------------
* less than 0.01%
OPTION VALUES AS OF JULY 31, 2000
The following table provides summary information concerning stock options
held as of July 31, 2000 by our Chief Executive Officer and by the other
executive officers named in the Summary Compensation Table above.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AS OF JULY 31,
SHARES AS OF JULY 31, 2000 2000
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John S. Katzman....... -- -- -- -- -- --
Mark Chernis.......... -- -- 46,778 281,250 $133,057 --
Stephen Melvin........ -- -- 10,625 159,375 -- --
Stephen
Quattrociocchi...... -- -- 28,634 110,000 88,471 --
Bruce Task............ -- -- 31,767 44,531 136,562 --
</TABLE>
2000 STOCK INCENTIVE PLAN
The following is a summary description of our 2000 Stock Incentive Plan.
You may refer to the exhibits that are part of the registration statement for a
copy of the stock incentive plan.
On March 31, 2000, we adopted our 2000 Stock Incentive Plan for the benefit
of our officers, other employees and directors and the officers, other employees
and directors of our subsidiaries. The stock incentive plan will remain
effective until March 30, 2010.
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The stock incentive plan provides for the grant of:
- options that are intended to qualify as incentive stock options, or
ISOs, within the meaning of Section 422 of the Internal Revenue Code;
- options not intended to so qualify, or NQOs;
- awards of restricted stock; and
- awards of deferred stock.
Our officers, other employees and directors and our affiliates designated
by the compensation committee of our board of directors are eligible to receive
grants under the plan. The plan is administered by the compensation committee,
and stock options, restricted stock awards and deferred stock awards are granted
at the discretion of the compensation committee.
Options. The compensation committee determines:
- which eligible persons will be granted options under the plan;
- the type of options and the terms and conditions of exercisability;
- the term of the options; and
- the number of shares of common stock for which an option will be
granted.
The maximum term of each stock option granted under the plan is 10 years
and one day. If an optionee's employment terminates, the option will remain
exercisable only to the extent determined by the compensation committee.
The aggregate fair market value, determined at the date the option is
granted, of stock with respect to which ISOs granted under the stock incentive
plan are exercisable for the first time in any calendar year by any eligible
officer or other employee may not exceed $100,000. The exercise price of ISOs
granted under the stock incentive plan may not be less than fair market value of
the stock on the date of grant, as determined by the compensation committee. The
exercise price for each NQO granted under the stock incentive plan is determined
by the compensation committee at the time of grant.
Restricted Stock Awards. The compensation committee determines:
- which eligible persons will receive restricted stock awards;
- whether the grant will be an award of restricted stock or rights to
purchase restricted stock;
- the number of shares of restricted stock or rights to purchase
restricted stock granted;
- the price to be paid by the recipient of a right to purchase
restricted stock; and
- the vesting conditions of such awards.
Unless otherwise determined by the compensation committee, if an employee
terminates employment before all of his or her restricted stock has vested or
the vesting requirements are otherwise not met, the unvested shares of
restricted stock will be forfeited. The purchase price paid by the employee with
respect to such shares will be returned to the employee or a cash payment equal
to the restricted stock's fair market value on the date of forfeiture, if lower,
will be paid to the employee. The compensation committee determines whether
holders of restricted stock will have the right to vote with respect to their
stock and whether they will be entitled to dividends.
Deferred Stock Awards. The compensation committee determines:
- which eligible persons will receive deferred stock awards;
- the number of shares of deferred stock to be awarded; and
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- the length and conditions of the deferral period.
Deferred stock awards may be conditioned upon the attainment of specified
performance goals or other criteria. Upon the expiration of the deferral period,
the grantee will be paid the value of the deferred stock award in stock, cash or
a combination, at the discretion of the compensation committee. Upon termination
of employment prior to the expiration of the deferral period, the employee will
forfeit all deferred stock awards.
The total number of shares of our common stock reserved and available for
awards under the stock incentive plan is 3,000,000. As of July 31, 2000, there
were:
- options outstanding under the stock incentive plan to purchase
1,734,429 shares of our Class B non-voting common stock at a weighted
average exercise price of $5.81 per share;
- 1,084,132 shares of Class B non-voting common stock issued under the
plan; and
- 181,441 shares available for future issuance under the plan.
Our board of directors has authorized an increase of 1,000,000 in the total
number of shares of our common stock available for awards under the plan to
4,000,000 upon the completion of this offering.
Change in Control. Under the stock incentive plan, in the event of a
change in control, all options become fully exercisable and all restrictions and
deferral limitations applicable to restricted stock awards and deferred stock
awards lapse, unless a successor assumes or substitutes options. If a successor
assumes or substitutes options in connection with a change in control and an
employee's employment is terminated in connection with or within one year
following a change in control without cause or after being reassigned, all
options become fully exercisable and all restrictions and deferral limitations
applicable to restricted stock awards and deferred stock awards lapse. A change
in control is defined under the stock incentive plan as:
- a corporate merger or similar transaction in which we are not the
surviving entity;
- the acquisition of 30% of our outstanding voting common stock by an
outside entity or a related group of outside entities;
- a change in the majority of the composition of our board of directors
within two years without the approval of two-thirds of the existing
directors;
- our liquidation or dissolution or a sale of substantially all of our
assets to an outside entity; or
- the execution of a binding agreement, which, if consummated, would
result in a change in control described above.
For purposes of the above definition, an outside entity means any person or
entity other than an affiliate of ours or any shareholder of any such affiliate
as of September 1, 1998.
Federal Income Tax Consequences. The following is a summary of federal
income tax consequences generally arising with respect to awards made under the
stock incentive plan.
The grant of an option will create no tax consequences for the optionee or
us. Upon exercising an option, other than an ISO, the optionee will generally
recognize ordinary income equal to the difference between the exercise price and
the fair market value of the shares acquired on the date of exercise and we will
generally be entitled to a tax deduction in the same amount. An optionee
generally will not recognize taxable income upon exercising an ISO and we will
not be entitled to any tax deduction with respect to an ISO if the optionee
holds the shares for the applicable periods specified in the Internal Revenue
Code.
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With respect to restricted stock awards, upon the payment of cash or the
issuance of shares or other property that is either not restricted as to
transferability or not subject to a substantial risk of forfeiture, the
participant will generally recognize ordinary income equal to the cash or the
fair market value of the shares or other property delivered. We will generally
be entitled to a deduction in an amount equal to the ordinary income recognized
by the participant.
EMPLOYMENT AGREEMENTS
Agreement with John S. Katzman. On August 7, 2000, we entered into an
employment agreement with John S. Katzman for his continued service as our Chief
Executive Officer at an annual base salary of $400,000, increasing each year at
the discretion of the board of directors. The agreement includes a performance
bonus of between 10% and 100% of his base salary. The agreement provides for an
initial term of two years with automatic renewal for additional two-year periods
on each anniversary of the effective date of the agreement until Mr. Katzman
voluntarily terminates employment or until we give Mr. Katzman written notice at
least six months prior to the anniversary date of the agreement.
If we terminate Mr. Katzman's employment without cause or if we do not
renew the agreement, we have agreed to pay Mr. Katzman his annual base salary
for an additional 18 months following termination.
Under this agreement, Mr. Katzman 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 this agreement.
Mr. Katzman has also agreed under this agreement that for 18 months after the
expiration or termination of this 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 franchises and then commencing services
for Mr. Katzman.
Agreement with Mark Chernis. On April 18, 2000, we entered into an
employment agreement with Mark Chernis for his continued service as our Chief
Operating Officer at an annual base salary of $257,500, increasing by 3% each
year. The agreement includes a $50,000 annual bonus and an annual performance
bonus of up to 50% of base salary. The agreement supersedes all previous
agreements between us and Mr. Chernis and provides for an initial term of two
years with automatic renewal for additional two-year periods on each anniversary
of the effective date of the agreement until Mr. Chernis voluntarily terminates
employment or until we give Mr. Chernis written notice of non-renewal six months
prior to the anniversary of the date of the agreement.
The employment agreement grants Mr. Chernis stock options to purchase
300,000 shares of our Class B non-voting common stock at a price of $6.25 per
share. These stock options are subject to the provisions of our stock incentive
plan. The stock options granted to Mr. Chernis vest in equal quarterly
installments until the fourth anniversary of the effective date of the
employment agreement. 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.
If we terminate Mr. Chernis' employment without cause or if we do not renew
the agreement, we have agreed to pay Mr. Chernis his annual base salary for an
additional 18 months following termination. In addition, we have agreed to
reimburse Mr. Chernis for any payments he makes to maintain medical and dental
insurance for 18 months following termination.
Under this agreement, Mr. Chernis 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 this agreement.
Mr. Chernis also has agreed under this agreement that for 18 months after the
expiration or termination of this agreement, he will not solicit the services of
any of our
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<PAGE> 73
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 franchises and then commencing services for Mr. Chernis.
Agreement with Stephen Melvin. On April 1, 2000, we entered into an
employment agreement with Stephen Melvin for his continued service as our Chief
Financial Officer at an annual base salary of $200,000, increasing by 5% each
year. The agreement includes an annual bonus of between 15% and 35% of his base
salary. The agreement supersedes all previous agreements between us and Mr.
Melvin and provides for an initial term of two years with automatic renewal for
additional two-year periods on each anniversary of the effective date of the
agreement until Mr. Melvin voluntarily terminates employment or until we give
Mr. Melvin written notice of non-renewal at least six months prior to the
anniversary date of the agreement.
The employment agreement grants Mr. Melvin stock options to purchase
170,000 shares of our Class B non-voting common stock at a price of $6.25 per
share. These stock options are subject to the provisions of our stock incentive
plan. The stock options granted to Mr. Melvin vest in equal quarterly
installments until the fourth anniversary of the effective date of the
employment agreement. 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.
If we terminate Mr. Melvin's employment without cause or if we do not renew
the agreement, we have agreed to pay Mr. Melvin his annual base salary for an
additional 10 months following termination.
Under this agreement, Mr. Melvin 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 this agreement.
Mr. Melvin also has agreed under this agreement that for 18 months after the
expiration or termination of this 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 franchises and then commencing services
for Mr. Melvin.
Agreement with Stephen Quattrociocchi. On April 10, 2000, we entered into
an employment agreement with Stephen Quattrociocchi for his continued service as
our Executive Vice President of the Instruction and Guidance Division at an
annual base salary of $245,000, increasing by a minimum of 3% each year. The
agreement includes an annual bonus of up to 35% of his base salary. The
agreement supersedes all previous agreements between us and Mr. Quattrociocchi
and provides for an initial term of two years with automatic renewal for
additional two-year periods on each anniversary of the effective date of the
agreement until Mr. Quattrociocchi voluntarily terminates employment or until we
give Mr. Quattrociocchi written notice of non-renewal at least six months prior
to the anniversary date of the agreement.
The employment agreement grants Mr. Quattrociocchi stock options to
purchase 120,000 shares of our Class B non-voting common stock at a price of
$6.25 per share. These stock options are subject to the provisions of our stock
incentive plan. The stock options granted to Mr. Quattrociocchi vest in equal
quarterly installments until the third anniversary of the effective date of the
employment agreement. 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.
If we terminate Mr. Quattrociocchi's employment without cause or if we do
not renew the agreement, we have agreed to pay Mr. Quattrociocchi his annual
base salary for an additional 12 months following termination.
Under this agreement, Mr. Quattrociocchi has agreed not to compete with us
in the business of providing assistance with respect to preparation for
standardized examinations or the college,
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<PAGE> 74
professional school, or graduate school admissions process for 18 months
following the expiration or termination of this agreement. Mr. Quattrociocchi
also has agreed under this agreement that for 18 months after the expiration or
termination of this 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 franchises and then commencing services for Mr.
Quattrociocchi.
Agreement with Bruce Task. On April 10, 2000, we entered into an
employment agreement with Bruce Task for his continued service as our Executive
Vice President of Princeton Review Ventures at an annual base salary of
$250,000, increasing by 3% each year. The agreement includes an annual
performance-based bonus of between 7.5% and 60% of his base salary. The
agreement supersedes all previous agreements between us and Mr. Task and
provides for an initial term of two years with automatic renewal for additional
two-year periods on each anniversary of the effective date of the agreement
until Mr. Task voluntarily terminates employment or until we give Mr. Task
written notice of non-renewal at least six months prior to the anniversary date
of the agreement.
The employment agreement grants Mr. Task stock options to purchase 47,500
shares of our Class B non-voting common stock at a price of $6.25 per share.
These stock options are subject to the provisions of our stock incentive plan.
The stock options granted to Mr. Task vest in equal quarterly installments until
the fourth anniversary of the effective date of the employment agreement.
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.
If we terminate Mr. Task's employment without cause or do not renew his
agreement, we have agreed to pay Mr. Task his annual base salary in bi-weekly
payments for an additional 12 months following termination. In addition, we have
agreed to reimburse Mr. Task for any payments he makes to maintain medical and
dental insurance for the number of weeks equal to twice the number of years
employed by us. If Mr. Task voluntarily terminates his employment, we have
agreed to pay him his base salary for six months following such termination.
Under this agreement, Mr. Task 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 this agreement.
Mr. Task also has agreed under this agreement that for 18 months after the
expiration or termination of this 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 franchises and then commencing services
for Mr. Task.
Under this employment agreement, we have agreed that we will not exercise
our right, under the stockholders' agreement dated April 1, 2000, to repurchase
Mr. Task's shares of common stock in the event Mr. Task ceases to be an
employee, consultant or board member of the company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 102 of the Delaware General Corporation Law, or the DGCL, allows a
corporation to eliminate the personal liability of directors of the corporation
to the corporation or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to the corporation or
its stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the DGCL regarding unlawful dividends and stock
purchases; or
- for any transaction from which the director derived an improper
personal benefit.
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<PAGE> 75
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability is
expressly forbidden by the DGCL, as it now exists or is later amended.
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with any
threatened, pending or completed actions, suits or proceedings in which such
person is made a party by reason of such person being or having been a director,
officer, employee or agent of the corporation. The statute provides that it is
not exclusive of other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
Our certificate of incorporation requires us to indemnify to the fullest
extent authorized or permitted by the DGCL (as it existed at the time of the
adoption of the certificate of incorporation, or, if the DGCL is later amended
to permit broader indemnification, as so amended) each person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was our director or officer,
or is or was serving at our request as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee or agent, or in any other capacity while serving as a
director, officer employee or agent. We are only required to indemnify any
person seeking indemnification in connection with an action initiated by that
person if the action was authorized by the board of directors. The certificate
of incorporation also provides that we must advance expenses to a director or
officer in advance of the final disposition of the matter with respect to which
the expenses are being advanced upon receipt of an undertaking, if the
undertaking is required by the DGCL, by or on behalf of the director or officer
to repay the amount if it is ultimately determined that the director or officer
is not entitled to be indemnified by us. The certificate of incorporation
further states that we may, by action of the board of directors, provide
indemnification to our employees and agents with the same scope and effect as
the provisions relating to directors and officers.
The certificate of incorporation provides that these rights to
indemnification and advancement of expenses are not exclusive of any other right
that any person may have or acquire under any statute, any amendment to the
certificate of incorporation, by-laws, agreement, vote of stockholders or
disinterested directors or otherwise.
We maintain directors and officers liability insurance.
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<PAGE> 76
RELATED PARTY TRANSACTIONS
OUR RESTRUCTURING
Distribution Prior to our Restructuring
Immediately prior to our restructuring, which is described more fully under
"Our Restructuring" elsewhere in this prospectus, we distributed stock of
Student Advantage owned by us to our then existing stockholders and the minority
interest holders of one of our limited liability company subsidiaries. The
following table shows:
- our executive officers and the beneficial owner of more than 5% of our
voting stock that received stock of Student Advantage in this
distribution;
- the number of shares of Student Advantage stock received by these
parties; and
- the aggregate public market value of these shares as of the date of
the distribution.
<TABLE>
<CAPTION>
SHARES OF
STOCK OF
STUDENT AGGREGATE
EXECUTIVE OFFICER OR 5% STOCKHOLDER ADVANTAGE VALUE
----------------------------------- ----------------- ----------
<S> <C> <C>
John S. Katzman............................................. 494,368 $4,944,000
Mark Chernis................................................ 5,205 52,000
Bruce Task.................................................. 8,832 88,000
Random House TPR, Inc. ..................................... 147,425 1,474,000
</TABLE>
Exchange of Stock of our Predecessor and its Subsidiaries for Stock of the
Holding Company
A number of our executive officers received shares of our common stock in
our restructuring in exchange for their interests in our predecessor, and a
beneficial owner of more than 5% of our voting stock received shares of our
common stock in exchange for its minority interests in each of our limited
liability company subsidiaries. The following table shows:
- our executive officers and the beneficial owner of more than 5% of our
voting stock that exchanged their ownership interests in our
predecessor or its subsidiaries, as applicable, in exchange for shares
of our common stock;
- the number and class of shares of our common stock received by each
party; and
- the aggregate value of the shares of common stock received by each
party, as of the date of the transaction.
<TABLE>
<CAPTION>
SHARES OF
SHARES OF CLASS B
CLASS A NON-VOTING
COMMON COMMON AGGREGATE
EXECUTIVE OFFICER OR 5% STOCKHOLDER STOCK STOCK VALUE
----------------------------------- ----------------- ----------------- -----------
<S> <C> <C> <C>
John S. Katzman................................ 11,470,063 120,756* $72,443,000
Mark Chernis................................... -- 120,756 755,000
Bruce Task..................................... -- 204,928 1,281,000
Random House TPR, Inc.......................... 3,378,618 -- 21,116,000
</TABLE>
---------------
* Represents shares that may be deemed to be beneficially owned by Mr. Katzman
through his wife, which beneficial ownership Mr. Katzman disclaims, except to
the extent of his pecuniary interest in these shares.
At the time of our restructuring, we also entered into a stockholders'
agreement with our then existing stockholders, including the executive officers
listed above and Random House TPR, Inc., which grants them "piggyback"
registration rights with respect to one company-initiated
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<PAGE> 77
registration of our securities under the Securities Act. See "Description of
Capital Stock" for more information about these registration rights.
Termination of PSU and SAR Plans
In connection with our restructuring, we terminated our PSU and SAR plans
and adopted our 2000 Stock Incentive Plan. A number of our executive officers
and directors held PSUs and SARs. Each such person entered into a conversion
agreement with us on April 18, 2000 under which they relinquished their rights
to PSUs or SARs, in exchange for a combination of cash, shares of our Class B
non-voting common stock, stock options under our new stock incentive plan and
stock of Student Advantage. The following table shows:
- each executive officer and director who relinquished rights in PSUs or
SARs under those plans;
- the consideration received by each person for relinquishing these
rights; and
- the aggregate value of the consideration received by each person.
<TABLE>
<CAPTION>
SHARES OF CLASS B SHARES OF STOCK
EXECUTIVE OFFICER OR NON-VOTING STOCK OF STUDENT AGGREGATE
DIRECTOR CASH COMMON STOCK OPTIONS ADVANTAGE VALUE
-------------------- ---------- ----------------- -------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Mark Chernis............... $2,168,967 385,000 328,028 15,111 $4,787,621
Stephen Quattrociocchi..... 836,667 148,000 138,634 5,809 1,880,645
Bruce Task................. 498,267 100,000 76,298 3,925 1,280,448
Linda Nessim-Rubin......... 335,650 64,620 60,120 2,536 809,253
Steven Hodas............... 291,838 53,001 37,186 2,080 634,014
Stephen Melvin............. 280,733 50,000 170,000 1,963 603,539
Evan Schnittman............ 163,742 32,578 42,000 1,279 374,069
Richard Katzman............ 36,542 25,000 30,000 726 196,604
Peter Taylor............... 20,829 4,999 40,000 196 118,702
</TABLE>
For purposes of calculating aggregate value in the above table we valued:
- shares of our common stock at $6.25 per share;
- options at the difference between the per share exercise price of the
option and $6.25; and
- shares of Student Advantage stock at $5.25 per share, which represents
the public market price of this stock on the date of distribution.
Concurrently with the termination of our PSU and SAR plans, we entered into
new employment agreements with the executive officers listed in the above table.
For a description of the terms of our employment agreements with Mark Chernis,
Stephen Melvin, Stephen Quattrociocchi and Bruce Task, see
"Management -- Employment Agreements."
SALE OF SERIES A PREFERRED STOCK
On April 18, 2000, we entered into a Series A preferred stock purchase
agreement with SGC Partners II, LLC, Olympus Growth Fund III, L.P. and Olympus
Executive Fund, L.P. Under the stock purchase agreement, we issued a total of
3,713,540 shares of our Series A preferred stock to these purchasers for an
aggregate cash purchase price of approximately $27.0 million. SGC Partners II
received 2,475,693 shares, Olympus Growth Fund III received 1,225,469 shares and
Olympus Executive Fund received 12,378 shares. We also entered into an
investors' rights agreement with these purchasers, providing them with the right
to require us to register under the Securities Act common stock to be received
by these purchasers upon conversion of their Series A
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<PAGE> 78
preferred stock. See "Description of Capital Stock" for a more complete
description of the rights of the holders of our Series A preferred stock.
As a result of the above transaction, SGC Partners II and Olympus Growth
Fund III, together with Olympus Executive Fund, became beneficial owners of more
than 5% of our voting stock, on an as converted basis. Additionally, SGC
Partners II became entitled to appoint one director to our board of directors.
This right terminates upon the consummation of this offering. Currently, V.
Frank Pottow serves as SGC Partners II's designated director. Mr. Pottow also
serves as a Managing Director of SG Capital Partners, the general partner of SG
Merchant Banking Fund L.P., which is the parent of SGC Partners II.
RELATIONSHIP WITH RANDOM HOUSE
During each of 1997, 1998 and 1999, we derived revenue from a number of
publication agreements with Random House. Random House, through its subsidiary
Random House TPR, beneficially owns approximately 15% of our voting common
stock, as of July 31, 2000. During these periods, we recognized revenue from
Random House for aggregate royalties, marketing fees, advances, copy editing
fees and other fees as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
<S> <C> <C>
$4,003,248 $2,917,467 $2,717,416
</TABLE>
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.
Random House TPR is also entitled to appoint one director to our board of
directors under the terms of our stockholders' agreement. This right terminates
upon the completion of this offering. Currently, Richard Sarnoff serves as
Random House TPR's designated director on our board. Mr. Sarnoff also serves as
Executive Vice President and Chief Financial Officer of Random House.
OTHER TRANSACTIONS
During 1997, John S. Katzman, our Chairman and Chief Executive Officer was
indebted to us for miscellaneous advances. Interest on this debt was payable
upon demand and accrued at approximately 7% in 1997. The largest outstanding
balance was $306,591 on December 31, 1997. There is currently no outstanding
balance.
We are party to an employment agreement, dated April 10, 2000, with Steven
Hodas, our Executive Vice President, Strategic Development, in which we agree 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 will have a three-year term
and will accrue interest at the lowest-available mortgage rate at the time of
the loan. The loan will not require Mr. Hodas to pay principal or interest
during the term of the loan and will be secured by shares of our common stock
that he owns.
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<PAGE> 79
PRINCIPAL STOCKHOLDERS
The following table shows information with respect to the beneficial
ownership of our common stock as of July 31, 2000 and as adjusted to reflect the
sale of the common stock offered by us in this offering, for:
- each person known by us to beneficially own more than 5% of our common
stock;
- each of our directors;
- each of our executive officers named in the summary compensation table;
and
- all of our directors and executive officers as a group.
Beneficial ownership is determined under the rules of the Commission 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 of July 31, 2000, but excludes shares of common stock underlying options
held by any other person. Percentage of beneficial ownership is based on
21,832,678 shares of common stock outstanding as of July 31, 2000 and
shares of common stock outstanding after completion of this offering.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY
SHARES OF OWNED
COMMON STOCK -------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------ ------------ -------- --------
<S> <C> <C> <C>
John S. Katzman(1)....................................... 11,590,819 52.91%
Random House TPR, Inc.(2)................................ 3,378,618 15.42
1540 Broadway
New York, NY 10036
SGC Partners II, LLC(3).................................. 2,475,693 11.30
1221 Avenue of the Americas
New York, NY 10020
Entities affiliated with Olympus Growth Fund III,
L.P.(4)................................................ 1,237,847 5.65
Metro Center
One Station Place
Stamford, CT 06902
Mark Chernis(5).......................................... 553,689 2.53
Bruce Task(6)............................................ 336,695 1.54
Stephen Melvin(7)........................................ 61,780 *
Stephen Quattrociocchi(8)................................ 176,634 *
Richard Katzman(9)....................................... 26,875 *
V. Frank Pottow.......................................... -- --
John C. Reid............................................. -- --
Richard Sarnoff.......................................... -- --
Sheree T. Speakman....................................... -- --
Howard A. Tullman........................................ 7,500 *
All executive officers and directors as a group
(15 persons)(10)....................................... 12,928,315 58.83
</TABLE>
---------------
* Less than one percent.
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<PAGE> 80
(1) Includes 120,756 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 1,699,830 shares held by Katzman
Business Holdings, L.P. and 170 shares held by Katzman Management, Inc.
Katzman Management, Inc. is the general partner of Katzman Business
Holdings, L.P. and is wholly owned by Mr. Katzman.
(2) Random House TPR, Inc. is a wholly-owned subsidiary of Random House, Inc.
(3) SGC Partners II is a wholly-owned subsidiary of SG Merchant Banking Fund.
The general partner of SG Merchant Banking Fund is SG Capital Partners. SG
Cowen Securities Corporation, a wholly owned subsidiary of Societe
Generale, is the managing member of SG Capital Partners. As a result of
these relationships, SG Merchant Banking Fund, SG Capital Partners, SG
Cowen Securities Corporation and Societe Generale may each be deemed to
share beneficial ownership of these shares. Each of these entities
disclaims beneficial ownership.
(4) Represents 1,255,469 shares held by Olympus Growth Fund III and 12,378
shares held by Olympus Executive Fund. Olympus Growth Fund III and Olympus
Executive Fund are Delaware limited partnerships principally engaged in
making investments. OGP III, L.L.C., a Delaware limited liability company
is the sole general partner of Olympus Growth Fund III, and OEF, L.P., a
Delaware limited partnership, is the sole general partner of Olympus
Executive Fund. The five members of OGP III are Robert S. Morris, Louis J.
Mischianti, James A. Conroy, Paul A. Rubin and L. David Cardenas. The
three general partners of OEF are RSM, L.L.C., LJM, L.L.C. and Conroy,
L.L.C. Each of RSM, LJM and Conroy is a Delaware limited liability
company. The majority owner of RSM is Robert S. Morris. The majority owner
of LJM is Louis J. Mischianti. The majority owner of Conroy is James A.
Conroy. As a result of these relationships, OGP III, OEF, RMS, LJM,
Conroy, Robert S. Morris, Louis J. Mischianti, James A. Conroy, Paul A.
Rubin and L. David Cardenas may each be deemed to share beneficial
ownership of these shares. Each of these entities and individuals
disclaims beneficial ownership.
(5) Includes 46,778 shares of common stock issuable upon exercise of options
exercisable within 60 days of July 31, 2000.
(6) Includes 31,767 shares of common stock issuable upon exercise of options
exercisable within 60 days of July 31, 2000.
(7) Includes 10,625 shares of common stock issuable upon exercise of options
exercisable within 60 days of July 31, 2000.
(8) Includes 28,634 shares of common stock issuable upon exercise of options
exercisable within 60 days of July 31, 2000.
(9) Includes 1,875 shares of common stock issuable upon exercise of options
exercisable within 60 days of July 31, 2000.
(10) Includes 142,248 shares of common stock issuable upon exercise of options
exercisable within 60 days of July 31, 2000.
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<PAGE> 81
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, our amended and restated certificate
of incorporation will authorize the issuance of up to shares of
common stock, par value $0.01 per share, and shares of preferred
stock, par value $0.01 per share, the rights and preferences of which may be
established from time to time by our board of directors. As of July 31, 2000,
21,832,678 shares of common stock were outstanding, assuming the conversion of
all preferred stock. As of July 31, 2000, we had 93 stockholders.
COMMON STOCK
Upon the completion of this offering, all shares of Class B non-voting
common stock will automatically convert into Class A common stock, which will be
redesignated as common stock. Each holder of common stock is entitled to one
vote for each share on all matters to be voted upon by the stockholders. There
are no cumulative voting rights. Subject to preferences that may be applicable
to any preferred stock outstanding at the time, holders of common stock are
entitled to receive ratable dividends, if any, as may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event of a liquidation, dissolution or winding up of The Princeton
Review, holders of common stock would be entitled to share in our assets
remaining after the payment of liabilities and liquidation preferences on any
outstanding preferred stock. Holders of common stock have no preemptive or
conversion rights or other subscription rights and there are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are, and the shares of common stock offered by us in this
offering, when issued and paid for, will be fully paid and nonassessable.
PREFERRED STOCK
Series A Preferred Stock
Upon the completion of this offering, all outstanding shares of Series A
preferred stock will convert into shares of common stock. As of July 31, 2000,
we had 3,748,548 shares of Series A preferred stock outstanding. Prior to the
conversion of these shares into common stock, the holders of the Series A
preferred stock are entitled to, among other substantial rights:
- voting rights equivalent to the voting rights they would hold as if
their holdings were converted to common stock at the then applicable
conversion rate, other than the right to elect directors;
- the right to designate one member of our board of directors;
- distribution and liquidation preferences;
- the option to convert to common stock at any time on a one-for-one
basis, subject to anti-dilution adjustments;
- automatic conversion upon the effective date of a qualified initial
public offering on a one-for-one basis, subject to anti-dilution
adjustments and the special provision described below;
- anti-dilution protection;
- covenants requiring their authorization of enumerated transactions;
and
- a mandatory redemption provision whereby any holder may give a
redemption notice at any time after March 31, 2005 and cause us to
redeem all or a portion of their shares within 90 days of receipt of
the redemption notice, with the redemption price defined as the
original purchase price multiplied by 1.9, which multiple is to be
increased if we breach certain covenants contained in the investor
rights agreement among us and the purchasers of the Series A preferred
stock.
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<PAGE> 82
In addition to the rights described above, in the event that the initial
public offering price of our common stock in this offering is less than $13.1447
per share, representing 1.8079 times the purchase price of $7.2707 per share
paid by holders of the Series A preferred stock, then instead of converting on a
one-for-one basis upon the completion of this offering, the Series A preferred
stock will convert into common stock upon the completion of this offering as
follows:
- first, the holders of Series A preferred stock will receive $27.0
million in common stock at the initial public offering price; and
- second, and in addition to the payment described above, the holders of
the Series A preferred stock will receive a number of shares of common
stock equal to the number of shares of our common stock that could be
purchased at the per share initial public offering price for a dollar
amount equal to 15.66% multiplied by the amount obtained by
subtracting $27.0 million from our total valuation immediately prior
to this offering.
The holders of Series A preferred stock are also entitled to demand and
incidental registration rights.
Undesignated Preferred Stock
Upon the completion of this offering, the board of directors will be
authorized, subject to Delaware law, without stockholder approval, from time to
time, to issue up to an aggregate of new shares of preferred
stock in one or more series. The board of directors can fix the rights,
preferences and privileges of the shares of each series and any qualifications,
limitations or restrictions. Issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of our outstanding voting stock. We have no present plans to
issue any shares of preferred stock.
WARRANTS
As of July 31, 2000, there were outstanding warrants to purchase such
number of shares of common stock as is obtained by dividing $1.2 million by the
initial public offering price of our common stock in this offering. These
warrants were issued in June 2000 in connection with the settlement of a lawsuit
against the company. These warrants are exercisable for an 18-month period,
beginning with the date of completion of this offering, at an exercise price
equal to the initial public offering price of our common stock in this offering.
The warrants may also be exercised without payment of the cash exercise price in
the following two ways:
- the holders may elect to receive the number of shares of common stock
that may be purchased with the excess of the then market price of the
shares subject to the warrant over the exercise price; or
- for a period of 60 days immediately after the warrants become
exercisable, the holders may elect to receive the cash value of the
excess of the then market price of the shares subject to the warrant over
the exercise price, provided that this cash payment may not exceed 50% of
the exercise price multiplied by the number of shares with respect to
which the warrant is being exercised.
REGISTRATION RIGHTS
After completion of this offering, the holders of shares of
our common stock will be entitled to registration rights. These rights include
rights to require us to include their common stock in future registration
statements we file with the Commission and, in some cases, demand registration
rights. Some holders may also require us to register their common stock once we
are eligible to use a short-form registration statement. However, holders of
substantially all of these shares have agreed not to exercise their registration
rights until 180 days after the date of this
78
<PAGE> 83
prospectus. Shares of common stock registered upon the exercise of demand
registration rights would be freely tradable without restriction under the
Securities Act immediately upon the effectiveness of that registration.
CHARTER AND BY-LAW PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUTE
The authorization of undesignated preferred stock as described above under
"Description of Capital Stock" makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of our company. These and
other provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company.
Under Delaware law, we may not engage in a "business combination," which
includes a merger or sale of more than 10% of our assets, with any "interested
stockholder," namely, a stockholder who owns 15% or more of our outstanding
voting stock, as well as affiliates and associates of an interested stockholder,
for three years following the time that stockholder became an interested
stockholder unless:
- the transaction in which the stockholder became an interested stockholder
is approved by our board of directors prior to the time the interested
stockholder attained that status;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
- at or after the time the stockholder became an interested stockholder,
the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the
affirmative vote of at least two-thirds of the outstanding voting stock
which is not owned by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is
.
79
<PAGE> 84
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of common stock, including
shares issued upon the exercise of outstanding options or warrants, in the
public market following this offering, the market price of our common stock
could decline. These sales also could make it more difficult for us to sell
equity or equity-related securities in the future and at a time and price that
we deem appropriate.
Upon completion of this offering, we will have outstanding an aggregate of
shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. As of
July 31, 2000, we had 93 holders of common stock, after giving effect to the
conversion of the preferred stock outstanding prior to this offering. Of these
shares, all of the shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act, unless these
shares are purchased by "affiliates" as that term is defined in Rule 144 under
the Securities Act. As a result, shares will be eligible for sale
in the public market as follows:
<TABLE>
<CAPTION>
ELIGIBILITY OF RESTRICTED SHARES
FOR SALE IN THE PUBLIC MARKET
--------------------------------
<S> <C>
After 90 days from the date of this prospectus. ............
After 180 days from the date of this prospectus (subject, in
some cases, to volume limitations)........................
At various times after 180 days from the date of this
prospectus (subject, in some cases, to volume
limitations)..............................................
</TABLE>
LOCK-UP AGREEMENTS
Substantially all of our stockholders including all of our executive
officers and directors, who beneficially own an aggregate of
shares of common stock, have agreed that they will not, without the prior
written consent of Chase Securities Inc., offer, sell or otherwise dispose of
any shares of common stock, options or warrants to acquire shares of common
stock or securities exchangeable for or convertible into shares of common stock
owned by them during the 180-day period following the date of this prospectus.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately shares immediately after this
offering; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume
80
<PAGE> 85
limitations or notice provisions of Rule 144. Therefore, unless otherwise
restricted, Rule 144(k) shares may be sold immediately upon the completion of
this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchases shares of our common
stock from us in connection with a compensatory stock or option plan or other
written agreement is eligible to resell those shares 90 days after the date of
this prospectus in reliance on Rule 144, but without compliance with some of the
restrictions, including the holding period, contained in Rule 144.
REGISTRATION RIGHTS
After this offering, holders of an aggregate of shares of
our common stock, or their transferees, will be entitled to rights with respect
to the registration of those shares under the Securities Act. These sales could
have a material adverse effect on the trading price of our common stock.
STOCK OPTIONS
Shortly after this offering, we intend to file a registration statement on
Form S-8 covering the shares of common stock reserved for issuance under our
stock incentive plan. Shares of common stock registered under any registration
statement will, subject to Rule 144 volume limitations applicable to affiliates,
be available for sale in the open market, unless the shares are subject to
vesting restrictions or the lock-up agreements described above.
81
<PAGE> 86
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, dated as
of , 2000, the underwriters named below, through their
representatives, Chase Securities Inc., U.S. Bancorp Piper Jaffray Inc. and
First Union Securities, Inc. have severally agreed to purchase from us the
following numbers of shares of common stock:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------------------------------------- ----------------
<S> <C>
Chase Securities Inc. ...................
U.S. Bancorp Piper Jaffray Inc...........
First Union Securities, Inc. ............
--------
Total..................................
========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are conditioned on the absence of any material adverse change in
our business and the receipt of certificates, opinions and letters from us, our
counsel and our independent auditors. The underwriters are committed to purchase
all shares of common stock offered in this prospectus if any shares are
purchased.
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and to dealers at the public offering price less a concession not in
excess of $ per share. The underwriters may allow and the dealers may
reallow a concession not in excess of $ per share to other dealers. After
the public offering of the shares, the underwriters may change the offering
price and other selling terms. The representatives of the underwriters have
informed us that the underwriters do not intend to confirm discretionary sales
in excess of 5% of the shares of common stock offered by this prospectus.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to
additional shares of common stock at the public offering price, less the
underwriting discount set forth on the cover page of this prospectus. To the
extent that the underwriters exercise this option, each underwriter will have a
firm commitment to purchase a number of shares that approximately reflects the
same percentage of total shares the underwriter purchased in the above table. We
will be obligated to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option only to cover over-
allotments made in connection with the sale of common stock offered by this
prospectus.
The following table shows the per share and total underwriting discounts
and commissions that we will pay to the underwriters. The underwriting discount
was determined based on an arms' length negotiation between the representatives
of the underwriters and us. These amounts are shown assuming both no exercise
and full exercise of the underwriters' over-allotment option to purchase
additional shares.
<TABLE>
<CAPTION>
PAID BY THE PRINCETON REVIEW
------------------------------
NO EXERCISE FULL EXERCISE
------------- -------------
<S> <C> <C>
Per share............................................. $ $
Total................................................. $ $
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ . The offering of
the shares is made for delivery when, as and if accepted by the underwriters and
subject to prior sale and to withdrawal, cancellation or modification of the
offering without notice. The underwriters reserve the right to reject an order
for the purchase of shares in whole or in part.
82
<PAGE> 87
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect of those liabilities.
Substantially all of our stockholders holding in the aggregate
shares of common stock, and including all of our executive officers and
directors, have agreed that they will not, without the prior written consent of
Chase Securities Inc., offer, sell or otherwise dispose of any shares of common
stock, options or warrants to acquire shares of common stock or securities
exchangeable for or convertible into shares of common stock owned by them during
the 180-day period following the date of this prospectus. We have agreed that we
will not, without the prior written consent of Chase Securities Inc., offer,
sell or otherwise dispose of any shares of common stock, options or warrants to
acquire shares of common stock or securities exchangeable for or convertible
into shares of common stock during the 180-day period following the date of this
prospectus, except that we may issue shares upon the exercise of options granted
prior to the date of this prospectus and may grant additional options under our
stock incentive plan, provided that, without the prior written consent of Chase
Securities Inc., any additional options will not be exercisable during the
180-day period.
At our request, the underwriters have reserved up to shares of
common stock to be sold in this offering and offered for sale, at the public
offering price, to our directors, officers, employees, business associates, such
as customers and suppliers, and persons related to, or affiliated with such
persons. The number of shares available for sale to the general public in this
offering will be reduced to the extent these persons purchase the reserved
shares. Any reserved shares not purchased will be offered to the general public
on the same basis as other shares offered by this prospectus.
Persons participating in this offering may over-allot or effect
transactions that stabilize, maintain or otherwise affect the market price of
the common stock at levels above those that might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or the effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
Stabilizing, if commenced, may be discontinued at any time.
Before this offering, there was no public market for the common stock. The
initial public offering price for the common stock will be determined by
negotiations between us and the representatives. Among the factors to be
considered in determining the initial public offering price will be prevailing
market and economic conditions, our revenue and earnings, market valuations of
other companies engaged in activities similar to ours, estimates of our business
potential and prospects, the present state of our business operations, our
management and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of common stock offered through this prospectus
will be passed upon for us by Patterson, Belknap, Webb & Tyler LLP, New York,
New York. Selected legal matters in connection with this offering will be passed
upon for the underwriters by Dewey Ballantine LLP, New York, New York.
83
<PAGE> 88
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1999 and for the years then ended,
as set forth in their report. We have included these financial statements in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
The consolidated financial statements for the year ended December 31, 1997
included in this prospectus and elsewhere in the registration statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and elsewhere in the registration statement, and is
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
Caras & Shulman, P.C., independent auditors, have audited the combined
financial statements of Princeton Review of Boston, Inc. and Princeton Review of
New Jersey, Inc. at December 31, 1998 and 1999 and for the years then ended, as
set forth in their report. We have included these financial statements in the
prospectus and elsewhere in the registration statement in reliance on Caras &
Shulman, P.C.'s report, given on their authority as experts in accounting and
auditing.
CHANGE IN ACCOUNTANTS
The Princeton Review, Inc., with the approval of its board of directors, on
January 11, 1999 changed its independent auditors from Deloitte & Touche LLP to
Ernst & Young LLP. Ernst & Young LLP's report on the financial statements of The
Princeton Review, Inc. for the fiscal years ended December 31, 1999 and 1998,
and the financial statements for the year ended December 31, 1997 reported on by
Deloitte & Touche LLP that are included in this prospectus were not qualified or
modified as to uncertainty, audit scope, or accounting principles. During
Deloitte & Touche LLP's appointment as independent auditors, there was no
disagreement on any matter of accounting principles or practices, financial
statements disclosure or auditing scope or procedure which if not resolved to
Deloitte & Touche LLP's satisfaction would have caused Deloitte & Touche LLP to
make reference to the subject matter of disagreement in connection with Deloitte
& Touche LLP's report on the financial statements for the year indicated above.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including amendments to it, relating to the common stock
offered by us. This prospectus does not contain all of the information in the
registration statement and its exhibits and schedules. For further information
with respect to The Princeton Review and our common stock, you should review the
registration statement and its exhibits and schedules. A copy of the
registration statement may be inspected without charge at the Commission's
principal office in Washington, D.C. and copies of all or any part of the
registration statement may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, the New York
Regional Office located at Seven World Trade Center, New York, New York 10048,
and the Chicago Regional Office located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, upon payment of fees prescribed by the Commission. You
may obtain information on the operation of the Public Reference Room by calling
the Commission at 1-800-SEC-0330. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's Web site is http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
audited financial statements certified by our independent auditors.
84
<PAGE> 89
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................. F-2
Independent Auditors' Report................................ F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)
and Redeemable Stock...................................... F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND THE PRINCETON
REVIEW OF BOSTON, INC.
Independent Auditors' Report................................ F-30
Combined Balance Sheets..................................... F-31
Combined Statements of Income............................... F-32
Combined Statements of Changes in Stockholders' Equity...... F-33
Combined Statements of Cash Flows........................... F-34
Notes to Combined Financial Statements...................... F-35
</TABLE>
F-1
<PAGE> 90
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
The Princeton Review, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The
Princeton Review, Inc. and Subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and redeemable stock and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Princeton Review, Inc. and Subsidiaries as of December 31, 1999 and 1998,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LLP
March 16, 2000, except for Note 15, as
to which the date is May 30, 2000
F-2
<PAGE> 91
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Princeton Review, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of operations,
stockholders' equity and redeemable stock and cash flows of The Princeton
Review, Inc. and Subsidiaries (the "Company") for the year ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of The
Princeton Review, Inc. and Subsidiaries' operations and their cash flows for the
year ended December 31, 1997 in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
New York, New York
August 5, 1998
F-3
<PAGE> 92
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,518,976 $ 2,658,081 $15,490,273
Accounts receivable, net of allowance of $670,451 in 1998,
$720,183 in 1999 and $335,676 in 2000 (unaudited)....... 1,563,792 4,397,020 3,816,673
Account receivable -- related parties..................... 1,657,033 1,989,663 2,019,359
Other receivables......................................... 80,517 34,960 73,544
Other receivables -- related parties...................... 253,015 398,082 328,602
Inventories............................................... 576,926 773,963 528,343
Prepaid expenses.......................................... 179,882 303,854 91,788
Securities, available for sale............................ -- 34,833,656 5,813,537
Other assets.............................................. 772,453 333,146 2,446,344
----------- ----------- -----------
Total current assets.................................... $ 6,602,594 $45,722,425 $30,608,463
Furniture, fixtures and equipment, net...................... 1,846,097 3,157,848 3,907,740
Franchise costs, net of accumulated amortization of $290,644
in 1998, $150,772 in 1999 and $162,070 in 2000
(unaudited)............................................... 212,624 190,032 190,735
Territorial marketing rights, net of accumulated
amortization of $395,681 in 1998, $506,105 in 1999 and
$561,317 in 2000 (unaudited).............................. 1,812,730 1,702,306 1,647,094
Publishing rights, net of accumulated amortization of
$245,900 in 1998, $318,900 in 1999 and $355,400 in 2000
(unaudited)............................................... 1,515,100 1,442,100 1,405,600
Deferred income taxes....................................... 365,000 560,000 6,088,817
Investment in affiliates.................................... -- -- 1,196,264
Other assets................................................ 1,104,569 922,846 796,423
----------- ----------- -----------
Total assets................................................ $13,458,714 $53,697,557 $45,841,136
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,617,191 $ 2,150,917 $ 935,236
Accrued expenses and taxes payable........................ 3,618,561 6,239,390 4,911,865
Accrued expenses -- related parties....................... -- 223,750 149,125
Line of credit............................................ -- 700,000 --
Current maturities of long-term debt...................... 168,003 390,206 354,625
Deferred income........................................... 1,480,420 2,463,687 4,581,681
Book advances............................................. -- 1,962,743 930,367
Book advances -- related parties.......................... 716,766 675,000 492,500
Deferred income taxes..................................... -- 1,461,000 1,902,460
----------- ----------- -----------
Total current liabilities............................... $ 7,600,941 $16,266,693 $14,257,859
Long-term debt.............................................. 264,476 538,051 538,353
Minority interest........................................... 2,527,219 3,112,299 --
Series A redeemable convertible preferred stock, $.01 par
value; 5,000,000 shares authorized, none issued at
December 31, 1998 and 1999, 3,748,548 issued and
outstanding at June 30, 2000.............................. -- -- 25,505,470
Class B redeemable non-voting common stock, $.01 par value;
10,000,000 shares authorized, 1,082,119 issued and 995,514
outstanding at December 31, 1998 and 1999 and 3,235,449
shares issued and outstanding at June 30, 2000............ 256,932 256,932 6,989,054
Stockholders' equity (deficit):
Class A common stock, $.01 par value; 25,000,000 shares
authorized, 11,302,274 issued and outstanding at December
31, 1998 and 1999 and 14,848,681 shares issued and
outstanding at June 30, 2000.............................. 113,023 113,023 148,487
Additional paid-in capital.................................. 7,649,265 7,649,265 4,567,252
Accumulated deficit......................................... (4,750,544) (7,334,326) (9,544,759)
Accumulated other comprehensive income...................... -- 33,298,218 3,379,420
----------- ----------- -----------
3,011,744 33,726,180 (1,449,600)
Treasury stock, 86,605 shares of Class B common stock, at
cost...................................................... (202,598) (202,598) --
----------- ----------- -----------
Total stockholders' equity (deficit)........................ 2,809,146 33,523,582 (1,449,600)
----------- ----------- -----------
Total liabilities and stockholders' equity.................. $13,458,714 $53,697,557 $45,841,136
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 93
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Instruction and Guidance................ $27,379,841 $28,322,062 $29,900,865 $13,711,419 $16,278,403
Review.com.............................. 5,133,837 4,464,169 5,289,095 1,847,410 1,950,377
Homeroom.com............................ -- 959,388 5,112,669 1,717,802 1,889,346
----------- ----------- ----------- ----------- -----------
Total revenue......................... 32,513,678 33,745,619 40,302,629 17,276,631 20,118,126
----------- ----------- ----------- ----------- -----------
Cost of revenue
Instruction and Guidance................ 10,575,607 9,844,248 9,759,264 5,053,460 5,655,888
Review.com.............................. 2,716,686 1,672,093 1,469,445 236,964 574,723
Homeroom.com............................ -- 383,755 1,941,569 297,160 359,043
----------- ----------- ----------- ----------- -----------
Total cost of revenue................. 13,292,293 11,900,096 13,170,278 5,587,584 6,589,654
----------- ----------- ----------- ----------- -----------
Gross profit.......................... 19,221,385 21,845,523 27,132,351 11,689,047 13,528,472
Operating expenses
Selling, general and administrative..... 17,918,550 22,030,210 28,815,126 11,911,572 29,173,283
Research and development................ 1,012,653 1,173,730 878,165 263,611 370,594
----------- ----------- ----------- ----------- -----------
Total operating expenses.............. 18,931,203 23,203,940 29,693,291 12,175,183 29,543,877
----------- ----------- ----------- ----------- -----------
Operating income(loss) from continuing
operations.............................. 290,182 (1,358,417) (2,560,940) (486,136) (16,015,405)
Gain on distribution/sale of securities
and other assets........................ 522,501 732,476 1,048,773 -- 7,597,226
Interest expense.......................... (157,207) (147,744) (87,931) (35,357) (69,672)
Other income.............................. 86,279 79,194 90,268 58,881 270,937
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before minority interest, equity
interest in operations of affiliates and
(provision) benefit for income taxes.... 741,755 (694,491) (1,509,830) (462,612) (8,216,914)
Minority interests' share of income in
subsidiaries............................ (472,702) (505,102) (585,080) (40,145) (50,129)
Equity interest in operations of
affiliates.............................. -- -- -- -- 196,264
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before (provision) benefit for income
taxes................................... 269,053 (1,199,593) (2,094,910) (502,757) (8,070,779)
(Provision) benefit for income taxes...... 188,340 (214,815) 50,932 (11,951) 5,860,346
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations.............................. 457,393 (1,414,408) (2,043,978) (514,708) (2,210,433)
Discontinued operations:
Loss from operations of discontinued
software division..................... (1,846,237) (643,947) -- -- --
Loss from operations of discontinued
student loan division................. (654,582) (706,014) -- -- --
Income on disposal of discontinued
software division..................... -- 4,873,810 -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from discontinued
operations.............................. (2,500,819) 3,523,849 -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)......................... $(2,043,426) $ 2,109,441 $(2,043,978) $ (514,708) $(2,210,433)
=========== =========== =========== =========== ===========
Net income (loss) per share -- basic and
diluted:
Income (loss) from continuing
operations............................ 0.03 (0.12) (0.17) (0.04) (0.15)
Income (loss) from discontinued
operations............................ (0.20) 0.29 -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) per share -- basic and
diluted................................. $ (0.17) $ 0.17 $ (0.17) $ (0.04) $ (0.15)
=========== =========== =========== =========== ===========
Weighted average basic and diluted shares
used in computing net income (loss) per
share................................... 12,297,788 12,297,788 12,297,788 12,297,788 15,190,959
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 94
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE STOCK
<TABLE>
<CAPTION>
REDEEMABLE STOCK
------------------------------------------------ STOCKHOLDERS' EQUITY (DEFICIT)
SERIES A CLASS B -------------------------------------------------
CAPITAL STOCK
REDEEMABLE CONVERTIBLE REDEEMABLE NON-VOTING ---------------------
PREFERRED STOCK COMMON STOCK CLASS A COMMON STOCK ADDITIONAL
----------------------- ---------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ----------- --------- ---------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996....................... -- -- 995,514 $ 256,932 11,302,274 $113,023 $ 7,649,265 $(4,426,812)
Distributions to
stockholders (12,012)
Net loss................... (2,043,426)
--------- ----------- --------- ---------- ---------- -------- ----------- -----------
Balance at December 31,
1997....................... -- -- 995,514 256,932 11,302,274 113,023 7,649,265 (6,482,250)
Distributions to
stockholders............. -- -- -- -- -- -- -- (377,735)
Net income................. -- -- -- -- -- -- -- 2,109,441
--------- ----------- --------- ---------- ---------- -------- ----------- -----------
Balance at December 31,
1998....................... -- -- 995,514 256,932 11,302,274 113,023 7,649,265 (4,750,544)
Distributions to
stockholders............. -- -- -- -- -- -- -- (539,804)
Comprehensive income
Net loss................. -- -- -- -- -- -- -- (2,043,978)
Unrealized gain on
securities, net of
tax.................... -- -- -- -- -- -- -- --
Comprehensive income....... -- -- -- -- -- -- -- --
--------- ----------- --------- ---------- ---------- -------- ----------- -----------
Balance at December 31,
1999....................... -- -- 995,514 256,932 11,302,274 113,023 7,649,265 (7,334,326)
Retirement of treasury stock
(unaudited)................ -- -- -- -- -- -- (202,598) --
Distributions to stockholders
(unaudited)................ -- -- -- -- -- -- (338,991) --
Distributions of securities,
available for sale
(unaudited)................ -- -- -- -- -- -- (7,427,556) --
Issuance of Princeton Review
Publishing LLC Units
(unaudited)................ -- -- -- -- -- -- 1,096,855 --
Minority interest
(unaudited)................ -- -- -- -- -- -- 3,162,428 --
Cancellation of stock
appreciation rights
(unaudited)................ -- -- -- -- -- -- 715,990 --
Issuance of Series A
redeemable convertible
preferred stock
(unaudited)................ 3,748,548 $25,505,470 -- -- -- -- (95,982) --
Issuance of Class B
redeemable non-voting
common stock (unaudited)... -- -- 2,239,935 6,732,122 -- -- -- --
Issuance of Class A common
stock (unaudited).......... -- -- -- -- 3,546,407 35,464 7,841 --
Comprehensive income
(unaudited)
Net loss (unaudited)....... -- -- -- -- -- -- -- (2,210,433)
Unrealized loss on
securities, net of tax
(unaudited).............. -- -- -- -- -- -- -- --
Comprehensive income (loss)
(unaudited)................ -- -- -- -- -- -- -- --
--------- ----------- --------- ---------- ---------- -------- ----------- -----------
Balance at June 30, 2000
(unaudited)................ 3,748,548 $25,505,470 3,235,449 $6,989,054 14,848,681 $148,487 $ 4,567,252 $(9,544,759)
========= =========== ========= ========== ========== ======== =========== ===========
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------
ACCUMULATED TOTAL
OTHER TREASURY STOCK STOCKHOLDERS'
COMPREHENSIVE ------------------ EQUITY
INCOME (LOSS) SHARES AMOUNT (DEFICIT)
------------- ------ --------- -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1996....................... -- 86,605 $(202,598) $ 3,132,878
Distributions to
stockholders (12,012)
Net loss................... (2,043,426)
------------ ------ --------- ------------
Balance at December 31,
1997....................... -- 86,605 (202,598) 1,077,440
Distributions to
stockholders............. -- -- -- (377,735)
Net income................. -- -- -- 2,109,441
------------ ------ --------- ------------
Balance at December 31,
1998....................... -- 86,605 (202,598) 2,809,146
Distributions to
stockholders............. -- -- -- (539,804)
Comprehensive income
Net loss................. -- -- -- (2,043,978)
Unrealized gain on
securities, net of
tax.................... $ 33,298,218 -- -- 33,298,218
------------
Comprehensive income....... -- -- -- 31,254,240
------------ ------ --------- ------------
Balance at December 31,
1999....................... 33,298,218 86,605 (202,598) 33,523,582
Retirement of treasury stock
(unaudited)................ -- -- 202,598 --
Distributions to stockholders
(unaudited)................ -- -- -- (338,991)
Distributions of securities,
available for sale
(unaudited)................ -- -- -- (7,427,556)
Issuance of Princeton Review
Publishing LLC Units
(unaudited)................ -- -- -- 1,096,855
Minority interest
(unaudited)................ -- -- -- 3,162,428
Cancellation of stock
appreciation rights
(unaudited)................ -- -- -- 715,990
Issuance of Series A
redeemable convertible
preferred stock
(unaudited)................ -- -- -- (95,982)
Issuance of Class B
redeemable non-voting
common stock (unaudited)... -- -- -- --
Issuance of Class A common
stock (unaudited).......... -- -- -- 43,305
Comprehensive income
(unaudited)
Net loss (unaudited)....... -- -- -- (2,210,433)
Unrealized loss on
securities, net of tax
(unaudited).............. (29,918,798) -- -- (29,918,798)
------------
Comprehensive income (loss)
(unaudited)................ -- -- -- (32,129,231)
------------ ------ --------- ------------
Balance at June 30, 2000
(unaudited)................ $ 3,379,420 86,605 -- $ (1,449,600)
============ ====== ========= ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 95
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income.......................................... $(2,043,426) $ 2,109,441 $(2,043,978) $ (514,708) $ (2,210,433)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation............................................. 470,156 630,589 900,939 562,927 403,053
Amortization............................................. 1,010,224 696,833 660,448 245,563 607,877
Bad debt expense......................................... -- 482,670 392,479 160,646 19,283
Provision for uncollectable advertising fees............. -- 180,286 220,409 -- --
Impairment loss.......................................... -- 2,000 -- -- --
Gain (loss) on sale of assets............................ 33,859 (151,000) -- -- --
Gain on sale/distribution of securities.................. (522,501) (583,476) (1,048,773) -- (7,427,556)
Gain on sale of software division........................ -- (4,873,810) -- -- --
Compensation expense on PSU conversion................... -- -- -- -- 6,614,330
Deferred income taxes.................................... -- 30,000 (122,000) (55,737) (5,986,036)
Deferred rent............................................ -- -- 140,960 -- --
Minority interests' share of income in subsidiaries...... 472,702 505,102 585,080 40,145 50,129
Equity interest in operations of affiliates.............. -- -- -- -- (196,264)
Net change in operating assets and liabilities, including
discontinued operations in 1997 and 1998:
Accounts receivable.................................... (339,428) 103,987 (3,225,707) (492,576) 561,064
Accounts receivable -- related parties................. (244,398) (449,233) (332,630) (699,498) (29,696)
Other receivables...................................... (143,453) 71,467 45,557 41,424 (38,583)
Other receivables -- related parties................... (147,833) 33,303 (145,067) (88,012) 69,480
Inventories............................................ 158,701 93,652 (197,037) (122,124) 245,620
Prepaid expenses....................................... 155,227 765,950 (123,972) 295,071 212,066
Other assets........................................... (526,526) 222,129 108,898 (702,979) (2,023,068)
Accounts payable....................................... (318,901) (21,655) 533,726 (510,957) (1,215,681)
Accrued expenses and taxes payable..................... 1,771,928 (853,408) 2,397,426 (150,843) (532,189)
Accrued expenses -- related parties.................... -- -- 223,750 -- (74,625)
Deferred income........................................ (9,670) (875,178) 983,267 3,407,730 2,117,994
Book advances.......................................... 152,500 (335,551) 1,879,211 (252,370) (1,032,376)
Book advances -- related parties....................... (302,250) (314,516) 41,766 280,033 (182,500)
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in) operating activities........ (373,089) (2,530,418) 1,874,752 1,443,735 (10,048,111)
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment............ (851,945) (1,052,200) (2,290,618) (716,956) (1,535,810)
Investments in affiliates................................ -- -- -- (52,167) (1,000,000)
Proceeds from sale of assets............................. 8,000 151,000 -- -- --
Proceeds from sale of securities......................... 505,000 625,000 1,049,965 -- --
Proceeds from sale of software division.................. -- 5,100,000 -- -- --
Proceeds from repayment of note receivable............... 75,000 225,000 -- -- --
Distribution from (purchase of) nonmarketable
securities............................................. (219,439) 215,245 -- -- --
Proceeds (repayments) of stockholder loan................ (21,070) 303,494 82,443 400,000 (79,346)
Investment in other assets............................... (470,505) (754,583) (233,411) (157,534) (97,711)
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in) investing activities........ (974,959) 4,812,956 (1,391,621) (526,657) (2,712,867)
----------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Proceeds (repayment) of line of credit................... 500,000 (1,425,000) 700,000 -- (700,000)
Proceeds (repayment) term loan, net...................... (55,414) 80,133 (35,258) (18,298) (18,298)
Proceeds from capital leases, net of repayments.......... 70,878 279,411 531,036 22,086 (16,981)
Distributions to stockholders............................ (12,012) (377,735) (539,804) (539,804) (338,991)
Proceeds from investment in Series A redeemable
convertible preferred stock, net of offering costs..... -- -- -- -- 25,409,488
Proceeds from sale of Class B redeemable non-voting
common stock........................................... -- -- -- -- 161,097
Issuance of Princeton Review Publishing, LLC units....... -- -- -- -- 1,096,855
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in) financing activities........ 503,452 (1,443,191) 655,974 (536,016) 25,593,170
----------- ----------- ----------- ----------- ------------
Net increase in cash and cash equivalents.................. (844,596) 839,347 1,139,105 381,062 12,832,192
Cash and cash equivalents, beginning of period............. 1,524,225 679,629 1,518,976 1,518,976 2,658,081
----------- ----------- ----------- ----------- ------------
Cash and cash equivalents, end of period................... $ 679,629 $ 1,518,976 $ 2,658,081 $ 1,900,038 $ 15,490,273
=========== =========== =========== =========== ============
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest (includes $5,581 and $32,077 of interest paid
related to discontinued operations in 1997 and 1998,
respectively).......................................... $ 148,159 $ 179,821 $ 46,491 $ 35,314 $ 69,672
=========== =========== =========== =========== ============
State and local income taxes............................. $ 82,678 $ 147,013 $ 123,908 $ 39,834 $ 112,115
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 96
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
The Princeton Review, Inc. and its wholly-owned subsidiaries, Princeton
Review Management, LLC, Princeton Review Publishing, LLC (including its
wholly-owned subsidiary, Apply Technology, LLC), Princeton Review Products, LLC
and Princeton Review Operations, LLC (together, the "Company") are engaged in
the business of providing courses that prepare students for college, graduate
school and other admissions tests. The Company, through Princeton Review
Operations, LLC, provides these courses in various locations throughout the
United States and over the Internet. As of June 30, 2000, there were also 42
independent franchises throughout the United States and overseas through which
these courses are conducted. The Company also sells support materials and
equipment to its franchises, authors content for various books and software
products published by third parties, and operates two Web sites providing
education-related content.
Effective March 31, 2000, the Company terminated its S corporation status
in preparation for a restructuring (see Note 7).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
The Princeton Review, Inc. and its wholly-owned subsidiaries. Prior to April 1,
2000, these subsidiaries were majority-owned. All significant intercompany
transactions and balances are eliminated in consolidation.
Basis of Presentation
The unaudited interim financial statements reflect all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods presented.
Cash and Cash Equivalents
As of December 31, 1998 and 1999, and June 30, 2000, (unaudited) cash and
cash equivalents consist of investments in securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities, which have average
maturities of 90 days or less at the date of purchase. Approximately 63%, 47%
and 90% of the Company's cash and cash equivalents at December 31, 1998, 1999,
and June 30, 2000 (unaudited), respectively, were on deposit at one financial
institution.
Inventories
Inventories consist of program support equipment, course materials and
supplies. All inventories are valued at the lower of cost (first-in, first-out
basis) or market.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using straight-line and
accelerated methods over the estimated useful lives of the assets principally
ranging from three to seven years. Leasehold improvements are amortized using
the straight-line method over the lesser of the lease term or its estimated
economic useful life.
F-8
<PAGE> 97
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Software Development
Effective January 1, 1999, the Company adopted the provisions of the
American Institute of Certified Public Accountants Statement of Position ("SOP")
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. The rule specifies the different stages of software development
and the related accounting guidance that accompanies each stage.
Effective July 1, 2000, the Company will adopt Emerging Issues Task Force
("EITF") 00-2, Accounting for Website Development Costs. The adoption of this
EITF is not expected to have a material effect on the Company's financial
condition or results of operations.
During the year ended December 31, 1999 and the six months ended June 30,
1999 and 2000 (unaudited), the Company expensed approximately $650,000,
$630,000, and $260,000, respectively, of product development costs under SOP
98-1 that were incurred in the preliminary project stage. During the year ended
December 31, 1999 and the six months ended June 30, 2000 (unaudited), the
Company capitalized approximately $950,000 and $551,000, respectively, in
application development costs under SOP 98-1. These capitalized costs are
amortized using the straight-line method over the estimated useful life of the
asset, ranging from 12 to 24 months.
Franchise Costs
The cost of franchise rights purchased by the Company from third parties is
amortized using the straight-line method over the remaining useful life of the
franchise agreement.
Territorial Marketing Rights
Territorial marketing rights represent rights contributed by unrelated
franchise corporations to Princeton Review Publishing, LLC to allow the
marketing of the Company's products on a contractually agreed-upon basis within
the franchisee territories. These rights are being amortized on a straight-line
basis over 20 years.
Publishing Rights
Publishing rights consist of amounts paid in 1995 to certain co-authors to
buy out their rights to future royalties. Such amounts are being amortized on a
straight-line basis over 25 years.
Capitalized Course Costs
Capitalized course costs consist of amounts paid to consultants or
employees specifically hired for the development or substantial revision of
courses and their related materials. Amortization of these capitalized course
costs commences with the realization of course revenues. The amortization
periods range from one to five years.
Investment in Affiliates
The Company carries its investments in affiliate companies in which it
exercises significant influence on the equity method of accounting. Ownership
interests in such investments range from approximately 20% to 22%.
Deferred Income
Deferred income primarily represents tuition that has not yet been earned.
This tuition is applied to income ratably over the periods in which it is
earned, generally the term of the program.
F-9
<PAGE> 98
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income also includes customer deposits which are refundable prior to
commencement of the program.
Minority Interests
In accounting for minority interests prior to April 1, 2000, the Company
had recognized 100% of the losses in those subsidiaries where minority interests
had been exhausted. In certain subsidiaries which were profitable, the minority
interests' share of such profits had been credited to the minority interests.
On April 1, 2000, as part of a corporate restructuring, all of the minority
stockholders contributed their interests in the subsidiaries to the newly formed
holding company for common stock. The minority interest liability on March 31,
2000 was reversed against additional paid-in capital (see Note 7).
Revenue Recognition
The Company recognizes revenue from the sale of products and services as
follows:
Course and Tutoring Income
Tuition and tutoring fees are paid to the Company and recognized over the
life of the course.
Book, Software and Publication Income and Expenses
The Company recognizes both book and publication income and expenses upon
the completion and acceptance of manuscripts by the publisher. Until such time,
all costs and revenues are deferred.
Royalty Service Fees
As consideration of the rights and entitlements granted under franchise
agreements, the franchisees are required to pay to the Company a monthly royalty
service fee equal to 8% of the franchise's gross receipts collected during the
preceding month.
Course Materials and Other Products
The Company recognizes revenue from the sale of course materials and other
products to the independently-owned franchises based upon shipment dates.
Initial Franchise Fees
Revenue from the initial sales of franchises is recognized when
substantially all significant services to be provided by the Company, pursuant
to the franchise agreement, have been performed and the franchise has commenced
operations.
Other Income
Other income consists of miscellaneous fees for other services provided to
third parties primarily for authoring questions, Internet-based marketing fees
and advertising.
F-10
<PAGE> 99
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the Company's revenue and cost of revenue
for the years ended December 31, 1997, 1998, 1999 and for the six months ended
June 30, 1999 and 2000 (unaudited):
<TABLE>
<CAPTION>
BOOK, SOFTWARE
COURSE AND COURSE AND INITIAL
TUTORING ROYALTY MATERIALS AND PUBLICATION FRANCHISE
INCOME SERVICE FEES OTHER PRODUCTS INCOME FEES OTHER INCOME TOTAL
----------- ------------ -------------- -------------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1997
Revenue
Instruction and
Guidance............ $21,488,294 $2,775,560 $2,824,138 -- $209,500 $ 82,349 $27,379,841
Review.com............ -- -- -- $4,825,249 -- 308,588 5,133,837
Homeroom.com.......... -- -- -- -- -- -- --
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $21,488,294 $2,775,560 $2,824,138 $4,825,249 $209,500 $ 390,937 $32,513,678
=========== ========== ========== ========== ======== ========== ===========
Cost of revenue
Instruction and
Guidance............ $ 6,838,091 -- $3,737,516 -- -- -- $10,575,607
Review.com............ -- -- -- $2,716,686 -- -- 2,716,686
Homeroom.com.......... -- -- -- -- -- -- --
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $ 6,838,091 -- $3,737,516 $2,716,686 -- -- $13,292,293
=========== ========== ========== ========== ======== ========== ===========
YEAR ENDED DECEMBER 31,
1998
Revenue
Instruction and
Guidance............ $22,831,566 $2,814,685 $2,283,153 -- $ 88,500 $ 304,158 $28,322,062
Review.com............ -- -- -- $3,323,816 -- 1,140,353 4,464,169
Homeroom.com.......... -- -- -- 959,388 -- -- 959,388
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $22,831,566 $2,814,685 $2,283,153 $4,283,204 $ 88,500 $1,444,511 $33,745,619
=========== ========== ========== ========== ======== ========== ===========
Cost of revenue
Instruction and
Guidance............ $ 6,775,177 -- $2,901,653 -- -- $ 167,418 $ 9,844,248
Review.com............ -- -- -- $1,041,358 -- 630,735 1,672,093
Homeroom.com.......... -- -- -- 383,755 -- -- 383,755
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $ 6,775,177 -- $2,901,653 $1,425,113 -- $ 798,153 $11,900,096
=========== ========== ========== ========== ======== ========== ===========
YEAR ENDED DECEMBER 31,
1999
Revenue
Instruction and
Guidance............ $23,502,632 $3,342,328 $2,419,819 -- $300,063 $ 336,023 $29,900,865
Review.com............ -- -- -- $3,369,287 -- 1,919,808 5,289,095
Homeroom.com.......... -- -- -- 5,112,669 -- -- 5,112,669
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $23,502,632 $3,342,328 $2,419,819 $8,481,956 $300,063 $2,255,831 $40,302,629
=========== ========== ========== ========== ======== ========== ===========
Cost of revenue
Instruction and
Guidance............ $ 7,383,333 -- $2,375,931 -- -- -- $ 9,759,264
Review.com............ -- -- -- $ 912,199 -- $ 557,246 1,469,445
Homeroom.com.......... -- -- -- 1,742,389 -- 199,180 1,941,569
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $ 7,383,333 -- $2,375,931 $2,654,588 -- $ 756,426 $13,170,278
=========== ========== ========== ========== ======== ========== ===========
</TABLE>
F-11
<PAGE> 100
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BOOK, SOFTWARE
COURSE AND COURSE AND INITIAL
TUTORING ROYALTY MATERIALS AND PUBLICATION FRANCHISE
INCOME SERVICE FEES OTHER PRODUCTS INCOME FEES OTHER INCOME TOTAL
----------- ------------ -------------- -------------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE
30, 1999 (unaudited)
Revenue
Instruction and
Guidance............ $ 9,832,381 $1,716,103 $2,162,935 -- -- -- $13,711,419
Review.com............ -- -- -- $1,222,645 -- $ 624,765 1,847,410
Homeroom.com.......... -- -- -- 1,717,802 -- -- 1,717,802
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $ 9,832,381 $1,716,103 $2,162,935 $2,940,447 -- $ 624,765 $17,276,631
=========== ========== ========== ========== ======== ========== ===========
Cost of revenue
Instruction and
Guidance............ $ 3,683,737 -- $1,369,723 -- -- -- $ 5,053,460
Review.com............ -- -- -- $ 236,964 -- -- 236,964
Homeroom.com.......... -- -- -- 297,160 -- -- 297,160
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $ 3,683,737 -- $1,369,723 $ 534,124 -- -- $ 5,587,584
=========== ========== ========== ========== ======== ========== ===========
SIX MONTHS ENDED JUNE
30, 2000 (unaudited)
Revenue
Instruction and
Guidance............ $12,724,848 $1,784,309 $1,658,532 -- -- $ 110,714 $16,278,403
Review.com............ -- -- -- $1,319,519 -- 630,858 1,950,377
Homeroom.com.......... -- -- -- 1,889,346 -- -- 1,889,346
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $12,724,848 $1,784,309 $1,658,532 $3,208,865 -- $ 741,572 $20,118,126
=========== ========== ========== ========== ======== ========== ===========
Cost of revenue
Instruction and
Guidance............ $ 4,487,579 -- $1,168,309 -- -- -- $ 5,655,888
Review.com............ -- -- -- $ 574,723 -- -- 574,723
Homeroom.com.......... -- -- -- 359,043 -- -- 359,043
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $ 4,487,579 -- $1,168,309 $ 933,766 -- -- $ 6,589,654
=========== ========== ========== ========== ======== ========== ===========
</TABLE>
Advertising and Promotion
The majority of costs associated with advertising and promotion are
expensed in the year incurred. Costs related to producing mailers and other
pamphlets are expensed when mailed. Due to the seasonal nature of the business,
all advertising costs related to mailers and pamphlets had been expensed by
December 31, 1997, 1998, 1999 and June 30, 1999 and 2000 (unaudited),
respectively. Total advertising and promotion expense was approximately
$1,400,000, $2,000,000, $2,400,000, $807,000 and $2,200,000 for the years ended
December 31, 1997, 1998, 1999, and for the six months ended June 30, 1999 and
2000 (unaudited), respectively. Advertising and promotion expense in 1997 and
1998 included approximately $1,025,000 and $420,000, respectively, relating to
discontinued operations.
Research and Development
The Company incurred research and development costs of approximately
$1,000,000, $1,200,000 and $878,000 during the years ended December 31, 1997,
1998 and 1999, respectively, and $263,000 and $370,000 for the six months ended
June 30, 1999 and 2000 (unaudited), respectively. The
F-12
<PAGE> 101
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company has no significant obligations or contracts to perform research and
development for others.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Significant accounting
estimates used include estimates for sales allowances, uncollectible accounts
receivable and amortization lives assigned to intangible assets. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
For financial statement instruments including cash and cash equivalents,
accounts receivable, other receivables and accounts payable, the carrying amount
approximated fair value because of their short maturity. Securities, available
for sale, are publicly traded and are stated at the last reported sales price on
the day of the valuation. The fair values for loans with fixed rates are
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar type loans.
Long-Lived Assets
It is the Company's policy to review its long-lived assets and certain
related intangibles for impairment whenever changes in circumstances indicate
that the carrying value of an asset may not be fully recoverable.
Income Taxes
The Company accounts for income taxes based upon the provisions of SFAS No.
109, Accounting for Income Taxes. Under SFAS 109, the liability method is used
for accounting for income taxes, and deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities.
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 diluted net income (loss) per share amount prior to
April 1, 2000 equals basic net income (loss) per share because the Company had
no common stock equivalents. The calculation of diluted net income (loss) per
share excludes potential common shares if the effect is antidilutive.
All share and per share data have been adjusted to reflect the corporate
restructuring (see Note 7).
Reclassifications
Certain 1997 and 1998 balances have been reclassified to conform with the
current presentation.
F-13
<PAGE> 102
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. OTHER ASSETS
Other assets (current) consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred book costs....................................... $178,820 $ 65,386 $ 990,008
Due from advertising fund (see Note 8)*................... 351,083 168,797 829,941
Deferred taxes............................................ 110,000 -- --
Other..................................................... 132,550 98,963 626,395
-------- -------- ----------
$772,453 $333,146 $2,446,344
======== ======== ==========
</TABLE>
---------------
* It was the opinion of management that the receivable from the advertising fund
was not fully recoverable and, accordingly, this amount was written down to
its net realizable value in 1999. In 1998, this amount was net of an allowance
of $1,499,321. No allowance has been provided as of June 30, 2000 (unaudited).
Other assets (noncurrent) consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1998 1999 2000
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Capitalized course costs, net of accumulated
amortization of $731,034 in 1998, $1,083,646 in 1999
and $1,197,743 in 2000 (unaudited) (see Note 1)....... $ 787,181 $434,620 $ 335,523
Investment in Student Advantage, Inc. (see Note 3)...... 38,630 -- --
Security deposits....................................... 179,776 316,120 387,003
Other................................................... 98,982 172,106 73,897
---------- -------- ----------
$1,104,569 $922,846 $ 796,423
========== ======== ==========
</TABLE>
3. INVESTMENT IN STUDENT ADVANTAGE, INC.
Princeton Review Publishing, LLC had a minority interest in Student
Advantage, L.L.C., a national college student membership organization. The
investment was carried at cost of $425,000, adjusted for the Company's
proportionate share of its undistributed earnings or losses. During 1997, the
Company sold a portion of its investment for $630,000 of which $505,000 was
received in 1997 and the remaining $125,000 was received in 1998. In 1997, the
Company recognized a gain of approximately $523,000 on this transaction.
In October 1998, Princeton Review Publishing, LLC's 981 membership units in
Student Advantage, L.L.C. were converted into 1,450,587 shares of common stock
and 134,597 shares of convertible preferred stock, convertible into 403,791
shares of common stock of the new company, Student Advantage, Inc. In November
1998, the Company, through the exercise of a put option in the amount of
$625,000, reduced its investment in Student Advantage, Inc. The put option was
granted to the Company in conjunction with a recapitalization and reorganization
of Student Advantage, Inc. The transaction resulted in a gain of approximately
$583,000 which was recognized in 1998. As of December 31, 1998, the Company's
remaining ownership interest in Student Advantage, Inc. was 1,450,587 shares of
common stock and 56,472 shares of preferred stock,
F-14
<PAGE> 103
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
convertible into 169,416 shares of common stock. At December 31, 1998, the
Company's investment was recorded at cost which approximated $40,000.
In June 1999, Student Advantage, Inc. sold its shares of common stock in an
initial public offering (Nasdaq symbol "STAD"). Under certain lockup agreements,
the Company was restricted from selling its shares for a period of six months
and then only in amounts using a formula based on average trading volumes. The
closing stock price on December 31, 1999 was $22.19 per share. The Company has
treated this investment as available for sale securities and has recorded an
unrealized gain of approximately $34,800,000 in equity as a component of other
comprehensive income. In December 1999, the Company sold 50,000 shares of common
stock for approximately $1,000,000, reducing its ownership interest in Student
Advantage, Inc. to 1,570,003 shares of common stock. The transaction resulted in
a gain of approximately $1,000,000 in 1999.
Effective March 31, 2000, in connection with the restructuring and sale of
Series A preferred stock, the Company's board of directors approved the
distribution of 742,876 shares of Student Advantage, Inc. stock to its
stockholders and 32,168 shares to its employees. On March 31, 2000, the Company
distributed the stock to the stockholders and realized a gain of approximately
$7,429,000. On April 18, 2000, the Company distributed 32,168 shares to the
employees and realized a gain of approximately $168,000. At June 30, 2000
(unaudited), the Company held 794,959 shares of Student Advantage, Inc. common
stock valued at $7.313 per share.
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1998 1999 2000
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment............................. $1,838,269 $2,037,431 $2,318,663
Furniture, fixtures and equipment.............. 685,604 738,367 884,219
Computer equipment under capital leases........ 372,169 1,091,026 1,272,189
Automobiles.................................... 20,503 20,503 42,277
Software....................................... 681,540 1,717,369 2,426,999
Leasehold improvements......................... 400,096 684,103 880,262
---------- ---------- ----------
3,998,181 6,288,799 7,824,609
Less accumulated depreciation and amortization,
including $45,594 in 1998, $337,299 in 1999
and $515,929 in 2000 (unaudited) of
accumulated deprecation for assets under
capital leases............................... 2,152,084 3,130,951 3,916,869
---------- ---------- ----------
$1,846,097 $3,157,848 $3,907,740
========== ========== ==========
</TABLE>
5. INVESTMENT IN AFFILIATES
The Company has a 20% ownership interest in Student Monitor, LLC. As of
June 30, 2000, the Company's investment in this company was approximately
$260,000.
In February 1999, the Company invested $5,000 for a 48% interest in
Tutor.com, Inc., a startup company. Effective December 31, 1999, as a result of
additional third party investments in Tutor.com, Inc. the Company's interest was
reduced to 30%. In May 2000, after further third party investments and an
additional $1,000,000 investment by the Company, the Company's ownership
F-15
<PAGE> 104
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest was reduced to 22%. At December 31, 1999, and June 30, 2000
(unaudited), the investment was approximately $0 and $936,000, respectively.
6. LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
In August 1999, the Company entered into a $1,500,000 line of credit with a
bank to fund working capital requirements. Advances payable under this agreement
are evidenced by promissory notes and are guaranteed by the majority stockholder
of the Company. Advances bear interest at the prime rate plus 0.5% (10% at June
30, 2000). The line expires on September 30, 2000. As of June 30, 2000, there
were no outstanding borrowings under the line of credit.
Long-term Debt
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Capital lease obligations......................... $350,289 $881,325 $864,344
Term loan......................................... 82,190 46,932 28,634
-------- -------- --------
432,479 928,257 892,978
Less current portion.............................. 168,003 390,206 354,625
-------- -------- --------
$264,476 $538,051 $538,353
======== ======== ========
</TABLE>
Capital Lease Obligations
At June 30, 2000 (unaudited), the Company has leased approximately
$1,272,000 of computer equipment under capital leases all of which are included
in fixed assets (see Note 4).
Capital Lease Obligations
The following is a schedule of the future minimum capital lease obligation
payments together with the present value of the minimum lease payments at
December 31, 1999:
<TABLE>
<S> <C>
Year ending December 31,
2000...................................................... $ 402,233
2001...................................................... 367,686
2002...................................................... 277,526
----------
Total....................................................... 1,047,445
Less amounts representing interest (effective rate ranges
from 9% to 14%)........................................... 166,120
----------
Present value of the minimum lease payments................. $ 881,325
==========
Current portion of capital lease obligations................ $ 343,274
Long-term portion of capital lease obligations.............. 538,051
----------
$ 881,325
==========
</TABLE>
F-16
<PAGE> 105
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Term Loan
In 1998, the Company entered into a promissory note for $120,000 as partial
payment for the repurchase of an existing franchise. The amount is payable in
monthly installments of approximately $3,800 including interest at 9% and
expires in December 2000.
7. STOCKHOLDERS' EQUITY
Corporate Restructuring
Effective March 31, 2000, a new holding company, TPR Holdings, Inc., a
Delaware corporation was formed and was subsequently renamed The Princeton
Review, Inc. The Company terminated its S corporation status effective March 31,
2000 (see Note 9).
On April 1, 2000, the Class A common stock and Class B non-voting common
stock of the predecessor company to TPR Holdings, Inc. were exchanged for a
proportionate number of shares of either Class A common stock or Class B
non-voting common stock of TPR Holdings, Inc. All of the members' interests held
by minority interest holders in Princeton Review Management, LLC, Princeton
Review Products, LLC, Princeton Review Publishing, LLC and Princeton Review
Operations, LLC were exchanged for an agreed upon number of shares of either
Class A common stock or Class B non-voting common stock of TPR Holdings, Inc.
Holders of Class B non-voting common stock have the right to require the
Company to repurchase their stock under certain circumstances (see Note 8).
Persons who participated in various aspects of these restructuring
transactions include a number of the Company's executive officers and directors
and Random House TPR, Inc., a holder of approximately 15% of the Company's
common stock.
Sale of Series A Preferred Stock
On April 18, 2000, the Company sold 3,713,540 shares of Series A
convertible preferred stock for $27,000,000. Prior to the conversion of their
shares into common stock, the holders of the convertible preferred stock are
entitled to, among other substantial rights, (1) voting rights equivalent to the
voting rights they would hold as if their holdings were converted to common
stock at the then applicable conversion rate, other than the right to elect
directors; (2) the right to name one member of the Company's board of directors;
(3) distribution and liquidation preferences; (4) the option to convert to
common stock at any time on a one-for-one basis, subject to anti-dilution
adjustments; (5) automatic conversion upon the effective date of a qualified
initial public offering on a one-for-one basis, subject to anti-dilution
adjustments and the special provision described below; (6) anti-dilution
protection; (7) covenants requiring convertible preferred stockholder
authorization of transactions; and (8) a mandatory redemption provision whereby
any holder of convertible preferred stock may give a redemption notice at any
time after March 31, 2005 and cause the Company to redeem all or a portion of
their shares within 90 days of receipt of the redemption notice, with the
redemption price defined as the original purchase price multiplied by 1.9, which
multiple is to be increased if the Company breaches certain covenants contained
in the Investor Rights Agreement among the Company and the purchasers of the
convertible preferred stock.
In addition to the rights described above, in the event that the initial
public offering price of the shares offered by the Company in its initial public
offering is less than $13.1447 per share, representing 1.8079 times the purchase
price of $7.2707 per share paid by holders of the Series A preferred stock,
then, instead of converting on a one-for-one basis upon the completion of the
F-17
<PAGE> 106
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's initial public offering, the Series A preferred stock will convert
into common stock upon the completion of the offering in accordance with the
following formula:
- first, the holders of Series A preferred stock will receive $27,000,000
in common stock at the initial public offering price, and
- second, and in addition to the payment described above, the holders of
the Series A preferred stock will receive a number of shares of common
stock equal to the number of shares of our common stock that could be
purchased at the per share initial public offering price for a dollar
amount equal to 15.66% multiplied by the amount obtained by subtracting
$27,000,000 from the total valuation of the Company immediately prior to
the initial public offering contemplated by this prospectus.
The holders of convertible preferred stock are party to an Investor Rights
Agreement which provides them with certain rights, including but not limited to,
demand and incidental registration rights.
In May 2000, the Company sold an additional 35,008 shares of Series A
preferred stock for approximately $291,000 to third parties.
The preferred shares are net of offering costs of approximately $1,919,000.
These costs are being accreted to the redemption date.
8. COMMITMENTS AND CONTINGENCIES
Advertising Fund
All domestic franchisees are required to pay a monthly advertising fee to
the Company, for contribution to an advertising fund, equal to 2% of their
franchises' gross receipts, as defined, for the preceding month. In accordance
with the terms of the franchise agreement, the Company shall use all advertising
fees it receives for the development, placement and distribution of regional and
national consumer advertising, designed at its discretion to promote consumer
demand for services and products available from the franchises.
The Company is required to keep separate advertising fund accounting
records and to maintain the advertising funds collected from the franchisees in
a separate bank account. Accordingly, the account balances of the advertising
fund are not included in the accompanying consolidated
F-18
<PAGE> 107
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements. The related balances of the advertising fund as of
December 31, 1998, December 31, 1999 and June 30, 2000 (unaudited) are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1998 1999 2000
----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Advertising fund cash.......................... $ 82,625 $ 12,649 $ 431,857
Advertising fund receivables................... 163,269 154,149 181,225
Advertising fund other assets.................. 26,381 18,321
Advertising fund accounts payable* (including
$1,850,404, $168,797, and $829,941 of
liabilities due to the Company at December
31, 1998, 1999 and June 30, 2000 (unaudited),
respectively)................................ (2,012,991) (175,089) (880,025)
----------- --------- ---------
Advertising fund surplus (deficit)............. $(1,767,097) $ 18,090 $(248,622)
=========== ========= =========
</TABLE>
---------------
* Management of the Company has adopted a program to reduce the expenditures of
the advertising fund as compared to amounts collected by the advertising fund
in order to reduce the amounts owed by the advertising fund to the Company. In
1999, the Company wrote off $1,719,731 of amounts due from the advertising
fund as uncollectible. At December 31, 1998, the Company had an allowance
against this receivable of $1,499,321. The net receivable balances at December
31, 1998, 1999 and June 30, 2000 (unaudited) were $351,083, $168,797, and
$829,941, respectively (see Note 2).
Office and Classroom Leases
The Company has entered into various operating leases for its office and
classroom site locations. Minimum rental commitments under these leases, which
are in excess of one year as of December 31, 1999 are approximately as follows:
<TABLE>
<S> <C>
Year ending December 31,
2001...................................................... $ 1,991,000
2002...................................................... 1,922,000
2003...................................................... 1,824,000
2004...................................................... 1,678,000
2005...................................................... 1,410,000
Thereafter.................................................. 5,365,000
-----------
$14,190,000
===========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998, 1999 and for the
six months ended June 30, 1999 and 2000 (unaudited) was approximately
$2,619,000, $2,708,000, $3,095,000, $1,468,000 and $1,734,000, respectively.
These amounts include rent expense for the rental of space on a month-to-month
basis, as well as those amounts incurred under operating leases for longer
periods. Certain leases provide for early termination without penalty.
The Company has been released from a portion of its rent obligation on
certain premises which it is subleasing through 2004; however, in the event of
default by the sublessee, it would remain liable for the balance of the rent
obligation, which, at December 31, 1998, 1999 and June 30, 2000 (unaudited),
aggregated approximately $630,000, $557,000 and $495,000, respectively.
F-19
<PAGE> 108
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum Royalties
In connection with an agreement dated October 28, 1996 relating to the
purchase of specific assets of a test preparation business, the Company is
contingently liable for certain future minimum royalty payments of approximately
$100,000 at June 30, 2000 (unaudited).
Legal Matters
The Company is party to various litigation matters in the ordinary course
of its business which, in the opinion of management, will not result in a
material loss to the Company.
In June 1996, an author filed a lawsuit against the Company. On May 10,
2000, the lawsuit was settled and the Company paid the author $900,000 cash and
issued warrants providing for the purchase of shares of the Company's common
stock equal in value to $1,200,000 at the offering price of the Company's common
stock to be sold in its initial public offering. In addition, the Company's
royalty agreement with the author was amended. Under the amended royalty
agreement, the publisher pays royalties directly to the author. Should royalties
paid under the agreement be less than $200,000 per year through December 31,
2004, the Company is required to pay the difference. The $200,000 royalty
payment is consistent with historical payments to the author under the original
royalty agreement. At June 30, 2000, the Company accrued a $180,000 expense for
the fair value of the warrants.
Publishing Contracts
The Company has entered into several agreements with its publisher, Random
House, Inc., which holds an approximate 15% ownership interest in the Company,
that provide for book royalties to be paid once acceptance advances have been
earned. Each agreement requires the completion and acceptance of manuscripts by
the publisher for predetermined titles in order to release the final contractual
advances (see Note 11).
The Company has recorded $178,820, $65,386 and $990,008, in current
deferred book costs at December 31, 1998, 1999 and June 30, 2000 (unaudited),
respectively (see Note 2), for costs incurred to complete publications prior to
acceptance of manuscripts by its publisher.
Co-authorship Agreements
In connection with its publishing agreements, the Company has entered into
various co-authorship agreements for the preparation of manuscripts. These
agreements require payment of nonrecourse advances for services rendered at
various established milestones. The Company's future contractual commitments
under the co-authorship agreements for manuscripts not yet delivered as of
December 31, 1998, 1999 and June 30, 2000 (unaudited) are $46,875, $57,543 and
$69,083, respectively. In addition, the co-authors are entitled to a percentage
of the future royalties earned by the Company, which are first to be offset
against such advances. The total costs incurred under these co-authorship
agreements by the Company for advances and royalties was $311,067, $278,075 and
$405,352 for the years ended December 31, 1997, 1998 and 1999, respectively, and
$179,425 and $151,376 for the six months ended June 30, 1999 and 2000
(unaudited), respectively.
Class B Non-voting Common Stock
In accordance with a stockholders' agreement dated April 1, 2000,
stockholders of Class B non-voting common stock with a total ownership interest
of 14.82% in the Company, have the right to require the Company to purchase all
or a portion of their stock at the earlier of April 18, 2005 or the redemption
by the Series A preferred stockholders of at least one-half of their shares. The
F-20
<PAGE> 109
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
redemption is calculated at a price per share as determined in accordance with
the agreement. This redemption price per share is initially $6.25, to be
adjusted periodically by unanimous consent of a valuation committee or, if a
fair market price cannot be agreed to by all committee members, then a price as
determined by an independent appraiser. As of December 31, 1999, the redemption
value of the Class B non-voting common stock was approximately $20,221,000.
Upon the completion of an initial public offering of the Company's common
stock, the repurchase right of the Class B stockholders described above
terminates.
McGraw-Hill Agreement
Effective September 1, 1998, Princeton Review Publishing, LLC entered into
an agreement with Educational and Professional Publishing Group, a unit of The
McGraw-Hill Companies, Inc. ("EPG"), whereby the Company will provide EPG with
certain materials including workbooks to be used by EPG in conjunction with
their textbooks. In addition, the Company will prepare and administer a
"question pool" of test questions for grades 2-12. For these services, the
Company will receive various fees from EPG. The Company recognized $959,388,
$1,029,795, $509,797 and $607,763, for the years ended December 31, 1998, 1999
and the six months ended June 30, 1999 and 2000 (unaudited), respectively, in
income for services provided to EPG.
9. INCOME TAXES
Prior to April 1, 2000, the Company was an S corporation under the
provisions of the Internal Revenue Code ("IRC"), which provides that in lieu of
corporate income taxes, each stockholder is taxed on their proportionate share
of the taxable income. The Princeton Review, Inc.'s operating companies were
organized as limited liability companies, which provided that income taxes were
the responsibility of the members and not the limited liability companies.
Certain state and local jurisdictions in which the Company operates do not
recognize S corporation or limited liability company status. Therefore, for
periods prior to April 1, 2000 provision for certain state and local income
taxes was provided, as applicable.
Effective April 1, 2000, in connection with its restructuring, the Company
converted to a C corporation and is now subject to federal, state and local
income taxes. In connection with this conversion, the Company recorded a one
time non-recurring benefit of approximately $899,000. Such benefit relates to
the deferred tax assets and liabilities associated with the difference between
the financial statements and tax basis of the assets and liabilities of the
Company.
The (provision) benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------- JUNE 30,
1998 1999 2000
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current.......................................... $(184,815) $(71,068) $ (125,690)
Deferred......................................... (30,000) 122,000 5,986,036
--------- -------- ----------
$(214,815) $ 50,932 $5,860,346
========= ======== ==========
</TABLE>
F-21
<PAGE> 110
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward........... $ 382,000 $ 548,000 $ 6,328,000
Advertising fund allowance................ 86,000 -- --
Allowance for doubtful accounts........... 18,000 18,000 138,000
Stock appreciation rights................. 18,000 87,000 218,000
Capitalized inventory costs............... 3,000 5,000 33,000
Deferred rent............................. -- 4,000 103,000
Accumulated depreciation.................. -- -- 105,000
Other..................................... 3,000 12,000 140,000
----------- ----------- -----------
Total deferred tax assets.............. 510,000 674,000 7,065,000
----------- ----------- -----------
Deferred tax liabilities:
Unrealized gains.......................... -- (1,498,000) (2,397,000)
Software development costs................ (35,000) (66,000) (453,000)
Accumulated amortization.................. -- -- (29,000)
Other..................................... -- (11,000) --
----------- ----------- -----------
Total deferred tax liabilities......... (35,000) (1,575,000) (2,879,000)
----------- ----------- -----------
Net deferred tax asset (liability)..... $ 475,000 $ (901,000) $ 4,186,000
=========== =========== ===========
</TABLE>
The net deferred tax asset at December 31, 1998 is classified in the
Company's consolidated balance sheet as current and noncurrent deferred tax
assets of $110,000 and $365,000, respectively. The net deferred tax
asset(liability) at December 31, 1999 and June 30, 2000 (unaudited) is
classified in the Company's consolidated balance sheet as noncurrent deferred
tax assets of approximately $560,000 and $6,088,000 respectively and current
deferred tax liabilities of $1,461,000 and $1,902,000 respectively. The Company
has a net operating loss carryforward of approximately $15,380,000 which expires
in the year 2020, and other timing differences which will be available to offset
regular taxable income during the carryback and carryforward periods. The
Company believes that the related deferred tax benefit amount will more likely
than not be recognized during these periods and, accordingly, no valuation
allowance was deemed necessary.
A reconciliation setting forth the differences between the effective tax
rate of the Company for the six months ended June 30, 2000 and the U.S. federal
statutory tax rate is as follows:
<TABLE>
<S> <C> <C>
Pre-tax net loss.......................................... $2,744,065 34%
Effect of non-tax period.................................. 1,525,454 19
Effect of minority interest and other permanent
differences............................................. (179,648) (2)
Effect of state taxes..................................... 871,031 11
Effect of conversion to C corporation..................... 899,444 11
---------- ---
$5,860,346 73%
========== ===
</TABLE>
Pro Forma Income Tax Adjustments (unaudited)
The Company existed as an S corporation until March 31, 2000. The pro forma
provision (benefit) for income taxes represents the income tax provision
(benefit) that would have been
F-22
<PAGE> 111
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported had the Company been subject to federal, state and local income taxes
as a C corporation during the year ended December 31, 1999. The pro forma income
tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
Current..................................................... $ 24,277
Deferred.................................................... (515,000)
---------
$(490,723)
=========
</TABLE>
Pro forma deferred income taxes will reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
pro forma financial reporting and the amounts used for income tax purposes.
Significant components of the Company's pro forma net deferred tax liability as
of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 1,068,000
Allowance for doubtful accounts........................... 288,000
Stock appreciation rights................................. 1,041,000
Capitalized inventory costs............................... 56,000
Deferred rent............................................. 56,000
Other..................................................... 55,000
------------
Total deferred tax assets.............................. 2,564,000
------------
Deferred tax liabilities:
Unrealized gains.......................................... (13,918,000)
Software development costs................................ (546,000)
Other..................................................... (93,000)
------------
Total deferred tax liabilities......................... (14,557,000)
------------
Net deferred tax liability............................. $(11,993,000)
============
</TABLE>
A reconciliation setting forth the differences between the pro forma
effective tax rate of the Company and the U.S. federal statutory tax rate is as
follows:
<TABLE>
<S> <C> <C>
Pre-tax net loss.......................................... $(712,269) (34)%
Effect of minority interest and permanent differences..... 274,572 13
Effect of state taxes..................................... (53,026) (3)
--------- ---
$(490,723) (24)%
========= ===
</TABLE>
10. EMPLOYEE BENEFITS AND CONTRACTS
Fully Insured Partial Funding Medical Plan
The Company currently provides a fully insured partial funding medical plan
for its employees. The Company is liable for medical claims submitted (after the
deductible and any co-payment by the employee) up to the amount of $20,000 per
employee. Any claims in excess of this amount are
F-23
<PAGE> 112
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
covered by the insurance carrier. As of December 31, 1998 and 1999 and June 30,
2000 (unaudited), the Company had no significant unfunded claims.
Employment Agreements
The Company has entered into amended employment agreements with executives
which have provided for annual compensation to these individuals of $2,674,000
in 2000, $2,890,000 in 2001, $2,792,000 in 2002, $2,470,000 in 2003 and $550,000
in 2004. In addition, these employment agreements provide for bonuses (as
defined in each agreement).
Retirement Plan
The Company has a defined contribution plan (the "Plan") under Section
401(k) of the IRC which provides that eligible employees may make contributions
subject to IRC limitations. Employees become eligible to participate in the Plan
after one year of continuous full-time employment. Under the provisions of the
Plan, contributions made by the Company are discretionary and are determined
annually by the trustees of the Plan. The Company's contributions to the Plan
for the years ended December 31, 1998 and 1999 were $65,927 and $71,982,
respectively, and for the six months ended June 30, 1999, and 2000 (unaudited)
were $34,336 and $52,224, respectively.
Stock Appreciation Rights Plan
Through April 1, 2000, the Company maintained a Stock Appreciation Rights
Plan (the "SAR Plan"). There were no issuances of units under the SAR Plan since
1996 as the Plan was augmented with a Phantom Stock Plan (see the Phantom Stock
Plan note below) in June 1997. As of December 31, 1997, 1998 and 1999, there
were 13,866, 12,215 and 10,723 phantom units vested, respectively. The Company
determined the benchmark value assigned to the Units to be $32.87 per unit at
December 31, 1997, $37.35 per unit at December 31, 1998 and $93.39 per unit as
of December 31, 1999.
The Company has recorded compensation expense of $64,320, $65,131 and
$609,068 for the years ended December 31, 1997, 1998 and 1999 respectively,
based on the appreciation of the benchmark and the change in the number of
vested Phantom Units.
Phantom Stock Plan
Effective June 1997, the Company augmented its SAR Plan with a Phantom
Stock Plan. The total issuance under the Phantom Stock Plan at December 31, 1997
was 6,108 phantom stock units ("PSUs") (at an average price of $44.00 per unit)
of which 3,722 were vested. In 1998, the Company awarded an additional 341 PSUs
at an average price of $44.00 per unit. In addition, during 1998 employees
purchased 2,137 PSUs at either $44.00 or $50.00 depending on the date of
purchase. As of December 31, 1998, total issuances under the Phantom Stock Plan
was 8,586 of which 6,961 were vested. In 1999, the Company awarded an additional
89,448 PSUs at a price of $50.00 per unit. In addition, during 1999 employees
purchased 1,618 PSUs at either $50.00 or $90.00 depending on date of purchase.
Total PSUs forfeited or paid out at December 31, 1999 was 672 (227 forfeited and
444 paid out). As of December 31, 1999 total issuances under the Phantom Stock
Plan was 98,892 of which 18,480 were vested. Vesting rights of awarded PSUs is
at the discretion of the Company's management at the time of the award. PSUs
that are purchased by employees are fully vested when purchased. The Company
determined the benchmark value assigned to the PSUs to be $50.00 per unit at
December 31, 1998 and $125 per unit at December 31, 1999 and the Company has
recorded compensation expense of $162,690, $18,443 and $1,879,292 for the years
ended December 31, 1997,
F-24
<PAGE> 113
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 and 1999, respectively, based on the actual issue prices of the vested
PSUs, the appreciation of the benchmark price and the change in the number of
vested PSUs.
Termination of SAR and PSU Plans
Effective April 1, 2000 the Company's SAR and PSU plans were terminated and
replaced by a new stock incentive plan adopted by the Company. Under the
Company's 2000 Stock Incentive Plan, 3,000,000 shares of Class B non-voting
common stock are reserved for future issuance. As a result of the conversion of
the SAR and PSU plans, holders of vested PSUs received stock in the Company
and/or cash while holders of SARs and unvested PSUs received stock options to
purchase common stock under the new stock incentive plan. The participants in
these plans received a total of 1,084,132 shares of Class B non-voting common
stock, options under our stock incentive plan exercisable for a total of
1,562,922 shares of Class B non-voting common stock and cash payments in the
form of withholding taxes paid on behalf of the employees totaling approximately
$5,600,000. Participants in the PSU and SAR plans also received on April 18,
2000 a total of 32,168 shares of common stock of Student Advantage, Inc. with a
total public market value of approximately $168,000 on the date of distribution.
In connection with the conversion of the SAR Plan to the new stock
incentive plan, the Company reversed the related SAR Plan liability of $715,990.
As a result of the conversion of the vested PSUs to shares of the Class B
non-voting common stock, the Company recognized $11,694,000 in compensation
expense as of June 30, 2000 (unaudited).
11. RELATED PARTIES
Publisher
Random House, Inc., a holder of an approximate 15% interest in the Company
is also the publisher and distributor of certain of the Company's products. The
contracts signed with Random House, Inc. typically contain an advance upon
signing with the balance due upon delivery of the completed manuscript. The
Company has various publishing agreements with Random House, Inc. dating from
1997 which are not fully completed. During 1998 and 1999 the Company signed
contracts with Random House, Inc. for 17 and 50 new books, respectively. The
total advances received at the time of the contracts for these books were
$370,000 and $562,500 for the six months ended June 30, 1999 and 2000
(unaudited) and $370,000 and $562,500 for the years ended December 31, 1998 and
1999, respectively, with the balances of $285,000, $562,500 and $0 due upon
delivery of the completed manuscripts at December 31, 1998, 1999 and June 30,
2000 (unaudited).
For the years ended December 31, 1997, 1998 and 1999 and for the six months
ended June 30, 1999 and 2000 (unaudited) the Company earned $4,003,248,
$2,917,467, $2,717,416, $1,085,458 and $1,336,088, respectively, for book and
publication income from Random House, Inc. Total receivables at December 31,
1998, 1999 and June 30, 2000 (unaudited) include $1,074,602, $1,552,080 and
$1,453,734, respectively, due from Random House, Inc. for royalties, book
advances, copy editing and marketing fees. In addition, Random House, Inc. has
paid advances of $716,766, $675,000, and $492,500, respectively, to the Company
for books that have not yet been completed as of December 31, 1998, 1999 and at
June 30, 2000, which are deferred as book advances. At December 31, 1999 the
Company had a liability to Random House, Inc. of $223,750 for advances
previously received on uncompleted books that were cancelled in 1999. This
liability was $149,125 at June 30, 2000 (unaudited).
F-25
<PAGE> 114
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Franchisees
As of May 31, 1995, the Company sold 17.6% of Princeton Review Publishing,
LLC to certain franchisees (which was reduced to 13.9% pursuant to subsequent
transactions and eliminated entirely on April 1, 2000 (see Note 7).
For the years ended December 31, 1997, 1998 and 1999 and for the six months
ended June 30, 1999 and 2000 (unaudited), respectively, the Company earned
revenues from these franchisees for management services through royalties of
approximately $2,462,641, $2,585,834, $2,460,111, $1,576,573 and $1,631,397,
respectively, and earned revenues of $2,253,926, $2,073,274, $2,214,936,
$1,298,000 and $1,586,000, respectively, through the sale of course materials.
Included in accounts receivable at December 31, 1998, 1999 and June 30, 2000
(unaudited) was $796,253, $835,665 and $894,228, respectively, due from these
franchisees.
12. DISCONTINUED OPERATIONS
Software Division
On June 23, 1998, the Company sold its software division along with a
20-year exclusive license for the use of the Company's brand and test
preparation content in disk-based educational and reference software products
for $5,100,000 in cash and future royalties. The sale has been accounted for as
a discontinued operation and resulted in a gain of approximately $4,900,000
which was recognized in 1998. As a result of the sale, net capitalized CD-ROM
costs of approximately $230,000 were written off in 1998.
Student Loans Division
Under a Trust Agreement dated April 30, 1997, Fleet National Bank, as
trustee for Apply Technology, L.L.C. ("Borrower"), entered into an agreement
whereby Borrower was granted an option from the Student Loan Marketing
Association ("Lender") to request advances (as defined in the agreement) in an
aggregate amount of up to $200,000,000. These advances were used by Borrower to
finance loans made under Parts B and F of Title IV of the Higher Education Act
of 1965, as amended from time to time, or any successor federal act, and all
regulations and guidelines promulgated thereunder from time to time. During
1998, the Company decided to exit the student loan business and, in 1999, sold
its student loan portfolio. This transaction was accounted for as a discontinued
operation. As of December 31, 1998, total loan obligations outstanding to the
Lender were $2,247,838 and were secured by student loan receivables of an equal
amount. These amounts were netted for balance sheet purposes. No material costs
were incurred and no material gains or losses were recognized as a result of
exiting this business that required additional accrual at December 31, 1998 and
there were no remaining balances associated with this division at December 31,
1999.
13. MAJOR CUSTOMERS
One customer accounted for approximately 22%, 16% and 18% of gross accounts
receivable as of December 31, 1998, 1999 and June 30, 2000 (unaudited),
respectively. This customer, whose revenues are reported in the Review.com
division, accounted for approximately 12% of the net sales of the Company for
the year ended 1997. In addition, a second customer, whose revenues are reported
in the Homeroom.com division, accounted for approximately 15%, 40% and 19% of
gross accounts receivable at December 31, 1998, and 1999, and June 30, 2000
(unaudited), respectively and 12% of net sales for the year ended December 31,
1999.
F-26
<PAGE> 115
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SEGMENT REPORTING
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 accounting policies of the business
segments are the same as those described in the summary of significant
accounting policies (see Note 1).
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
Instruction and Guidance division, which sells a range of services including
test preparation, tutoring and academic counseling. Instruction and Guidance
derives its revenue from company operated locations and from royalties from and
product sales to independently-owned franchises. Review.com sells advertising
and sponsorships, collects marketing fees from higher education institutions as
well as earns income from developing content for books, software and other
publications for third-party publishers. Finally, Homeroom.com recently launched
an Internet-based subscription service for K-12 schools and parents. It
currently earns fees from its content development work.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- --------------------------
BUSINESS SEGMENTS 1997 1998 1999 1999 2000
----------------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Instruction and Guidance..... $27,379,841 $28,322,062 $29,900,865 $13,711,419 $ 16,278,403
Review.com................... 5,133,837 4,464,169 5,289,095 1,847,410 1,950,377
Homeroom.com................. -- 959,388 5,112,669 1,717,802 1,889,346
----------- ----------- ----------- ----------- ------------
Total revenue............. $32,513,678 $33,745,619 $40,302,629 $17,276,631 $ 20,118,126
=========== =========== =========== =========== ============
Cost of revenue
Instruction and Guidance..... $10,575,607 $ 9,844,248 $ 9,759,264 $ 5,053,460 $ 5,655,888
Review.com................... 2,716,686 1,672,093 1,469,445 236,964 574,723
Homeroom.com................. -- 383,755 1,941,569 297,160 359,043
----------- ----------- ----------- ----------- ------------
Total cost of revenue..... $13,292,293 $11,900,096 $13,170,278 $ 5,587,584 $ 6,589,654
=========== =========== =========== =========== ============
Selling, general and
administrative expenses
Instruction and Guidance..... $12,344,711 $14,617,200 $15,549,146 $ 6,933,497 $ 12,533,519
Review.com................... 4,149,042 5,270,285 5,816,566 2,569,265 5,607,475
Homeroom.com................. -- 163,277 4,454,429 1,600,320 4,211,722
Other corporate.............. 453,903 909,965 1,437,607 -- 6,093,577
Depreciation and
amortization*............. 970,874 1,069,483 1,557,378 808,490 726,990
----------- ----------- ----------- ----------- ------------
Total selling, general and
administrative
expenses................ 17,918,550 22,030,210 28,815,126 11,911,572 29,173,283
</TABLE>
F-27
<PAGE> 116
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- --------------------------
BUSINESS SEGMENTS 1997 1998 1999 1999 2000
----------------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Instruction and Guidance --
research and
development............... 1,012,653 1,173,730 878,165 263,611 370,594
----------- ----------- ----------- ----------- ------------
Total operating
expenses................ $18,931,203 $23,203,940 $29,693,291 $12,175,183 $ 29,543,877
=========== =========== =========== =========== ============
Operating income (loss) from
continuing operations........ $ 290,182 $(1,358,417) $(2,560,940) $ (486,136) $(16,015,405)
=========== =========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- JUNE 30,
1997 1998 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Segment Assets
Instruction and Guidance............ $ 5,026,658 $ 4,001,447 $ 4,476,311 $ 7,279,714
Review.com.......................... 5,708,241 5,599,444 41,163,451 13,298,494
Homeroom.com........................ -- 626,438 3,808,307 2,420,283
Other Corporate..................... 2,495,468 3,231,385 4,249,488 22,842,645
----------- ----------- ----------- -----------
13,230,367 13,458,714 53,697,557 45,841,136
Discontinued Operations............. 1,650,105 2,247,838 -- --
----------- ----------- ----------- -----------
Total Assets..................... $14,880,472 $15,706,552 $53,697,557 $45,841,136
=========== =========== =========== ===========
</TABLE>
* Approximately $100,000 of amortization for the year ended December 31, 1999
and $284,000 for the six months ended June 30, 2000 (unaudited) was directly
allocated to Homeroom.com. The years 1997 and 1998 exclude depreciation and
amortization on assets from discontinued operations.
15. SUBSEQUENT EVENTS
As more fully described in Notes 1, 3, 7 and 8, effective April 1, 2000,
the Company completed its restructuring. Holders of Class B non-voting common
stock have the right to require the Company to repurchase their stock under
certain circumstances.
The Company, in conjunction with the aforementioned restructuring,
distributed shares of Student Advantage, Inc. stock to stockholders and
employees (see Note 3).
As more fully described in Note 7, on April 18, 2000, the Company sold
shares of Series A preferred stock.
As more fully described in Note 10, effective April 1, 2000, the Company's
Stock Appreciation Rights and Phantom Stock plans were discontinued and replaced
by a new stock incentive plan.
As more fully described in Note 5, in May 2000, the Company increased its
investment in Tutor.com.
As more fully described in Note 8, in May 2000, the Company settled a
lawsuit.
On May 30, 2000, the Company entered into an option agreement to acquire
the assets comprising the businesses of Princeton Review of Boston, Inc. and
Princeton Review of New Jersey, Inc. Each of these entities provides test
preparation courses under The Princeton Review name pursuant to one or more
franchise agreements with us.
F-28
<PAGE> 117
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under this agreement, the Company has the option to acquire the operations
of Princeton Review of Boston, Inc. and Princeton Review of New Jersey, Inc. for
a total purchase price of approximately $12,500,000, subject to adjustment in
accordance with the purchase agreement. If the Company exercises this option, it
will be required to purchase the operations of both of these entities. This
option becomes effective upon the completion of an initial public offering of
the Company's common stock and remains in effect until December 31, 2000. If the
Company exercises the option, the Company must sign a definitive purchase
agreement within 30 days of exercise and consummate the purchase within 90 days
of exercise. The option agreement also restricts the Company, subject to a
number of limited exceptions, from consummating the acquisition of any entity
holding a Princeton Review franchise for Los Angeles, California, Denver,
Colorado, Westport, Connecticut or the State of Texas, for one year from the
date of the agreement, unless the Company completes the acquisition contemplated
by the agreement.
If the Company exercises its option to purchase these operations, 75% of
the purchase price will be payable in cash at the time of closing and 25% of the
purchase price is to be paid by delivery of a convertible promissory note. The
promissory note will be payable in 20 equal quarterly installments beginning
with the 17th calendar quarter following the closing date of the acquisition and
will bear interest at the rate of 8.25% per year. The promissory note will be
convertible into common stock of the Company at the price per share at which
shares of common stock are sold to the public in the public offering for a
period of 60 days, beginning on the first anniversary date of the closing of the
acquisition. During this period, the holder of the note may convert 100% or any
percentage between 0% and 33% of the unpaid principal amount due under the note
into common stock.
For the year ended December 31, 1999, Princeton Review of Boston, Inc. and
Princeton Review of New Jersey, Inc. had combined revenue of approximately
$10,300,000.
F-29
<PAGE> 118
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Princeton Review of New Jersey, Inc. and
The Princeton Review of Boston, Inc.
Princeton, NJ
We have audited the accompanying combined balance sheets of The Princeton
Review of New Jersey, Inc. and The Princeton Review of Boston, Inc. as of
December 31, 1998 and 1999 and the related combined statements of income,
combined statements of changes in stockholders' equity and combined statements
of cash flows for the years then ended. These combined financial statements are
the responsibility of the Companies' management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of The Princeton Review
of New Jersey, Inc. and The Princeton Review of Boston, Inc. as of December 31,
1998 and 1999, and the combined results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ CARAS & SHULMAN, P.C.
---------------------------------------------------
CARAS & SHULMAN, PC
Certified Public Accountants
May 18, 2000
F-30
<PAGE> 119
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1998 1999 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash (Note 1).......................................... $ 979,182 $1,020,142 $2,384,708
Investments (Note 2)................................... -- -- 516,774
Prepaid expenses....................................... 81,410 226,463 80,007
Due from affiliates (Note 5)........................... 30,152 114,541 155,918
Due from officer (Note 5).............................. 8,611 400,496 --
Due from landlord...................................... -- 15,711 17,721
Employee advances...................................... 3,640 3,366 --
---------- ---------- ----------
Total current assets................................ 1,102,995 1,780,719 3,155,128
---------- ---------- ----------
Fixed assets (Note 1)
Furniture and equipment................................ 250,304 290,348 305,165
Motor vehicle.......................................... 107,304 104,548 104,548
Leasehold improvements................................. 14,903 27,903 27,903
---------- ---------- ----------
Total fixed assets.................................. 372,511 422,799 437,616
Less accumulated depreciation (Note 3).............. 150,024 202,734 233,093
---------- ---------- ----------
Net fixed assets.................................... 222,487 220,065 204,523
---------- ---------- ----------
Other assets
Investments, available for sale (Note 2)................. -- -- 159,825
Security deposits...................................... 24,660 24,660 31,660
Franchise fees, net of accumulated amortization (Note
1).................................................. 169,294 150,484 141,079
USMLE course, net of accumulated amortization (Note
1).................................................. 41,219 37,958 36,329
Goodwill, net of accumulated amortization (Note 1)..... 574 503 468
---------- ---------- ----------
Total other assets.................................. 235,747 213,605 369,361
---------- ---------- ----------
Total assets............................................. $1,561,229 $2,214,389 $3,729,012
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable....................................... $ 92,084 $ 84,086 $ 7,058
Accrued payroll........................................ -- 80,361 --
Accrued expenses....................................... 18,074 74,363 190,040
Employee benefits...................................... 1,928 51,409 28,144
Due to officer (Note 5)................................ -- -- 3,555
Deferred revenues (Note 1)............................. 724,954 992,849 1,649,859
Deposits............................................... 9,595 -- --
Corporate income taxes payable......................... 243 11,124 4,074
Other current liabilities.............................. 344 164 --
---------- ---------- ----------
Total current liabilities........................... 847,222 1,294,356 1,882,730
---------- ---------- ----------
Stockholders' equity
Common stock, no par value, authorized, issued and
outstanding 503 shares.............................. 1,202 1,203 1,203
Additional paid-in capital............................. 647,780 674,579 674,579
Cumulative comprehensive income (Note 2)............... -- -- 159,825
Retained earnings...................................... 65,025 244,251 1,010,675
---------- ---------- ----------
Total stockholders' equity.......................... 714,007 920,033 1,846,282
---------- ---------- ----------
Total liabilities and stockholders' equity.......... $1,561,229 $2,214,389 $3,729,012
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE> 120
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
COMBINED STATEMENTS OF INCOME
FOR THE PERIODS ENDED
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- ------------------------
1998 1999 1999 2000
---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue.................................. $9,010,582 $10,344,757 $4,649,471 $5,151,232
Cost of services provided................ 4,463,210 4,958,756 2,356,335 2,424,863
---------- ----------- ---------- ----------
Gross profit............................. 4,547,372 5,386,001 2,293,136 2,726,369
Total operating expenses................. 3,565,075 3,748,488 1,696,266 1,887,307
---------- ----------- ---------- ----------
Income from operations................... 982,297 1,637,513 596,870 839,062
Other income (expense)
Interest income........................ 32,120 55,999 14,978 29,913
Miscellaneous income................... 8,015 2,736 2,608 11,049
Bad debt............................... (10,508) (51,832) (4,752) 4,203
Loss on sale of fixed asset............ -- (5,816) (5,816) --
---------- ----------- ---------- ----------
Income before profit sharing plan........ 1,011,924 1,638,600 603,888 884,227
Profit sharing plan (Note 7)............. 39,476 50,548 21,747 23,653
---------- ----------- ---------- ----------
Income before income tax expense......... 972,448 1,588,052 582,141 860,574
Income tax expense (Note 1).............. 16,497 18,418 8,782 14,950
---------- ----------- ---------- ----------
Net Income............................... $ 955,951 $ 1,569,634 $ 573,359 $ 845,624
========== =========== ========== ==========
</TABLE>
If all of the Company's operations had been subject to income taxes, net
income would have been as follows (unaudited):
<TABLE>
<S> <C> <C> <C> <C>
Historical income before taxes......... $ 972,448 $ 1,588,052 $ 582,141 $ 860,574
Provision for taxes.................... 388,000 633,000 225,100 339,300
---------- ----------- ---------- ----------
Pro forma net income................... $ 584,448 $ 955,052 $ 357,041 $ 521,274
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE> 121
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
AND THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
--------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
------ ------ ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997.... 501 $1,201 $ 628,901 $ (108,171) -- $ 521,931
Net income.................... -- -- -- 955,951 -- 955,951
Stockholder distributions..... -- -- -- (782,755) -- (782,755)
Common stock issuance......... 1 1 18,879 -- -- 18,880
------ ------ ----------- ---------- -------- -----------
Balance, December 31, 1998.... 502 1,202 647,780 65,025 -- 714,007
Net income.................... -- -- 1,569,634 -- -- 1,569,634
Stockholder distributions..... -- -- (1,390,408) -- -- (1,390,408)
Common stock issuance......... 1 1 26,799 -- -- 26,800
------ ------ ----------- ---------- -------- -----------
Balance, December 31, 1999.... 503 1,203 674,579 244,251 -- 920,033
Net income (unaudited)........ -- -- -- 845,624 -- 845,624
Stockholder distributions
(unaudited)................. -- -- -- (79,200) -- (79,200)
Unrealized holding gains
arising during period
(unaudited)................. -- -- -- -- $159,825 159,825
------ ------ ----------- ---------- -------- -----------
Balance, June 30, 2000
(unaudited)................. 503 $1,203 $ 674,579 $1,010,675 $159,825 $ 1,846,282
====== ====== =========== ========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-33
<PAGE> 122
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- ------------------------
1998 1999 1999 2000
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash provided by (used for) operating
activities
Net income............................ $ 955,951 $ 1,569,634 $ 573,359 $ 845,624
Items not affecting cash
Depreciation and amortization...... 68,128 78,936 39,888 41,428
Loss on sale of fixed assets....... -- 5,816 5,816 --
Bad debt........................... 1,546 18 4,752 (4,204)
Changes in current assets and
liabilities
Other current assets............... 167,766 (168,821) 2,016 149,267
Other current liabilities.......... 182,351 455,449 546,979 587,569
----------- ----------- ---------- ----------
Cash provided by operating activities... 1,375,742 1,941,032 1,172,810 1,619,684
----------- ----------- ---------- ----------
Cash provided by (used for) investing
activities
Cash paid for investments............. -- -- -- (516,774)
Acquisition of fixed assets........... (115,667) (60,188) (48,170) (14,818)
Advances to affiliates................ 10,818 (84,391) (54,238) (41,377)
Deposits.............................. 6,882 -- -- (7,000)
----------- ----------- ---------- ----------
Cash used for investing activities...... (97,967) (144,579) (102,408) (579,969)
----------- ----------- ---------- ----------
Cash provided by (used for) financing
activities
Officer loans......................... (2,954) (391,885) (29,952) 404,051
Stockholder distributions............. (782,755) (1,390,408) (128,200) (79,200)
Common stock issuance................. 1 1 -- --
Additional paid-in capital............ 18,879 26,799 -- --
----------- ----------- ---------- ----------
Cash provided by (used for) financing
activities............................ (766,829) (1,755,493) (158,152) 324,851
----------- ----------- ---------- ----------
Increase in cash........................ 510,946 40,960 912,250 1,364,566
Cash, beginning of period............... 468,236 979,182 979,182 1,020,142
----------- ----------- ---------- ----------
Cash, end of period..................... $ 979,182 $ 1,020,142 $1,891,432 $2,384,708
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE> 123
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
JUNE 30, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
NOTE 1 -- ACCOUNTING POLICIES
A summary of the significant accounting policies applied on a consistent
basis by The Princeton Review of New Jersey, Inc. and The Princeton Review of
Boston, Inc. (the "Companies") in the preparation of the accompanying combined
financial statements is set forth below:
Nature of Operations -- the Companies provide test preparation review
courses to individuals in the New Jersey and Boston area who are pursuing
entrance into a college or university.
Use of Estimates -- the preparation of combined financial statements
in conformity with generally accepted accounting principles requires the
use of estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Such estimates primarily relate to
unsettled transactions and events as of the date of the combined financial
statements. Accordingly, upon settlement, actual results may differ from
estimated amounts.
Cash and Cash Equivalents -- the Companies consider all highly liquid
debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
The Companies maintain cash balances at various financial
institutions. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. The Companies' accounts at
these institutions may, at times, exceed the federally insured limits. The
Companies have not experienced any losses in such accounts.
Investments -- investments in which the Companies have less than a 20%
interest are carried at cost adjusted for the Companies' proportionate
share of their undistributed earnings and losses.
The Companies' securities investments that are bought and held
principally for the purpose of selling them in the near term are classified
as trading securities. Trading securities are recorded at fair value on the
balance sheet date in current assets, with the change in fair value during
the period included in earnings.
Securities investments that the Companies have the positive intent and
ability to hold to maturity are classified as held-to-maturity securities
and recorded at amortized cost in investments and other assets. Securities
investments not classified as either held-to-maturity or trading securities
are classified as available-for-sale securities. Available for sale
securities are recorded at fair value in investments and other assets on
the balance sheet, with the change in fair value during the period excluded
from earnings and recorded net of tax as a component of other comprehensive
income.
Deferred Revenue -- the Companies recognize tuition revenue collected
from students at the time the courses are conducted.
Fixed Assets -- all fixed assets are stated at cost. Major additions
and improvements are charged to the property accounts; while replacements,
maintenance or repairs that do not improve or extend the life of the
respective assets are expensed in the year incurred. Fully depreciated
assets are retained in property and equipment until they are removed from
service. Fully depreciated assets as of December 31, 1998 and 1999, were
approximately $59,000 and $61,700, respectively. Fully depreciated assets
as of June 30, 1999 (unaudited) were $61,700.
F-35
<PAGE> 124
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Realization of Long-Lived Assets -- in March 1995, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of. It is the Companies' policy
to review its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying
value of an asset may not be fully recoverable.
Depreciation -- depreciation is computed by the straight-line method.
The estimated useful life of each class of assets is as follows:
<TABLE>
<CAPTION>
ASSETS LIFE IN YEARS
------ -------------
<S> <C>
Furniture and equipment....................... 5-7
Motor vehicles................................ 5
Leasehold improvements........................ 31.5-39
</TABLE>
For the years ended December 31, 1998 and 1999, depreciation expense
totaled $45,987 and $56,795, respectively. For the six months ended June
30, 1999 and 2000, depreciation expense totaled $28,819 and $30,359,
respectively.
Unamortized Costs -- the Companies are amortizing the cost of an USMLE
course over the life of the agreement. Amortization expense charged to
operations for the years ended December 31, 1998 and 1999, was $3,260 each
year. Amortization expense charged to operations for the six months ended
June 30, 1999 and 2000, was $1,629 each period (unaudited).
Franchise Fees -- the Companies are amortizing the cost of franchising
fees over the life of the agreements. Amortization expense charged to
operations for the years ended December 31, 1998 and 1999, totaled $18,810
each year. Amortization expense charged to operations for the six months
ended June 30, 1999 and 2000 totaled $9,405 each period (unaudited).
Goodwill -- the Companies are amortizing the cost of goodwill over a
14-year period. Amortization expense charged to operations for the years
ended December 31, 1998 and 1999, totaled $71 each year. Amortization
expense charged to operations for the six months ended June 30, 1999 and
2000 totaled $35 each period (unaudited).
Income Taxes -- effective January 1, 1988, the Companies elected to be
taxed as Subchapter S corporations under Section 1362 of the Internal
Revenue Code. As a result of this election, the Companies are no longer
subject to corporate level income taxes, and the future obligation for
income taxes are the responsibility of the shareholders. The Companies are
responsible for certain state excise taxes and income taxes when revenue
exceeds specified levels.
For the years ended December 31, 1998 and 1999, a provision was
recorded for state taxes totaling $16,497 and $18,418, respectively. For
the six months ended June 30, 1999 and 2000, a provision was recorded for
state taxes totaling $8,782 and $14,950, respectively.
NOTE 2 -- INVESTMENTS
The Princeton Review of New Jersey, Inc. and The Princeton Review of
Boston, Inc. had minority interests in Princeton Review Publishing, LLC, a
publisher of books and software products. The investment was carried at cost,
adjusted for the Companies' proportionate share of its undistributed earnings or
losses. At December 31, 1998 and 1999, there was no cost or accumulated earnings
associated with this investment. At June 30, 2000 (unaudited), The Princeton
Review of
F-36
<PAGE> 125
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
New Jersey, Inc. and The Princeton Review of Boston, Inc. purchased an
additional 131.83 units in Princeton Review Publishing, LLC, respectively, for a
total cost of $516,774.
Investments in securities are summarized as follows at June 30 (unaudited):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
GAIN LOSS VALUE
---------- ---------- --------
<S> <C> <C> <C>
Available-for-sale Securities:
2000 Mutual Funds........................... $159,825 -- $159,825
======== === ========
</TABLE>
Other comprehensive income for the six months ended June 30, 2000
(unaudited), includes an unrealized holding gain on available-for-sale
securities of $159,825. The before-tax and after-tax amount of unrealized
holding gains included in accumulated comprehensive income is as follows, for
the six months ended June 30 (unaudited):
<TABLE>
<CAPTION>
BEFORE TAX EXPENSE AFTER
2000 TAX (NOTE 1) TAX
---- -------- ----------- --------
<S> <C> <C> <C>
Unrealized holding gains........................ $159,825 -- $159,825
======== === ========
</TABLE>
NOTE 3 -- ACCUMULATED DEPRECIATION
Breakdown of accumulated depreciation by each asset class was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment......................... $100,373 $146,726 $171,872
Motor vehicles.................................. 45,479 51,207 56,024
Leasehold improvements.......................... 4,172 4,801 5,197
-------- -------- --------
Total........................................... $150,024 $202,734 $233,093
======== ======== ========
</TABLE>
NOTE 4 -- LEASING ARRANGEMENTS
Operating Leases
The Companies lease certain operating facilities and vehicles under terms
of operating leases expiring in years through 2007. For the years ended December
31, 1998 and 1999, lease expenses under terms of these operating leases totaled
$172,970 and $194,234, respectively. For the six months ended June 30, 1999 and
2000 (unaudited), operating leases totaled $97,027 and $112,471, respectively.
F-37
<PAGE> 126
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancellable operating leases, by
year and in aggregate, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------ ----------------
(UNAUDITED)
<S> <C> <C> <C>
2000......................... $ 197,297 2001......................... $ 234,078
2001......................... 210,844 2002......................... 243,970
2002......................... 198,131 2003......................... 216,085
2003......................... 168,934 2004......................... 180,770
2004 and thereafter.......... 417,285 2005 and thereafter.......... 505,181
---------- ----------
Total future minimum lease
payments................... $1,192,491 $1,380,084
========== ==========
</TABLE>
NOTE 5 -- RELATED PARTY TRANSACTIONS
The Companies entered into several related party transactions with other
franchisees, parties that share common ownership and management. The advances
are payable on demand and do not carry a stated interest rate.
Due from affiliates consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Princeton Review of Hawaii....................... $ 7,948 $ 49,442 $ 77,900
Princeton Review of Quebec....................... 19,874 65,099 78,018
------- -------- --------
Total............................................ $27,822 $114,541 $155,918
======= ======== ========
</TABLE>
In addition, the Companies entered into a related party transaction with an
entity that shares common ownership and management, Everbare, Inc. The advances
are payable on demand and carry no stated interest rate. As of December 31,
1998, advances due from this entity totaled $2,330.
Fees of $12,500 and $13,500 from The Princeton Review of Hawaii and The
Princeton Review of Quebec were recorded for management services in December 31,
1998 and 1999, respectively. Fees of $4,250 and $10,000 from The Princeton
Review of Hawaii and The Princeton Review of Quebec were recorded for management
services in June 30, 1999 and 2000 (unaudited), respectively.
Due from (to) officers consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Rob Cohen........................................ $ 3,585 $429,241 $ 1,741
Matt Rosenthal................................... 5,026 (28,745) (5,296)
------- -------- --------
Total............................................ $ 8,611 $400,496 $ (3,555)
======= ======== ========
</TABLE>
F-38
<PAGE> 127
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- STOCKHOLDERS' EQUITY
As of December 31, 1998, 0.80 shares of common stock were issued to an
employee of the Companies. Total issue price of the stock was $18,880.
As of December 31, 1999, 1 share of common stock was issued to an employee
of the Companies. Total issue price of the stock was $26,800.
NOTE 7 -- PROFIT SHARING PLAN
The Companies maintain a profit sharing plan covering substantially all
employees. The amount of contribution is discretionary and is limited by
aggregate compensation of participants during the year. For the years ended
December 31, 1998 and 1999, the profit sharing contribution totaled $39,476 and
$50,548, respectively. For the six months ended June 30, 1999 and 2000
(unaudited), the profit sharing contribution totaled $21,747 and $23,653,
respectively.
NOTE 8 -- RETAINED EARNINGS
The Companies elected to be treated as Subchapter S corporations as of
January 1, 1988. Shareholders account for their share of income on their
applicable individual income tax returns.
Retained earnings was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
C corporation deficit......................... $ (19,482) $ (19,482) $ (19,482)
----------- ----------- ----------
S corporation
Accumulated adjustments, beginning............ (88,689) 84,507 263,733
Net income.................................. 955,951 1,569,634 845,624
Stockholder distributions................... (782,755) (1,390,408) (79,200)
----------- ----------- ----------
Accumulated adjustments, ending............... 84,507 263,733 1,030,157
----------- ----------- ----------
Total retained earnings....................... $ 65,025 $ 244,251 $1,010,675
=========== =========== ==========
</TABLE>
NOTE 9 -- SUPPLEMENTAL DISCLOSURE ON CASH FLOW INFORMATION
The Companies made the following payments for income taxes:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------- ----------------
1998 1999 1999 2000
------- ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income Taxes........................................ $36,176 $7,504 $1,757 $10,876
======= ====== ====== =======
</TABLE>
F-39
<PAGE> 128
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES
[TPR LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
FIRST UNION SECURITIES, INC.
------------------------
, 2000
------------------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of our common stock or possession or distribution of
this prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.
Until , 2000, all dealers that buy, sell or trade in our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 129
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
The following table sets forth the expenses payable by The Princeton Review
in connection with this offering (excluding underwriting discounts and
commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- -------
<S> <C>
SEC Registration Fee........................................ $17,160
NASD Filing Fee............................................. 7,000
Nasdaq National Market Listing Fee..........................
Accounting Fees and Expenses................................
Legal Fees and Expenses.....................................
Printing Expenses...........................................
Blue Sky Qualification Fees and Expenses....................
Transfer Agent's Fee........................................
Miscellaneous...............................................
Total..................................................
</TABLE>
---------------
(1) The amounts set forth above, except for the SEC, NASD and Nasdaq National
Market Listing fees, are in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the Delaware General Corporation Law, or the DGCL, allows a
corporation to eliminate the personal liability of directors of the corporation
to the corporation or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to the corporation or
its stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the DGCL regarding unlawful dividends and stock
purchases; or
- for any transaction from which the director derived an improper
personal benefit.
The Princeton Review's certificate of incorporation includes a provision
that eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except to the extent such exemption from
liability is expressly forbidden by the DGCL, as it now exists or is later
amended.
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with any
threatened, pending or completed actions, suits or proceedings in which such
person is made a party by reason of such person being or having been a director,
officer, employee of or agent of the corporation. The statue provides that it is
not exclusive of other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
The Princeton Review's certificate of incorporation requires The Princeton
Review to indemnify to the fullest extent authorized or permitted by the DGCL
(as it existed at the time of the adoption of the certificate of incorporation,
or, if the DGCL is later amended to permit broader indemnification, as so
amended) each person who was or is a party or is threatened to be made a
II-1
<PAGE> 130
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal administrative or investigative, by reason of the fact
that he is or was a director or officer of The Princeton Review, or is or was
serving at the request of The Princeton Review as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer employee or agent, or in any other capacity while serving as a
director, officer employee or agent. The Princeton Review is only required to
indemnify any such person seeking indemnification in connection with an action
initiated by such person if such action was authorized by the board of
directors. The certificate of incorporation also provides that The Princeton
Review must advance expenses to a director of officer in advance of the final
disposition of the matter with respect to which such expenses are being advanced
upon receipt of an undertaking, if such undertaking is required by the DGCL, by
or on behalf of such director or officer to repay such amount if it is
ultimately determined that the director or officer is not entitled to be
indemnified by The Princeton Review. The certificate of incorporation further
states that The Princeton Review may, by action of the board of directors,
provide indemnification to employees and agents of the company with the same
scope and effect as the foregoing provisions relating to directors and officers.
The certificate of incorporation provides that the rights to
indemnification and advancement of expenses conferred by it are not exclusive of
any other right that any person may have or acquire under any statute, any
amendment to the certificate of incorporation, by-laws, agreement, vote of
stockholders or disinterested directors or otherwise.
The Princeton Review maintains directors and officers liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a description of the sale of unregistered securities for
the last three years:
(1) On June 2, 2000, we issued two warrants in connection with the
settlement of a lawsuit against us. The warrants are exercisable for
such number of shares of our common stock as is obtained by dividing
$1.2 million by the initial public offering price of our common stock,
at an exercise price equal to the initial public offering price of our
common stock.
(2) On April 27, 2000, we sold 35,008 shares of Series A preferred stock to
three accredited investors at a purchase price of $7.27 per share,
which was paid in cash.
(3) On April 18, 2000, we sold 3,713,540 shares of Series A preferred stock
to three accredited investors at a purchase price of $7.27 per share,
which was paid in cash.
(4) Since April 1, 2000, we have issued a total of 1,084,132 shares of
Class B non-voting common stock to 65 employees and one of our
directors in connection with their giving up certain rights under our
previously existing Phantom Stock and Stock Appreciation Rights Plans.
For purposes of these transactions, we valued our stock at $6.25 per
share.
(5) Since April 1, 2000, we have granted options to our employees and
directors exercisable for a total of 1,734,429 shares of our Class B
non-voting common stock, at exercise prices ranging from $1.46 to $6.25
per share.
(6) On April 1, 2000, we issued a total of 14,848,681 shares of our Class A
common stock and 2,151,317 shares of our Class B non-voting common
stock to 22 accredited investors in connection with the consummation of
our corporate restructuring. These shares were issued in exchange for
equity interests in our predecessor and our LLC subsidiaries. For
purposes of these transactions, we valued our stock at $6.25 per share.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated under Section 4(2) of the Securities
Act, or, with respect to issuances to employees, Rule 701
II-2
<PAGE> 131
promulgated under Section 3(b) of the Securities Act as transactions by an
issuer not involving a public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under Rule 701.
The recipients of securities in each transaction represented their intentions to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution of the Securities and appropriate legends were
affixed to the instruments representing the securities issued in these
transactions. All recipients had adequate access, through their relationships
with The Princeton Review, to information about the company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
2.1 Conversion and Contribution Agreement, dated as of March 31,
2000, by and among The Princeton Review, Inc., the
Non-Voting Members of Princeton Review Publishing LLC, John
S. Katzman and TPR Holdings, Inc.
2.2 RH Contribution Agreement, dated as of March 31, 2000, by
and among Random House TPR, Inc., Random House, Inc., The
Princeton Review, Inc., John S. Katzman, and TPR Holdings,
Inc.
2.3 TPR Contribution Agreement, dated as of March 31, 2000, by
and among The Princeton Review, Inc., each of the persons
listed on Schedule I attached to the agreement and TPR
Holdings, Inc.
2.4 Option Agreement, dated as of May 30, 2000, by and among
Princeton Review Operations, LLC, Princeton Review of
Boston, Inc. and Princeton Review of New Jersey, Inc.
3.1 Restated Articles of Incorporation.
3.2* Form of Amended and Restated Certificate of Incorporation,
to be filed prior to the closing of the offering made under
this Registration Statement.
3.3 By-laws.
4.1* Form of Specimen Common Stock Certificate.
5.1* Opinion of Patterson, Belknap, Webb & Tyler LLP as to the
validity of the securities being offered.
10.1 Stockholders Agreement, dated as of April 1, 2000, by and
among The Princeton Review, Inc., and its stockholders.
10.2 Stock Purchase Agreement, dated April 18, 2000, by and among
The Princeton Review, Inc., SG Capital Partners LLC, Olympus
Growth Fund III, L.P. and Olympus Executive Fund, L.P.
10.3 Joinder Agreement, dated April 18, 2000, to the Stockholders
Agreement dated April 1, 2000, among stockholders of The
Princeton Review, Inc.
10.4 Investor Rights Agreement, dated April 18, 2000, by and
among The Princeton Review, Inc., SG Capital Partners LLC,
Olympus Growth Fund III, L.P. and Olympus Executive Fund,
L.P.
10.5 The Princeton Review, Inc. 2000 Stock Incentive Plan, March
2000.
10.6 Form of Incentive Stock Option Agreement.
10.7 Letter Agreement, dated August 17, 1999, by and between
Princeton Review Operations, LLC and The Chase Manhattan
Bank.
10.8 Master Service Agreement, dated June 16, 1999, by and
between Frontier Global Center and The Princeton Review,
Inc.
10.9 Addendum to Master Service Agreement, dated June 18, 1999.
10.10 Software Purchase Agreement, dated as of June 23, 1998, by
and between Learning Company Properties and Princeton Review
Publishing, LLC.
10.11 The Princeton Review Executive Compensation Policy
Statement.
10.12 Office Lease, dated as of April 23, 1992, as amended, by and
between The Princeton Review, Inc. and 2316 Broadway Realty
Co.
</TABLE>
II-3
<PAGE> 132
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.13 Amendment to Office Lease, dated December 9, 1993.
10.14 Second Amendment to Office Lease, dated February 6, 1995.
10.15 Third Amendment to Office Lease, dated April 2, 1996.
10.16 Fourth Amendment to Office Lease, dated July 10, 1998.
10.17 Employment Agreement, dated as of August 7, 2000, by and
between The Princeton Review, Inc. and John S. Katzman.
10.18 Employment Agreement, dated as of April 27, 2000, by and
between The Princeton Review, Inc. and Mark Chernis.
10.19 Employment Agreement, dated as of April 1, 2000, by and
between The Princeton Review, Inc. and Stephen Melvin.
10.20 Employment Agreement, dated as of April 10, 2000, by and
between The Princeton Review, Inc. and Stephen
Quattrociocchi.
10.21 Employment Agreement, dated as of April 18, 2000, by and
between The Princeton Review, Inc. and Evan Schnittman.
10.22 Employment Agreement, dated as of April 10, 2000, by and
between The Princeton Review, Inc. and Linda Nessim-Rubin.
10.23 Employment Agreement, dated as of April 10, 2000, by and
between The Princeton Review, Inc. and Bruce Task.
10.24 Employment Agreement, dated as of April 10, 2000, by and
between The Princeton Review, Inc. and Steven Hodas.
10.25 Employment Agreement, dated as of April 28, 2000, by and
between The Princeton Review, Inc. and Peter Taylor.
10.26 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Mark Chernis.
10.27 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Steve Hodas.
10.28 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Richard Katzman.
10.29 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Steve Melvin.
10.30 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Linda Nessim-Rubin.
10.31 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Stephen Quattrociocchi.
10.32 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Evan Schnittman.
10.33 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Peter Taylor.
10.34 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Bruce Task.
10.35 Office Lease by and between The Rector, Church-Wardens and
Vestrymen of Trinity Church in the City of New York, as
Landlord, and Princeton Review Publishing, LLC, as Tenant.
16.1 Letter re: change in certifying accountant.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Patterson, Belknap, Webb & Tyler LLP (included in
Exhibit 5.1 hereto).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Ernst & Young LLP.
23.4 Consent of Caras & Shulman, PC.
</TABLE>
II-4
<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
24.1 Powers of Attorney (included on the signature pages hereto).
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
</TABLE>
---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
1. The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
The Princeton Review, Inc. pursuant to the foregoing provisions, or otherwise,
The Princeton Review, Inc. has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by The Princeton Review, Inc. of expenses incurred or paid by a
director, officer, or a controlling person of The Princeton Review, Inc. in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, The Princeton Review, Inc. will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
3. The undersigned registrant hereby undertakes that:
a. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by The Princeton Review, Inc. pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
b. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The Princeton
Review, Inc. has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York on
August 15, 2000.
THE PRINCETON REVIEW, INC.
By: /s/ JOHN S. KATZMAN
------------------------------------
Name: John S. Katzman
Title: Chairman and Chief
Executive Officer
POWER OF ATTORNEY
Each individual whose signature appears below constitutes and appoints each
of John S. Katzman, Mark Chernis and Stephen Melvin, such person's true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to sign any other registration
statement and any and all amendments thereto for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto each said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that any said attorney-in-fact
and agent, or any substitute or substitutes of any of them, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN S. KATZMAN Chairman and Chief Executive August 15, 2000
--------------------------------------------------- Officer (Principal Executive
John S. Katzman Officer)
/s/ STEPHEN MELVIN Chief Financial Officer August 15, 2000
--------------------------------------------------- (Principal Financial and
Stephen Melvin Accounting Officer)
/s/ RICHARD KATZMAN Director August 8, 2000
---------------------------------------------------
Richard Katzman
/s/ V. FRANK POTTOW Director August 15, 2000
---------------------------------------------------
V. Frank Pottow
/s/ JOHN C. REID Director August 3, 2000
---------------------------------------------------
John C. Reid
</TABLE>
II-6
<PAGE> 135
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD SARNOFF Director August 10, 2000
---------------------------------------------------
Richard Sarnoff
/s/ SHEREE T. SPEAKMAN Director August 7, 2000
---------------------------------------------------
Sheree T. Speakman
/s/ HOWARD A. TULLMAN Director August 4, 2000
---------------------------------------------------
Howard A. Tullman
</TABLE>
II-7
<PAGE> 136
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
1.1* Form of Underwriting Agreement..............................
2.1 Conversion and Contribution Agreement, dated as of March 31,
2000, by and among The Princeton Review, Inc., the
Non-Voting Members of Princeton Review Publishing LLC, John
S. Katzman and TPR Holdings, Inc. ..........................
2.2 RH Contribution Agreement, dated as of March 31, 2000, by
and among Random House TPR, Inc., Random House, Inc., The
Princeton Review, Inc., John S. Katzman, and TPR Holdings,
Inc. .......................................................
2.3 TPR Contribution Agreement, dated as of March 31, 2000, by
and among The Princeton Review, Inc., each of the persons
listed on Schedule I attached to the agreement and TPR
Holdings, Inc. .............................................
2.4 Option Agreement, dated as of May 30, 2000, by and among
Princeton Review Operations, LLC, Princeton Review of
Boston, Inc. and Princeton Review of New Jersey, Inc. ......
3.1 Restated Articles of Incorporation. ........................
3.2* Form of Amended and Restated Certificate of Incorporation,
to be filed prior to the closing of the offering made under
this Registration Statement. ...............................
3.3 By-laws. ...................................................
4.1* Form of Specimen Common Stock Certificate. .................
5.1* Opinion of Patterson, Belknap, Webb & Tyler LLP as to the
validity of the securities being offered. ..................
10.1 Stockholders Agreement, dated as of April 1, 2000, by and
among The Princeton Review, Inc., and its stockholders. ....
10.2 Stock Purchase Agreement, dated April 18, 2000, by and among
The Princeton Review, Inc., SG Capital Partners LLC, Olympus
Growth Fund III, L.P. and Olympus Executive Fund, L.P. .....
10.3 Joinder Agreement, dated April 18, 2000, to the Stockholders
Agreement dated April 1, 2000, among stockholders of The
Princeton Review, Inc. .....................................
10.4 Investor Rights Agreement, dated April 18, 2000, by and
among The Princeton Review, Inc., SG Capital Partners LLC,
Olympus Growth Fund III, L.P. and Olympus Executive Fund,
L.P. .......................................................
10.5 The Princeton Review, Inc. 2000 Stock Incentive Plan, March
2000. ......................................................
10.6 Form of Stock Option Agreement. ............................
10.7 Letter Agreement, dated August 17, 1999, by and between
Princeton Review Operations, LLC and The Chase Manhattan
Bank. ......................................................
10.8 Master Service Agreement, dated June 16, 1999, by and
between Frontier Global Center and The Princeton Review,
Inc. .......................................................
10.9 Addendum to Master Service Agreement, dated June 18,
1999. ......................................................
10.10 Software Purchase Agreement, dated as of June 23, 1998, by
and between Learning Company Properties and Princeton Review
Publishing, LLC. ...........................................
10.11 The Princeton Review Executive Compensation Policy
Statement. .................................................
10.12 Office Lease, dated as of April 23, 1992, as amended, by and
between The Princeton Review, Inc. and 2316 Broadway Realty
Co. ........................................................
10.13 Amendment to Office Lease, dated December 9, 1993. .........
10.14 Second Amendment to Office Lease, dated February 6, 1995....
10.15 Third Amendment to Office Lease, dated April 2, 1996. ......
10.16 Fourth Amendment to Office Lease, dated July 10, 1998. .....
10.17 Employment Agreement, dated as of August 7, 2000, by and
between The Princeton Review, Inc. and John S. Katzman. ....
10.18 Employment Agreement, dated as of April 27, 2000, by and
between The Princeton Review, Inc. and Mark Chernis. .......
</TABLE>
<PAGE> 137
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
10.19 Employment Agreement, dated as of April 1, 2000, by and
between The Princeton Review, Inc. and Stephen Melvin. .....
10.20 Employment Agreement, dated as of April 10, 2000, by and
between The Princeton Review, Inc. and Stephen
Quattrociocchi. ............................................
10.21 Employment Agreement, dated as of April 18, 2000, by and
between The Princeton Review, Inc. and Evan Schnittman. ....
10.22 Employment Agreement, dated as of April 10, 2000, by and
between The Princeton Review, Inc. and Linda
Nessim-Rubin. ..............................................
10.23 Employment Agreement, dated as of April 10, 2000, by and
between The Princeton Review, Inc. and Bruce Task. .........
10.24 Employment Agreement, dated as of April 10, 2000, by and
between The Princeton Review, Inc. and Steven Hodas. .......
10.25 Employment Agreement, dated as of April 28, 2000, by and
between The Princeton Review, Inc. and Peter Taylor. .......
10.26 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Mark Chernis. ...............
10.27 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Steven Hodas. ...............
10.28 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Richard Katzman. ............
10.29 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Steve Melvin. ...............
10.30 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Linda Nessim-Rubin. .........
10.31 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Stephen Quattrociocchi. .....
10.32 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Evan Schnittman. ............
10.33 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Peter Taylor. ...............
10.34 Conversion Agreement, dated April 18, 2000, by and between
The Princeton Review, Inc. and Bruce Task. .................
10.35 Office Lease, by and between The Rector, Church-Wardens and
Vestrymen of Trinity Church in the City of New York, as
Landlord, and Princeton Review Publishing, LLC, as
Tenant. ....................................................
16.1 Letter re: change in certifying accountant. ................
21.1 Subsidiaries of the Registrant. ............................
23.1* Consent of Patterson, Belknap, Webb & Tyler LLP (included in
Exhibit 5.1 hereto). .......................................
23.2 Consent of Deloitte & Touche LLP. ..........................
23.3 Consent of Ernst & Young LLP. ..............................
23.4 Consent of Caras & Shulman, PC. ............................
24.1 Powers of Attorney (included on the signature pages
hereto). ...................................................
27.1 Financial Data Schedule.....................................
27.2 Financial Data Schedule.....................................
</TABLE>
---------------
* To be filed by amendment.
