<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 2000
REGISTRATION NO. 333-43874
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
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>
------------------------
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:
<TABLE>
<S> <C>
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>
------------------------
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. [ ]
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 DECEMBER 22, 2000
PROSPECTUS
----------------
5,400,000 SHARES
[LOGO]
COMMON STOCK
This is the initial public offering of common stock by The Princeton
Review, Inc. We are selling 5,400,000 shares of our common stock. We estimate
that the initial public offering price will be between $11.00 and $13.00 per
share.
------------------
Prior to this offering, there has been no public market for our common
stock. We have applied 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 810,000 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 9.
------------------
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
, 2000
<PAGE> 3
[INSIDE FRONT COVER]
The Princeton Review, Inc. logo is at the top left of the inside front
cover. Below the logo are three color photographs arranged diagonally across the
page.
Picture 1: Photograph, lower left, depicts two students with books. Caption
at right reads "The Princeton Review helps students, parents and
educators deal with competitive college and graduate school
admissions and the growing number of standardized assessments."
Picture 2: Photograph, top center, shows a student with a laptop computer.
Picture 3: Photograph, top right, shows students at tables taking tests.
[INSIDE GATEFOLD]
The gatefold is a photographic, graphic and textual description of our
business. On the top left of the page is The Princeton Review, Inc. logo. Under
the logo is a color photograph of an instructor writing on a blackboard. At left
center of the page is the caption "Over the years, The Princeton Review has
helped hundreds of thousands of students with test preparation, admissions and
financial aid advice through courses, books, our Web site and software." Under
the caption is a color photograph of various books that we author. To the left
and right of the books are photographs of students in a classroom setting.
On the top right of the page are the words "Better Scores. Better Schools."
At the far right of the page is a small color photograph of a page from our
Homeroom.com Web site with a black and white photograph of a jumping student
superimposed on the Web page. Above that photograph is a color photograph of a
page from our Review.com Web site. At the center right of the page is a color
photograph of a student and teacher with a page of one of our online courses in
the background. Beneath this photograph are the words, "The Princeton Review's
courses helped more than 90,000 students prepare for various standardized tests
at the high school, college and professional level in 1999. Our courses are
given in more than 500 locations in 11 countries."
<PAGE> 4
TABLE OF CONTENTS
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PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 9
Forward-Looking Statements.................................. 22
Our Restructuring........................................... 22
Our Franchised Operations and Our Plans to Acquire Our
Domestic Franchises....................................... 23
Use of Proceeds............................................. 26
Dividend Policy............................................. 27
Capitalization.............................................. 28
Dilution.................................................... 30
Unaudited Pro Forma Consolidated Financial Data............. 32
Selected Consolidated Historical Financial Data............. 37
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 39
Business.................................................... 56
Management.................................................. 73
Related Party Transactions.................................. 85
Principal Stockholders...................................... 89
Description of Capital Stock................................ 92
Shares Eligible for Future Sale............................. 95
Underwriting................................................ 97
Legal Matters............................................... 99
Experts..................................................... 99
Change in Accountants....................................... 99
Where You Can Find More Information......................... 100
Index to Financial Statements............................... F-1
</TABLE>
<PAGE> 5
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
about us and the financial statements and notes appearing elsewhere in this
prospectus. 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 classroom-based, print and online
products and services that address the needs of students, parents, educators and
educational institutions. Based on our experience in the test preparation
industry, we believe that we offer the leading SAT preparation course 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 test preparation courses for the SAT, GMAT, MCAT, LSAT, GRE
and other standardized admissions tests to more than 90,000 students in over 500
locations, from which we derived the majority of our revenue. We also receive
royalties and other related fees from more than 150 book and software titles
authored by us and published by Random House, Inc. and other publishers. In
1998, we began providing Princeton Review branded test preparation content for
kindergarten through twelfth grade, or K-12, textbooks and workbooks published
by The McGraw-Hill Companies, Inc.
One of our primary initiatives has been to integrate and complement our
core products with a range of online services. In July 2000, we introduced
Princeton Review Online, our Internet-based test preparation courses, which can
function as stand-alone alternatives to our classroom-based courses or can be
combined with our classroom-based courses to provide each student's optimal test
preparation mix. During 2000 we also significantly enhanced the content and
functionality of our Review.com Web site, which provides students, parents and
counselors free access to a comprehensive source of academic admissions
information and tools. Finally, in August 2000, we began selling our
Homeroom.com Internet-based subscription service to K-12 schools. This service
is designed to provide academic assessment and remediation tools for children in
grades three through eight to help them and their teachers prepare for the
state-mandated assessments that have become a mainstay in K-12 education. To
date, we have not generated significant revenue from any of our Internet
operations.
We operate our businesses through the following three divisions, each of
which combines our traditional and online products and services:
- The Instruction and Guidance division, founded in 1981, provides
classroom-based and Princeton Review Online test preparation courses and
receives royalties from our independent franchisees who provide
classroom-based courses under the Princeton Review brand. In addition,
this division offers admissions counseling services directly to students
and through institutional relationships with high schools. During 1999, we
derived approximately 74% of our revenue from services provided by this
division. Our Princeton Review Online courses have not generated
significant revenue to date.
- The Review.com division, founded in 1986 as our publishing division,
authors more than 150 print and software titles on test preparation,
college selection and related topics published by Random House, TIME
magazine and other publishers. This division also operates our Review.com
Web site, which brings together potential applicants and their families,
guidance counselors and colleges and graduate schools to exchange
information and facilitate the recruitment, application and admissions
process. Based on statistics compiled by PC Data Online, our Review.com
Web site is one of the most widely used educational Web sites dedicated to
post-secondary academic opportunities. During 1999, approximately 64% of
this
1
<PAGE> 6
division's revenue, representing approximately 8% of our total revenue,
was comprised of royalties and other fees received from publishers of our
books and software and approximately 36% of this division's revenue,
representing approximately 5% of our total revenue, was comprised of
Internet-related revenue from colleges and businesses that market and
advertise on our Review.com Web site.
- The Homeroom.com division, founded in 1998, authors workbooks and creates
Princeton Review branded content for textbooks published by McGraw-Hill.
This division also operates our new Homeroom.com online subscription
service. To date, substantially all of the revenue generated by this
division, representing approximately 13% of our total revenue in 1999, was
derived from fees and royalties paid to us under our contract with
McGraw-Hill. This division has not yet generated significant
Internet-based revenue from the Homeroom.com online subscription service.
THE MARKET OPPORTUNITY
The education market is the second largest sector of the U.S. economy,
according to EduVentures LLC. The U.S. Department of Education estimates that
approximately $372 billion was spent in the United States during the 1998-1999
school year on 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.
Educators, students and parents are also 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.
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, we believe 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, we find that students, parents and schools are
increasingly seeking a comprehensive, one-stop source of information and
assistance in the testing, application and admissions process. At the same time,
our experience suggests that colleges and graduate schools are competing to
reach and enroll greater numbers of the most desirable prospects in a
cost-effective and efficient manner.
BENEFITS OF OUR PRODUCTS AND SERVICES
We provide integrated classroom-based, print and online educational
products and services that, we believe, offer the following benefits:
Benefits to Students
- Our courses, books and software enable prospective college and graduate
school students to increase their scores on admissions tests.
- Our Review.com Web site serves as a free, convenient and centralized
resource for college and graduate school selection and application
services.
- Our individual and institutional admissions counseling and advisory
services can improve the information available to students in making
their academic choices.
- Our Homeroom.com online subscription service offers students in grades
three through eight a variety of assessment, remediation and enrichment
tools to enhance their academic achievement and improve outcomes on
state-mandated assessments.
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<PAGE> 7
Benefits to Parents
- Our Homeroom.com online subscription service and our Review.com Web site
allow parents to increase involvement in their children's education and
admissions processes in an easy and time-efficient manner.
- Our courses, books and Review.com Web site provide a trusted resource for
guidance through educational transitions.
- Our Review.com Web site provides access to active community discussions
with other parents and educational experts.
Benefits to Educators and Educational Institutions
- Our institutional admissions counseling services and the resources
available on our Review.com Web site can improve college guidance
programs in high schools.
- Colleges and graduate schools can reach and enroll prospective students
in a more cost-effective way by posting their marketing information and
applications on our Review.com Web site.
- Our Homeroom.com online subscription service provides educators with the
tools to make more efficient use of classroom time through effective
academic diagnosis and allows them to benefit from improved student
performance on state-mandated assessments.
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:
- continuing to expand our online test preparation courses to provide our
students with a flexible, fully integrated package of classroom-based and
online courses;
- building the user base of our Homeroom.com online service in the K-12
education market;
- capitalizing on the network effect among students, parents, educators and
schools on our Review.com Web site to increase marketing, advertising and
e-commerce revenue;
- expanding relationships with institutional customers such as colleges and
graduate schools and forming long-term relationships with K-12 schools
and school districts; and
- increasing the cross-marketing of our products and services.
Our ability to implement our strategy is subject to the risks and
uncertainties described in this prospectus, including those listed under "Risk
Factors."
In order to increase our revenue growth, we will need to derive a
substantial portion of our future revenue from our Internet businesses,
including tuition fees from our Princeton Review Online courses, marketing and
advertising fees from our Review.com Web site and subscription fees from our
Homeroom.com online subscription service.
OUR FRANCHISES
Our classroom-based courses and tutoring services are provided through
company-operated locations and our independent franchisees. Under our franchise
agreements, our franchisees pay us a royalty of 8% of their cash receipts
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 materials together accounted for approximately 14% of our 1999
revenue and approximately 17% of our revenue for the nine-month period ended
September 30, 2000. As of September 30, 2000, we had 16 franchisees operating
approximately 40 offices under the Princeton Review name in the United States
and approximately 13 offices abroad operated by franchisees in 10 additional
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<PAGE> 8
countries. Based on the royalties paid to us by our franchisees during these
periods, we estimate that our franchisees had cash receipts of approximately
$42.0 million in 1999 and approximately $38.0 million in the first nine months
of 2000. We are not currently offering any new domestic franchises.
If we are able to negotiate favorable terms, we will seek to purchase the
businesses operated by all 16 of our domestic franchisees over the next three
years. As part of this strategy, on December 14, 2000, we exercised our option
under an option agreement to acquire the assets comprising the businesses of
Princeton Review of Boston, Inc. and Princeton Review of New Jersey, Inc. The
option agreement requires us to complete this acquisition within 90 days after
exercising the option. The combined purchase price under this option is
approximately $13.8 million, subject to adjustments specified in the agreement.
To acquire these operations, we expect to pay approximately $3.5 million of the
purchase price in cash, finance approximately $6.7 million with bank debt and
issue two promissory notes to the sellers for the remaining approximately $3.6
million. In the fourth quarter of 2000, we also entered into option agreements
to purchase the operations of T.S.T.S., Inc. and Princeton Review Peninsula,
Inc., both of which offer test preparation courses under franchise agreements
with us. For a more detailed description of these agreements, see "Our
Franchised Operations and Our Plans to Acquire Our Domestic Franchises -- Option
Agreements to Purchase Four of Our Independent Franchises."
We estimate that the aggregate purchase price that we will have to pay if
we acquire the businesses of Princeton Review of Boston, Princeton Review of New
Jersey, T.S.T.S., Princeton Review Peninsula and all 12 of our other domestic
franchisees will be between $40.0 million and $50.0 million. As described more
fully under "Use of Proceeds," we expect to use the net proceeds of this
offering to pay approximately half of the aggregate purchase price that we will
have to pay to acquire these businesses and will seek to finance the remaining
half through one or more credit facilities. The actual aggregate purchase price
that we pay for the businesses operated by our franchisees may differ materially
from our estimates and will depend upon numerous factors, including our ability
to complete the acquisitions of the businesses identified above as being under
option, our ability to negotiate favorable terms with our other franchisees, the
continuing viability of our acquisition strategy and the timing of any completed
acquisitions.
------------------------
For the year ended December 31, 1999, we had revenue of approximately $40.3
million and a net loss of approximately $2.0 million. For the nine months ended
September 30, 2000, we had revenue of approximately $34.2 million and a net loss
of approximately $3.1 million. We expect to incur operating and net losses for
the foreseeable future.
------------------------
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.
4
<PAGE> 9
THE OFFERING
Common stock offered by The Princeton
Review.................................... 5,400,000 shares
Common stock to be outstanding after this
offering.................................. 26,039,720 shares
Use of proceeds........................... We intend to use the net proceeds
from this offering to repay
outstanding indebtedness, for
working capital, other general
corporate purposes and capital
expenditures. If we acquire the
businesses of our domestic
franchisees, including Princeton
Review of Boston, Princeton Review
of New Jersey, T.S.T.S. and
Princeton Review Peninsula, all of
which are currently under option,
we expect to use a portion of the
net proceeds from this offering to
consummate these acquisitions. We
also may use a portion of the net
proceeds to acquire or invest in
other complementary businesses or
technologies. 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:
- 15,299,215 shares of common stock outstanding as of December 20, 2000.
- 5,090,713 shares of common stock to be issued upon automatic conversion
of 3,748,548 shares of preferred stock outstanding as of December 20,
2000 upon completion of this offering, assuming an initial public
offering price of $12.00 per share, the midpoint of the price range set
forth on the cover page of this prospectus. If, however, the initial
public offering price of the shares sold in this offering is above $12.99
per share, the outstanding preferred stock will convert into 3,602,566
shares of common stock upon completion of this offering. For a
description of the conversion rights of our outstanding preferred stock,
see "Description of Capital Stock -- Preferred Stock."
- Assuming an initial public offering price of $12.00 per share, 249,792
shares of common stock to be issued upon the automatic cashless exercise
of warrants to purchase 250,000 shares of common stock outstanding as of
December 20, 2000, with an exercise price of $0.01 per share, upon
completion of this offering.
- 5,400,000 shares of common stock being offered in this offering.
The above information excludes:
- 1,437,364 shares of common stock underlying options granted under our
stock incentive plan and outstanding as of December 20, 2000 at a
weighted average exercise price of $6.87 per share;
- 394,963 additional shares of common stock reserved for future issuance
under our stock incentive plan as of December 20, 2000;
- 846,000 additional shares of common stock that will be reserved for
future issuance under our stock incentive plan upon the completion of
this offering;
5
<PAGE> 10
- assuming an initial public offering price of $12.00 per share, up to
100,000 shares of common stock issuable under warrants outstanding as of
December 20, 2000, with an exercise price equal to the initial public
offering price of our common stock in this offering;
- assuming an initial public offering price of $12.00 per share, up to
260,417 shares of common stock issuable upon conversion of a $3,125,000
convertible promissory note to be issued in connection with the proposed
acquisition of Princeton Review of Boston and Princeton Review of New
Jersey.
------------------------
Unless we indicate otherwise, all information in this prospectus assumes
the following:
- an .846-for-one reverse stock split of our common stock effected on
November 16, 2000 (all share and per share amounts of our common stock
have been retroactively adjusted to reflect the stock split);
- no exercise by the underwriters of their over-allotment option to
purchase up to 810,000 additional shares of common stock;
- the automatic conversion of all outstanding preferred stock into
5,090,713 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;
- assuming an initial public offering price of $12.00 per share, the
issuance of 249,792 shares of common stock upon the automatic cashless
exercise of warrants to purchase 250,000 shares of common stock with an
exercise price of $0.01 per share upon completion of this offering; and
- amendments to our certificate of incorporation and by-laws to be
effective upon completion of this offering.
6
<PAGE> 11
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables present:
- our summary historical consolidated financial data as of September 30,
2000 and for the years ended December 31, 1997, 1998 and 1999 and for the
nine months ended September 30, 1999 and 2000;
- our summary unaudited pro forma consolidated financial data as of
September 30, 2000 and for the year ended December 31, 1999 and for the
nine months ended September 30, 2000, giving effect to our proposed
acquisition of Princeton Review of Boston and Princeton Review of New
Jersey as described in "Our Franchised Operations and Our Plans to
Acquire Our Domestic Franchises -- Option Agreements to Purchase Four 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 September 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 into 5,090,713 shares of common stock upon the completion
of this offering, the conversion of our Class A common stock and Class B
non-voting common stock into common stock upon the completion of this
offering, the issuance of 249,792 shares of common stock upon the
automatic cashless exercise of warrants upon completion of this offering
and the issuance of 5,400,000 shares of common stock offered by this
prospectus at an assumed initial public offering price of $12.00 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 the
acquisition of Princeton Review of Boston and Princeton Review of New Jersey as
of the dates indicated and should not be construed as representative of our
future operating results or financial condition. Additionally, our acquisition
of Princeton Review of Boston and Princeton Review of New Jersey is subject to a
number of conditions, including the fulfillment or waiver of the conditions to
closing included in the option agreement and other documentation relating to the
acquisition. We cannot assure you that these conditions will be fulfilled or
that this acquisition will be completed.
The summary unaudited pro forma and pro forma as adjusted consolidated
financial data does not reflect the operating results of T.S.T.S. or Princeton
Review Peninsula.
The financial data as of September 30, 2000 and for the nine months ended
September 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, NINE MONTHS ENDED SEPTEMBER 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 $40,302 $49,246 $30,672 $ 34,154 $ 42,431
Gross profit................... 19,222 21,846 27,132 32,518 21,716 23,812 29,303
Operating income (loss) from
continuing operations........ 290 (1,358) (2,561) (987) 2,450 (17,139) (14,695)
Income (loss) from continuing
operations before (provision)
benefit for income taxes..... 269 (1,200) (2,095) (1,574) 1,935 (9,637) (7,987)
Net income (loss).............. $(2,043) $ 2,109 $(2,044) $(1,541) $ 1,876 $ (3,105) $ (1,499)
Net income (loss) per share --
basic and diluted............ $ (0.20) $ 0.20 $ (0.20) $ (0.15) $ 0.18 $ (0.57) $ (0.45)
Weighted average basic and
diluted shares used in
computing net income (loss)
per share.................... 10,404 10,404 10,404 10,404 10,404 13,667 13,667
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $11,586 $ 9,626 $ 68,829
Working capital............................................. 11,203 7,820 65,984
Total assets................................................ 55,891 67,673 125,837
Long-term debt, net of current portion...................... 682 11,032 11,032
Series A redeemable convertible preferred stock............. 27,869 27,869 --
Class B redeemable non-voting common stock.................. 9,449 9,449 --
Stockholders' equity........................................ 1,047 1,047 96,529
</TABLE>
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<PAGE> 13
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 LIMITED EXPERIENCE
GENERATING REVENUE FROM OUR INTERNET-BASED BUSINESSES, CONSISTING OF OUR
PRINCETON REVIEW ONLINE TEST PREPARATION COURSES, OUR REVIEW.COM WEB SITE AND
OUR HOMEROOM.COM ONLINE SUBSCRIPTION SERVICE.
Our Princeton Review Online test preparation courses were launched in July
2000, and we began selling our Homeroom.com online subscription service in
August 2000. These operations have not generated significant revenue to date.
Our ability to generate revenue from our Review.com Web site is also unproven.
Consequently, there is limited operating history on which you can base your
evaluation of the business and prospects of these operations.
WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES AND EXPECT TO INCUR
SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE.
We expect to incur operating losses and experience negative cash flow for
the foreseeable future. We have significantly increased our operating expenses
in recent periods in order to grow our existing Internet operations through our
Review.com Web site and expand into new lines of Internet-based businesses with
our Homeroom.com subscription service and our Princeton Review Online products.
As a result, we have incurred significant losses in these periods. As of
September 30, 2000, we had an accumulated deficit of approximately $7.4 million.
We incurred a net loss of approximately $2.0 million for the year ended December
31, 1999 and approximately $3.1 million for the nine months ended September 30,
2000. We anticipate our losses will also increase significantly from current
levels as we incur additional costs and expenses related 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 Princeton Review of Boston and Princeton Review of New
Jersey and the acquisition of the operations of any of our other
franchisees with whom we are able to reach agreement on favorable terms.
IF WE ARE UNABLE TO SUBSTANTIALLY INCREASE OUR REVENUE FROM OUR INTERNET
OPERATIONS, OUR GROWTH WILL SUFFER.
If we are unable to substantially increase our revenue from our Internet
businesses, we will be unable to execute our current business plan and our
operating results may be adversely affected. In order to grow as currently
contemplated, we will need to derive an increasing portion of our revenue from
our Internet-based businesses, consisting of our Review.com Web site, our
Homeroom.com Internet-based subscription service and our Princeton Review Online
courses. We have limited experience with generating revenue from Internet-based
businesses and their results are largely uncertain. In order to increase revenue
from these businesses we must, among other things, successfully:
- attract a large number of students, parents and educators to our Web
sites;
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<PAGE> 14
- 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.
We may be unable to achieve these objectives.
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 and market share. Our current competitors include but are not limited
to:
- providers of online and offline test preparation, admissions
assistance and career counseling to prospective higher education
students, with our primary national competitor in this area being
Kaplan, Inc.;
- 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 K-12 oriented 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
face-to-face and Internet-based products and services to assist
individuals and educational organizations with counseling, marketing
and student applications.
Some of our competitors may have more resources than we do. These
competitors may be able to devote greater resources than we can to the
development, promotion and sale of their services and respond more quickly than
we can to new technologies or changes in customer preferences. We may not be
able to maintain our competitive position or otherwise compete effectively with
current or future competitors, especially those with significantly greater
resources.
Some of our competitors that provide K-12 oriented online education
products may have more experience, larger customer bases and greater brand
recognition in that market. Further, established companies with high brand
recognition and extensive experience providing various educational
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<PAGE> 15
products to the K-12 market may develop online products and services that are
competitive with our Homeroom.com subscription service.
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.
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 largest portion of our test preparation revenue in the third
quarter. Since Homeroom.com's Internet-based subscription service has not yet
generated significant 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 approximately 12% of
our revenue in 1999 and 3% of our revenue in 1998. During 1999 and 1998, revenue
from McGraw-Hill
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<PAGE> 16
represented 100% of the revenue reported in our Homeroom.com division. 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 approximately 7% of our revenue in 1999 and 9% of
our revenue in 1998. Revenue from Random House represented approximately 51% of
the revenue reported in our Review.com division in 1999 and 65% of the revenue
reported in that division in 1998.
THE TERMS OF OUR CURRENT CREDIT FACILITIES RESTRICT US FROM ENGAGING IN MANY
ACTIVITIES AND REQUIRE US TO SATISFY VARIOUS FINANCIAL TESTS, AND WE EXPECT THAT
ANY CREDIT FACILITIES WE OBTAIN IN THE FUTURE WILL CONTAIN SIMILAR RESTRICTIONS
AND REQUIREMENTS.
Our current credit facilities contain covenants that restrict, among other
things, our ability to incur additional debt, pay cash dividends, create liens,
change our fundamental organization or lines of business, make investments and
engage in transactions with affiliates. Our credit facilities also require us to
maintain specific financial ratios. Events beyond our control could affect our
ability to meet those financial ratios, and we cannot assure you that we will
meet them. A breach of any of the covenants contained in our credit facilities
could allow our lenders to declare all amounts outstanding under the credit
facilities to be immediately due and payable. We have pledged substantially all
of our assets to our lenders as collateral. Our lenders could proceed against
the collateral granted to them if we are unable to meet our debt service
obligations. If the amounts outstanding under our credit facilities are
accelerated, we cannot assure you that our assets will be sufficient to repay in
full the money owed to these lenders.
We are required to repay amounts outstanding under our credit facility with
Excel Bank, N.A. within 10 days after completion of this offering and to repay
amounts outstanding under our credit facility with Reservoir Capital Partners,
L.P. and the other lenders thereunder within 180 days after completion of this
offering. We expect to repay amounts outstanding under these facilities with the
proceeds of this offering, as described under "Use of Proceeds." Upon repayment,
each of these facilities will terminate. In order to pursue our strategy of
acquiring the businesses of our domestic franchisees, we will seek to obtain one
or more credit facilities shortly after completion of this offering to replace
these terminating facilities. We expect that any credit facilities we obtain
will contain restrictions and requirements similar to those described above.
IF WE ARE NOT ABLE TO CONTINUALLY ENHANCE OUR INTERNET PRODUCTS AND SERVICES AND
ADAPT THEM TO CHANGES IN TECHNOLOGY, OUR FUTURE REVENUE GROWTH 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 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 ARE UNABLE TO RENEW OUR AGREEMENTS WITH OUR FRANCHISEES, OR IF OUR
FRANCHISEES CONTEST OUR INTERPRETATION OF THOSE AGREEMENTS, OUR ABILITY TO OFFER
OUR PRODUCTS IN OUR FRANCHISEES' TERRITORIES COULD BE ADVERSELY AFFECTED, WHICH
COULD ADVERSELY AFFECT OUR REVENUE.
If we are unable to renew our agreements on favorable terms with those
franchisees whose businesses we do not purchase, or if any of those franchisees
contest our interpretation of our rights and obligations under these agreements,
then our ability to deliver our products and services within their franchise
territories could be hindered, and our revenue could be adversely affected.
Through a series of franchise agreements and other agreements, our independent
franchisees have
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<PAGE> 17
various rights to provide test preparation products and services under The
Princeton Review brand within specified territories, and to use our trademarks
and other intellectual property in connection with providing these services.
Similarly, we have various rights to market and sell our products and services
in the franchisees' territories. Our agreements have been reviewed and
renegotiated to accommodate our business goals and the goals of our franchisees
as they have both developed over the years. The majority of our franchise
agreements expire on December 31, 2005, and our agreements governing the royalty
payment terms applicable when we offer our Princeton Review Online products to
customers in franchisee territories expire on December 31, 2002. For a more
detailed description of our franchised operations, see "Our Franchised
Operations and Our Plans to Acquire Our Domestic Franchises" elsewhere in this
prospectus.
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 on
economically acceptable terms. 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.
THE ABSENCE OF AN UNOPPOSED FEDERAL REGISTRATION OF OUR "THE PRINCETON REVIEW"
SERVICE MARK AND TRADEMARK MAY MAKE IT MORE DIFFICULT AND EXPENSIVE FOR US TO
PREVENT OTHERS FROM USING THE MARK AND COULD OTHERWISE SIGNIFICANTLY HARM OUR
BUSINESS.
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 Princeton University, and the validity of our registration is
uncertain. No one, including Princeton University, 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. The absence of an unopposed federal
registration of our mark,
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<PAGE> 18
however, may make the enforcement of our exclusive right to use the mark against
possible future infringers more difficult and costly. In addition, if we are
unable to prevent a competitor or another business from using "The Princeton
Review" or similar marks, then we could lose customers or suffer a dilution of
the prominence of our principal mark. It is also possible that Princeton
University 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. Moreover, 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 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 COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
We depend on the continued service of our senior management. The loss of
any of our Chief Executive Officer, John Katzman, our President and Chief
Operating Officer, Mark Chernis, our Chief Financial Officer, Stephen Melvin or
our Executive Vice Presidents, Steven Quattrociocchi and Evan Schnittman, 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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<PAGE> 19
OUR BUSINESS MAY BE HARMED BY ACTIONS TAKEN BY OUR FRANCHISEES THAT ARE OUTSIDE
OUR CONTROL.
Approximately 14% of our 1999 revenue and approximately 17% of our revenue
for the first nine months of 2000 was derived from royalties paid to us by
independent businesses that operate under franchise agreements with us,
including Princeton Review of Boston, Princeton Review of New Jersey, T.S.T.S.
and Princeton Review Peninsula, and from sales of our course and marketing
materials to these franchisees. The quality of franchised test preparation
operations may be diminished if our franchisees do not successfully provide test
preparation services in a manner consistent with our standards and requirements,
or do not hire and train qualified managers or instructors. As a result, 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 OF
OPERATIONS.
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. Compliance with federal and state 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.
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.
Without the net proceeds of this offering, our capital resources will not be
sufficient to meet our expected needs for working capital and capital
expenditures for the next 12 months. Therefore, if this offering is not
completed, we will need to access other sources of financing to meet our needs.
We expect that the net proceeds from this offering, together with currently
available funds, will be sufficient to meet our working capital and capital
expenditure needs for at least the next 24 months. 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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<PAGE> 20
WE MAY ENGAGE IN 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 ACQUISITIONS ARE NOT SUCCESSFULLY INTEGRATED WITH OUR BUSINESS, OUR ONGOING
OPERATIONS COULD BE NEGATIVELY AFFECTED.
We have entered into option agreements to purchase Princeton Review of
Boston, Princeton Review of New Jersey, T.S.T.S. and Princeton Review Peninsula.
In addition to the acquisition of these franchises, we may acquire our other
franchises and other 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, as will be the case
if the approximately $3.1 million convertible note to be issued by us
if we acquire Princeton Review of Boston and Princeton Review of New
Jersey is converted into up to 260,417 shares of common stock,
assuming an initial public offering price in this offering of $12.00
per share;
- 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 PLANNED ACQUISITIONS OF THE BUSINESSES OF OUR DOMESTIC FRANCHISEES MAY NOT
BE CONSUMMATED, AND IF NOT CONSUMMATED, OUR GROWTH MAY BE ADVERSELY AFFECTED.
If we do not consummate our planned acquisitions of Princeton Review of
Boston, Princeton Review of New Jersey, T.S.T.S., Princeton Review Peninsula or
the businesses of our other domestic franchisees, our growth may be adversely
affected. Additionally, if we do not acquire the operations of Princeton Review
of Boston and Princeton Review of New Jersey, our financial results would be
materially different from those set forth in our unaudited pro forma
consolidated financial data included elsewhere in this prospectus, which gives
effect to our planned acquisition of Princeton Review of Boston and Princeton
Review of New Jersey.
Our planned acquisition of Princeton Review of Boston and Princeton Review
of New Jersey is subject to a number of conditions, including the fulfillment or
waiver of the conditions to closing included in the option agreement and other
documentation relating to the acquisition. Our planned acquisitions of T.S.T.S.
and Princeton Review Peninsula are also subject to a number of conditions,
including our ability and willingness to exercise these options, the attainment
by these businesses of specified financial benchmarks, the availability of
financing, and, if the options are exercised, the fulfillment or waiver of the
conditions to closing included in the option agreements and other documentation
relating to these acquisitions. Our plans to acquire the businesses of our other
domestic franchisees are subject to our ability to negotiate favorable terms for
these acquisitions and may also be subject to conditions similar to those
described above.
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Accordingly, we cannot assure you that any or all of these acquisitions
will be consummated on the terms described in this prospectus, or at all. This
offering is not contingent or in any way dependent on the consummation of any or
all of these acquisitions. If any of these acquisitions is not consummated, a
larger portion of the net proceeds from this offering will not be designated for
a specific use. In these circumstances, our management will have broader
discretion with respect to the use of the proceeds of the offering and you will
not have the opportunity, as part of your investment decision, to assess whether
the proceeds are being used appropriately.
IF WE COMPLETE THE PROPOSED ACQUISITIONS OF PRINCETON REVIEW OF BOSTON,
PRINCETON REVIEW OF NEW JERSEY, T.S.T.S. AND PRINCETON REVIEW PENINSULA, THE
AMORTIZATION EXPENSE AND INTEREST EXPENSE THAT WILL BE INCURRED IN CONNECTION
WITH THESE ACQUISITIONS WILL NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
If we complete the proposed acquisition of Princeton Review of Boston and
Princeton Review of New Jersey, we will have to record approximately $13.3
million of goodwill which will be amortized over 15 years. This will increase
our net loss or decrease our net income by approximately $888,000 in each of
2001 through 2015. Additionally, if we complete this acquisition, we will incur
indebtedness to the sellers of these businesses in the form of promissory notes
for approximately $3.6 million, bearing interest at 8.25% per year. We would
also seek to finance approximately $6.7 million of the acquisition price under
our existing credit facilities or through a new credit facility. Interest
expense associated with this indebtedness would also increase our net loss or
reduce our earnings. For a description of the terms of the proposed promissory
notes to the current owners of Princeton Review of Boston and Princeton Review
of New Jersey, see "Our Franchised Operations and Our Plans to Acquire our
Domestic Franchises -- Option Agreements to Purchase Four of Our Independent
Franchises."
If we complete the proposed acquisitions of the businesses of T.S.T.S.,
Princeton Review Peninsula or the businesses of any of our other franchisees,
amortization and interest expense relating to these acquisitions would also
increase our net loss or reduce our earnings.
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, AND
A LIABILITY CLAIM AGAINST US COULD AVERSELY AFFECT OUR REPUTATION AND OUR
FINANCIAL RESULTS.
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 primary and backup 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. Although all of our material
systems are redundant, short-term service interruptions may take place if our
primary systems were to fail or be disrupted and we are forced to transition to
backup systems. 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. We do not have a formal disaster recovery plan, and 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. While slower response
times have not had a material effect on our results of operations to date, 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.
In the past, securities class action lawsuits alleging fraud have often
been filed against a company following periods of volatility in the market price
of its securities. In the future, we may be the target of similar lawsuits. 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. Declines in the
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market price of our common stock could also harm employee morale and retention,
our ability to attract qualified employees and our access to capital.
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.
Upon completion of this offering, we will have outstanding an aggregate of
26,039,720 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. 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
promulgated under the Securities Act. The remaining 20,639,720 shares of common
stock held by existing stockholders are restricted securities. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration described below under Rules 144,
144(k) or 701 promulgated under the Securities Act. Substantially all of our
stockholders 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.
As a result of the contractual restrictions described above and the
provisions of Rules 144, 144(k) and 701 described under "Shares Eligible for
Future Sale," all 20,639,720 restricted shares will be available for sale in the
public market upon the expiration of the lock-up agreements described above, 180
days after the date of this prospectus, subject, in some cases, to volume
limitations.
A large number 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 $8.76 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 $12.00 per share. You will incur additional dilution
upon the exercise of stock options exercisable for 1,437,364 shares of common
stock outstanding as of December 20, 2000, which have been granted between April
18, 2000 and October 23, 2000 with a weighted average exercise price of $6.87
per share, which is significantly below the initial public offering price in
this offering, or if the underwriters exercise their over-allotment option. For
more detailed information, see "Dilution."
BECAUSE OUR SECURITIES HAVE NO PRIOR PUBLIC MARKET, THE LIQUIDITY OF OUR COMMON
STOCK IS UNCERTAIN, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE
THE PRICE YOU PAID.
There has not been a public market for our common stock. As a result, the
initial public offering price was determined by negotiations among the
underwriters and us, and may not be indicative of prices that will prevail in
the public trading markets. We also cannot predict the extent to which a trading
market for our common stock will develop or how liquid that market will
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be. You may not be able to resell your shares at or above the initial public
offering price. 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.
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 repayment of
outstanding indebtedness, capital expenditures, working capital and other
general corporate purposes. If we acquire Princeton Review of Boston, Princeton
Review of New Jersey, T.S.T.S., Princeton Review Peninsula or any of the
operations of our other franchisees, we expect to use a portion of the net
proceeds from this offering to consummate these acquisitions. We may also use a
portion of the net proceeds from this offering to acquire or invest in other
complementary businesses or technologies. 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 72.8% of our outstanding common stock. In
particular, John S. Katzman, our Chief Executive Officer, will beneficially own
approximately 37.7% 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. See "Principal Stockholders" for the
names and ownership of our directors, executive officers and holders of more
than 5% of our common stock.
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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. We implemented this restructuring in order to eliminate
minority interests in our subsidiaries, provide all equity holders with a common
interest in our company and otherwise facilitate the initial public offering
contemplated by this prospectus. As part of our restructuring, all stockholders
of the S corporation and Random House TPR, Inc. and a number of our franchisees,
who held all the minority 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 12,561,986 shares of Class A
common stock and 1,820,025 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. Our current structure is that of a holding company with
five wholly owned subsidiaries.
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, Inc. held by that subsidiary. The public market value of this
stock on the date of distribution was approximately $7,429,000. In connection
with this distribution and the distribution of 32,168 shares of stock of Student
Advantage to our employees described in the following paragraph, we recorded a
gain of $7.6 million in the first half of 2000.
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 917,204 shares of Class B non-voting common stock, options
under our stock incentive plan exercisable for a total of 1,322,364 shares of
Class B non-voting common stock, cash payments totaling approximately $5.6
million and 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., which owned a 20% interest in each of our subsidiaries
immediately prior to our restructuring and continues to own approximately 18.7%
of our common stock as of December 20, 2000, without giving effect to the
conversion of our outstanding preferred stock. The interests of these parties in
the restructuring transactions and Random House TPR, Inc.'s ongoing involvement
in our operations are further described in this prospectus under "Related Party
Transactions."
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OUR FRANCHISED OPERATIONS AND OUR PLANS TO
ACQUIRE OUR DOMESTIC FRANCHISES
OUR FRANCHISES
Our classroom-based courses and tutoring services are provided through
company-operated locations and through our independent franchisees. Our
franchisees provide these test preparation courses and tutoring services under
The Princeton Review brand within a specified territory, in accordance with
franchise agreements with us. In exchange, our franchisees pay us a royalty of
8% of their cash receipts 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 materials together accounted for
approximately 14% of our 1999 revenue and approximately 17% of our revenue for
the nine-month period ended September 30, 2000.
Our franchisees do not provide our Princeton Review Online courses.
However, to the extent we provide our Princeton Review Online courses to
customers residing within the exclusive jurisdictions of our franchisees, we are
obligated to pay those franchisees a royalty of 15% of all of our revenue
derived from selling Princeton Review Online courses to students residing in
their territories, net of certain administrative expenses. To date, because we
have not yet derived significant revenue from our Princeton Review Online
courses, our royalty payments to our franchisees have also not been significant.
If these courses generate material revenue in the future, the royalty payments
will increase proportionally. To the extent we acquire the operations of our
franchisees, we will no longer be required to make royalty payments to those
franchisees as a result of the termination of their franchises.
As of September 30, 2000, we had 16 franchisees operating approximately 40
offices under the Princeton Review name in the United States and approximately
13 offices abroad operated by franchisees in 10 additional countries. Based on
the royalties paid to us by our franchisees during these periods, we estimate
that our domestic franchisees had cash receipts of approximately $37.0 million
in 1999 and approximately $34.0 million in the first nine months of 2000 and
that our international franchisees had cash receipts of approximately $5.0
million in 1999 and approximately $4.0 million in the first nine months of 2000.
Our international franchises are located primarily in Asia. We currently
intend to expand our international presence through the sale, in the next
several years, of additional franchises in Asian markets, including India, China
and the Philippines. This expansion is not expected to result in the incurrence
of material expenses, with expenses consisting primarily of insignificant
up-front fees and the cost of teacher and office training.
We are not currently offering any new domestic franchises. If we are able
to negotiate favorable terms, we will seek to purchase the businesses operated
by our domestic franchisees over the next several years. As part of this
strategy, we have entered into the agreements and transactions described below.
We anticipate that acquisitions of our other domestic franchisees, if
consummated, would involve some combination of cash, debt and the issuance of
our common stock. To the extent we consummate acquisitions of the businesses of
our franchisees, including Princeton Review of Boston, Princeton Review of New
Jersey, T.S.T.S. and Princeton Review Peninsula, we expect to use the net
proceeds from this offering to fund a portion of the purchase price of these
acquisitions. For a more detailed description of our expected use of the net
proceeds from this offering for these purposes, see "Use of Proceeds."
OPTION AGREEMENTS TO PURCHASE FOUR OF OUR INDEPENDENT FRANCHISES
Princeton Review of Boston and Princeton Review of New Jersey
On December 14, 2000, we exercised our option under an option agreement
entered into on May 30, 2000 to acquire the assets comprising the businesses of
Princeton Review of Boston and Princeton Review of New Jersey for a total
purchase price of approximately $13.8 million, subject
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to adjustment in accordance with the option agreement. Each of these entities
provides test preparation courses under The Princeton Review name through one or
more franchise agreements with us.
Under the option agreement, 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 this option agreement.
Approximately $10,175,000 of the purchase price will be payable in cash at
the time of closing. We anticipate that we will finance approximately $6,700,000
of the cash portion of the purchase price with bank debt. The remaining
$3,625,000 of the purchase price will be paid by delivery of two subordinated
promissory notes. The first promissory note will be in a principal amount of
$3,125,000, 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. This 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 completion of this offering.
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. The second promissory note will be in a principal amount of $500,000,
will bear interest at the rate of 8.25% per year, payable on a quarterly basis,
and will be payable as to the entire principal amount four years from its date
of issuance. This note will not be convertible.
Princeton Review of Boston and Princeton Review of New Jersey had combined
revenue of approximately $10.3 million for the year ended December 31, 1999 and
approximately $9.5 million for the nine months ended September 30, 2000. As of
September 30, 2000, Princeton Review of Boston and Princeton Review of New
Jersey had approximately 47 full time and 347 part time employees.
T.S.T.S.
On October 18, 2000, we entered into an option agreement to acquire the
assets of T.S.T.S., which provides test preparation courses in Texas, Arizona,
Oklahoma, Louisiana and New Mexico under The Princeton Review name through four
franchise agreements with us. Under this option agreement, we have the option to
acquire the operations of T.S.T.S. for a total purchase price between $6.2
million and $7.5 million, subject to adjustments specified in the option
agreement. The actual purchase price to be paid by us will depend on the
financial performance of T.S.T.S. and the timing of the exercise of the option
in accordance with the terms of the option agreement. This option remains in
effect until July 15, 2001.
If we exercise this option, we will be required to purchase the operations
of T.S.T.S. unless the T.S.T.S. business does not meet the financial performance
standards specified in the option agreement. If we exercise the option and
T.S.T.S. has met those standards, we must sign a definitive purchase agreement
within 30 days after exercising the option and close the purchase within 90 days
of exercising the option. If we have consummated our initial public offering but
have not exercised the option by July 15, 2001, then we are obligated to
purchase T.S.T.S. as if we had exercised the option on July 15, 2001. Under
limited circumstances involving T.S.T.S.'s inability to obtain consents to the
transaction from third parties, T.S.T.S. has the right to terminate the option
agreement.
If we exercise our option to purchase T.S.T.S., the difference between the
actual purchase price and $4.5 million will be payable by delivery of a
five-year promissory note. The remainder of the purchase price will be payable
in cash at the time of closing. The promissory note will be
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payable in 20 equal quarterly installments beginning with the first business day
of the first calendar quarter following the closing date of the acquisition and
will bear interest at the rate of 8.25% per year.
Based upon the approximately $541,000 in royalties we received from
T.S.T.S. in 1999, we estimate that T.S.T.S. had cash receipts of approximately
$6.8 million in 1999. As of September 30, 2000, T.S.T.S. had approximately 38
full-time and 186 part-time employees.
Princeton Review Peninsula
On December 15, 2000, we entered into an option agreement to acquire the
assets of Princeton Review Peninsula, which provides test preparation courses in
several counties in California under The Princeton Review name through a
franchise agreement with us. Under this option agreement, we have the option to
acquire the operations of Princeton Review Peninsula for a total purchase price
between $2.5 million and $2.8 million payable in cash at the closing, subject to
adjustments specified in the option agreement. The actual purchase price to be
paid by us will depend on the financial performance of Princeton Review
Peninsula in accordance with the terms of the option agreement. This option
remains in effect until May 1, 2001.
If we exercise this option, we will be required to purchase the operations
of Princeton Review Peninsula unless the Princeton Review Peninsula business
does not meet the financial performance standards specified in the option
agreement. If we exercise the option and Princeton Review Peninsula has met
those standards, we must sign a definitive purchase agreement within 30 days
after exercising the option and close the purchase within 90 days of exercising
the option.
Based upon the approximately $149,000 in royalties we received from
Princeton Review Peninsula in 1999, we estimate that Princeton Review Peninsula
had cash receipts of approximately $1.9 million in 1999. As of September 30,
2000, Princeton Review Peninsula had approximately 9 full-time and 44 part-time
employees.
If we acquire the businesses of Princeton Review of Boston, Princeton
Review of New Jersey, T.S.T.S. and Princeton Review Peninsula, we expect to
retain the majority of their employees. Because each of these businesses is very
similar to our test preparation business, we do not anticipate that the
integration of these businesses with ours will require any material operational
adjustments.
Our acquisitions of these businesses are subject to a number of conditions,
including conditions to closing contained in the option agreements and related
documentation, our ability and willingness to exercise the options for T.S.T.S.
and Princeton Review Peninsula and the attainment by these businesses of
specified financial benchmarks. We cannot assure you that we will complete these
acquisitions on the terms described in this prospectus, or at all.
ACQUISITION OF TWO OF OUR INDEPENDENT FRANCHISES
On August 18, 2000, we acquired the operations of Princeton Review of
Hawaii and, on September 8, 2000, we acquired the operations of Princeton Review
of Quebec. Each of these entities provided test preparation courses under The
Princeton Review name through franchise agreements with us. These businesses
have been integrated into the operations of our Instruction and Guidance
division. Because the services they provided prior to our acquisition were very
similar to our test preparation business, no material adjustments to the
operations of these businesses were required subsequent to the acquisition. The
total purchase price for this acquisition was approximately $320,000 in cash.
Based upon the approximately $30,000 in royalties we received from Princeton
Review of Hawaii and Princeton Review of Quebec, we estimate that they had
combined cash receipts of approximately $375,000 in 1999.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $58,164,000
from the sale of 5,400,000 shares of common stock at an assumed initial public
offering price of $12.00 per share, after deducting underwriting discounts and
commissions of $4,536,000 and estimated offering expenses of approximately
$2,100,000. If the underwriters exercise their over-allotment option in full, we
will receive net proceeds of approximately $67,204,000.
We plan to use the net proceeds of this offering as follows:
- approximately $20.0 million to $25.0 million to acquire the operations of
our domestic franchisees, including the acquisition of Princeton Review
of Boston, Princeton Review of New Jersey, T.S.T.S. and Princeton Review
Peninsula with respect to which we have entered into option agreements as
described under "Our Franchised Operations and Our Plans to Acquire our
Domestic Franchises -- Option Agreements to Purchase Four of Our
Independent Franchises" in this prospectus;
- approximately $7.0 million for capital expenditures;
- approximately $4.5 million to repay outstanding borrowings under our
credit facility with Excel Bank, N.A., under which we had outstanding
borrowings of $4.5 million as of December 20, 2000, bearing interest at
the prime rate plus 1%, which was 10.5% as of December 20, 2000; and
- the remainder for working capital and other general corporate purposes.
If we are able to reach agreements to acquire all of our domestic
franchises, the $20.0 million to $25.0 million allocated for that purpose in the
previous paragraph would represent approximately half of the approximately $40.0
million to $50.0 million that we estimate would be required to consummate these
acquisitions. We will seek to finance the remaining portion of the purchase
price we expect to pay for these operations through our existing credit
facilities and one or more credit facilities that we will seek to obtain shortly
after completion of this offering. If we are unable to obtain debt financing in
the amounts we require or on acceptable terms, we may use the net proceeds of
this offering to pay a greater portion of the purchase price of these
operations, up to 100% of the purchase price. To the extent we do so, this will
reduce the amount of the net proceeds available for the other uses identified
above.
The actual aggregate purchase price that we pay for the businesses operated
by our franchisees may differ materially from our estimates and will depend upon
numerous factors, including our ability to complete the acquisition of the
businesses identified above as being under option, our ability to negotiate
favorable terms with our other franchisees, the continuing viability of our
acquisition strategy and the timing of any completed acquisitions.
We may also use the net proceeds from this offering to acquire or invest in
other complementary businesses or technologies. We have no present commitments
or agreements with respect to any such acquisitions or investments.
The amounts and timing of our expenditures will depend upon numerous
factors, including the amount of proceeds actually raised in this offering, the
timing of any acquisitions we complete, the availability of debt financing and
the amount of cash generated by our operations. Until the proceeds from this
offering are used as described above, we intend to invest the net proceeds of
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. As of the
date of this prospectus, we cannot specify with certainty all of the particular
uses for the net proceeds we will have upon completion of this offering.
Accordingly, our management will have broad discretion to allocate the net
proceeds from this offering. To the
26
<PAGE> 31
extent we do not complete any or all of the acquisitions of our franchisees
specifically identified in this prospectus or otherwise, a larger portion of the
net proceeds from this offering will not be designated for a specific use and
will be subject to the broad discretion of our management.
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 currently intend to retain any
earnings for use in the operation of our business and to fund future growth. Any
future determination to pay cash dividends will be at the discretion of our
board of directors and will depend upon our financial condition, operating
results, capital requirements and such other factors as the board of directors
deems relevant.
27
<PAGE> 32
CAPITALIZATION
The following table describes our capitalization as of September 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 "Our Franchised Operations and Our Plans to Acquire Our
Domestic Franchises -- Option Agreements to Purchase Four of Our
Independent Franchises," as if such transactions had occurred on
September 30, 2000; and
- on a pro forma as adjusted basis giving further effect to the conversion
of all of our outstanding preferred stock into 5,090,713 shares of common
stock upon the completion of this offering, the conversion of our Class B
non-voting common stock and Class A common stock into common stock upon
the completion of this offering, the issuance of 249,792 shares of common
stock upon the automatic cashless exercise of warrants upon completion of
this offering and our sale of 5,400,000 shares of common stock in this
offering at an assumed initial public offering price of $12.00 per share,
after deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
The following table does not give effect to our proposed acquisitions of
T.S.T.S. or Princeton Review Peninsula. 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 SEPTEMBER 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...................... $ 682 $11,032 $ 11,032
Series A redeemable convertible preferred stock, $.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............... 27,869 27,869 --
Class B redeemable non-voting common stock, $.01 par value;
10,000,000 shares authorized and 2,737,229 shares issued
and outstanding actual and pro forma; no shares
authorized, issued or outstanding pro forma as adjusted... 9,449 9,449 --
Stockholders' equity (deficit):
Class A common stock, $.01 par value; 25,000,000 shares
authorized, 12,561,986 shares issued and outstanding
actual and pro forma; no shares authorized, issued or
outstanding pro forma as adjusted....................... 126 126 --
Preferred stock (undesignated), $.01 par value; no shares
authorized, issued or outstanding actual and pro forma;
5,000,000 shares authorized and no shares issued or
outstanding pro forma as adjusted....................... -- -- --
Common stock, $.01 par value; no shares authorized, issued
or outstanding actual and pro forma; 100,000,000 shares
authorized, 26,039,720 shares issued and outstanding pro
forma as adjusted....................................... -- -- 260
Additional paid-in capital................................ 5,146 5,146 100,494
Accumulated deficit....................................... (7,447) (7,447) (7,447)
Accumulated other comprehensive income.................... 3,310 3,310 3,310
Deferred compensation..................................... (88) (88) (88)
------- ------- --------
Total stockholders' equity.............................. 1,047 1,047 96,529
------- ------- --------
Total capitalization.................................... $39,047 $49,397 $107,561
======= ======= ========
</TABLE>
28
<PAGE> 33
In the event that the initial public offering price of the shares being
offered in this offering is greater than $12.99 per share, our 3,748,548 shares
of preferred stock outstanding as of December 20, 2000 will convert into
3,602,566 shares of common stock upon the completion of this offering rather
than the 5,090,713 shares of common stock indicated above. This would result in
24,301,781 shares of common stock being outstanding upon the completion of this
offering, and the pro forma as adjusted information in the table above would
change accordingly.
Outstanding share information in the table above is based on our shares
outstanding as of September 30, 2000. This information excludes:
- 1,437,364 shares of common stock underlying options granted under our
stock incentive plan and outstanding as of December 20, 2000 at a
weighted average exercise price of $6.87 per share;
- 394,963 additional shares of common stock reserved for future issuance
under our stock incentive plan as of December 20, 2000;
- 846,000 additional shares of common stock that will be reserved for
future issuance under our stock incentive plan upon the completion of
this offering;
- assuming an initial public offering price of $12.00 per share, up to
100,000 shares of common stock issuable under warrants outstanding as
of December 20, 2000, with an exercise price equal to the initial
public offering price of our common stock in this offering; and
- assuming an initial public offering price of $12.00 per share, up to
260,417 shares of common stock issuable upon conversion of a $3,125,000
convertible promissory note to be issued in connection with the
proposed acquisition of Princeton Review of Boston and Princeton Review
of New Jersey.
29
<PAGE> 34
DILUTION
Our tangible book value (deficit) as of September 30, 2000 was
approximately $26.3 million, or $1.28 per share of common stock. Pro forma net
tangible book value per share is determined by dividing the amount of our total
tangible assets less our total liabilities, giving effect to our proposed
acquisition of Princeton Review of Boston and Princeton Review of New Jersey, by
the pro forma number of shares of common stock outstanding after giving effect
to the issuance of 249,792 shares of common stock upon the automatic cashless
exercise of warrants, the conversion of all outstanding preferred stock into
5,090,713 shares of common stock and the conversion of all outstanding shares of
Class B non-voting common stock into 2,737,229 shares of common stock upon the
completion of this offering. At an assumed initial public offering price of
$12.00 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 September 30, 2000 would have been approximately $84.5 million, or $3.24
per share. This represents an immediate increase in pro forma net tangible book
value to existing stockholders of $1.96 per share and an immediate dilution to
new investors of $8.76 per share. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $12.00
Pro forma net tangible book value per share as of
September 30, 2000..................................... $1.28
Increase per share attributable to this offering.......... 1.96
Pro forma as adjusted net tangible book value per share..... 3.24
------
Dilution per share to new investors......................... $ 8.76
======
</TABLE>
Assuming the underwriters' over-allotment option is exercised in full, our
adjusted pro forma net tangible book value as of September 30, 2000 would have
been $3.48 per share, representing an immediate increase in pro forma net
tangible book value of $4.35 per share to our existing stockholders and an
immediate dilution of $8.52 per share to new investors.
The following table illustrates on a pro forma basis, as of September 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 $12.00 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...... 20,639,720 79.3% $ 46,193,000 41.6% $ 2.24
New investors.............. 5,400,000 20.7 64,800,000 58.4 12.00
---------- ----- ------------ ----- ------
Total............ 26,039,720 100.0% $110,993,000 100.0% $ 4.26
========== ===== ============ ===== ======
</TABLE>
The above computations exclude 1,437,364 shares of common stock issuable
upon the exercise of options outstanding as of December 20, 2000 at a weighted
average exercise price of $6.87 per share. To the extent any of these options
are exercised, there will be further dilution to new investors. The above
computations also exclude:
- 394,963 shares of common stock reserved for issuance under our stock
incentive plan;
- 846,000 additional shares of common stock that will be reserved for
future issuance under our stock incentive plan upon the completion of
this offering;
30
<PAGE> 35
- assuming an initial public offering price of $12.00 per share, up to
100,000 shares of common stock issuable under warrants outstanding as of
October 31, 2000, with an exercise price equal to the initial public
offering price of our common stock in this offering; and
- assuming an initial public offering price of $12.00 per share, up to
260,417 shares of common stock issuable upon conversion of a $3,125,000
convertible promissory note to be issued in connection with the proposed
acquisition of Princeton Review of Boston and Princeton Review of New
Jersey.
31
<PAGE> 36
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Our unaudited pro forma consolidated financial data as of September 30,
2000 and for the year ended December 31, 1999 and for the nine months ended
September 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 September 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 into 5,090,713 shares of common stock upon the completion
of this offering, the conversion of our Class A common stock and Class B
non-voting common stock into common stock upon the completion of this
offering, the issuance of 249,792 shares of common stock upon the
automatic cashless exercise of warrants upon completion of this offering
and the issuance of 5,400,000 shares of common stock offered by this
prospectus at an assumed initial public offering price of $12.00 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 completed the
acquisition of Princeton Review of Boston and Princeton Review of New Jersey as
of the dates indicated and should not be construed as representative of our
future operating results or financial condition. Additionally, our acquisition
of Princeton Review of Boston and Princeton Review of New Jersey is subject to a
number of conditions, including the fulfillment or waiver of the conditions to
closing included in the option agreement and other documentation relating to the
acquisition. We cannot assure you that these conditions will be fulfilled or
that this acquisition will be completed.
The summary unaudited pro forma and pro forma as adjusted consolidated
financial data does not reflect the operating results of T.S.T.S. or Princeton
Review Peninsula.
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 nine months ended September 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. 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.
32
<PAGE> 37
<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 (927)(2) 32,627
888(3)
Research and development......................... 878 -- -- 878
------- ------- ------- -------
Total operating expenses.................. 29,693 3,851 (39) 33,505
------- ------- ------- -------
Operating income (loss)............................ (2,561) 1,535 39 (987)
Gain (loss) on distribution/sale of securities and
other assets..................................... 1,049 (6) -- 1,043
Interest expense................................... (88) -- (1,106)(4) (1,194)
Other income....................................... 90 59 -- 149
------- ------- ------- -------
Income (loss) before minority interests and
(provision) benefit for income taxes............. (1,510) 1,588 (1,067) (989)
Minority interests' share of income in
subsidiaries..................................... (585) -- -- (585)
Income (loss) before (provision) benefit for income
taxes............................................ (2,095) 1,588 (1,067) (1,574)
(Provision) benefit for income taxes............... 51 (18) -- 33
------- ------- ------- -------
Net income (loss).................................. $(2,044) $ 1,570 $(1,067) $(1,541)
======= ======= ======= =======
Net loss per share -- basic and diluted............ $ (0.20) $ (0.15)
======= =======
Weighted average basic and diluted shares used in
computing net loss per share..................... 10,404 10,404
</TABLE>
------------------
(1) Represents the elimination of royalty payments and payments for course and
marketing materials and other products received by us from these entities.
(2) Represents the elimination of approximately $927,000 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 approximately
$888,000 arising from the transaction.
(4) Represents interest expense related to anticipated borrowings to finance
this acquisition consisting of an approximately $3.6 million convertible
note to the sellers and expected bank debt of approximately $6.7 million.
The sellers' note would bear interest at the rate of 8.25% per year.
Interest on the bank indebtedness is estimated using a 12% per year rate of
interest. This adjustment assumes that the note is not converted into common
stock during the periods presented.
33
<PAGE> 38
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 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......................... $ 27,283 $9,528 $(1,251)(1) $ 35,560
Review.com....................................... 3,756 -- -- 3,756
Homeroom.com..................................... 3,115 -- -- 3,115
-------- ------ ------- --------
Total revenue............................. 34,154 9,528 (1,251) 42,431
-------- ------ ------- --------
Cost of revenue
Instruction and Guidance......................... 8,922 4,037 (1,251)(1) 11,708
Review.com....................................... 800 -- -- 800
Homeroom.com..................................... 620 -- -- 620
-------- ------ ------- --------
Total cost of revenue..................... 10,342 4,037 (1,251) 13,128
-------- ------ ------- --------
Gross profit.............................. 23,812 5,491 -- 29,303
Operating expenses
Selling, general and administrative.............. 40,531 2,742 (361)(2) 43,578
666(3)
Research and development......................... 420 -- -- 420
-------- ------ ------- --------
Total operating expenses.................. 40,951 2,742 305 43,998
-------- ------ ------- --------
Operating income (loss).......................... (17,139) 2,749 (305) (14,695)
Gain on distribution/sale of securities and other
assets........................................... 7,597 -- -- 7,597
Interest expense................................... (105) -- (830)(4) (935)
Other income....................................... 473 36 -- 509
-------- ------ ------- --------
Income (loss) before minority interests, equity
interest in operations of affiliates and
(provision) benefit for income taxes............. (9,174) 2,785 (1,135) (7,524)
Minority interests' share of income in
subsidiaries..................................... (50) -- -- (50)
Equity interest in operations of affiliates........ (413) -- -- (413)
-------- ------ ------- --------
Income (loss) before (provision) benefit for income
taxes............................................ (9,637) 2,785 (1,135) (7,987)
(Provision) benefit for income taxes............... 6,532 (44) -- 6,488
-------- ------ ------- --------
Net income (loss).................................. $ (3,105) $2,741 $(1,135) $ (1,499)
Accreted dividends on Series A redeemable preferred
stock............................................ (2,267) -- -- (2,267)
Accreted dividends on Class B non-voting common
stock............................................ (2,448) -- -- (2,448)
-------- ------ ------- --------
Net income (loss) attributed to common
stockholders..................................... $ (7,820) $2,741 $(1,135) $ (6,214)
======== ====== ======= ========
Net loss per share -- basic and diluted............ $ (0.57) $ (0.45)
======== ========
Weighted average basic and diluted shares used in
computing net loss per share..................... 13,667 13,667
</TABLE>
------------------
(1) Represents the elimination of royalty payments and payments for course and
marketing materials and other products received by us from these entities.
(2) Represents the elimination of approximately $361,000 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 approximately
$666,000 arising from the transaction.
(4) Represents interest expense related to anticipated borrowings to finance
this acquisition consisting of an approximately $3.6 million convertible
note to the sellers and expected bank debt of approximately $6.7 million.
The sellers' note would bear interest at the rate of 8.25% per year.
Interest on the bank indebtedness is estimated using a 12% per year rate of
interest. This adjustment assumes that the note is not converted into common
stock during the periods presented.
34
<PAGE> 39
<TABLE>
<CAPTION>
AS OF SEPTEMBER 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............................... $11,586 $4,117 $(2,627)(1) $ 9,626 $ 68,829
(3,450)(2)
Accounts receivable, net................................ 5,033 -- 5,033 5,033
Accounts receivable -- related parties.................. 1,998 -- (59)(3) 1,939 1,939
Other receivables....................................... 10 -- 10 10
Other receivables -- related parties.................... 346 19 365 365
Inventories............................................. 474 -- 474 474
Prepaid expenses........................................ 883 49 932 932
Securities, available for sale.......................... 5,859 -- 5,859 5,859
Other assets............................................ 1,858 517 (517)(4) 1,858 819
------- ------ ------- ------- --------
Total current assets.................................. 28,047 4,702 (6,653) 26,096 84,260
Furniture, fixtures, equipment and software development,
net..................................................... 6,182 201 6,383 6,383
Franchise costs, net...................................... 227 -- 227 227
Territorial marketing rights, net......................... 1,620 -- 1,620 1,620
Publishing rights, net.................................... 1,387 -- 1,387 1,387
Deferred income taxes..................................... 6,847 -- 6,847 6,847
Investments in affiliates................................. 587 -- 587 587
Goodwill.................................................. 8,364 -- 13,327(5) 21,691 21,691
Other assets.............................................. 2,630 365 (160)(4) 2,835 2,835
------- ------ ------- ------- --------
Total assets.......................................... $55,891 $5,268 $ 6,514 $67,673 $125,837
======= ====== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................ $ 1,262 -- $ 1,262 $ 1,262
Accrued expenses and taxes payable...................... 6,024 $ 271 $ (271)(6) 5,965 5,965
(59)(3)
Accrued expenses -- related parties..................... 202 -- 202 202
Current maturities of long-term debt.................... 486 -- 486 486
Deferred income......................................... 5,809 1,491 7,300 7,300
Book advances........................................... 472 -- 472 472
Book advances -- related parties........................ 492 -- 492 492
Deferred income taxes................................... 2,097 -- 2,097 2,097
------- ------ ------- ------- --------
Total current liabilities............................. 16,844 1,762 (330) 18,276 18,276
Long-term debt............................................ 682 -- 10,350(7) 11,032 11,032
Minority interest......................................... -- -- --
Series A redeemable convertible preferred stock, $.01 par
value; 5,000,000 shares authorized, 3,748,548 shares
issued and outstanding.................................. 27,869 -- 27,869 --
Class B redeemable non-voting common stock, $.01 par
value; 10,000,000 shares authorized, 2,737,229 shares
issued and outstanding.................................. 9,449 -- 9,449 --
Stockholders' equity (deficit):
Class A common stock $.01 par value; 25,000,000 shares
authorized, 12,561,986 shares issued and outstanding.... 126 1 (1) 126 --
Common stock $.01 par value, no shares authorized, issued
or outstanding actual and pro forma: 100,000,000 shares
authorized, 26,039,720 shares issued and outstanding pro
forma as adjusted....................................... -- -- -- 260
Additional paid-in capital................................ 5,146 675 (675) 5,146 100,494
Retained earnings (accumulated deficit)................... (7,447) 2,669 (2,669) (7,447) (7,447)
Accumulated other comprehensive income.................... 3,310 161 (161) 3,310 3,310
Deferred compensation..................................... (88) -- -- (88) (88)
------- ------ ------- ------- --------
Total stockholders' equity (deficit).................. 1,047 3,506 (3,506)(8) 1,047 96,529
------- ------ ------- ------- --------
Total liabilities and stockholders' equity............ $55,891 $5,268 $ 6,514 $67,673 $125,837
======= ====== ======= ======= ========
</TABLE>
---------------
(footnotes on following page.)
35
<PAGE> 40
------------------
(1) Represents cash balance, less portion attributed to deferred income. Cash
balances in excess of amounts related to deferred income are excluded from
the assets being acquired.
(2) Represents the cash portion of the purchase price of the acquisition, net of
expected indebtedness.
(3) Represents the elimination of $59,000 of receivables due from these
entities.
(4) Represents the elimination of other assets not being acquired.
(5) Represents goodwill resulting from the acquisition of these businesses of
approximately $13.3 million.
(6) Represents the elimination of liabilities that are not part of the
acquisition, which remain the responsibility of the sellers.
(7) Represents our anticipated incurrence of indebtedness in connection with the
financing of this acquisition, consisting of an approximately $3.6 million
convertible note to the sellers and expected bank debt of approximately $6.7
million.
(8) Represents the elimination of stockholders' equity of approximately $3.5
million.
36
<PAGE> 41
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 nine months ended September 30,
1999 and 2000, and the consolidated balance sheet data as of December 31, 1998
and 1999 and September 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 nine months ended
September 30, 1999 and 2000 and the consolidated balance sheet data as of
September 30, 2000 are 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.
37
<PAGE> 42
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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 $ 23,645 $ 27,283
Review.com........................................ 2,910 3,238 5,134 4,464 5,289 3,894 3,756
Homeroom.com...................................... -- -- -- 959 5,112 3,133 3,115
------- ------- ------- ------- ------- ----------- -----------
Total revenue................................... 26,985 26,480 32,514 33,746 40,302 30,672 34,154
------- ------- ------- ------- ------- ----------- -----------
Cost of revenue
Instruction and Guidance.......................... 9,458 7,941 10,575 9,844 9,759 7,338 8,922
Review.com........................................ 1,307 2,587 2,717 1,672 1,469 817 800
Homeroom.com...................................... -- -- -- 384 1,942 801 620
------- ------- ------- ------- ------- ----------- -----------
Total cost of revenue........................... 10,765 10,528 13,292 11,900 13,170 8,956 10,342
------- ------- ------- ------- ------- ----------- -----------
Gross profit.................................... 16,220 15,952 19,222 21,846 27,132 21,716 23,812
Operating expenses
Selling, general and administrative............... 13,918 19,205 17,919 22,030 28,815 18,747 40,531
Research and development.......................... 780 493 1,013 1,174 878 519 420
------- ------- ------- ------- ------- ----------- -----------
Total operating expenses........................ 14,698 19,698 18,932 23,204 29,693 19,266 40,951
------- ------- ------- ------- ------- ----------- -----------
Operating income (loss) from continuing
operations........................................ 1,522 (3,746) 290 (1,358) (2,561) 2,450 (17,139)
Gain on distribution/sale of securities and other
assets............................................ -- -- 523 732 1,049 -- 7,597
Interest expense.................................... (33) (45) (157) (148) (88) (44) (105)
Other income........................................ 162 98 86 79 90 42 473
------- ------- ------- ------- ------- ----------- -----------
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 2,448 (9,174)
Minority interests' share of income in
subsidiaries...................................... 214 1,112 (473) (505) (585) (513) (50)
Equity interest in operations of affiliates......... -- -- -- -- -- -- (413)
------- ------- ------- ------- ------- ----------- -----------
Income (loss) from continuing operations before
(provision) benefit for income taxes.............. 1,865 (2,581) 269 (1,200) (2,095) 1,935 (9,637)
(Provision) benefit for income taxes................ (105) 172 188 (215) 51 (59) 6,532
------- ------- ------- ------- ------- ----------- -----------
Income (loss) from continuing operations............ 1,760 (2,409) 457 (1,415) (2,044) 1,876 (3,105)
Discontinued operations:............................
Loss from operations of discontinued software
division...................................... (932) (2,334) (1,846) (644) -- -- --
Loss from operations of discontinued student
loan division................................. -- 228 (655) (706) -- -- --
Income on disposal of discontinued software
division...................................... -- -- -- 4,874 -- -- --
------- ------- ------- ------- ------- ----------- -----------
Income (loss) from discontinued operations.......... (932) (2,106) (2,501) 3,524 -- -- --
------- ------- ------- ------- ------- ----------- -----------
Net income (loss)................................... $ 828 $(4,515) $(2,043) $ 2,109 $(2,044) $ 1,876 $ (3,105)
Accreted dividends on Series A redeemable preferred
stock............................................. -- -- -- -- -- -- (2,267)
Accreted dividends on Class B non-voting common
stock............................................. -- -- -- -- -- -- (2,448)
------- ------- ------- ------- ------- ----------- -----------
Net income (loss) attributed to common
stockholders...................................... $ 828 $(4,515) $(2,043) $ 2,109 $(2,044) $ 1,876 $ (7,820)
======= ======= ======= ======= ======= =========== ===========
Net income (loss) per share -- basic and diluted:
Income (loss) from continuing operations.......... 0.17 (0.24) 0.04 (0.14) (0.20) 0.18 (0.57)
Income (loss) from discontinued operations........ (0.09) (0.20) (0.24) 0.34 -- -- --
------- ------- ------- ------- ------- ----------- -----------
Net income (loss) per share -- basic and diluted.... $ 0.08 $ (0.44) $ (0.20) $ 0.20 $ (0.20) $ (0.18) $ (0.57)
======= ======= ======= ======= ======= =========== ===========
Weighted average basic and diluted shares used in
computing net income (loss) per share............. 10,104 10,231 10,404 10,404 10,404 10,404 13,667
======= ======= ======= ======= ======= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------- SEPTEMBER 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 $11,586
Total assets................................................ 16,958 12,186 13,230 13,459 53,698 55,891
Long-term debt, net of current portion...................... 58 3 251 264 538 682
Series A redeemable convertible preferred stock............. -- -- -- -- -- 27,869
Class B redeemable non-voting common stock.................. 257 257 257 257 257 9,449
Stockholders' equity........................................ 7,975 3,050 973 2,809 33,524 1,047
</TABLE>
38
<PAGE> 43
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 classroom-based, print and online
products and services to students, parents, educators and educational
institutions. We earn the majority of our revenue from standardized test
preparation courses and tutoring services provided by our company-operated
locations and our franchisees. We also earn fees and royalties from authoring
books and developing content for software for third party publishers.
We recently introduced a series of Internet-based products and expanded our
existing online services in order to complement our core products and create
online revenue streams. In July 2000, we introduced our Princeton Review Online
test preparation courses. During 2000 we also significantly enhanced the content
and functionality of our Review.com Web site. Finally, in August 2000, we began
selling our Homeroom.com Internet-based subscription service to K-12 schools. To
launch and expand these online products and services, we have significantly
increased our operating expenses in recent periods, resulting in increasing
losses from continuing operations in each of 1998, 1999 and the first nine
months of 2000. In order to increase our revenue growth, we will need to derive
a substantial portion of our future revenue from our Internet businesses,
including tuition fees from our Princeton Review Online courses, marketing and
advertising fees from our Review.com Web site and subscription fees from our
Homeroom.com online subscription service. To date, we have not generated
significant revenue from any of our Internet operations.
We operate our businesses through three divisions, each of which combines
our traditional and online products and services. Our Instruction and Guidance
division provides classroom-based and Princeton Review Online test preparation
courses and receives royalties from our independent franchisees who provide
classroom-based courses under the Princeton Review brand. In addition,
Instruction and Guidance offers admissions counseling services directly to
students and through institutional relationships with high schools. Our
Review.com division authors our print and software titles published by Random
House and other publishers and operates our Review.com Web site. Finally, our
Homeroom.com division authors workbooks and creates Princeton Review branded
content for textbooks published by McGraw-Hill and operates our Homeroom.com
online subscription service.
Revenue
Historically, we have derived the majority of our revenue from the services
provided by our Instruction and Guidance division, which had approximately $29.9
million in revenue and approximately $20.1 million in gross profit in 1999.
Instruction and Guidance derives its revenue from our company-owned operations
and from our independent franchisees. Revenue from our independent franchisees
is received by us in the form of royalties and fees for course and marketing
materials. Our franchisees operate these businesses independently and are
responsible for all of the costs and expenses associated with rendering their
services.
In recent periods, profits from the Instruction and Guidance division have
been used to fund costs of the online 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 Internet-based products and services.
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<PAGE> 44
Instruction and Guidance. The Instruction and Guidance division derives
revenue from:
- test preparation courses and tutoring services, which consists of
tuition and fees paid to our company-operated sites. 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.
Tutoring revenue is based on an hourly fee and is recognized as the
services are delivered. Course and tutoring revenue represented
approximately 58% of our total revenue in 1999 and approximately 62%
of our total revenue in the first nine months of 2000.
- royalty fees paid to us by our independent franchisees. These
royalties are 8% of all cash receipts collected by our franchisees for
all test preparation and tutoring services performed 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. In 2000
these royalties have also included a per student fee paid by our
franchisees for use by their students of our online supplemental
course tools. We recognize revenue from franchise royalties on a
monthly basis. This revenue represented approximately 8% of our total
revenue in 1999 and approximately 10% of our total revenue in the
first nine months of 2000.
- 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. This revenue represented approximately 6% of our total 1999
revenue and approximately 7% of our total revenue in the first nine
months of 2000.
- 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. Revenue from our admissions counseling services
represented approximately 0.3% of our total 1999 revenue and
approximately 0.5% of our total revenue in the first nine months of
2000.
Our Instruction and Guidance division launched Princeton Review Online
courses in July 2000. To date, we have not derived significant revenue from
these courses but expect that these courses will generate significant revenue in
future periods.
If we are successful in implementing our strategy of acquiring the
operations of our domestic franchisees, including Princeton Review of Boston,
Princeton Review of New Jersey, T.S.T.S. and Princeton Review Peninsula, we
anticipate that revenue from our Instruction and Guidance division will increase
in future periods as recognition of royalties from franchisees is replaced by
recognition of all revenue earned from rendering these services. For a pro forma
presentation of the impact of the proposed acquisition of Princeton Review of
Boston and Princeton Review of New Jersey on our historical financial
statements, see "Unaudited Pro Forma Consolidated Financial Data" elsewhere in
this prospectus.
Review.com. The Review.com division derives revenue from:
- authoring books published by Random House and providing content for
software. 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. This
40
<PAGE> 45
revenue represented approximately 8% of our total 1999 revenue and
approximately 7% of our total revenue in the first nine months of
2000.
- annual marketing fees paid to us by colleges and graduate schools to
promote their programs on our Review.com Web site and in our
co-branded publications, and to include their admissions applications
on our Web site and APPLY! CD. Historically, we have recognized this
revenue during the third and fourth quarters as the products were
delivered. As a result of the introduction of additional Web-based
features in 2000, in the third quarter of 2000 we began recognizing
this revenue ratably over the course of the year. This revenue
represented approximately 2.4% of our total 1999 revenue and
approximately 0.8% of our total revenue in the first nine months of
2000.
- sales of advertising and sponsorships to businesses wishing to promote
their products and services on our Review.com Web site. Advertising
and sponsorship revenue is recognized each month based on contractual
terms. This revenue represented approximately 0.6% of our total
revenue in 1999 and approximately 3% of our total revenue in the first
nine months of 2000. With the addition of several agreements in 2000
providing for sales of advertisements on our Review.com Web site, we
expect this revenue to increase in future periods.
As described above, Internet-related revenue from our Review.com division,
consisting of college marketing fees and sales of advertising and sponsorships,
has not been significant to date.
Homeroom.com. The Homeroom.com division 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. Under the
agreement, the maximum amount of royalties that we can earn in any one
year is $1.55 million;
- an annual fee for the use of The Princeton Review trademark on
materials published by McGraw-Hill, 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 agreement
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.
Our agreement with McGraw-Hill also contains a non-competition provision that
restricts us from entering into a similar agreement during the term of the
agreement with anyone engaged in the development, publication and distribution
of proprietary educational materials to the pre-K-12 educational market. It also
restricts our use, after the expiration of the agreement, of the materials we
develop under the agreement by not permitting us to use or publish more than 40%
of those materials in competing textbooks or other educational programs.
Substantially all of the revenue generated by this division to date has
been generated from non Internet-related services rendered under our agreement
with McGraw-Hill. We expect that, with the launch of Homeroom.com's
Internet-based subscription service in the third quarter of 2000, this division
will also earn annual subscription fees from schools and families. We anticipate
that we will recognize subscription revenue ratably over the life of the
subscription period. With respect to any future revenue received through our
distribution agreement with bigchalk.com, we will only recognize the portion of
the revenue to which we are entitled under the agreement. For a description of
our distribution agreement with bigchalk.com, see "Business -- Sales and
Marketing."
41
<PAGE> 46
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 franchisees. Costs of materials sold are comprised of the costs
to manufacture and distribute the course and marketing materials and other
products. The largest components of cost of revenue in our Instruction and
Guidance division are rent of classroom space and teacher salaries, which
together accounted for approximately 61% of the cost of revenue of this division
in 1999 and approximately 55% of the cost of revenue of this division in the
first nine months of 2000. In the third quarter of 2000, we began paying a
royalty to our franchisees in exchange for allowing us to offer our Princeton
Review Online courses within their territories. Through December 31, 2002, this
royalty will be calculated as 15% of our revenue from Princeton Review Online
courses provided to students residing within our franchisee's territories, net
of certain administrative expenses. If we are successful in acquiring our
domestic franchisees, cost of revenue in this division will include the costs of
operating these acquired businesses.
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. To the extent these costs relate to revenue which is
not recognized until products are delivered, the corresponding costs are also
deferred until delivery of the 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. To the extent these costs relate to revenue which is
not recognized until products are delivered, the corresponding costs are also
deferred until delivery of the products. Beginning with the third quarter of
2000, we began amortizing Web site related content development costs. As of
September 30, 2000, we had approximately $1.8 million of capitalized Web site
related content development costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include payroll and payroll
related expenses, advertising expenses, and office facility expenses, including
rent, utilities, telephone and miscellaneous expenditures, which collectively
represented approximately 70% of our total selling, general and administrative
expenses in 1999 and approximately 53% of our total selling, general and
administrative expenses in the first nine months of 2000. Selling, general and
administrative expenses also include compensation expenses associated with the
PSU and SAR plans formerly maintained by us, as well as the one time
compensation expense incurred by us in the second quarter of 2000 as a result of
the termination of those plans as part of our restructuring. These expenses
comprised approximately 9% of our total selling, general and administrative
expenses in 1999 and approximately 26% of our total selling, general and
administrative expenses in the first nine months of 2000. Compensation expenses
in connection with awards under our new 2000 Stock Incentive Plan are also
recorded in selling, general and administrative expenses. Finally, the remaining
components of selling, general and administrative expenses include professional
fees, travel and entertainment and depreciation and amortization. If we are
successful in acquiring our domestic franchisees, selling, general and
administrative expenses associated with our Instruction and Guidance division
will include expenses associated with the operation of these businesses. For a
more detailed description of our restructuring and the termination of our PSU
and SAR plans, see "Our Restructuring."
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<PAGE> 47
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' Share of Income in Subsidiaries
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 were not 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 now 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 on disposal of discontinued
software division represents the gain to us from the sale of our Software
Manufacturing and Distribution division to The Learning Company in 1998 and the
grant to The Learning Company of a license to use our brand. We received
approximately $5.1 million in the transaction, resulting in a net gain of
approximately $4.9 million.
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<PAGE> 48
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>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 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% 77.1% 79.9%
Review.com.......................................... 15.8 13.2 13.1 12.7 11.0
Homeroom.com........................................ -- 2.9 12.7 10.2 9.1
----- ----- ----- ----- -----
Total revenue..................................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue
Instruction and Guidance............................ 32.5 29.2 24.2 23.9 26.1
Review.com.......................................... 8.4 5.0 3.6 2.7 2.4
Homeroom.com........................................ -- 1.1 4.8 2.6 1.8
----- ----- ----- ----- -----
Total cost of revenue............................. 40.9 35.3 32.6 29.2 30.3
----- ----- ----- ----- -----
Gross profit...................................... 59.1 64.7 67.4 70.8 69.7
Operating expenses
Selling, general and administrative................. 55.1 65.2 71.5 61.1 118.7
Research and development............................ 3.1 3.5 2.2 1.7 1.2
----- ----- ----- ----- -----
Total operating expenses.......................... 58.2 68.7 73.7 62.8 119.9
----- ----- ----- ----- -----
Operating income (loss) from continuing operations.... 0.9 (4.0) (6.3) 8.0 (50.2)
Gain on distribution/sale of securities and other
assets.............................................. 1.6 2.1 2.6 -- 22.2
Interest expense...................................... (0.5) (0.4) (0.2) (0.1) (0.3)
Other income.......................................... 0.3 0.2 0.2 0.1 1.4
----- ----- ----- ----- -----
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) 8.0 (26.9)
Minority interests' share of income in subsidiaries... (1.5) (1.5) (1.5) (1.7) (0.1)
Equity interest in operations of affiliates........... -- -- -- -- (1.2)
Income (loss) from continuing operations before
(provision) benefit for income taxes................ 0.8 (3.6) (5.2) 6.3 (28.2)
(Provision) benefit for income taxes.................. 0.6 (0.6) 0.1 (0.2) 19.1
----- ----- ----- ----- -----
Income (loss) from continuing operations.............. 1.4 (4.2) (5.1) 6.1 (9.1)
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)% 6.1% (9.1)%
===== ===== ===== ===== =====
</TABLE>
44
<PAGE> 49
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue
Our total revenue increased from $30.7 million in 1999 to $34.2 million in
2000, representing an 11% increase.
Instruction and Guidance revenue increased from $23.6 million in 1999 to
$27.3 million in 2000, representing a 15% increase, comprised of an increase of
approximately $2.9 million in revenue from our company-owned operations and an
increase of approximately $800,000 in royalties from independent franchisees.
The increased revenue from company-owned operations resulted primarily from an
increase of approximately $2.3 million in revenue from test preparation courses
and tutoring, of which approximately $500,000 was attributable to increased
enrollment and approximately $1.8 million was attributable to average price
increases.
Review.com's revenue decreased from $3.9 million in 1999 to $3.8 million in
2000, representing a 4% decrease. The majority of this decrease resulted from a
decrease in revenue from college marketing fees recognized during the period,
from $1.0 million to $274,000. This decrease in marketing fees was caused by a
change in the method of recognizing those fees during the nine months ended
September 30, 2000. In 1999 and prior periods, we recognized this revenue solely
in the third and fourth quarters, as the books, magazine and application CDs
containing the colleges' marketing materials were delivered. In 2000, inclusion
of the colleges' marketing information and applications on our Review.com Web
site became a much more significant aspect of the services being rendered to
these customers. This alteration in the mix of services being rendered requires
us to recognize this revenue over the 12-month period that this information is
maintained on our Web site. Accordingly, we now recognize this revenue ratably
over the course of the year, beginning in the third quarter when the marketing
information is first delivered. The decrease in revenue recognized from college
marketing fees was partially offset by an increase in Internet-based advertising
revenue from approximately $375,000 in 1999 to approximately $1.0 million in
2000.
Homeroom.com's revenue was $3.1 million for both periods. Revenue from
McGraw-Hill for workbook development fees declined by approximately $334,000,
which was offset by increased royalty revenue. We began selling our Homeroom.com
Internet-based subscription service in the third quarter of 2000. Accordingly,
revenue from subscription fees for this product have not been significant to
date.
Cost of Revenue
Our total cost of revenue increased from $9.0 million in 1999 to $10.3
million in 2000, representing a 15% increase.
Instruction and Guidance cost of revenue increased from $7.3 million in
1999 to $8.9 million in 2000, representing a 22% increase. This increase
resulted from an increase of approximately $641,000 in the cost of delivering
our courses, due in part to increased enrollment, and an increase of
approximately $942,000 in the cost of materials sold to our independent
franchises. The increase in the cost of materials sold resulted primarily from
increased sales in 2000 and the reduction of accruals of approximately $390,000.
Review.com's cost of revenue decreased from $817,000 in 1999 to $799,000 in
2000, representing a 2% decrease. This decrease corresponds to the decrease in
revenue recognized from college marketing fees resulting from the change in the
timing of the recognition of that revenue.
Homeroom.com's cost of revenue decreased from $801,000 in 1999 to $620,000
in 2000, representing a 23% decrease. This decrease is primarily attributable to
lower sales of workbooks to McGraw-Hill during 2000.
45
<PAGE> 50
Operating Expenses
Selling general and administrative expenses increased from $18.7 million in
1999 to $40.5 million in 2000, representing a 116% 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 the stock of
Student Advantage to our employees in April 2000. These events resulted in a
non-recurring charge of approximately $10.6 million in 2000. The remaining $11.2
million increase was caused by the following:
- an increase of approximately $4.1 million in salaries and payroll taxes
primarily related to new product development and sales efforts for
Princeton Review Online, Homeroom.com and Review.com;
- an increase of approximately $2.7 million in advertising and marketing
expenses;
- increased legal expenses of approximately $824,000 and settlement costs
of approximately $1.2 million related to a lawsuit against us;
- an increase of approximately $1.8 million 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 $577,000 resulting from the development of our Homeroom.com
and Review.com Web sites.
In addition to the amounts expensed for Web site technology and development, the
company capitalized approximately $2.2 million of Web site development costs
during the first nine months of 2000, compared to approximately $1.0 million
capitalized during the first nine months of 1999.
Research and development costs decreased from $519,000 in 1999 to $421,000
in 2000, representing a 19% decrease. This decrease resulted primarily from an
increased focus on the development of our Princeton Review Online courses. Many
of the costs associated with the development of these courses were capitalized
in 2000, which resulted in a lower expense in 2000.
Gain on Distribution/Sale of Securities and Other Assets
We recorded a gain of $7.6 million in the first half 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 $44,000 in 1999 to $105,000 in 2000,
representing a 138% increase. This increase resulted from increases in both
equipment lease balances and balances outstanding under our credit facility.
Other Income
Other income increased from $42,000 in 1999 to $473,000 in 2000,
representing a 1,024% increase. This represents interest income earned on the
company's cash balances which increased substantially in the second quarter of
2000 as a result of the 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, comprised of an increase of
approximately $900,000 in revenue from our
46
<PAGE> 51
company-owned operations, an increase of approximately $500,000 in royalties
from independent franchisees and approximately $200,000 of initial franchise
fees. The increased revenue from company-owned operations resulted primarily
from an increase of approximately $700,000 in revenue from test preparation
courses and tutoring which was almost entirely due to enrollment increases.
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. These fees increased from approximately $300,000 in 1998
to approximately $980,000 in 1999, representing an increase of approximately
227%.
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.
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
decrease of approximately $200,000 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 an
increase of approximately $1.4 million 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 of
approximately $2.2 million and a compensation expense increase of nearly $3.0
million 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. In 1999, we booked approximately $3.0 million of
compensation expense related to the PSU and SAR plans, compared to approximately
$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. The
increased selling, general and administrative expenses also resulted from an
increase of approximately $895,000 in advertising spending, an increase of
approximately $1.0 million in software development expenses and an increase of
approximately $522,000 in amortization expense, all related to developing and
promoting our new Internet-based products. These increases were partially offset
by a decrease of approximately $255,000 in postage and shipping expenses and a
decrease of approximately $290,000 in bad debts, due to a large one-time write
down effected in 1998.
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.
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<PAGE> 52
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 due to an
increase of approximately $466,000 in gains on sales of Student Advantage stock,
offset by a decrease of approximately $150,000 in gain on sale of other assets,
as no other assets were sold 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, comprised of an increase of
approximately $800,000 in revenue from our company-owned operations and an
increase of approximately $100,000 in royalties from independent franchisees.
The increased revenue from company-owned operations resulted primarily from an
increase of $1.3 million in revenue from test preparation courses and tutoring,
of which approximately $950,000 was attributable to average price increases and
approximately $350,000 was attributable to increased enrollment. This increase
was partially offset by a decrease of approximately $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.
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 decrease of
approximately $900,000 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
approximately $300,000 in marketing fees charged to colleges.
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 a decrease of approximately $800,000 in costs of the course materials sold
due to lower costs to print and assemble the materials, which was partially
offset by an increase of approximately $100,000 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
decrease of approximately $700,000 in content development costs, which was
primarily due to lower costs resulting from the delivery of
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<PAGE> 53
fewer manuscripts in 1998 compared to 1997, and a decrease of approximately
$300,000 in costs primarily related to lower manufacturing costs for our APPLY!
CD.
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
approximately $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 greater
gains 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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<PAGE> 54
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited statement of operations data for
each of the eight quarters in the period ended September 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
-----------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1999 1999 1999 1999 2000 2000 2000
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Instruction and Guidance............. $ 5,121 $6,729 $6,982 $ 9,933 $ 6,257 $ 7,857 $ 8,537 $10,889
Review.com........................... 1,104 677 1,170 2,046 1,395 795 1,155 1,806
Homeroom.com......................... 527 555 1,163 1,416 1,979 686 1,204 1,225
------- ------ ------ ------- ------- ------- -------- -------
Total revenue...................... 6,752 7,961 9,315 13,395 9,631 9,338 10,896 13,920
------- ------ ------ ------- ------- ------- -------- -------
Cost of revenue
Instruction and Guidance............. 2,066 2,344 2,709 2,285 2,420 2,584 3,072 3,266
Review.com........................... 516 4 233 580 652 81 318 400
Homeroom.com......................... 211 92 206 504 1,141 195 120 306
------- ------ ------ ------- ------- ------- -------- -------
Total cost of revenue.............. 2,793 2,440 3,148 3,369 4,213 2,860 3,510 3,972
------- ------ ------ ------- ------- ------- -------- -------
Gross profit....................... 3,959 5,521 6,167 10,026 5,418 6,478 7,386 9,948
Operating expenses
Selling, general and
administrative..................... 6,786 6,064 5,847 6,836 10,068 9,328 20,528 10,674
Research and development............. 187 114 150 255 359 165 52 204
------- ------ ------ ------- ------- ------- -------- -------
Total operating expenses........... 6,973 6,178 5,997 7,091 10,427 9,493 20,580 10,878
------- ------ ------ ------- ------- ------- -------- -------
Operating income (loss) from
continuing operations................ (3,014) (657) 170 2,935 (5,009) (3,015) (13,194) (930)
------- ------ ------ ------- ------- ------- -------- -------
Gain on distribution/sale of
securities and other assets.......... 583 -- -- -- 1,049 7,597 -- --
Interest expense...................... (50) (14) (22) (9) (43) (33) (36) (35)
Other income.......................... 61 24 6 12 48 42 229 202
------- ------ ------ ------- ------- ------- -------- -------
Income (loss) from continuing
operations before minority interests,
equity interest in operations of
affiliates and (provision) benefit
for income taxes..................... (2,420) (647) 154 2,938 (3,955) 4,591 (13,001) (763)
------- ------ ------ ------- ------- ------- -------- -------
Minority interests' share of income in
subsidiaries......................... 76 (93) 52 (472) (72) (50) -- --
Equity interest in operations of
affiliates........................... -- -- -- -- -- 165 (36) (541)
------- ------ ------ ------- ------- ------- -------- -------
Income (loss) from continuing
operations before (provision) benefit
for income taxes..................... (2,344) (740) 206 2,466 (4,027) 4,706 (13,037) (1,304)
------- ------ ------ ------- ------- ------- -------- -------
(Provision) benefit for income
taxes................................ (177) 16 (4) (71) 110 (364) 6,311 584
------- ------ ------ ------- ------- ------- -------- -------
Income (loss) from continuing
operations........................... (2,521) (724) 202 2,395 (3,917) 4,342 (6,726) (720)
------- ------ ------ ------- ------- ------- -------- -------
Loss from discontinued operations..... (91) -- -- -- -- -- -- --
Income on disposal of discontinued
software division.................... 267 -- -- -- -- -- -- --
------- ------ ------ ------- ------- ------- -------- -------
Net income (loss)..................... $(2,345) $ (724) $ 202 $ 2,395 $(3,917) $ 4,342 $ (6,726) $ (720)
======= ====== ====== ======= ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Instruction and Guidance............. 75.8% 84.5% 75.0% 74.2% 65.0% 84.2% 78.4% 78.2%
Review.com........................... 16.4 8.5 12.5 15.3 14.5 8.5 10.6 13.0
Homeroom.com......................... 7.8 7.0 12.5 10.5 20.5 7.3 11.0 8.8
------- ------ ------ ------- ------- ------- -------- -------
Total revenue...................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------ ------ ------- ------- ------- -------- -------
Cost of revenue:
Instruction and Guidance............. 30.6 29.4 29.1 17.1 25.1 27.7 28.2 23.5
Review.com........................... 7.6 0.1 2.5 4.3 6.8 0.8 2.9 2.9
Homeroom.com......................... 3.1 1.2 2.2 3.8 11.8 2.1 1.1 2.2
------- ------ ------ ------- ------- ------- -------- -------
Total cost of revenue.............. 41.4 30.7 33.8 25.2 43.7 30.6 32.2 28.5
------- ------ ------ ------- ------- ------- -------- -------
Gross profit....................... 58.6 69.3 66.2 74.8 56.3 69.4 67.8 71.5
Operating expenses:
Selling, general and
administrative..................... 100.5 76.2 62.8 51.0 104.5 99.9 188.2 76.7
Research and development............. 2.8 1.4 1.6 1.9 3.7 1.8 0.5 1.5
------- ------ ------ ------- ------- ------- -------- -------
Total operating expenses........... 103.3 77.6 64.4 52.9 108.2 101.7 188.7 78.2
------- ------ ------ ------- ------- ------- -------- -------
Operating income (loss) from
continuing operations................ (44.6) (8.3) 1.8 21.9 (52.0) (32.3) (120.9) (6.7)
------- ------ ------ ------- ------- ------- -------- -------
Gain on distribution/sale of
securities and other assets.......... 8.6 -- -- -- 10.9 81.4 -- --
Interest expense...................... 0.9 0.3 0.1 0.1 0.5 0.7 2.1 1.5
Other income.......................... (0.7) (0.2) (0.2) (0.1) (0.4) (0.3) (0.3) (0.3)
------- ------ ------ ------- ------- ------- -------- -------
Income (loss) from continuing
operations before minority interests,
equity interest in operations of
affiliates and (provision) benefit
for income taxes..................... (35.8) (8.2) 1.7 21.9 (41.1) 49.2 (119.2) (5.5)
------- ------ ------ ------- ------- ------- -------- -------
Minority interests' share of income to
subsidiaries......................... 1.1 (1.2) 0.6 (3.5) (0.7) (0.5) -- --
------- ------ ------ ------- ------- ------- -------- -------
Equity interest in operations of
affiliates........................... -- -- -- -- -- 1.8 (0.3) (3.9)
------- ------ ------ ------- ------- ------- -------- -------
Income (loss) from continuing
operations before (provision) benefit
for income taxes..................... (34.7) (9.4) 2.3 18.4 (41.8) 50.5 (119.5) (9.4)
------- ------ ------ ------- ------- ------- -------- -------
(Provision) benefit for income
taxes................................ (2.6) 0.2 -- (0.5) 1.1 (3.9) 57.9 4.2
------- ------ ------ ------- ------- ------- -------- -------
Income (loss) from continuing
operations........................... (37.3) (9.2) 2.3 17.9 (40.7) 46.6 (61.6) (5.2)
------- ------ ------ ------- ------- ------- -------- -------
Loss from discontinued operations..... (1.3) -- -- -- -- -- -- --
Income on disposal of discontinued
software division.................... 4.0 -- -- -- -- -- -- --
------- ------ ------ ------- ------- ------- -------- -------
Net income (loss)..................... (34.6)% (9.2)% 2.3% 17.9% (40.7)% 46.6% (61.6)% (5.2)%
======= ====== ====== ======= ======= ======= ======== =======
</TABLE>
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<PAGE> 55
Revenue
Instruction and Guidance. During the eight quarterly periods presented,
our Instruction and Guidance revenue has increased in each quarter relative to
the corresponding quarter of the previous year. Instruction and Guidance revenue
has also increased during the third quarter of each of 1999 and 2000 relative to
the other quarters in those years, reflecting student preferences to take test
preparation courses at the beginning of the traditional school year or in the
summer. Historically, Instruction and Guidance revenue has decreased in the
fourth quarter due to holidays and school vacations.
Review.com. Review.com's revenue has historically been comprised primarily
of revenue from our publishing contracts with Random House, with the exception
of the approximately $1 million in college marketing fees recorded in the third
quarter of 1999, which accounted for the increase in revenue during that period.
The historical quarterly fluctuations in revenue received from Random House have
resulted primarily from the timing of payments received by us for new books,
which we recognize when manuscripts for the new titles are delivered. The timing
of new book contracts and the recognition of the payments associated with these
contracts has been dependent on Random House's publishing schedules. These
schedules have not followed a pattern from year to year or quarter to quarter.
Beginning with new book contracts entered into after January 1, 2000, we earn a
smaller initial payment upon delivery of a new title, but begin to earn
royalties from the first sales of the books. Previously, we received a larger
initial payment, but earned royalties only after the initial payment was earned
out. During the first three quarters of 2000, this division recorded increased
revenue from advertising on the Review.com Web site of approximately $10,000 in
the first quarter, $290,000 in the second quarter and $510,000 in the third
quarter, as compared with the same periods in 1999. Finally, in the third
quarter of 2000, we recognized approximately $274,000 in college marketing fees,
as compared with the third quarter of 1999, during which we recognized
approximately $980,000. This was due primarily to the move to Internet-based
college marketing services as described under "-- Comparison of Nine Months
Ended September 30, 2000 and 1999."
Homeroom.com. The revenue earned by our Homeroom.com division during the
eight quarterly periods presented is comprised almost entirely of fees earned
from our contract with McGraw-Hill. This revenue has been dependent on the
timing of McGraw-Hill's production requests which have not followed a pattern
from year to year or quarter to quarter. We began earning subscription fees for
our Internet-based Homeroom.com subscription service in the third quarter of
2000, corresponding to the beginning of our sale of this product in August 2000
and the beginning of the school year. To date, these fees have not been
significant. We expect that this Internet-based revenue will be recognized
ratably over the terms of the subscriptions, which are expected to correspond to
the school year.
Cost of Revenue
Instruction and Guidance. Cost of revenue in this division has increased
in each quarter presented relative to the corresponding quarter of the previous
year.
Review.com. Cost of revenue in this division fluctuates on a quarterly
basis due to fluctuations in this division's revenue and the revenue mix. In the
fourth quarter of 1998 and the third and fourth quarters of 1999, Review.com
revenue reflected a large percentage of delivery-based fees for book advances,
which have higher cost of revenue associated with them. In other quarters
presented, Review.com's revenue was comprised more heavily of performance-based
fees and revenue from college marketing and advertising on our Web site, which
have much lower associated cost of revenue.
Homeroom.com. Cost of revenue in this division fluctuates on a quarterly
basis due to fluctuations in this division's revenue and the revenue mix. In the
third and fourth quarters of 1999 and the third quarter of 2000, Homeroom.com's
revenue was comprised more heavily of fees for
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<PAGE> 56
workbooks and question pool development, which have higher cost of revenue
associated with them. By comparison, revenue in the other quarters presented was
comprised more heavily of royalties and the recognition of the fee associated
with the use of our trademarks, which do not have cost of revenue associated
with them.
Selling, General and Administrative Expenses
Payroll and payroll related expenses, which comprise a large percentage of
selling, general and administrative expenses, have generally increased
throughout the periods presented, due in large part to increased staffing
relating primarily to the expansion of our Internet-based businesses. These
payroll and payroll related expenses relating to expansion of our Internet
businesses increased from approximately $376,000 in the first quarter of 1999 to
approximately $1.1 million in the third quarter of 2000. Major quarterly
fluctuations that differ from this trend in the periods presented have resulted
primarily from compensation expenses associated with our SAR and PSU plans in
the third and fourth quarters of 1999 and the first quarter of 2000 and a
one-time charge associated with the termination of those plans in the second
quarter of 2000.
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. In 1995, we sold a minority interest in our subsidiaries to Random
House for approximately $8.0 million. We have also supplemented cash flow from
operations by generating cash from periodic sales of stock of Student Advantage
owned by us. Cash from these sales totaled approximately $505,000 in 1997,
$625,000 in 1998 and $1,050,000 in 1999. 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 gross proceeds from the sale of our Series A
preferred stock. The expansion of our Internet-based businesses has required
increased amounts of expenditures in 1998, 1999 and the first nine 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 September 30,
2000, we had approximately $11.6 million of cash and cash equivalents.
Net cash used by operating activities during the nine months ended
September 30, 2000 was $9.3 million, resulting primarily from the net loss from
continuing operations. Net cash used in investing activities during the nine
months ended September 30, 2000 was $7.7 million resulting primarily from the
purchase of equipment and software and investment in affiliates. Net cash
provided by financing activities was $25.9 million during the nine months ended
September 30, 2000 resulting primarily from proceeds received from the sale of
Series A preferred stock.
Net cash provided by operating activities during 1999 was $4.1 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 approximately $2.3 million, partially offset by proceeds from
the sale of marketable securities of approximately $1.0 million. Net cash used
in financing activities during 1999 was $1.6 million, resulting primarily from
the discontinuance of the student loan business, partially offset by proceeds
from a line of credit.
Net cash used in operating activities during 1998 was $4.3 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
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<PAGE> 57
sale of our software division. Net cash provided by financing activities during
1998 was $308,000, resulting primarily from approximately $1.8 million in
proceeds from the sale of our student loan business, partially offset by
approximately $1.4 million used to repay a line of credit.
Net cash used in operating activities during 1997 was $629,000, 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 $1.2 million and was primarily attributable to the purchase of
furniture, fixtures and equipment, investment in other assets and purchase of
non-marketable securities, totaling approximately $1.8 million, partially offset
by proceeds from the sale of non-marketable securities of approximately
$505,000. Net cash provided by financing activities during 1997 was $1.0
million, resulting primarily from borrowings under credit facilities and student
loans.
Until October 2000 we maintained a discretionary line of credit with The
Chase Manhattan Bank that provided for borrowings of up to $1.5 million.
Borrowings bore interest at the bank's prime rate plus 0.5%, which was 10% at
September 30, 2000. To maintain this line of credit, we paid an annual
administrative fee of $15,000. Other terms were mutually agreed upon from time
to time. As of September 30, 2000, no borrowings were outstanding under this
line of credit.
In October 2000, we entered into a loan agreement with Excel Bank, N.A.,
providing for a $4,500,000 line of credit under which the bank may make short
term loans for the acquisition of our independent franchises and for working
capital purposes. Amounts borrowed under the credit facility bear interest at a
variable annual interest rate equal to the prime rate plus 1% and the facility
has a commitment fee of 0.25% per year on the unused portion of the line of
credit. The loan is secured by substantially all of our current and future
business assets, including membership interests in our subsidiaries, and is
guaranteed by our subsidiaries. Under the terms of the loan arrangement, we are
required to provide the bank with periodic financial statements. In addition,
the negative covenants prohibit us from issuing dividends, creating liens or
incurring any additional unsubordinated indebtedness for borrowed money. As of
December 20, 2000, $4.5 million was outstanding under the loan facility and the
interest rate on outstanding borrowings was 10.5% per year. We are required to
prepay all outstanding borrowings under the loan facility within ten days after
the completion of this offering. At that time, the facility will terminate.
On December 14, 2000, we entered into a loan agreement with Reservoir
Capital Partners, L.P., Reservoir Capital Master Fund, L.P., Reservoir Capital
Associates, L.P., SGC Partners II, LLC, Olympus Growth Fund III, L.P., and
Olympus Executive Fund, L.P., providing for a line of credit of up to $25.0
million under which we may borrow up to $18,750,000 for the acquisition of our
independent franchises and up to $6,250,000 for general corporate purposes.
Amounts borrowed under the credit facility initially bear interest at an annual
interest rate of 13%. Until the termination of the facility, the applicable
annual interest rate will increase by 1% on each anniversary of the agreement.
The loan is secured by substantially all of our current and future business
assets, including membership interests in our subsidiaries, and is guaranteed by
our subsidiaries. The loan agreement contains covenants typical to a secured
credit facility, including covenants requiring us to maintain a number of
financial ratios and prohibiting us from issuing dividends, creating liens,
incurring additional indebtedness for borrowed money, changing our fundamental
organization or lines of business, making investments and engaging in
transactions with affiliates. As of December 20, 2000, no borrowings were
outstanding under this line of credit. We are required to prepay all outstanding
borrowings under the loan facility within 180 days after the completion of this
offering. At that time, the facility will terminate.
As part of the loan transaction, the lenders received warrants initially
exercisable for a total of 250,000 shares of our common stock at an exercise
price of $0.01 per share. In the event that the loan facility remains
outstanding on December 14, 2001, the warrants will be exercisable for an
additional 275,000 shares and if the loan facility remains outstanding on
December 14, 2002, the warrants will be exercisable for an additional 400,000
shares. For more information about the
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<PAGE> 58
warrants issued by us in connection with this agreement, see "Description of
Capital Stock -- Warrants."
We will seek to obtain one or more additional credit facilities after
completion of this offering. We anticipate that these facilities would be used
to finance up to half of the purchase price of the acquisitions of Princeton
Review of Boston, Princeton Review of New Jersey, T.S.T.S. and Princeton Review
Peninsula, as well as other franchises that we may agree to purchase in the
future. As described more fully under "Use of Proceeds," we estimate that the
total purchase price for these acquisitions will be between $40.0 million and
$50.0 million. However, we are not able to predict this amount with any degree
of accuracy since it is subject to a variety of factors, including our ability
to complete the acquisition of franchises identified above as being under
option, our ability to negotiate favorable terms with other franchisees, the
continuing viability of this acquisition strategy and the timing of any
completed acquisitions.
As of September 30, 2000, our principal capital commitments consisted of
obligations outstanding under our long-term office and classroom leases and
several capital leases of computer equipment. We operate from leased premises in
New York, California, Georgia, Hawaii, Illinois, Ohio, Pennsylvania, Washington,
Washington D.C., and Canada. As of September 30, 2000, our aggregate minimum
annual rental obligations under these leases were approximately $700,000 for
2000, $2.7 million for 2001 and $2.6 million for 2002. As of September 30, 2000,
our future minimum capital lease obligation payments were approximately $126,000
for 2000, $593,000 for 2001 and 419,000 for 2002.
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 Princeton Review of Boston, Princeton Review of New
Jersey, T.S.T.S. and Princeton Review Peninsula and the acquisition of
the operations of any of our other 12 domestic franchisees with whom
we are able to reach agreement on favorable terms.
We may also devote substantial capital resources to other strategic
acquisitions and relationships.
Without the net proceeds of this offering, our capital resources will not
be sufficient to meet our expected needs for working capital and capital
expenditures for the next 12 months. Therefore, if this offering is not
completed, we will need to access other sources of financing to meet our needs.
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 24
months. Despite these expectations, we may need to raise additional capital
before the end of the next 24 months.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, or SAB 101, Revenue Recognition in Financial
Statements, which provides guidance on the 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
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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.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, or FIN 44, Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998 or January 12,
2000. The adoption of certain of the provisions of FIN 44 prior to March 31,
2000 did not have a material impact on our financial statements. Management does
not expect that the adoption of the remaining provisions will have a material
effect on our financial statements.
In March 2000, the Emerging Issues Task Force issued EITF 00-3, Application
of AICPA Statement of Position 97-2, Software Revenue Recognition, to
Arrangements That Include the Right to Use Software Stored on Another Entity's
Hardware. EITF 00-3 clarifies the recognition of revenues by vendors who license
software products where end users do not take possession of the software but
rather use the software on an as-needed basis over the Internet or via a
dedicated line to the vendor's or some third party's hardware. Management does
not currently have any of these arrangements and does not currently anticipate
licensing software in this manner. Accordingly these provisions are not expected
to have an impact on our financial statements.
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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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 were founded in 1981 by our Chairman and Chief Executive Officer, John
Katzman, as an SAT preparation course. Today, based on our experience in the
test preparation industry, we believe we offer the leading SAT preparation
course 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. We also author more than 150 book and
software titles on test preparation, college selection and related topics, which
are published by Random House and other publishers. In 1998, we began providing
Princeton Review branded test preparation content for K-12 textbooks and
workbooks published by McGraw-Hill.
We recently introduced a new series of Internet-based products and expanded
our existing online services in order to integrate and complement our core
products and create online revenue streams. In July 2000, we introduced our
Princeton Review Online test preparation courses. During 2000 we also
significantly enhanced the content and functionality of our Review.com Web site.
Finally, in August 2000, we began selling our Homeroom.com Internet-based
subscription service to K-12 schools. We believe that the introduction of these
online products has allowed us to become one of the few branded education
companies able to deliver its products and services to multiple audiences
through a variety of channels.
To launch and expand our online products and services, we have
significantly increased our operating expenses in recent periods, resulting in
increasing losses from continuing operations in each of 1998, 1999 and the first
nine months of 2000. In order to increase our revenue growth, we will need to
derive a substantial portion of our future revenue from our Internet businesses,
including tuition fees from our Princeton Review Online courses, marketing and
advertising fees from our Review.com Web site and subscription fees from our
Homeroom.com online subscription service. To date, we have not generated
significant revenue from any of our Internet operations.
We operate our businesses through the following three divisions, each of
which combines our traditional and online products and services:
- The Instruction and Guidance division provides classroom-based and
online test preparation courses and receives royalties from our
independent franchisees who provide classroom-based courses under the
Princeton Review brand. In addition, this division offers admissions
counseling services directly to students and through institutional
relationships with high schools.
- The Review.com division, formerly known as our publishing division,
authors more than 150 print and software titles published by Random
House, TIME magazine and other publishers. This division also operates
our Review.com Web site, which brings together potential applicants and
their families, guidance counselors and colleges and graduate schools
to exchange information and facilitate the recruitment, application and
admissions process.
- The Homeroom.com division authors workbooks and creates Princeton
Review branded content for textbooks published by McGraw-Hill. This
division also operates our Homeroom.com online subscription service.
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INDUSTRY BACKGROUND
The Traditional Education Industry
The education market is the second largest sector of the U.S. economy, with
an estimated $700 billion, or approximately 10% of the U.S. gross domestic
product, spent on education in 1998, according to EduVentures LLC. The U.S.
Department of Education estimates that 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.
According to the U.S. Department of Education, 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 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
We believe 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. According to market research we commissioned from Fox River
Learning, Inc., 22 states now publicize the performance of individual schools or
reward them for high scores, and 32 states require students to score above a
specified level in order to advance to the next grade or to graduate. As a
result, we believe that educators are increasingly looking for a means to
improve measurable academic performance and prepare students for these
high-stakes assessments and that 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, we believe 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
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limited number of places at select institutions, our experience suggests that
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, we find that students, parents and schools are increasingly seeking
a comprehensive, one-stop source of information and assistance in the testing,
application and admissions process.
BENEFITS OF OUR PRODUCTS AND SERVICES
We provide integrated classroom-based, print and online 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. Our Instruction and Guidance division
provides intensive test preparation courses for the SAT, GMAT, MCAT, LSAT, GRE
and other standardized tests, and also provides tutoring and admissions
counseling services. Our Review.com division authors numerous print and software
titles and operates a Web site that 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. Our Homeroom.com division works with McGraw-Hill to create content
for their workbooks and textbooks and offers an online subscription service
designed to help primary school students and teachers prepare for state-mandated
assessments by providing them with real-time feedback that connects them to
targeted preparation, remediation and enrichment materials. Through these
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 classroom-based and online 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 our Review.com Web site, 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 through our APPLY! CD.
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 subscription
service. 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.
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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.
The Homeroom.com online subscription service allows parents to directly monitor
their children's academic performance and access resources customized for their
children's academic needs at their convenience. Using our Review.com Web site,
parents can access information on specific colleges, the selection and
admissions process, financial aid, student loans and scholarships.
Trusted educational resource. We believe that The Princeton Review is one
of the most trusted brands in educational products and services based on our 19
year history and our reputation for providing quality standardized test
preparation and college admissions guidance. 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. Our Review.com Web site provides
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.
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 offline and
online resources. Our Review.com Web site 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 our Review.com Web
site 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 our
Homeroom.com subscription service, 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 the Homeroom.com online
subscription service 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 classroom-based and online course
offerings. This approach will permit our students to choose the optimal mix of
offline and online 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
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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
our Homeroom.com online subscription service 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 marketing revenue from educational institutions, higher
price points for advertising, sponsorship and e-commerce and greater ability to
cross-sell our products.
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, our Homeroom.com
online subscription service 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.
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OUR PRODUCTS AND SERVICES
Instruction and Guidance Division
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 11 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 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 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 PrincetonReview.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 alternative to our classroom-based
courses. Princeton Review Online courses
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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, GMAT, LSAT and GRE, 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 are providing these college counseling services in all seven high
schools operated by Edison Schools. 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 20 high
schools in the fall of 2001.
Review.com Division
Our Publications and Software
Our Review.com division 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 for
use in software and collect royalties on 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>
Our Review.com Web Site
Our Review.com Web site is one of the most widely used educational Web
sites dedicated to post-secondary academic opportunities. Our Review.com Web
site 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. Our Review.com Web site 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 discussion groups or order one of our
more than 150 print and software titles. According to PC Data Online, for the
month of October 2000 our Review.com Web site had approximately 954,000 unique
users and over 15 million total page views.
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The following are some of the major services and tools available to the
various users of our Review.com Web site:
Students. Students have access to the following resources:
- School 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 and graduate schools 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 accounts.
- APPLY. We enable students to access hundreds of college and graduate
school-specific admissions applications, including instructions to
financial aid forms, teacher recommendations and counselor reports.
APPLY 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 graduate school or transmit them
electronically.
Counselors. With the launch of APPLY, we introduced our first set of
online counselor tools that allow counselors to be actively involved in the
application management process. Counselors can view the progress of all of their
students, send targeted messages to individuals or groups and suggest customized
lists of colleges.
Colleges. Our Review.com Web site 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. 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.
Homeroom.com Division
Our Agreement with McGraw-Hill
Under our agreement with McGraw-Hill, our Homeroom.com division develops
content and provides editorial services to McGraw-Hill educational publishing
units. Through this exclusive relationship we author workbooks and textbook
questions for McGraw-Hill that are designed to correspond to the material
covered by various state-mandated assessments. We also provide
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editorial review of McGraw-Hill educational materials to ensure that sample test
questions and other testing information are accurate and aligned with state or
national standards. Finally, we author test questions in various subjects and at
various grade levels for use in an electronic database.
Our Homeroom.com Online Subscription Service
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. Our Homeroom.com
subscription service, is currently focused on math and reading in grades three
through eight. We began selling this service to K-12 schools in August 2000. It
is currently available nationally, with state-specific content available for 24
states. In 2001, we intend to make our Homeroom.com subscription service
available in additional states with state-specific content, add content for
other grade levels and initiate retail sales.
Our Homeroom.com subscription service enables teachers and parents to
quickly assess students' academic strengths and weaknesses and provides
immediate feedback and tailored educational resources for improving performance.
Our Homeroom.com subscription service 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. This service 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.
In addition to a large pool of test questions and drills, the Homeroom.com
subscription service 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.
The Homeroom.com subscription service 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, software 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;
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- 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, software, and proprietary Homeroom.com lessons for
teachers, students and parents that reinforce their curriculum
objectives.
STRATEGIC INVESTMENTS AND ACQUISITIONS
We have made a number of strategic investments that we hope will 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 2.2%
of its outstanding stock, as of July 31, 2000. As of December 20,
2000, the aggregate public market value of our stock of Student
Advantage was $1,788,658. 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 also sells 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.
We recently completed the acquisition of two of our independent franchises,
Princeton Review of Hawaii and Princeton Review of Quebec, and have entered into
option agreements allowing us
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to purchase the operations of four additional franchisees, Princeton Review of
Boston, Princeton Review of New Jersey, T.S.T.S., and Princeton Review
Peninsula. For a description of the terms of these agreements, see "Our
Franchised Operations and Our Plans to Acquire Our Domestic Franchises -- Option
Agreements to Purchase Four of Our Independent Franchises." If we acquire
Princeton Review of Boston, Princeton Review of New Jersey, T.S.T.S., and
Princeton Review Peninsula or any of our other franchises, we expect to use a
portion of the proceeds from this offering to consummate the acquisitions. 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 our option agreements to purchase Princeton
Review of Boston, Princeton Review of New Jersey, T.S.T.S., and Princeton Review
Peninsula. For more information about our anticipated use of the net proceeds of
this offering to purchase our franchises, see "Use of Proceeds."
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;
- Random House, which publishes and distributes our test preparation
books and trade books; and
- McGraw-Hill, which publishes K-12 textbooks and workbooks that contain
our branded materials.
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 our Review.com Website and promote and support our
Homeroom.com Web-based subscription service. Our current and planned sales and
marketing activities by division are as follows:
Instruction and Guidance Division. 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 Division. Review.com has a sales and marketing force of 10
people actively soliciting colleges and graduate schools to subscribe to our
APPLY! and APPLY! CD 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
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relationships with MSN, Student Advantage, Bolt and Vault.com and create new
relationships with portals and online communities.
Homeroom.com Division. We are marketing our Homeroom.com subscription
service to K-12 schools and school districts through a number of channels,
including national conferences, direct mail, electronic media and telemarketing.
In June 2000, we 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 has the right, as our exclusive third
party distributor, to sell 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 sell Homeroom.com subscriptions directly to K-12 educational institutions.
The version of Homeroom.com distributed either by us or by bigchalk.com to K-12
educational institutions is 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 prior notice. After termination
of the agreement, other than for bigchalk.com's breach, 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.
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 Division. 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 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
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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 Division. 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 schools as subscribers to our application services.
Homeroom.com Division. 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 online subscription service from products offered by 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, increase state-specific availability and provide material for
additional grade levels.
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 regional
offices. Our technology platform is a combination of Microsoft/Intel, Unix and
Oracle, which 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.
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SIGNIFICANT CUSTOMERS
Royalties, advances and other fees from services rendered by us to
McGraw-Hill represented approximately 12% of our revenue in 1999 and 3% of our
revenue in 1998. During 1999 and 1998, revenue from McGraw-Hill represented 100%
of the revenue reported in our Homeroom.com division. Royalties, advances and
other fees from books authored by us and published and distributed by Random
House represented approximately 7% of our revenue in 1999 and 9% of our revenue
in 1998. Revenue from Random House represented approximately 51% of the revenue
reported in our Review.com division in 1999 and 65% of the revenue reported in
that division in 1998.
COMPETITION
The markets for our 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:
Test preparation companies. Our Instruction and Guidance division
faces competition on a national level primarily from one other established
company, Kaplan, Inc. We also face competition from 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
face-to-face 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.
We believe that the principal competitive factors in our offline and online
markets include the following:
- brand recognition;
- ability to demonstrate measurable results;
- availability of integrated online and offline solutions;
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- ability to achieve a critical mass of students, parents and
educational institutions on our Web site;
- overall quality of user experience;
- speed in the introduction of new services;
- 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 our primary competitive advantages are our well-known and
trusted Princeton Review brand, our extensive experience in test preparation and
admissions and our innovative, high-quality educational products and services.
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. However, some of our competitors may
have more resources than we do, and they may be able to devote greater resources
than we can to the development, production and sale of their services and
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
or otherwise compete effectively with 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.
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.
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OUR PRINCIPAL SERVICE MARK
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 Princeton University 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. The absence of an
unopposed federal registration of our mark, however, may make the enforcement of
our exclusive right to use the mark against possible future infringers more
difficult and costly. In addition, if we are unable to prevent a competitor or
another business from using "The Princeton Review" or similar marks, then we
could lose customers or suffer a dilution of the prominence of our principal
mark. It is also possible that Princeton University 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. Moreover, 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.
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 September 30, 2000, we had 297 full-time employees, including 87 in
content and editorial, 42 in administration, finance and human resources, 36 in
information systems, 21 in marketing, 10 in sales and sales support and 101 in
our regional offices performing multiple tasks, including sales, administrative,
and teaching functions. In addition, we had approximately 1600 part-time
employees comprised mainly of teachers.
None of our employees is covered by a collective bargaining agreement. We
consider our employee relations to be good.
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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, Hawaii, 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................ 41 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................ 44 Director
V. Frank Pottow................ 37 Director
John C. Reid................... 50 Director
Richard Sarnoff................ 41 Director
Sheree T. Speakman............. 46 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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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. Mr. Pottow is SG Capital
Partners LLC's representative on our board of directors, in accordance with the
terms of our stockholders' agreement.
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
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1998, Mr. Sarnoff served as Chief Financial Officer of Bantam Doubleday Dell, a
consumer book publisher, and from 1995 to 1998, he was Senior Vice President,
Corporate Development of Bantam Doubleday Dell. Mr. Sarnoff is also a 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. Mr. Sarnoff is
Random House's representative on our board of directors, in accordance with the
terms of our stockholders' agreement.
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 August 2000, Mr. Tullman has been Chief Executive Officer and a director
of Xceed, Inc., a business consulting company. 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
16,920 shares of common stock as one-time compensation for services as a
director. Richard Katzman received an additional grant of options to purchase
25,380 shares in consideration for past services as our director. These options
have an exercise price of $7.39 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 DECEMBER 20, 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 December 20, 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 1,437,364 shares of common stock granted under our stock option
plan through December 20, 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 139,857 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 $7.39 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 $7.39 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 $7.39 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. Potential realizable value has been calculated using an assumed
initial public offering price of $12.00 per share, although we estimate that, in
each case, the fair market value of our stock at the time the option was granted
was substantially less. These numbers are calculated based on the requirements
of the Commission and do not reflect our estimate of future stock price growth.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
INDIVIDUAL GRANTS ANNUAL
-------------------------------------------------------- RATES OF STOCK
NUMBER OF PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO EXERCISE OPTION
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR(%) SHARE($) DATE 5% 10%
---- ---------- ------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John S. Katzman...... -- -- -- -- -- --
Mark Chernis......... 253,800 16.9% $7.39 4/18/10 $1,322,880 $1,475,160
19,543 1.3 1.73 4/18/10 212,487 224,212
4,169 0.3 2.01 4/18/10 44,163 46,664
Stephen Melvin....... 143,820 9.6 7.39 4/18/10 749,632 835,924
Stephen
Quattrociocchi..... 101,520 6.7 7.39 4/18/10 529,152 590,064
13,028 0.9 1.73 4/18/10 146,658 149,475
2,736 0.2 2.01 4/18/10 28,982 30,623
Bruce Task........... 40,185 2.7 7.39 4/18/10 209,456 233,567
19,543 1.3 1.73 4/18/10 212,487 224,212
4,821 0.3 2.01 4/18/10 51,063 53,955
</TABLE>
OPTION VALUES AS OF DECEMBER 20, 2000
The following table provides summary information concerning stock options
held as of December 20, 2000 by our Chief Executive Officer and by the other
executive officers named in the Summary Compensation Table above. The value of
in-the-money options represents the difference between the exercise price of an
option and an assumed initial public offering price of $12.00 per share.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AS OF
SHARES AS OF DECEMBER 20, 2000 DECEMBER 20, 2000
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John S. Katzman....... -- -- -- -- -- --
Mark Chernis.......... -- -- 55,437 222,075 $431,327 $1,024,275
Stephen Melvin........ -- -- 17,978 125,843 103,371 580,423
Stephen
Quattrociocchi...... -- -- 33,182 84,600 267,912 390,200
Bruce Task............ -- -- 29,386 35,162 284,502 162,177
</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.
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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.
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.
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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
- 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 2,749,500. As of December 20, 2000,
there were:
- options outstanding under the stock incentive plan to purchase
1,437,364 shares of our Class B non-voting common stock at a weighted
average exercise price of $6.87 per share;
- 917,204 shares of Class B non-voting common stock issued under the
plan; and
- 394,963 shares available for future issuance under the plan.
Our board of directors has authorized an increase of 846,000 in the total
number of shares of our common stock available for awards under the plan to
3,595,500 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
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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.
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 franchisees 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
253,800 shares of our Class B non-voting common stock at a price of $7.39 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,
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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
employees or our franchisees' employees, and he will not take any action that
results, or might reasonably result, in any employee ceasing to perform services
for us or any of our franchisees and then commencing services for 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
143,820 shares of our Class B non-voting common stock at a price of $7.39 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 franchisees 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 101,520 shares of our Class B non-voting common stock at a price of
$7.39 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.
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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, 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 franchisees 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 40,185
shares of our Class B non-voting common stock at a price of $7.39 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 franchisees 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;
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- 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.
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> 89
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;
- the aggregate value of the shares of common stock received by each
party, as of the date of the transaction based on a price of $7.39 per
share; and
- the aggregate value of the shares of common stock received by each
party at an assumed initial public offering price of $12.00 per share.
<TABLE>
<CAPTION>
AGGREGATE
VALUE AT
SHARES OF AGGREGATE ASSUMED
SHARES OF CLASS B VALUE INITIAL
CLASS A NON-VOTING ON THE PUBLIC
COMMON COMMON TRANSACTION OFFERING
EXECUTIVE OFFICER OR 5% STOCKHOLDER STOCK STOCK DATE PRICE
----------------------------------- ----------------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C>
John S. Katzman....................... 9,703,675 102,160* $72,443,000 $117,670,020
Mark Chernis.......................... -- 102,160 755,000 1,225,920
Bruce Task............................ -- 173,370 1,281,000 2,080,440
Random House TPR, Inc................. 2,858,311 -- 21,116,000 34,299,732
</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.
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<PAGE> 90
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 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;
- the aggregate value of the consideration received by each person as of
the transaction date; and
- the current aggregate value of the consideration received by each
person, as of the most recent practicable date.
<TABLE>
<CAPTION>
AGGREGATE
VALUE
EXECUTIVE SHARES OF CLASS B SHARES OF STOCK ON THE CURRENT
OFFICER OR NON-VOTING STOCK OF STUDENT TRANSACTION AGGREGATE
DIRECTOR CASH COMMON STOCK OPTIONS ADVANTAGE DATE VALUE
---------- ---------- ----------------- -------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mark Chernis......... $2,168,967 325,710 277,513 15,111 $4,787,621 $7,524,537
Stephen
Quattrociocchi..... 836,667 125,208 117,285 5,809 1,880,645 2,981,670
Bruce Task........... 498,267 84,600 64,549 3,925 1,280,448 1,956,597
Linda Nessim-Rubin... 335,650 54,670 50,863 2,536 809,260 1,288,407
Steven Hodas......... 291,838 44,840 31,460 2,080 634,021 979,699
Stephen Melvin....... 280,733 42,300 143,820 1,963 603,539 1,456,090
Evan Schnittman...... 163,742 27,562 35,532 1,279 374,076 661,247
Richard Katzman...... 36,542 21,150 25,380 726 196,604 409,036
Peter Taylor......... 20,829 4,230 33,840 196 53,109 228,112
</TABLE>
For purposes of calculating aggregate value on the transaction date in the
above table we valued:
- shares of our common stock at $7.39 per share;
- options at the difference between the per share exercise price of the
option and $7.39; 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.
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<PAGE> 91
For purposes of calculating current aggregate value in the above table we
valued:
- shares of our common stock at an assumed initial public offering price
of $12.00 per share;
- options at the difference between an assumed initial public offering
price of $12.00 per share and the per share exercise price of the
option; and
- shares of Student Advantage stock at $2.25 per share, which represents
the closing price of this stock on December 20, 2000.
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 AND SUBSEQUENT TRANSACTION WITH OUR SERIES A
PREFERRED STOCKHOLDERS
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 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.
On December 14, 2000, we entered into a loan agreement with lenders that
include SGC Partners II, Olympus Growth Fund III and Olympus Executive Fund,
holders of our Series A Preferred Stock. The loan agreement provides for a line
of credit of up to $25.0 million under which the lenders may make loans to us
for acquiring our independent franchisees and for general corporate purposes.
Under the terms of the agreement, SGC Partners II agreed to lend us up to
$5,000,000, Olympus Growth Fund III agreed to lend us up to $4,967,000 and
Olympus Executive Fund agreed to lend us up to $33,000. In exchange for making
these funds available to us, SGC Partners II received warrants initially
exercisable for 50,000 shares of our common stock, Olympus Growth Fund III
received warrants initially exercisable for 49,670 shares of our common stock
and Olympus Executive Fund received warrants initially exercisable for 330
shares of our common stock. These warrants are exercisable immediately at an
exercise price of $0.01 per share. Assuming an initial public offering price of
$12.00 per share, these warrants will be automatically exercised on a cashless
basis for a total of 99,917 shares of common stock upon completion of this
offering.
We are required to repay all outstanding borrowings under this loan
facility within 180 days after completion of this offering. In the event that
the loan facility remains outstanding on December 14, 2001, the warrants held by
SGC Partners will be exercisable for an additional 55,000 shares, the warrants
held by Olympus Growth Fund III will be exercisable for an additional 54,637
shares, and the warrants held by Olympus Executive Fund will be exercisable for
an additional 363
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<PAGE> 92
shares. If the loan facility remains outstanding on December 14, 2002, the
warrants held by SGC Partners II will be exercisable for an additional 80,000
shares, the warrants held by Olympus Growth Fund III will be exercisable for an
additional 79,472 shares, and the warrants held by Olympus Executive Fund will
be exercisable for an additional 528 shares. We also entered into a warrant
agreement with these entities providing them with the right to require us to
register under the Securities Act the common stock to be received upon exercise
of the warrants.
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 18.7% of our voting common
stock, as of December 20, 2000, without giving effect to the conversion of our
outstanding preferred stock. 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. Under that
agreement, we agreed to lend Mr. Hodas on a fully non-recourse basis up to an
aggregate principal amount of $250,000 for a purchase of real estate. The loan
is for a three-year term subject to earlier prepayment upon the occurrence of
specified events, and accrues interest at 7.3% per year. The loan does not
require Mr. Hodas to pay principal or interest during the term of the loan and
is secured by shares of our common stock that he owns. As of December 20, 2000,
approximately $85,000 had been advanced and was outstanding under the loan.
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<PAGE> 93
PRINCIPAL STOCKHOLDERS
The following table shows information with respect to the beneficial
ownership of our common stock as of December 20, 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 following December 20, 2000, but excludes shares of common stock
underlying options held by any other person. Percentage of beneficial ownership
is based on 19,151,573 shares of common stock outstanding as of December 20,
2000, which includes 3,602,566 shares of common stock issuable upon conversion
of outstanding shares of preferred stock and 249,792 shares issuable upon
cashless exercise of outstanding warrants, and 26,039,720 shares of common stock
outstanding after completion of this offering, which includes an additional
1,488,147 shares of common stock issuable to the holders of outstanding
preferred stock upon the completion of this offering, assuming an initial
offering price of $12.00 per share. In the event that the initial public
offering price of the shares offered in this offering is greater than $12.99 per
share, the additional 1,488,147 shares of common stock referred to in the
preceding sentence will not be issued to the holders of preferred stock. In such
case, the percentage of beneficial ownership after this offering will be as
described in the footnotes to this table.
<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)....................................... 9,805,833 51.20% 37.66%
Random House TPR, Inc.(2)................................ 2,858,311 14.92 10.98
1540 Broadway
New York, NY 10036
SGC Partners II, LLC(3).................................. 2,429,237 12.68 13.10
1221 Avenue of the Americas
New York, NY 10020
Entities affiliated with Olympus Growth Fund III,
L.P.(4)................................................ 1,230,599 6.47 6.65
Metro Center
One Station Place
Stamford, CT 06902
Mark Chernis(5).......................................... 500,147 2,60 1.92
Bruce Task(6)............................................ 289,789 1.51 1.11
Stephen Melvin(7)........................................ 70,245 * *
Stephen Quattrociocchi(8)................................ 166,353 * *
Richard Katzman(9)....................................... 28,025 * *
V. Frank Pottow(10)...................................... 2,115 * *
John C. Reid(10)......................................... 2,115 * *
Richard Sarnoff(10)...................................... 2,115 * *
Sheree T. Speakman(10)................................... 2,115 * *
Howard A. Tullman(10).................................... 8,460 * *
All executive officers and directors as a group
(15 persons)(11)....................................... 11,048,819 57.02% 42.07%
</TABLE>
---------------
* Less than one percent.
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<PAGE> 94
(1) Includes 102,160 shares held by Mr. Katzman's wife. Mr. Katzman disclaims
beneficial ownership of these shares, except to the extent of his
pecuniary interest. Also includes 1,438,057 shares held by Katzman
Business Holdings, L.P. and 144 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. In the event that the
initial public offering price of the shares being offered in this offering
is greater than $12.99 per share, the percentage beneficially owned by Mr.
Katzman would be 39.94% after this offering.
(2) Random House TPR, Inc. is a wholly-owned subsidiary of Random House, Inc.
which is a wholly-owned subsidiary of Bertelsmann AG, a private company
formed under German law. In the event that the initial public offering
price of the shares being offered in this offering is greater than $12.99
per share, the percentage beneficially owned would be 11.64% after this
offering.
(3) Represents 49,958 shares of common stock issuable upon cashless exercise
of warrants and 2,379,279 shares of common stock issuable upon conversion
of 2,475,693 shares of preferred stock prior to the offering. Percentage
of beneficial ownership after offering includes an additional 982,834
shares of common stock issuable to SGC Partners II upon completion of this
offering, assuming an initial public offering price of $12.00 per share.
In the event that the initial public offering price is greater than $12.99
per share, the percentage beneficially owned after this offering would be
9.89%. 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. Societe
Generale is a public company formed under French law. 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 49,628 shares of common stock issuable to Olympus Growth Fund
III and 330 shares of common stock issuable to Olympus Executive Fund upon
cashless exercise of warrants and 1,177,745 shares of common stock
issuable to Olympus Growth Fund III and 11,896 shares of common stock
issuable to Olympus Executive Fund upon conversion of 1,225,469 shares of
preferred stock held by Olympus Growth Fund III and 12,378 shares of
preferred stock held by Olympus Executive Fund prior to the offering.
Percentage of beneficial ownership after offering includes an additional
486,502 shares of common stock issuable to Olympus Growth Fund III and an
additional 4,914 shares of common stock issuable to Olympus Executive Fund
upon completion of this offering, assuming an initial public offering
price of $12.00 per share. In the event that the initial public offering
price is greater than $12.99 per share, the percentage beneficially owned
after this offering would be 5.05%. 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 71,300 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 20, 2000. In the event that the
initial public offering price of the shares
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<PAGE> 95
being offered in this offering is greater than $12.99 per share, the
percentage beneficially owned by Mr. Chernis would be 2.03% after this
offering.
(6) Includes 31,819 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 20, 2000. In the event that the
initial public offering price of the shares being offered in this offering
is greater than $12.99 per share, the percentage beneficially owned by Mr.
Task would be 1.18% after this offering.
(7) Includes 26,967 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 20, 2000. In the event that the
initial public offering price of the shares being offered in this offering
is greater than $12.99 per share, the percentage beneficially owned by Mr.
Melvin would be less than 1% after this offering.
(8) Includes 41,145 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 20, 2000. In the event that the
initial public offering price of the shares being offered in this offering
is greater than $12.99 per share, the percentage beneficially owned by Mr.
Quattrociocchi would be less than 1% after this offering.
(9) Includes 6,875 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 20, 2000. In the event that the
initial public offering price of the shares being offered in this offering
is greater than $12.99 per share, the percentage beneficially owned by Mr.
Katzman would be less than 1% after this offering.
(10) Includes 2,115 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 20, 2000. In the event that the
initial public offering price of the shares being offered in this offering
is greater than $12.99 per share, the percentage beneficially owned by
each of Mr. Pottow, Mr. Reid, Mr. Sarnoff, Mr. Tullman and Ms. Speakman
would be less than 1% after this offering.
(11) Includes 225,458 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 20, 2000. In the event that the
initial public offering price of the shares being offered in this offering
is greater than $12.99 per share, the percentage beneficially owned by all
executive officers and directors as a group would be 44.59% after this
offering.
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<PAGE> 96
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, our amended and restated certificate
of incorporation will authorize the issuance of up to 100,000,000 shares of
common stock, par value $0.01 per share, and 5,000,000 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 December 20,
2000, 20,639,720 shares of common stock were outstanding, assuming the
conversion of all preferred stock and the issuance of 249,792 shares of common
stock upon the cashless exercise of warrants upon the completion of this
offering. As of December 20, 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 in accordance with the
terms described below. As of December 20, 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 .961-for-one
basis, subject to anti-dilution adjustments;
- anti-dilution protection;
- covenants requiring their authorization of enumerated transactions;
- 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; and
- automatic conversion upon the effective date of a qualified initial
public offering on a .961-for-one basis, subject to anti-dilution
adjustments, except that, in the event that the
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<PAGE> 97
initial public offering price of our common stock in this offering is
less than $12.99 per share, then, instead of converting on a
.961-for-one basis upon the completion of this offering, the holders
of Series A preferred stock will receive, upon the completion of this
offering, in exchange for their shares of Series A preferred stock:
(1) first, to reflect their pre-offering ownership percentage, such
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 (a) 15.66% multiplied by (b) our total valuation immediately
prior to this offering, minus $27.0 million; and
(2) second, $27.0 million in common stock at the initial public
offering price.
Accordingly, at an assumed initial offering price of $12.00 per share, a
total of 5,090,713 shares of common stock will be issued to the holders of the
Series A preferred stock upon conversion of the Series A preferred stock upon
completion of this offering. In the event that the initial public offering price
of the shares offered in this offering is greater than $12.99 per share, then a
total of 3,602,566 shares of common stock will be issued to the holders of the
Series A preferred stock upon conversion of the Series A preferred stock upon
completion of 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 5,000,000 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 December 20, 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:
- Receive shares without paying exercise price. The holders may elect to
receive the number of shares of common stock that they would be able to
purchase at the market price on the date of exercise with the amount of
cash equal to (a) the aggregate market price of the shares on the date of
exercise minus (b) the aggregate initial public offering price of the
shares; or
- Receive cash instead of shares. For a period of 60 days immediately after
the warrants become exercisable, the holders may elect to receive a cash
payment equal to (a) the aggregate market price of the shares on the date
of exercise minus (b) the aggregate initial public offering price of the
shares, provided that this cash payment may not exceed 50% of the
aggregate initial public offering price of the shares.
Additionally, as of December 20, 2000, we had outstanding warrants to
purchase a total of 250,000 shares of common stock at an exercise price of $0.01
per share. These warrants were issued in December 2000 to the lenders under our
loan agreement with Reservoir Capital Partners, L.P. in
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<PAGE> 98
connection with the execution of a $25.0 million line of credit. In the event
that the credit facility remains outstanding on December 14, 2001, the warrants
will be exercisable for an additional 275,000 shares and if the loan facility
remains outstanding on December 14, 2002, the warrants will be exercisable for
an additional 400,000 shares. We also entered into a warrant agreement with
these entities, providing them with the right to require us to register the
common stock to be received upon the conversion of the warrants under the
Securities Act. Upon consummation of this offering, these warrants will be
automatically converted into common stock in a cashless exercise at the exercise
price of $0.01 per share. Assuming an initial public offering price of $12.00
per share, the outstanding warrants will be automatically converted into a total
of 249,792 shares of common stock. If the initial public offering price is below
$10.00 per share, then the number of shares issued upon conversion will be
multiplied by a fraction, of which the numerator is $10.00 and the denominator
is the initial public offering price.
REGISTRATION RIGHTS
After completion of this offering, the holders of 20,143,919 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 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 Continental Stock
Transfer & Trust Company.
94
<PAGE> 99
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
26,039,720 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. 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
promulgated under the Securities Act. The remaining 20,639,720 shares of common
stock held by existing stockholders are restricted securities. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration described below under Rules 144,
144(k) or 701 promulgated under the Securities Act.
As a result of the contractual restrictions described below and the
provisions of Rules 144, 144(k) and 701, all 20,639,720 restricted shares will
be available for sale in the public market upon the expiration of the lock-up
agreements described below, 180 days after the date of this prospectus, subject,
in some cases, to volume limitations.
LOCK-UP AGREEMENTS
Substantially all of our stockholders 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.
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 260,397 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 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.
95
<PAGE> 100
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 20,143,919 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.
96
<PAGE> 101
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. and U.S. Bancorp Piper Jaffray 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...........
---------
Total.................................. 5,400,000
=========
</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 810,000 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 discounts
and commissions were 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. We do not expect the underwriting discounts and
commissions per share of our common stock to exceed 7% of the initial public
offering price per share of our common stock.
<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 $2,100,000. 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.
97
<PAGE> 102
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 20,639,720
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. Chase Securities Inc. may, in its sole discretion and at any
time or from time to time without notice, release all or any portion of the
securities subject to the lock-up agreements as described above. Chase
Securities Inc. has indicated that it has no current intent to waive any
provisions of its lock-up agreement with the stockholders or with us. In
deciding whether to grant a waiver, Chase Securities Inc. would consider various
factors, which may include the market prices and trading volumes of the common
stock at that time, market conditions generally, the size and timing of the
requested waiver and any other circumstances that Chase Securities Inc.
considers relevant at such time.
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. U.S. Bancorp Piper Jaffray Inc. is administering a directed share
program for us. We will provide U.S. Bancorp Piper Jaffray Inc. with a list of
names of persons that we would like to ask to participate in the program. These
reserved shares will be sold at the initial public offering price that appears
on the cover of this prospectus. 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
98
<PAGE> 103
prospects, the present state of our business operations, our management and
other factors deemed relevant.
Until November 2000, an affiliate of Chase Securities Inc., The Chase
Manhattan Bank, was the lender under our $1.5 million line of credit.
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.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule 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 have included the schedule elsewhere in the
registration statement in reliance on Ernst & Young LLP's reports, 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 the related financial statement schedule
included 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 are 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 dismissed its then independent auditors Deloitte & Touche LLP,
and engaged Ernst & Young LLP as its independent auditors. 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.
99
<PAGE> 104
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.
100
<PAGE> 105
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 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-37
Combined Balance Sheets..................................... F-38
Combined Statements of Income............................... F-39
Combined Statements of Changes in Stockholders' Equity...... F-40
Combined Statements of Cash Flows........................... F-41
Notes to Combined Financial Statements...................... F-42
</TABLE>
F-1
<PAGE> 106
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, 1998
and 1999, and the related consolidated statements of operations, stockholders'
equity 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, 1998 and 1999,
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
New York, New York
March 16, 2000, except for Note 15, as
to which the date is December 15, 2000
F-2
<PAGE> 107
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. Our audit also included the financial statement schedule listed in Item
16(b). These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
New York, New York
August 5, 1998
F-3
<PAGE> 108
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ----------- -------------
(UNAUDITED)
(RESTATED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,518,976 $ 2,658,081 $11,586,493
Accounts receivable, net of allowance of $670,451 in 1998,
$720,183 in 1999 and $480,623 in 2000 (unaudited)....... 1,563,792 4,397,020 5,033,401
Account receivable -- related parties..................... 1,657,033 1,989,663 1,997,405
Other receivables......................................... 80,517 34,960 10,275
Other receivables -- student loans........................ 2,247,838 -- --
Other receivables -- related parties...................... 253,015 398,082 346,102
Inventories............................................... 576,926 773,963 474,198
Prepaid expenses.......................................... 179,882 303,854 882,536
Securities, available for sale............................ -- 34,833,656 5,859,248
Other assets.............................................. 772,453 333,146 1,857,473
----------- ----------- -----------
Total current assets.................................... $ 8,850,432 $45,722,425 $28,047,131
Furniture, fixtures, equipment and software development,
net....................................................... 1,846,097 3,157,848 6,182,076
Franchise costs, net of accumulated amortization of $290,644
in 1998, $150,772 in 1999 and $176,430 in 2000
(unaudited)............................................... 212,624 190,032 227,035
Territorial marketing rights, net of accumulated
amortization of $395,681 in 1998, $506,105 in 1999 and
$588,923 in 2000 (unaudited).............................. 1,812,730 1,702,306 1,619,488
Publishing rights, net of accumulated amortization of
$245,900 in 1998, $318,900 in 1999 and $373,650 in 2000
(unaudited)............................................... 1,515,100 1,442,100 1,387,350
Deferred income taxes....................................... 365,000 560,000 6,847,200
Investments in affiliates................................... -- -- 587,155
Goodwill, net............................................... -- -- 8,363,519
Other assets................................................ 1,104,569 922,846 2,629,704
----------- ----------- -----------
Total assets................................................ $15,706,552 $53,697,557 $55,890,658
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,617,191 $ 2,150,917 $ 1,262,117
Accrued expenses and taxes payable........................ 3,270,511 3,929,390 6,023,987
Accrued expenses -- PSU's................................. 348,050 2,310,000 --
Accrued expenses -- related parties....................... -- 223,750 201,740
Line of credit............................................ -- 700,000 --
Current maturities of long-term debt...................... 168,003 390,206 486,039
Current maturities long-term debt -- student loans........ 2,247,838 -- --
Deferred income........................................... 1,480,420 2,463,687 5,808,752
Book advances............................................. -- 1,962,743 471,778
Book advances -- related parties.......................... 716,766 675,000 492,500
Deferred income taxes..................................... -- 1,461,000 2,097,450
----------- ----------- -----------
Total current liabilities............................... $ 9,848,779 $16,266,693 $16,844,363
Long-term debt.............................................. 264,476 538,051 681,813
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 September 30, 2000, liquidation preference
of $29,267,394 at September 30, 2000...................... -- -- 27,868,847
Class B redeemable non-voting common stock, $.01 par value;
10,000,000 shares authorized, 915,473 issued and 842,205
outstanding at December 31, 1998 and 1999 and 2,737,229
shares issued and outstanding at September 30, 2000....... 256,932 256,932 9,448,522
Stockholders' equity (deficit):
Class A common stock, $.01 par value; 25,000,000 shares
authorized, 9,561,724 issued and outstanding at December
31, 1998 and 1999 and 12,561,986 shares issued and
outstanding at September 30, 2000......................... 95,617 95,617 125,620
Additional paid-in capital.................................. 7,666,671 7,666,671 5,146,099
Accumulated deficit......................................... (4,750,544) (7,334,326) (7,446,806)
Accumulated other comprehensive income...................... -- 33,298,218 3,310,091
Deferred compensation....................................... -- -- (87,891)
----------- ----------- -----------
3,011,744 33,726,180 1,047,113
Treasury stock, 73,268 shares of Class B common stock at
December 31, 1998 and 1999 and 0 shares at September 30,
2000, at cost............................................. (202,598) (202,598) --
----------- ----------- -----------
Total stockholders' equity.................................. 2,809,146 33,523,582 1,047,113
----------- ----------- -----------
Total liabilities and stockholders' equity.................. $15,706,552 $53,697,557 $55,890,658
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 109
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
(RESTATED)
<S> <C> <C> <C> <C> <C>
Revenue
Instruction and Guidance............................... $27,379,841 $28,322,062 $29,900,865 $23,644,621 $ 27,282,698
Review.com............................................. 5,133,837 4,464,169 5,289,095 3,893,628 3,756,393
Homeroom.com........................................... -- 959,388 5,112,669 3,133,674 3,114,840
----------- ----------- ----------- ----------- ------------
Total revenue........................................ 32,513,678 33,745,619 40,302,629 30,671,923 34,153,931
----------- ----------- ----------- ----------- ------------
Cost of revenue
Instruction and Guidance............................... 10,575,607 9,844,248 9,759,264 7,338,387 8,922,321
Review.com............................................. 2,716,686 1,672,093 1,469,445 816,986 799,420
Homeroom.com........................................... -- 383,755 1,941,569 800,927 620,336
----------- ----------- ----------- ----------- ------------
Total cost of revenue................................ 13,292,293 11,900,096 13,170,278 8,956,300 10,342,077
----------- ----------- ----------- ----------- ------------
Gross profit......................................... 19,221,385 21,845,523 27,132,351 21,715,623 23,811,854
Operating expenses
Selling, general and administrative.................... 17,918,550 22,030,210 28,815,126 18,747,317 40,530,736
Research and development............................... 1,012,653 1,173,730 878,165 518,616 420,546
----------- ----------- ----------- ----------- ------------
Total operating expenses............................. 18,931,203 23,203,940 29,693,291 19,265,933 40,951,282
----------- ----------- ----------- ----------- ------------
Operating income(loss) from continuing operations........ 290,182 (1,358,417) (2,560,940) 2,449,690 (17,139,428)
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) (44,048) (104,623)
Other income............................................. 86,279 79,194 90,268 42,111 473,199
----------- ----------- ----------- ----------- ------------
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) 2,447,753 (9,173,626)
Minority interests' share of income in subsidiaries...... (472,702) (505,102) (585,080) (512,736) (50,129)
Equity interest in operations of affiliates.............. -- -- -- (412,845)
----------- ----------- ----------- ----------- ------------
Income (loss) from continuing operations before
(provision) benefit for income taxes................... 269,053 (1,199,593) (2,094,910) 1,935,017 (9,636,600)
(Provision) benefit for income taxes..................... 188,340 (214,815) 50,932 (59,511) 6,531,794
----------- ----------- ----------- ----------- ------------
Income (loss) from continuing operations................. 457,393 (1,414,408) (2,043,978) 1,875,506 (3,104,806)
Discontinued operations:
Loss from operations of discontinued software division,
net of tax........................................... (1,846,237) (643,947) -- -- --
Loss from operations of discontinued student loan
division, net of tax................................. (654,582) (706,014) -- -- --
Income on disposal of discontinued software division,
net of tax........................................... -- 4,873,810 -- -- --
----------- ----------- ----------- ----------- ------------
Income (loss) from discontinued operations, net of tax... (2,500,819) 3,523,849 -- -- --
----------- ----------- ----------- ----------- ------------
Net income (loss)........................................ $(2,043,426) $ 2,109,441 $(2,043,978) $ 1,875,506 $ (3,104,806)
Accreted dividends on Series A redeemable preferred
stock.................................................. -- -- -- -- (2,267,394)
Accreted dividends on Class B non-voting common stock.... -- -- -- -- (2,448,300)
----------- ----------- ----------- ----------- ------------
Net income (loss) attributed to common stockholders...... (2,043,426) 2,109,441 (2,043,978) $ 1,875,506 $ (7,820,500)
=========== =========== =========== =========== ============
Net income (loss) per share -- basic and diluted:
Income (loss) from continuing operations............... $ 0.04 $ (0.14) $ (0.20) $ 0.18 $ (0.57)
Income (loss) from discontinued operations............. (0.24) 0.34 -- -- --
----------- ----------- ----------- ----------- ------------
Net income (loss) per share -- basic and
diluted................................................ $ (0.20) $ 0.20 $ (0.20) $ 0.18 $ (0.57)
=========== =========== =========== =========== ============
Weighted average basic and diluted shares used in
computing net income (loss) per share.................. 10,403,934 10,403,934 10,403,934 10,403,934 13,667,455
=========== =========== =========== =========== ============
Proforma income tax (provision) benefit assuming C-Corp
status (unaudited)..................................... $ 876,994 $(1,007,103) $ 803,631 $ (834,732) $ 5,457,906
=========== =========== =========== =========== ============
Proforma net income (loss) from continuing operations
(unaudited)............................................ $ 1,146,047 $(2,206,696) $(1,291,279) $ 1,100,285 $ (4,075,559)
=========== =========== =========== =========== ============
Proforma net income (loss) per share -- basic and diluted
(unaudited)............................................ $ 0.11 $ (0.21) $ (0.12) $ 0.11 $ (0.64)
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 110
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND REDEEMABLE STOCK
<TABLE>
<CAPTION>
REDEEMABLE STOCK STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------------------ ---------------------
SERIES A CLASS B CAPITAL STOCK
REDEEMABLE REDEEMABLE NON- ---------------------
CONVERTIBLE VOTING CLASS A COMMON
PREFERRED STOCK COMMON STOCK STOCK
----------------------- ---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.................... -- -- 842,205 $ 256,932 9,561,724 $ 95,617
Distributions to stockholders..................
Net loss.......................................
--------- ----------- --------- ---------- ---------- --------
Balance at December 31, 1997.................... -- -- 842,205 256,932 9,561,724 95,617
Distributions to stockholders.................. -- -- -- -- -- --
Net income..................................... -- -- -- -- -- --
--------- ----------- --------- ---------- ---------- --------
Balance at December 31, 1998.................... -- -- 842,205 256,932 9,561,724 95,617
Distributions to stockholders.................. -- -- -- -- -- --
Comprehensive income
Net loss..................................... -- -- -- -- -- --
Unrealized gain on securities, net of tax.... -- -- -- -- -- --
Comprehensive income........................... -- -- -- -- -- --
--------- ----------- --------- ---------- ---------- --------
Balance at December 31, 1999.................... -- -- 842,205 256,932 9,561,724 95,617
Distributions to stockholders (unaudited)....... -- -- -- -- -- --
Distributions of securities, available for sale
(unaudited).................................... -- -- -- -- -- --
Issuance of Princeton Review Publishing LLC
Units (unaudited).............................. -- -- -- -- -- --
Effect of termination of S-Corp. (unaudited) ... -- -- -- -- -- --
Minority interest (unaudited)................... -- -- -- -- -- --
Issuance of employee options (unaudited)........ -- -- -- -- -- --
Issuance of Series A redeemable convertible
preferred stock (unaudited).................... 3,748,548 $25,601,453 -- -- -- --
Issuance of Class B redeemable non-voting common
stock (unaudited).............................. -- -- 778,190 6,732,122 -- --
Acquisition of minority interest of
franchisees.................................... -- -- 1,116,834 11,168 -- --
Deferred compensation related to issuance of
options (unaudited)............................
Amortization of deferred compensation
(unaudited).................................... .........
Issuance of Class A common stock (unaudited).... -- -- -- -- 3,000,262 30,003
Comprehensive income (unaudited)
Net income prior to S-Corp. termination
(unaudited)..................................
Net loss subsequent to S-Corp. termination
(unaudited).................................. -- -- -- -- -- --
Unrealized loss on securities, net of tax
(unaudited).................................. -- -- -- -- -- --
Comprehensive income (loss) (unaudited)......... -- -- -- -- -- --
Retirement of treasury stock (unaudited)........ -- -- -- -- -- --
Accreted dividends on Series A redeemable
preferred stock (unaudited).................... -- 2,267,394 -- -- -- --
Accreted dividends on Class B non-voting common
stock.......................................... -- -- -- 2,448,300 -- --
--------- ----------- --------- ---------- ---------- --------
Balance at September 30, 2000 (unaudited)
(Restated)..................................... 3,748,548 $27,868,847 2,737,229 $9,448,522 12,561,986 $125,620
========= =========== ========= ========== ========== ========
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TREASURY STOCK
PAID-IN ACCUMULATED COMPREHENSIVE DEFERRED -------------------
CAPITAL DEFICIT INCOME (LOSS) COMPENSATION SHARES AMOUNT
----------- ----------- ------------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.................... $ 7,666,671 $(4,426,812) -- -- 73,268 $(202,598)
Distributions to stockholders.................. (12,012) -- -- -- --
Net loss....................................... (2,043,426) -- -- -- --
----------- ----------- ------------ -------- ------- ---------
Balance at December 31, 1997.................... 7,666,671 (6,482,250) -- -- 73,268 (202,598)
Distributions to stockholders.................. -- (377,735) -- -- -- --
Net income..................................... -- 2,109,441 -- -- -- --
----------- ----------- ------------ -------- ------- ---------
Balance at December 31, 1998.................... 7,666,671 (4,750,544) -- -- 73,268 (202,598)
Distributions to stockholders.................. -- (539,804) -- -- -- --
Comprehensive income
Net loss..................................... -- (2,043,978) -- -- -- --
Unrealized gain on securities, net of tax.... -- -- $ 33,298,218 -- -- --
Comprehensive income........................... -- -- -- -- -- --
----------- ----------- ------------ -------- ------- ---------
Balance at December 31, 1999.................... 7,666,671 (7,334,326) 33,298,218 -- 73,268 (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).............................. 1,100,932 -- -- -- -- --
Effect of termination of S-Corp. (unaudited) ... (10,758,873) 10,758,873 -- -- --
Minority interest (unaudited)................... 3,162,428 -- -- -- -- --
Issuance of employee options (unaudited)........ 738,519 -- -- -- -- --
Issuance of Series A redeemable convertible
preferred stock (unaudited).................... (191,964) -- -- -- -- --
Issuance of Class B redeemable non-voting common
stock (unaudited).............................. -- -- -- -- -- --
Acquisition of minority interest of
franchisees.................................... 8,239,626 -- -- -- -- --
Deferred compensation related to issuance of
options (unaudited)............................ 93,750 $(93,750) -- --
Amortization of deferred compensation
(unaudited).................................... 5,859
Issuance of Class A common stock (unaudited).... 13,302 -- -- -- -- --
Comprehensive income (unaudited)
Net income prior to S-Corp. termination
(unaudited).................................. 4,342,000
Net loss subsequent to S-Corp. termination
(unaudited).................................. -- (7,446,806) -- -- -- --
Unrealized loss on securities, net of tax
(unaudited).................................. -- -- (29,988,127) -- -- --
Comprehensive income (loss) (unaudited)......... -- -- -- -- -- --
Retirement of treasury stock (unaudited)........ (202,598) -- -- -- (73,268) 202,598
Accreted dividends on Series A redeemable
preferred stock (unaudited).................... (2,267,394) -- -- -- -- --
Accreted dividends on Class B non-voting common
stock.......................................... (2,448,300) -- -- -- -- --
----------- ----------- ------------ -------- ------- ---------
Balance at September 30, 2000 (unaudited)
(Restated)..................................... $ 5,146,099 $(7,446,806) $ 3,310,091 $(87,891) -- --
=========== =========== ============ ======== ======= =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balance at December 31, 1996.................... $ 3,132,878
Distributions to stockholders.................. (12,012)
Net loss....................................... (2,043,426)
------------
Balance at December 31, 1997.................... 1,077,440
Distributions to stockholders.................. (377,735)
Net income..................................... 2,109,441
------------
Balance at December 31, 1998.................... 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
------------
Comprehensive income........................... 31,254,240
------------
Balance at December 31, 1999.................... 33,523,582
Distributions to stockholders (unaudited)....... (338,991)
Distributions of securities, available for sale
(unaudited).................................... (7,427,556)
Issuance of Princeton Review Publishing LLC
Units (unaudited).............................. 1,100,932
Effect of termination of S-Corp. (unaudited) ... --
Minority interest (unaudited)................... 3,162,428
Issuance of employee options (unaudited)........ 738,519
Issuance of Series A redeemable convertible
preferred stock (unaudited).................... (191,964)
Issuance of Class B redeemable non-voting common
stock (unaudited).............................. --
Acquisition of minority interest of
franchisees.................................... 8,239,626
Deferred compensation related to issuance of
options (unaudited)............................ --
Amortization of deferred compensation
(unaudited).................................... 5,859
Issuance of Class A common stock (unaudited).... 43,305
Comprehensive income (unaudited)
Net income prior to S-Corp. termination
(unaudited).................................. 4,342,000
Net loss subsequent to S-Corp. termination
(unaudited).................................. (7,446,806)
Unrealized loss on securities, net of tax
(unaudited).................................. (29,988,127)
------------
Comprehensive income (loss) (unaudited)......... (33,092,933)
Retirement of treasury stock (unaudited)........ --
Accreted dividends on Series A redeemable
preferred stock (unaudited).................... (2,267,394)
Accreted dividends on Class B non-voting common
stock.......................................... (2,448,300)
------------
Balance at September 30, 2000 (unaudited)
(Restated)..................................... $ 1,047,113
============
</TABLE>
See accompanying notes.
F-6
<PAGE> 111
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(RESTATED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $(2,043,426) $ 2,109,441 $(2,043,978) $ 1,875,506 $(3,104,806)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation............................................... 470,156 630,589 900,939 393,795 379,794
Amortization............................................... 1,010,224 696,833 660,448 466,142 1,442,647
Bad debt expense........................................... -- 482,670 392,479 110,108 182,902
Provision for uncollectable advertising fees............... -- 180,286 220,409 -- 150,000
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) -- (6,664,469)
Deferred rent.............................................. -- -- 140,960 105,819 264,906
Minority interests' share of income in subsidiaries........ 472,702 505,102 585,080 512,736 50,129
Amortization of deferred compensation...................... -- -- -- -- 5,859
Equity interest in operations of affiliates................ -- -- -- -- 412,845
Net change in operating assets and liabilities, including
discontinued operations in 1997 and 1998:
Accounts receivable...................................... (339,428) 103,987 (3,225,707) (2,414,978) (763,239)
Accounts receivable -- related parties................... (244,398) (449,233) (332,630) 522,534 (7,742)
Other receivables........................................ (143,453) 71,467 45,557 17,184 24,686
Other receivables -- related parties..................... (147,833) 33,303 (145,067) 5,738 51,980
Other receivables -- student loans....................... (255,674) (1,751,541) 2,247,838 2,247,838 --
Inventories.............................................. 158,701 93,652 (197,037) (85,410) 318,739
Prepaid expenses......................................... 155,227 765,950 (123,972) (27,070) (569,005)
Other assets............................................. (526,526) 222,129 108,898 (859,863) (1,661,978)
Accounts payable......................................... (318,901) (21,655) 533,726 (665,312) (888,800)
Accrued expenses and taxes payable....................... 1,609,238 (1,038,768) 435,476 174,790 2,881,394
Accrued expenses -- PSU's................................ 162,690 185,360 1,961,950 412,693 (2,310,000)
Accrued expenses -- related parties...................... -- -- 223,750 104,000 (22,010)
Deferred income.......................................... (9,670) (875,178) 983,267 1,786,735 3,037,943
Book advances............................................ 152,500 (335,551) 1,879,211 (110,715) (1,490,966)
Book advances -- related parties......................... (302,250) (314,516) 41,766 247,277 (182,500)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities......... (628,763) (4,281,959) 4,122,590 4,819,547 (9,274,917)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of furniture, fixtures, equipment and software
development.............................................. (851,945) (1,052,200) (2,290,618) (1,909,787) (4,354,332)
Investments in affiliates.................................. -- -- -- (13,398) (1,000,000)
Purchase of franchises..................................... -- -- -- -- (320,000)
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 82,443 338,000 (79,346)
Investment in other assets................................. (711,128) (754,583) (233,411) (90,140) (1,915,114)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities......... (1,215,582) 4,812,956 (1,391,621) (1,675,325) (7,668,792)
----------- ----------- ----------- ----------- -----------
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) (27,447) (27,447)
Proceeds (repayment) from student loan credit facilities... 496,297 1,751,541 (2,247,838) (2,247,838) --
Proceeds from capital leases, net of repayments............ 70,878 279,411 531,036 309,423 267,042
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......... -- -- -- -- 1,100,932
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities......... 999,749 308,350 (1,591,864) (2,505,666) 25,872,121
----------- ----------- ----------- ----------- -----------
Net increase in cash and cash equivalents................... (844,596) 839,347 1,139,105 638,556 8,928,412
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 $ 2,157,532 $11,586,493
=========== =========== =========== =========== ===========
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 $ 44,115 $ 110,033
=========== =========== =========== =========== ===========
State and local income taxes............................... $ 82,678 $ 147,013 $ 123,908 $ 110,106 $ 124,079
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-7
<PAGE> 112
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 September 30, 2000, there were also
41 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 September 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 91% of the Company's cash and cash equivalents at December 31, 1998, 1999,
and September 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> 113
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 adopted Emerging Issues Task Force
("EITF") 00-2, Accounting for Website Development Costs. The adoption of this
EITF has not had a material effect on the Company's financial condition or
results of operations.
During the year ended December 31, 1999 and the nine months ended September
30, 1999 and 2000 (unaudited), the Company expensed approximately $650,000,
$163,000 and $797,000, 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 nine months ended September 30, 2000 (unaudited), the
Company capitalized approximately $1,036,000 and $2,598,000, 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 our
independent franchisees to Princeton Review Publishing, LLC in 1995 to allow the
marketing of the Company's products on a contractually agreed-upon basis within
the franchisee territories. Without these rights, the Company would be
prohibited from selling its products in these territories due to the exclusivity
granted to the franchisees within their territories. In consideration for these
rights, these franchisees were given membership units in Princeton Review
Publishing LLC representing approximately 13% of the total units. Accordingly,
the Company recorded these assets at $2,208,000, which represented approximately
13% of the value of Princeton Review Publishing LLC at the time of the
transaction. This value was based upon an investment by an independent third
party. 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 on certain books. 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.
Goodwill
Goodwill represents the excess purchase price over the fair value of net
assets acquired and is being amortized over a 15 year or 40 year period.
F-9
<PAGE> 114
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-lived Assets
The Company evaluates the carrying value of its long-lived assets when
events or changes in circumstances indicate that an asset's carrying value may
not be recoverable. An impairment loss is recognized when the sum of the
expected future undiscounted net cash flows is less than the carrying value of
the asset. An impairment loss would be measured by comparing the amount by which
the carrying value exceeds the fair value of the asset being evaluated for
impairment. No such losses have been identified by the Company.
Investments 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 are approximately 20%.
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. 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 revenue from both performance-based fees such as
marketing fees and royalties and delivery-based fees such as advances and copy
editing fees. Performance-based fees are recognized as books are sold. Delivery
based fees are recognized upon the completion and acceptance of the product by
the publisher. Until such time, all costs and revenues related to such
delivery-based fees are deferred. Book advances are recorded as liabilities and
deferred book expenses are included in other current assets.
F-10
<PAGE> 115
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Royalty Service Fees
As consideration of the rights and entitlements granted under franchise
agreements, which entitle the franchisees to provide test preparation services
utilizing the Princeton Review Method in their licensed territories, 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. In addition, these fees include a per student fee charged to our
franchisees for use by their students of the Company's supplemental online
course tools.
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. These services consist of approximately two weeks of training the
franchisees' teachers to use The Princeton Review Method and the franchisee's
staff on how to operate an office. The initial franchise fee gives the
franchisee a license to conduct, operate and market a test preparation business
utilizing The Princeton Review Method in a specific territory for an initial
period of typically 10 years, with a right to renew for an additional 10 years.
Renewal fees of $2,500 are recognized upon the commencement of the renewal
period.
Other Income
Other income consists of miscellaneous fees for other services provided to
third parties primarily for authoring questions, college marketing fees and
advertising. These fees are recognized as the products or services are
delivered.
The following table summarizes the Company's revenue and cost of revenue
for the years ended December 31, 1997, 1998, 1999 and for the nine months ended
September 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
=========== ========== ========== ========== ======== ========== ===========
</TABLE>
F-11
<PAGE> 116
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>
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
=========== ========== ========== ========== ======== ========== ===========
NINE MONTHS ENDED
SEPTEMBER 30, 1999
(unaudited)
Revenue
Instruction and
Guidance............ $18,826,071 $2,708,716 $1,928,169 -- $ 63 $ 181,602 $23,644,621
Review.com............ -- -- -- $2,550,721 -- 1,342,907 3,893,628
Homeroom.com.......... -- -- -- 3,133,674 -- -- 3,133,674
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $18,826,071 $2,708,716 $1,928,169 $5,684,395 $ 63 $1,524,509 $30,671,923
=========== ========== ========== ========== ======== ========== ===========
</TABLE>
F-12
<PAGE> 117
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>
Cost of revenue
Instruction and
Guidance............ $ 6,601,474 -- $ 736,913 -- -- -- $ 7,338,387
Review.com............ -- -- -- $ 467,414 -- $ 349,572 816,986
Homeroom.com.......... -- -- -- 732,941 -- 67,986 800,927
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $ 6,601,474 -- $ 736,913 $1,200,355 -- $ 417,558 $ 8,956,300
=========== ========== ========== ========== ======== ========== ===========
NINE MONTHS ENDED
SEPTEMBER 30, 2000
(unaudited)
Revenue
Instruction and
Guidance............ $21,157,532 $3,446,695 $2,422,558 -- $ 25,000 $ 230,913 $27,282,698
Review.com............ -- -- -- $2,257,753 -- 1,498,640 3,756,393
Homeroom.com.......... -- -- -- 3,114,840 -- -- 3,114,840
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $21,157,532 $3,446,695 $2,422,558 $5,372,593 $ 25,000 $1,729,553 $34,153,931
=========== ========== ========== ========== ======== ========== ===========
Cost of revenue
Instruction and
Guidance............ $ 7,245,656 -- $1,676,665 -- -- -- $ 8,922,321
Review.com............ -- -- -- $ 538,507 -- $ 260,913 799,420
Homeroom.com.......... -- -- -- 586,678 -- 33,658 620,336
----------- ---------- ---------- ---------- -------- ---------- -----------
Total................. $ 7,245,656 -- $1,676,665 $1,125,185 -- $ 294,571 $10,342,077
=========== ========== ========== ========== ======== ========== ===========
</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 September 30, 1999 and 2000 (unaudited),
respectively. Total advertising and promotion expense was approximately
$1,400,000, $2,000,000, $2,400,000, $1,385,000 and $4,110,000 for the years
ended December 31, 1997, 1998, 1999, and for the nine months ended September 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 $519,000 and $346,000 for the nine months ended
September 30, 1999 and 2000 (unaudited), respectively. The 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
F-13
<PAGE> 118
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The carrying value of
the Company's debt approximated fair value as the interest rates for the debt
approximated market rates of interest available to the Company for similar
instruments. Securities, available for sale, are publicly traded and are stated
at the last reported sales price on the day of the valuation.
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 Company's
corporate restructuring (see Note 7).
Prior to 2000, there were no common stock equivalents excluded from the net
income (loss) per share calculation. During 2000, certain shares of Series A
preferred stock, warrants and stock options were issued that would be dilutive
but were excluded because to include them would have been antidulutive. The
weighted average number of shares so excluded as of September 30, 2000 was
3,078,664 shares of stock issuable upon exercise of stock options and conversion
of preferred stock.
Reclassifications
Certain 1997 and 1998 balances have been reclassified to conform with the
current presentation.
Restatement
The accompanying unaudited interim financial statements as of and for the
nine months ended September 30, 2000 have been restated from previously issued
unaudited interim financial statements to record accretion from the issue date
to September 30, 2000 on the Company's Class B non-voting common stock, the
effect of which was to increase the net loss attributed to common stockholders
by $0.17 per share for the nine months ended September 30, 2000 and to record
F-14
<PAGE> 119
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
goodwill and related amortization as a result of the acquisition of the minority
interest of the franchisees' (see Note 7), the effect of which was to increase
net loss for the nine months ended September 30, 2000 by $103,135 or $0.01 per
share.
2. OTHER ASSETS
Other assets (current) consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1998 1999 2000
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred book costs..................................... $178,820 $ 65,386 $ 392,561
Due from advertising fund (see Note 8)*................. 351,083 168,797 294,503
Deferred IPO costs...................................... -- -- 1,039,133
Deferred taxes.......................................... 110,000 -- --
Other................................................... 132,550 98,963 131,276
-------- -------- ----------
$772,453 $333,146 $1,857,473
======== ======== ==========
</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. An allowance of $150,000 has been provided as of September 30,
2000 (unaudited).
Other assets (noncurrent) consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 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 $1,284,140 in 2000 (unaudited) (see Note 1)...... $ 787,181 $434,620 $2,184,269
Investment in Student Advantage, Inc. (see Note 3)..... 38,630 -- --
Security deposits...................................... 179,776 316,120 396,580
Other.................................................. 98,982 172,106 48,855
---------- -------- ----------
$1,104,569 $922,846 $2,629,704
========== ======== ==========
</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 1,498 membership units out of its original investment of 2,479
units 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., with a cost basis of approximately $80,000, 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
F-15
<PAGE> 120
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, convertible into 169,416 shares of common stock. At December
31, 1998, the Company's investment was recorded at cost, which approximated
$38,000.
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
$7,428,000. On April 18, 2000, the Company distributed 32,168 shares to the
employees and realized a gain of approximately $169,000. At September 30, 2000
(unaudited), the Company held 794,959 shares of Student Advantage, Inc. common
stock valued at $7.37 per share.
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1998 1999 2000
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment........................... $1,838,269 $2,037,431 $2,579,915
Furniture, fixtures and equipment............ 685,604 738,367 1,057,290
Computer equipment under capital leases...... 372,169 1,091,026 1,668,035
Automobiles.................................. 20,503 20,503 42,277
Software..................................... 681,540 1,717,369 4,315,840
Leasehold improvements....................... 400,096 684,103 988,946
---------- ---------- ----------
3,998,181 6,288,799 10,652,303
Less accumulated depreciation and
amortization, including $45,594 in 1998,
$337,299 in 1999 and $616,218 in 2000
(unaudited) of accumulated deprecation for
assets under capital leases................ 2,152,084 3,130,951 4,470,227
---------- ---------- ----------
$1,846,097 $3,157,848 $6,182,076
========== ========== ==========
</TABLE>
5. INVESTMENT IN AFFILIATES
The Company has an ownership interest of approximately 20% in Student
Monitor, LLC. At September 30, 2000, the Company's investment in this company
was approximately $143,000.
F-16
<PAGE> 121
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1999, the Company invested $5,000 for an ownership interest of
approximately 48% 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 approximately 30%. During 2000, after further
third party investments and an additional $1,000,000 investment by the Company,
the Company's ownership interest was reduced to approximately 20%. At December
31, 1999 and September 30, 2000 (unaudited), the investment was approximately $0
and $421,000, respectively. The investment agreement includes various marketing
arrangements including the license by the Company to use various trademarks to
co-brand the Tutor.com service, the sharing of lists of prospective and current
customers and promotion of each other's Web sites. These marketing arrangements
are mutually provided free of charge.
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
September 30, 2000). The line expires on June 30, 2001. As of September 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,
-------------------- SEPTEMBER 30,
1998 1999 2000
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Capital lease obligations....................... $350,289 $881,325 $1,148,367
Term loan....................................... 82,190 46,932 19,485
-------- -------- ----------
432,479 928,257 1,167,852
Less current portion............................ 168,003 390,206 486,039
-------- -------- ----------
$264,476 $538,051 $ 681,813
======== ======== ==========
</TABLE>
Capital Lease Obligations
At September 30, 2000 (unaudited), the Company has leased approximately
$1,668,000 of computer and phone equipment under capital leases all of which are
included in fixed assets (see Note 4).
F-17
<PAGE> 122
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of the future minimum capital lease obligation
payments together with the present value of the minimum lease payments at
September 30, 2000 (unaudited):
<TABLE>
<S> <C>
Year ending September 30, (unaudited)
2001...................................................... $ 499,955
2002...................................................... 513,914
2003...................................................... 205,457
2004...................................................... 108,527
2005...................................................... 18,088
----------
Total....................................................... 1,345,941
Less amounts representing interest (effective rate ranges
from 9% to 17%)........................................... 197,574
----------
Present value of the minimum lease payments................. $1,148,367
==========
Current portion of capital lease obligations................ $ 466,554
Long-term portion of capital lease obligations.............. 681,813
----------
$1,148,367
==========
</TABLE>
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
Until March 31, 2000, the Company was an S corporation with four majority
owned limited liability company subsidiaries, Princeton Review Management, LLC,
Princeton Review Products, LLC, Princeton Review Publishing, LLC and Princeton
Review Operations, LLC (collectively, the "Subsidiaries"). The stockholders of
the S corporation held Class A voting and Class B non-voting common stock.
Effective March 31, 2000, a new holding company, TPR Holdings, Inc., a Delaware
corporation, was formed.
On April 1, 2000, the Class A common stock and Class B non-voting common
stock of the S corporation 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 the Subsidiaries 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. In
this transaction, the shareholders of the S corporation received 9,703,675
shares of Class A common stock and 700,259 shares of Class B non-voting common
stock of TPR Holdings, Inc. The minority interest holders in the Subsidiaries
received 2,858,311 shares of Class A common stock and 1,116,834 shares of Class
B non-voting common stock of TPR Holdings, Inc. The acquisition of the minority
interest was accounted for as a purchase business combination. The resulting
goodwill of $8,250,794 is being amortized over a period of 40 years.
Concurrently, the Company authorized an additional 2,538,000 shares of common
stock to be used for the granting of stock and/or options to employees. The fair
value of the Company's common stock, in the opinion of management, at the time
of this restructuring was $7.39 per share.
As a result of the foregoing transactions the Company's status as an S
corporation terminated as of March 31, 2000 (see Note 9). Shortly after the
completion of the foregoing transactions, TPR
F-18
<PAGE> 123
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holdings, Inc. was renamed The Princeton Review, Inc. and the former S
corporation was merged into The Princeton Review, Inc.
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 an ownership interest of approximately
15% in the Company as of September 30, 2000.
Holders of the Company's Class B non-voting common stock have the right to
require the Company to repurchase their stock under certain circumstances (see
Note 8).
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 designate 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 .961-for-one basis, subject to
anti-dilution adjustments; (5) automatic conversion upon the effective date of a
qualified initial public offering on a .961-for-one basis, subject to
anti-dilution adjustments and the special provision described below; (6)
anti-dilution protection; (7) covenants requiring their authorization of
enumerated 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. As of September 30, 2000, there were no breaches of
the covenants in the Investor Rights Agreement. Accordingly, the total
redemption value for Series A preferred stock after March 31, 2005 is
$51,663,000.
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 $12.99 per share, then, instead of converting on a
.961-for-one basis upon the completion of the Company's initial public offering,
the holders of Series A preferred stock will receive upon the completion of the
offering, in exchange for their shares of Series A preferred stock:
- first, to reflect their pre-offering ownership percentage, such 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 (a) 15.66%
multiplied by (b) our total valuation immediately prior to this offering,
minus $27.0 million; and
- second, $27.0 million in common stock at the initial public offering
price.
The holders of convertible preferred stock and the Company are parties 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 $254,000 to third parties.
The Series A preferred stock is net of offering costs of approximately
$1,919,000. These costs are being accreted to the value of the Series A
preferred stock to the redemption date.
F-19
<PAGE> 124
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 agreements, the Company is required to 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 financial statements. The
related balances of the advertising fund as of December 31, 1998, December 31,
1999 and September 30, 2000 (unaudited) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1998 1999 2000
----------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Advertising fund cash........................ $ 82,625 $ 12,649 $ 159,018
Advertising fund receivables................. 163,269 154,149 105,314
Advertising fund other assets................ 26,381 18,321
Advertising fund accounts payable* (including
$1,850,404, $168,797, and $444,503 of
liabilities due to the Company at December
31, 1998, 1999 and September 30, 2000
(unaudited), respectively)................. (2,012,991) (175,089) (512,036)
----------- --------- ---------
Advertising fund surplus (deficit)........... $(1,767,097) $ 18,090 $(229,383)
=========== ========= =========
</TABLE>
---------------
* Management of the Company has adopted a program to reduce the expenditures of
the advertising fund relative 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 and September 30, 2000
(unaudited), the Company had an allowance against the receivables of
$1,499,321 and $150,000, respectively. The net receivable balances at December
31, 1998, 1999 and September 30, 2000 (unaudited) were $351,083, $168,797, and
$294,503, respectively (see Note 2).
F-20
<PAGE> 125
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
2000...................................................... $ 1,991,000
2001...................................................... 1,922,000
2002...................................................... 1,824,000
2003...................................................... 1,678,000
2004...................................................... 1,410,000
Thereafter.................................................. 5,365,000
-----------
$14,190,000
===========
</TABLE>
During 2000, the Company entered into additional operating leases. Minimum
rental commitments under these leases, which are in excess of one year, are as
follows: $370,000 in 2000, $786,000 in 2001, $797,000 in 2002, $808,000 in 2003,
$849,000 in 2004 and $5,009,000 thereafter.
Rent expense for the years ended December 31, 1997, 1998, 1999 and for the
nine months ended September 30, 1999 and 2000 (unaudited) was approximately
$2,619,000, $2,708,000, $3,095,000, $2,361,000 and $2,786,000, 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 September 30, 2000
(unaudited), aggregated approximately $630,000, $557,000 and $463,000,
respectively.
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 such number of shares of the
Company's common stock as is obtained by dividing $1.2 million by the initial
public offering price of the Company's common stock. These warrants are
exercisable for an 18-month period, beginning with the date of the completion of
an initial public offering by the Company, at an exercise price equal to the
initial offering price of the Company's stock. At September 30, 2000, the
Company recorded a $300,000 expense for the fair value of the warrants. The fair
value of the warrants was determined using the Black-Scholes option pricing
model with the following assumptions: an expected life of 18 months, an exercise
price of $12 per share, an expected dividend yield of 0, an expected stock price
volatility of 50% and a risk-free interest rate of 6.8%. In addition, as part of
the settlement, 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.
As of September 30, 2000, the Company accrued $30,000 for the remaining royalty
due to this author for the year.
F-21
<PAGE> 126
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Publishing Contracts
The Company has entered into several agreements with its publisher, Random
House, Inc., which holds an ownership interest in the Company of approximately
15% as of September 30, 2000, that provide for book royalties to be paid once
acceptance advances have been earned out. 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 $392,561, in current
deferred book costs at December 31, 1998, 1999 and September 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 September 30, 2000 (unaudited) are $46,875, $57,543
and $68,083, 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
$318,682 and $199,021 for the nine months ended September 30, 1999 and 2000
(unaudited), respectively.
The expense related to co-author payments is accrued monthly. This expense
is adjusted based upon actual expenditures paid to the co-authors. These
expenditures are a percentage of the royalties paid to the Company by the
publisher. Royalties from the publisher are recorded as revenue with the
co-author expenditures recorded as expense.
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
in the Company of approximately 15% at September 30, 2000, 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 purchase price is calculated in accordance
with the agreement. This purchase price per share is initially $7.39, 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 and September
30, 2000 (unaudited), the redemption value of the Class B non-voting common
stock was estimated to be approximately $20,221,000 and $24,279,000,
respectively.
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. ("McGraw-Hill"). Under this agreement, the Company
provides McGraw-Hill with certain materials, including workbooks, to be used by
McGraw-Hill in conjunction with their textbooks. In
F-22
<PAGE> 127
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
addition, the Company prepares and administers a "question pool" of test
questions for grades 2-12. For these services, the Company receives various fees
from McGraw-Hill. The Company recognized $959,388, $1,029,795, $1,008,544 and
$905,638, for the years ended December 31, 1998, 1999 and the nine months ended
September 30, 1999 and 2000 (unaudited), respectively, in income for services
provided to McGraw-Hill.
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 Company's operating subsidiaries were organized as
limited liability companies, therefore, 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 made, 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>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current........................................ $(184,815) $(71,068) $ (133,206)
Deferred....................................... (30,000) 122,000 6,665,000
--------- -------- ----------
$(214,815) $ 50,932 $6,531,794
========= ======== ==========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward.......... $ 382,000 $ 548,000 $ 7,838,000
Advertising fund allowance............... 86,000 -- 62,000
Allowance for doubtful accounts.......... 18,000 18,000 199,000
Stock appreciation rights................ 18,000 87,000 2,000
Capitalized inventory costs.............. 3,000 5,000 40,000
Deferred rent............................ -- 4,000 110,000
Accumulated amortization................. -- -- 29,000
Accumulated depreciation................. -- -- 141,000
Deferred compensation.................... -- -- 125,000
Other.................................... 3,000 12,000 139,000
----------- ----------- -----------
Total deferred tax assets............. 510,000 674,000 8,685,000
----------- ----------- -----------
</TABLE>
F-23
<PAGE> 128
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax liabilities:
Unrealized gains......................... -- (1,498,000) (2,512,000)
Software development costs............... (35,000) (66,000) (1,423,000)
Accumulated amortization................. -- -- --
Other.................................... -- (11,000) --
----------- ----------- -----------
Total deferred tax liabilities........ (35,000) (1,575,000) (3,935,000)
----------- ----------- -----------
Net deferred tax asset (liability).... $ 475,000 $ (901,000) $ 4,750,000
=========== =========== ===========
</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 September 30, 2000 (unaudited) is
classified in the Company's consolidated balance sheet as noncurrent deferred
tax assets of approximately $560,000 and $6,847,000 respectively and current
deferred tax liabilities of approximately $1,461,000 and $2,097,000
respectively. The Company has a net operating loss carryforward of approximately
$18,842,000 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.
The net operating loss carryforward of approximately $18,842,000 is based
on book losses for the period from April 1, 2000 through September 30, 2000 in
the amount of approximately $6,999,000 and adjusted for permanent and timing
differences of approximately $11,843,000. Prior to April 1, 2000 the company was
an S corporation and not subject to most federal, state and local taxes.
A reconciliation setting forth the differences between the effective tax
rate of the Company for the six months ended September 30, 2000 and the U.S.
federal statutory tax rate is as follows:
<TABLE>
<S> <C> <C>
Pre-tax net loss.......................................... $3,245,981 34%
Effect of S-Corp. non-tax period (January 1 - March 31,
2000)................................................... 1,448,164 15
Effect of minority interest and other permanent
differences............................................. (77,586) (1)
Effect of state taxes..................................... 1,015,791 11
Effect of conversion to C corporation..................... 899,444 10
---------- ---
$6,531,794 69%
========== ===
</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 reported had the Company been subject to federal,
state and local income taxes as a C corporation
F-24
<PAGE> 129
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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..................................................... $ --
Deferred.................................................... 803,631
--------
$803,631
========
</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 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 3,330,000
Allowance for doubtful accounts........................... 720,000
Stock appreciation rights................................. 2,603,000
Capitalized inventory costs............................... 141,000
Deferred rent............................................. 141,000
Other..................................................... 138,000
------------
Total deferred tax assets.............................. 7,073,000
------------
Deferred tax liabilities:
Unrealized gains.......................................... (34,796,000)
Software development costs................................ (1,367,000)
Other..................................................... (231,000)
------------
Total deferred tax liabilities......................... (36,394,000)
------------
Net deferred tax liability............................. $(29,321,000)
============
</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...... (49,513) (3)
Effect of state taxes...................................... 140,875 7
-------- ---
$803,631 38%
======== ===
</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 covered by the insurance
carrier. As of December 31, 1998 and 1999 and September 30, 2000 (unaudited),
the Company had no significant unfunded claims. As of September 30, 2000 and
based
F-25
<PAGE> 130
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on the number of covered employees at that time, the maximum annual liability
for medical claims for 2000 would be $680,000.
Employment Agreements
The Company has entered into amended employment agreements with executives
which provide 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. The maximum
annual bonus payments, as defined under these agreements, are approximately
$1,200,000.
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 nine months ended September 30, 1999 and 2000
(unaudited) were $54,415 and $76,177, respectively.
Stock Appreciation Rights Plan (number of units and per unit prices have been
adjusted to reflect changes to the number of outstanding shares of the Company's
common stock as a result of its corporate restructuring and reverse stock split
described in Notes 7 and 15).
Until April 2000, the Company maintained a Stock Appreciation Rights Plan
(the "SAR Plan"). There were no issuances of Stock Appreciation Rights units
("SARs") under the SAR Plan since 1996, as the SAR Plan was augmented with a
Phantom Stock Plan in June 1997 (see the Phantom Stock Plan note below). As of
December 31, 1997, 1998 and 1999, there were 182,999, 161,209 and 141,625 SARs
vested, respectively. Vesting rights of awarded SARs were at the discretion of
the Company's management at the time of the award. The vesting periods varied
from immediate to three years based on the circumstances of each award. The
number of vested SARs decreased from 1997 to 1999 due to payouts to certain
individuals during this period. The Company determined the fair value assigned
to the SARs to be $2.49 per unit at December 31, 1997, $2.83 per unit at
December 31, 1998 and $7.07 per unit as of December 31, 1999. The annual
increase in fair value, as determined by the valuation committee under the SAR
Plan, is based upon various factors including transactions and potential
transactions with third parties. The per unit values were derived by dividing
the total value of the Company as determined by the valuation committee by
1,132,460 underlying units under the SAR Plan.
The Company 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 fair value and the change in the number of vested SARs. Such
amounts were recorded quarterly.
Phantom Stock Plan (number of units and per unit prices have been adjusted to
reflect changes to the number of outstanding shares of the Company's common
stock as a result of its corporate restructuring and reverse stock split
described in Notes 7 and 15).
Effective June 1997, the Company augmented its SAR Plan with a Phantom
Stock Plan (the "PSU Plan"). Under this plan, Phantom Stock Units ("PSUs") could
be purchased by eligible employees or awarded by management. Employee purchases
of PSUs were made through bi-weekly
F-26
<PAGE> 131
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payroll deductions based on annual elections made in December of the prior year.
Awarded PSUs were at the discretion of management. The total number of PSUs
issued under the PSU Plan at December 31, 1997 was 103,347 (at an average price
of $2.60 per unit), of which 62,977 were vested. In 1998, the Company awarded an
additional 5,770 PSUs at an average price of $2.60 per unit. In addition, during
1998, employees purchased 36,158 PSUs at either $2.96 or $2.60, depending on the
date of purchase. As of December 31, 1998, total issuances under the PSU Plan
were 145,275, of which 117,781 were vested. In 1999, the Company awarded
1,513,460 PSUs at a price of $2.96 per unit. In addition, during 1999, employees
purchased 27,376 PSUs at either $2.96 or $5.32, depending on the date of
purchase. A total of 11,353 PSUs were forfeited or paid out at December 31, 1999
(3,841 forfeited and 7,512 paid out). As of December 31, 1999, a total of
1,674,758 PSUs had been issued under the PSU Plan, of which 312,682 were vested.
Vesting rights of awarded PSUs were at the discretion of the Company's
management at the time of the award. PSUs that were purchased by employees were
fully vested when purchased. The Company determined the fair value assigned to
the PSUs to be $2.96 per unit at December 31, 1998 and $7.39 per unit at
December 31, 1999. The annual increase in fair value, as determined by the
valuation committee under the PSU Plan, is based upon various factors including
transactions and potential transactions with third parties. The per unit values
for PSUs were derived by dividing the total value of the Company, as determined
by the valuation committee, by 846,000 underlying units under the PSU Plan.
The Company recorded compensation expense of $162,690, $18,443 and
$1,879,292 for the years ended December 31, 1997, 1998 and 1999, respectively,
based on the actual issue prices of the vested PSUs, the annual appreciation of
the fair value and the change in the number of vested PSUs. The vesting periods
for awarded PSUs are based on the circumstances of each award. Some were awarded
with vesting periods based on the passage of time and some were awarded with
vesting based on performance. The above amounts were recorded quarterly.
Performance awards were recorded quarterly once the Company determined that such
awards would be achieved.
Termination of SAR and PSU Plans
In April 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, 2,538,000 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. 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.
At the time of the Company's restructuring (see Note 7), the valuation
committee of the PSU Plan determined the per share price of the Company's common
stock to be $7.39 per share. This determination was based on a number of
factors, including the $7.27 per share (adjusted to $8.59 per share for a
subsequent .846-for-one reverse stock split of the Company's common stock) price
paid by the Series A preferred shareholders that were then investing in the
Company. Applying a discount of approximately 14% to the preferred share price,
the per share value for common stock was estimated to be $7.39 per share. This
per share value of $7.39 was used to value the PSUs and SARs, the exercise price
of newly issued options and the stock used to replace the vested PSUs.
In connection with the termination of the PSU Plan in April 2000, the
Company issued 890,767 shares of Class B non-voting common stock with a value of
$6,580,519 to the holders of PSUs in exchange for all vested and unvested PSUs
and paid related payroll withholding taxes, for a total compensation expense of
approximately $11,962,000. The Company recorded this expense in April
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<PAGE> 132
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000, while simultaneously reversing the prior liability for vested PSUs of
approximately $3,498,000. This amount represents all accrued PSU expenses from
the three months ended March 31, 2000 and all prior periods remaining as of
March 31, 2000. In addition, certain employees purchased a total of 26,437
additional shares of the Company's Class B common stock, at $7.39 per share, for
a total of 917,204 shares issued during the conversion. In addition to the
shares of Class B non-voting common stock, 1,182,507 stock options were awarded
as a result of the termination of the PSU Plan. These options were unvested at
the time of grant, have a $7.39 exercise price, which was the estimated fair
value at the time of grant, and vest quarterly over periods ranging from 3 to 4
years.
The outstanding SARs, which were all fully vested, were converted into
139,857 stock options on a one for one basis with exercise prices between $1.73
and $2.29, which equal the initial SAR value at the time of the award adjusted
for the increased number of underlying shares of common stock of the Company.
Since these exercise prices are below the estimated fair value of $7.39 per
share at the time of grant, the compensation expense recorded in prior periods
to record the expense up to the $7.39 per share fair value was not reversed at
the time of the conversion from SARs to stock options.
F-28
<PAGE> 133
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the Company's SAR and PSU activity and
related information for the years ended December 31, 1997, 1998 and 1999 and the
nine months ended September 30, 2000. Where noted the number of shares and per
share prices have been adjusted to reflect the Company's April 1, 2000
restructuring and the reverse stock split (see Notes 7 and 15).
<TABLE>
<CAPTION>
SAR'S
---------------------- PSU'S
AVG. VALUE ------------------------------
ADJUSTED AT TIME OF VALUE AT TIME OF
# OF GRANT ADJUSTED GRANT/PURCHASE
SAR'S (ADJUSTED) # OF PSU'S (ADJUSTED)
-------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Outstanding at beginning of year............ 290,074 $1.88 --
Granted................................... -- 103,347 $2.60
Exercised................................. 15,930 $1.88 --
Cancelled................................. -- --
------- ---------
Outstanding at end of year.................. 274,144 103,347
------- ---------
YEAR ENDED DECEMBER 31, 1998
Outstanding at beginning of year............ 274,144 103,347
Granted................................... -- 5,770 $2.60
Purchased................................. -- 20,659 $2.60
Purchased................................. -- 15,499 $2.96
Exercised................................. 99,589 $1.88 --
Cancelled................................. -- --
------- ---------
Outstanding at end of year.................. 174,555 145,275
------- ---------
YEAR ENDED DECEMBER 31, 1999
Outstanding at beginning of year............ 174,555 145,275
------- ---------
Granted..................................... -- 1,513,460 $2.96
Purchased................................... -- 14,754 $2.96
Purchased................................... -- 12,622 $5.32
Exercised................................... 32,930 $1.88 7,512 $5.32
Cancelled................................... -- 3,841 $5.32
------- ---------
Outstanding at end of year.................. 141,625 1,674,758
NINE MONTHS ENDED SEPTEMBER 30, 2000
Outstanding at beginning of period.......... 141,625 1,674,758
Granted................................... -- 27,664 $5.32
Purchased................................. -- 31,971 $5.32
Exercised................................. 1,768 $1.88 --
Cancelled................................. 139,857 $1.88 1,734,393 $7.39
------- ---------
Outstanding at end of period................ -- --
======= =========
</TABLE>
STOCK INCENTIVE PLAN
On April 1, 2000, the Company adopted its 2000 Stock Incentive Plan (the
"Plan") providing for the authorization and issuance of up to 2,538,000 shares
of common stock, as adjusted. In June 2000, an additional 211,500 shares were
authorized. The Plan provides for the granting of incentive stock options,
non-qualified stock options, restricted stock and deferred stock to eligible
F-29
<PAGE> 134
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
participants. Options granted under the Plan are for periods not to exceed ten
years. Other than for options to purchase 139,857 shares granted to certain
employees which were vested immediately, options outstanding under the Plan
generally vest quarterly over four years.
A summary of the activity of the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE FAIR VALUE
--------- ---------------- ----------------
<S> <C> <C> <C>
Outstanding at December 31,
1999......................... -- $ -- $ --
Granted below market........... 139,857 1.88 5.96
Granted at market.............. 1,363,045 7.40 1.78
Forfeited...................... (57,060) 7.15 1.96
--------- -----
Outstanding at September 30,
2000......................... 1,445,842 $6.88 2.18
========= =====
</TABLE>
Stock options outstanding at September 30, 2000 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE OPTIONS OPTIONS REMAINING WEIGHTED-AVERAGE
PRICE OUTSTANDING EXERCISABLE CONTRACTUAL LIFE EXERCISE PRICE
-------------- ----------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
$1.73 - 2.29 137,290 137,290 9.5 $1.88
7.39 1,296,538 131,912 9.5 7.39
8.87 12,014 -- 9.9 8.87
--------- -------
1,445,842 269,202 9.5
========= =======
</TABLE>
During 2000, the Company granted 139,857 stock options to employees at
exercise prices ranging from $1.73-$2.29 per share. Compensation expense, in
accordance with the provisions of APB 25, of approximately $739,000 was recorded
by the Company for the nine months ended September 30, 2000 (unaudited).
Pro forma information regarding net loss is required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123") and has been determined as if the Company had
accounted for its employee stock options under the fair-value method of that
statement. The fair value for these options was estimated at the date of grant
using the minimum-value method, which utilizes a near-zero volatility factor.
The remaining assumptions, which are a weighted average, under this method are
as follows:
<TABLE>
<S> <C>
Expected life (years)....................................... 5
Risk-free interest rate..................................... 5.5%
Dividend yield.............................................. 0
</TABLE>
This option-valuation method requires input of highly subjective
assumptions. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because change in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing method does not necessarily provide a
reliable single measure of the fair value of its employee stock options. The
effects of applying SFAS 123 in this pro forma disclosure are not indicative of
future amounts and additional awards in future years are anticipated.
For purposes of pro forma disclosure, the estimated fair value of the
equity awards is amortized to expense over the options' vesting period.
F-30
<PAGE> 135
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's pro forma information is as follows for the nine months ended
September 30, 2000 (unaudited):
<TABLE>
<S> <C>
Pro forma net loss...................................... $(3,422,620)
</TABLE>
11. RELATED PARTIES
Publisher
Random House, Inc., a holder of an ownership interest of approximately 15%
in the Company at September 30, 2000, 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 years ended December 31, 1998
and 1999, respectively, with the balances of $285,000 and $562,500 due upon
delivery of the completed manuscripts at December 31, 1998 and 1999. There were
no new contracts signed during the nine months ended September 30, 2000.
For the years ended December 31, 1997, 1998 and 1999 and for the nine
months ended September 30, 1999 and 2000 (unaudited) the Company earned
$4,003,248, $2,917,467, $2,717,416, $1,689,693 and $1,779,570, respectively,
from book and publication income from Random House, Inc. Total receivables at
December 31, 1998, 1999 and September 30, 2000 (unaudited) include $1,074,602,
$1,552,080 and $1,328,138, 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 September 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 September 30, 2000 (unaudited). The Company
also had an additional liability of $52,615 at September 30, 2000 (unaudited).
Franchisees
As of May 31, 1995, the Company sold approximately 18% of Princeton Review
Publishing, LLC to certain franchisees (which was reduced to approximately 14%
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 nine
months ended September 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, $2,432,957 and $2,770,673,
respectively, and earned revenues of $2,253,926, $2,073,274, $2,214,936,
$1,848,909 and $2,359,688, respectively, through the sale of course materials.
Included in accounts receivable at December 31, 1998, 1999 and September 30,
2000 (unaudited) was $796,253, $835,665 and $1,015,369, respectively, due from
these franchisees.
In conjunction with the Company's restructuring (see Note 7), certain
franchisees exercised their preemptive rights to buy more membership units in
Princeton Review Publishing, LLC. These franchisees purchased an additional
280.25 units for $1,100,932.
F-31
<PAGE> 136
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 software
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, LLC ("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 13% of gross accounts
receivable as of December 31, 1998, 1999 and September 30, 2000 (unaudited),
respectively. This customer, whose revenues are reported in the Review.com
division, accounted for approximately 12% of the revenue 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 26% of gross
accounts receivable at December 31, 1998, and 1999, and September 30, 2000
(unaudited), respectively and approximately 12% of the Company's revenue for the
year ended December 31, 1999.
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
F-32
<PAGE> 137
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 earns revenue from developing content
for books, software and other publications for third-party publishers, sells
advertising and sponsorships and earns marketing fees from higher education
institutions. Homeroom.com earns fees from its content development work and
recently launched an Internet-based subscription service for K-12 schools and
parents.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 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 $23,644,621 $ 27,282,698
Review.com................... 5,133,837 4,464,169 5,289,095 3,893,628 3,756,393
Homeroom.com................. -- 959,388 5,112,669 3,133,674 3,114,840
----------- ----------- ----------- ----------- ------------
Total revenue............. $32,513,678 $33,745,619 $40,302,629 $30,671,923 $ 34,153,931
=========== =========== =========== =========== ============
Cost of revenue
Instruction and Guidance..... $10,575,607 $ 9,844,248 $ 9,759,264 $ 7,338,387 $ 8,922,321
Review.com................... 2,716,686 1,672,093 1,469,445 816,986 799,420
Homeroom.com................. -- 383,755 1,941,569 800,927 620,336
----------- ----------- ----------- ----------- ------------
Total cost of revenue..... $13,292,293 $11,900,096 $13,170,278 $ 8,956,300 $ 10,342,077
=========== =========== =========== =========== ============
Selling, general and
administrative expenses
Instruction and Guidance..... $12,344,711 $14,617,200 $15,549,146 $11,316,170 $ 18,545,948
Review.com................... 4,149,042 5,270,285 5,816,566 4,067,187 7,952,299
Homeroom.com................. -- 163,277 4,454,429 2,504,023 6,838,317
Other corporate.............. 453,903 909,965 1,433,598 -- 5,946,079
Depreciation and
amortization*............. 970,894 1,069,483 1,561,387 859,937 1,248,093
----------- ----------- ----------- ----------- ------------
Total selling, general and
administrative
expenses................ 17,918,550 22,030,210 28,815,126 18,747,317 40,530,736
Instruction and Guidance --
research and
development............... 1,012,653 1,173,730 878,165 518,616 420,546
----------- ----------- ----------- ----------- ------------
Total operating
expenses................ $18,931,203 $23,203,940 $29,693,291 $19,265,933 $ 40,951,282
=========== =========== =========== =========== ============
Operating income (loss) from
continuing operations........ $ 290,182 $(1,358,417) $(2,560,940) $ 2,449,690 $(17,139,428)
=========== =========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- SEPTEMBER 30,
1997 1998 1999 2000
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Segment Assets
Instruction and Guidance........... $ 5,026,658 $ 4,001,447 $ 4,476,311 $ 7,685,156
Review.com......................... 5,708,241 5,599,444 41,163,451 14,757,284
Homeroom.com....................... -- 626,438 3,808,307 4,659,452
</TABLE>
F-33
<PAGE> 138
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- SEPTEMBER 30,
1997 1998 1999 2000
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Other Corporate.................... 2,495,468 3,231,385 4,249,488 28,788,766
----------- ----------- ----------- -----------
13,230,367 13,458,714 53,697,557 55,890,658
Discontinued Operations............ 1,650,105 2,247,838 -- --
----------- ----------- ----------- -----------
Total Assets.................... $14,880,472 $15,706,552 $53,697,557 $55,890,658
=========== =========== =========== ===========
</TABLE>
---------------
* Approximately $574,000 of amortization for the nine months ended September 30,
2000 (unaudited) was directly allocated to Instruction and Guidance
($137,000), Review.com ($21,000) and Homeroom.com ($416,000). 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, in April 2000, the Company's SAR and
PSU 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.
On December 14, 2000, the Company exercised its option under the option
agreement to acquire the assets comprising the businesses of Princeton Review of
Boston and Princeton Review of New Jersey for a total purchase price of
approximately $13.8 million, subject to adjustment in accordance with the option
agreement.
Under the option agreement, 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 this option agreement.
Approximately $10,175,000 of the purchase price will be payable in cash at
the time of closing. The remaining $3,625,000 of the purchase price will be paid
by delivery of two subordinated promissory notes. The first promissory note will
be in a principal amount of $3,125,000, will be
F-34
<PAGE> 139
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. This promissory note will be convertible into 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 completion of this offering. 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. The second
promissory note will be in a principal amount of $500,000, will bear interest at
the rate of 8.25% per year, payable on a quarterly basis, and will be payable as
to the entire principal amount four years from its date of issuance. This note
will not be convertible.
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.
On October 18, 2000, the Company entered into an option agreement to
acquire the assets of T.S.T.S., which provides test preparation courses in
Texas, Arizona, Oklahoma, Louisiana and New Mexico under The Princeton Review
name through four franchise agreements with the Company. Under this option
agreement, the Company has the option to acquire the operations of T.S.T.S. for
a total purchase price between $6.2 million and $7.5 million, subject to
adjustments specified in the option agreement. The actual purchase price to be
paid will depend on the financial performance of T.S.T.S. and the timing of the
exercise of the option in accordance with the terms of the option agreement.
This option remains in effect until July 15, 2001.
If the Company exercises the option and T.S.T.S. has met financial
performance standards specified in the option agreement, the Company must sign a
definitive purchase agreement within 30 days after exercising the option and
close the purchase within 90 days of exercising the option. If the Company has
consummated its initial public offering but has not exercised the option by July
15, 2001, then the Company is obligated to purchase T.S.T.S. as if the Company
had exercised the option on July 15, 2001.
If the Company exercises its option to purchase T.S.T.S., the difference
between the actual purchase price and $4.5 million will be payable by delivery
of a five-year promissory note. The remainder of the purchase price will be
payable in cash at the time of closing. The promissory note will be payable in
20 equal quarterly installments beginning with the first business day of the
first calendar quarter following the closing date of the acquisition and will
bear interest at the rate of 8.25% per year.
On October 27, 2000, the Company entered into a Line of Credit Agreement
with Excel Bank, N.A. and borrowed $4,500,000. The line of credit is due on the
earlier of October 31, 2001 or 10 days after the Company's initial public
offering and bears interest at a variable rate of prime plus 1% per year.
On October 23, 2000, the Company's Board of Directors approved an
.846-for-one reverse stock split of its common stock which became effective on
November 16, 2000. All share and per share amounts have been adjusted to reflect
the Company's recapitalization and stock split.
On December 14, 2000, the Company entered into a loan agreement with
Reservoir Capital Partners, L.P., Reservoir Capital Master Fund, L.P., Reservoir
Capital Associates, L.P., SGC Partners II, LLC, Olympus Growth Fund III, L.P.,
and Olympus Executive Fund, L.P., providing for a line of credit of up to $25.0
million under which the Company may borrow up to $18,750,000 for the acquisition
of independent franchises and up to $6,250,000 for general corporate purposes.
Amounts borrowed under the credit facility initially bear interest at an annual
interest rate of 13%. Until the termination of the facility, the applicable
annual interest rate will increase by 1% on each
F-35
<PAGE> 140
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
anniversary of the agreement. The loan is secured by substantially all of the
Company's current and future business assets. The loan agreement contains
covenants typical to a secured credit facility, including covenants requiring
the Company to maintain a number of financial ratios and prohibiting the Company
from issuing dividends, creating liens, incurring additional indebtedness for
borrowed money, changing the fundamental organization or lines of business,
making investments and engaging in transactions with affiliates. The Company is
required to prepay all outstanding borrowings under the loan facility within
180 days after the completion of this offering. At that time, the facility will
terminate.
As part of the loan transaction, the lenders received warrants initially
exercisable for a total of 250,000 shares of common stock at an exercise price
of $0.01 per share. In the event that the loan facility remains outstanding on
December 14, 2001, the warrants will be exercisable for an additional 275,000
shares and if the loan facility remains outstanding on December 14, 2002, the
warrants will be exercisable for an additional 400,000 shares.
On December 15, 2000, the Company entered into an option agreement to
acquire the assets of Princeton Review Peninsula, which provides test
preparation courses in several counties in California under The Princeton Review
name through a franchise agreement with the Company. Under this option
agreement, the Company has the option to acquire the operations of Princeton
Review Peninsula for a total purchase price between $2.5 million and $2.8
million payable in cash at the closing, subject to adjustments specified in the
option agreement. The actual purchase price to be paid will depend on the
financial performance of Princeton Review Peninsula in accordance with the terms
of the option agreement. This option remains in effect until May 1, 2001.
If the Company exercises the option and Princeton Review Peninsula has met
financial performance standards specified in the agreement, the Company must
sign a definitive purchase agreement within 30 days after exercising the option
and close the purchase within 90 days of exercising the option.
F-36
<PAGE> 141
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
Burlington, Massachusetts
May 18, 2000
F-37
<PAGE> 142
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1998 1999 2000
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash (Note 1)......................................... $ 979,182 $1,020,142 $4,117,290
Investments (Note 2).................................. -- -- 516,774
Prepaid expenses...................................... 81,410 226,463 49,250
Due from affiliates (Note 5).......................... 30,152 114,541 1,194
Due from officer (Note 5)............................. 8,611 400,496 5,184
Due from landlord..................................... -- 15,711 11,010
Employee advances..................................... 3,640 3,366 1,023
---------- ---------- ----------
Total current assets............................... 1,102,995 1,780,719 4,701,725
---------- ---------- ----------
Fixed assets (Note 1)
Furniture and equipment............................... 250,304 290,348 317,969
Motor vehicle......................................... 107,304 104,548 104,548
Leasehold improvements................................ 14,903 27,903 27,903
---------- ---------- ----------
Total fixed assets................................. 372,511 422,799 450,420
Less accumulated depreciation (Note 3)............. 150,024 202,734 249,474
---------- ---------- ----------
Net fixed assets................................... 222,487 220,065 200,946
---------- ---------- ----------
Other assets
Investments, available for sale (Note 2)................ -- -- 161,181
Security deposits..................................... 24,660 24,660 31,660
Franchise fees, net of accumulated amortization (Note
1)................................................. 169,294 150,484 136,376
USMLE course, net of accumulated amortization (Note
1)................................................. 41,219 37,958 35,513
Goodwill, net of accumulated amortization (Note 1).... 574 503 450
---------- ---------- ----------
Total other assets................................. 235,747 213,605 365,180
---------- ---------- ----------
Total assets............................................ $1,561,229 $2,214,389 $5,267,851
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable...................................... $ 92,084 $ 84,086 $ --
Accrued payroll....................................... -- 80,361 --
Accrued expenses...................................... 18,074 74,363 220,793
Employee benefits..................................... 1,928 51,409 21,407
Deferred revenues (Note 1)............................ 724,954 992,849 1,490,481
Deposits.............................................. 9,595 -- --
Corporate income taxes payable........................ 243 11,124 29,273
Other current liabilities............................. 344 164 --
---------- ---------- ----------
Total current liabilities.......................... 847,222 1,294,356 1,761,954
---------- ---------- ----------
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).............. -- -- 161,181
Retained earnings..................................... 65,025 244,251 2,668,934
---------- ---------- ----------
Total stockholders' equity......................... 714,007 920,033 3,505,897
---------- ---------- ----------
Total liabilities and stockholders' equity......... $1,561,229 $2,214,389 $5,267,851
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE> 143
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, SEPTEMBER 30,
------------------------- ------------------------
1998 1999 1999 2000
---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue.................................. $9,010,582 $10,344,757 $8,486,986 $9,527,872
Cost of services provided................ 4,463,210 4,958,756 3,733,142 4,037,145
---------- ----------- ---------- ----------
Gross profit............................. 4,547,372 5,386,001 4,753,844 5,490,727
Total operating expenses................. 3,565,075 3,748,488 2,389,824 2,741,537
---------- ----------- ---------- ----------
Income from operations................... 982,297 1,637,513 2,364,020 2,749,190
Other income (expense)
Interest income........................ 32,120 55,999 21,937 51,047
Miscellaneous income................... 8,015 2,736 2,636 16,807
Bad debt............................... (10,508) (51,832) (7,451) (68)
Loss on sale of fixed asset............ -- (5,816) (5,816) --
---------- ----------- ---------- ----------
Income before profit sharing plan........ 1,011,924 1,638,600 2,375,326 2,816,976
Profit sharing plan (Note 7)............. 39,476 50,548 28,769 31,608
---------- ----------- ---------- ----------
Income before income tax expense......... 972,448 1,588,052 2,346,557 2,785,368
Income tax expense (Note 1).............. 16,497 18,418 29,371 44,485
---------- ----------- ---------- ----------
Net Income............................... $ 955,951 $ 1,569,634 $2,317,186 $2,740,883
========== =========== ========== ==========
</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 $2,346,557 $2,785,368
Provision for taxes.................... 388,000 633,000 936,000 1,113,100
---------- ----------- ---------- ----------
Pro forma net income................... $ 584,448 $ 955,052 $1,410,557 $1,672,268
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE> 144
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 NINE MONTHS ENDED SEPTEMBER 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)........ -- -- -- 2,740,883 -- 2,740,883
Stockholder distributions
(unaudited)................. -- -- -- (316,200) -- (316,200)
Unrealized holding gains
arising during period
(unaudited)................. -- -- -- -- $161,181 161,181
--- ------ -------- ----------- -------- -----------
Balance, September 30, 2000
(unaudited)................. 503 $1,203 $674,579 $ 2,668,934 $161,181 $ 3,505,897
=== ====== ======== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE> 145
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, SEPTEMBER 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 $2,317,186 $2,740,883
Items not affecting cash
Depreciation and amortization...... 68,128 78,936 62,881 63,344
Loss on sale of fixed assets....... -- 5,816 5,816 --
Bad debt........................... 10,508 51,832 7,451 68
Changes in current assets and
liabilities
Other current assets............... 158,804 (168,821) 14,747 184,257
Other current liabilities.......... 182,351 403,635 490,202 467,532
----------- ----------- ---------- ----------
Cash provided by operating activities... 1,375,742 1,941,032 2,898,283 3,456,084
----------- ----------- ---------- ----------
Cash provided by (used for) investing
activities
Cash paid for investments............. -- -- -- (516,774)
Acquisition of fixed assets........... (115,667) (60,188) (52,796) (27,621)
Advances to affiliates................ 10,818 (84,391) (64,478) 113,347
Deposits.............................. 6,882 -- -- (7,000)
----------- ----------- ---------- ----------
Cash used for investing activities...... (97,967) (144,579) (117,274) (438,048)
----------- ----------- ---------- ----------
Cash provided by (used for) financing
activities
Officer loans......................... (2,954) (391,885) (537,227) 395,312
Stockholder distributions............. (782,755) (1,390,408) (334,600) (316,200)
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) (871,827) 79,112
----------- ----------- ---------- ----------
Increase in cash........................ 510,946 40,960 1,909,182 3,097,148
Cash, beginning of period............... 468,236 979,182 979,182 1,020,142
----------- ----------- ---------- ----------
Cash, end of period..................... $ 979,182 $ 1,020,142 $2,888,364 $4,117,290
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE> 146
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
SEPTEMBER 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.
The Companies maintain a cash balance of approximately $3,052,000 in
commercial paper for the nine months ended September 30, 2000. Such
balances are not insured. 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.
F-42
<PAGE> 147
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Fully depreciated assets as of December 31, 1998 and 1999, were
approximately $59,000 and $61,700, respectively. Fully depreciated assets
as of September 30, 2000 (unaudited) were $61,700.
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 nine months ended
September 30, 1999 and 2000, depreciation expense totaled $46,275 and
$46,738, 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 nine months ended
September 30, 1999 and 2000, was $2,445 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 nine months
ended September 30, 1999 and 2000 totaled $14,108 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 nine months ended September 30, 1999
and 2000 totaled $53 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 nine months ended September 30, 1999 and 2000, a provision was recorded
for state taxes totaling $29,371 and $44,485, 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
F-43
<PAGE> 148
THE PRINCETON REVIEW OF NEW JERSEY, INC. AND
THE PRINCETON REVIEW OF BOSTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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. In March, 2000 (unaudited), The Princeton Review of 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.
Effective April 1, 2000, these membership units were converted into 442,247
shares of Class B non-voting common stock of The Princeton Review, Inc.
Investments in securities are summarized as follows at September 30
(unaudited):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
GAIN LOSS VALUE
---------- ---------- --------
<S> <C> <C> <C>
Available-for-sale Securities:
2000 Mutual Funds........................... $161,181 -- $161,181
======== === ========
</TABLE>
Other comprehensive income for the nine months ended September 30, 2000
(unaudited), includes an unrealized holding gain on available-for-sale
securities of $161,181. The before-tax and after-tax amount of unrealized
holding gains included in accumulated comprehensive income is as follows, for
the nine months ended September 30 (unaudited):
<TABLE>
<CAPTION>
BEFORE TAX EXPENSE AFTER
2000 TAX (NOTE 1) TAX
---- -------- ----------- --------
<S> <C> <C> <C>
Unrealized holding gains........................ $161,181 -- $161,181
======== === ========
</TABLE>
NOTE 3 -- ACCUMULATED DEPRECIATION
Breakdown of accumulated depreciation by each asset class was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1998 1999 2000
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment....................... $100,373 $146,726 $185,644
Motor vehicles................................ 45,479 51,207 58,434
Leasehold improvements........................ 4,172 4,801 5,396
-------- -------- --------
Total......................................... $150,024 $202,734 $249,474
======== ======== ========
</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 nine months ended September 30,
1999 and 2000 (unaudited), operating leases totaled $145,634 and $188,131,
respectively.
F-44
<PAGE> 149
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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------ -----------------
(UNAUDITED)
<S> <C> <C> <C>
2000......................... $ 197,297 2001......................... $ 279,579
2001......................... 210,844 2002......................... 260,001
2002......................... 198,131 2003......................... 215,095
2003......................... 168,934 2004......................... 169,857
2004 and thereafter.......... 417,285 2005 and thereafter.......... 333,288
---------- ----------
Total future minimum lease
payments................... $1,192,491 $1,257,820
========== ==========
</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,
------------------- SEPTEMBER 30,
1998 1999 2000
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Princeton Review of Hawaii..................... $ 7,948 $ 49,442 $ 1,037
Princeton Review of Quebec..................... 19,874 65,099 157
------- -------- --------
Total.......................................... $27,822 $114,541 $ 1,194
======= ======== ========
</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 $10,125 and $15,000 from The Princeton
Review of Hawaii and The Princeton Review of Quebec were recorded for management
services in September 30, 1999 and 2000 (unaudited), respectively.
Due from (to) officers consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1998 1999 2000
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Rob Cohen...................................... $ 3,585 $429,241 $ 1,741
Matt Rosenthal................................. 5,026 (28,745) 3,443
------- -------- --------
Total.......................................... $ 8,611 $400,496 $ 5,184
======= ======== ========
</TABLE>
F-45
<PAGE> 150
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 nine months ended September 30, 1999 and 2000
(unaudited), the profit sharing contribution totaled $28,769 and $31,608,
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,
----------------------- SEPTEMBER 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 2,740,883
Stockholder distributions................... (782,755) (1,390,408) (316,200)
--------- ----------- ----------
Accumulated adjustments, ending............... 84,507 263,733 2,688,416
--------- ----------- ----------
Total retained earnings....................... $ 65,025 $ 244,251 $2,668,934
========= =========== ==========
</TABLE>
NOTE 9 -- SUPPLEMENTAL DISCLOSURE ON CASH FLOW INFORMATION
The Companies made the following payments for income taxes:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------- ----------------
1998 1999 1999 2000
------- ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income Taxes........................................ $36,176 $7,504 $1,757 $26,336
======= ====== ====== =======
</TABLE>
F-46
<PAGE> 151
[Inside Back Cover]
At the top left is The Princeton Review, Inc. logo. Below the logo in the
center of the page are the words "Better Scores" and "Better Schools." In the
center of the page is a color photograph of three students holding books and
notebooks. To the left of this photograph are the words "Test Prep Courses,"
"Counseling & Tutoring," "Books & Software," "Review.com" and "Homeroom.com."
<PAGE> 152
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
5,400,000 SHARES
[TPR LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
------------------------
, 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> 153
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........................................ $ 21,313
NASD Filing Fee............................................. 8,573
Nasdaq National Market Listing Fee.......................... 95,000
Accounting Fees and Expenses................................ 700,000
Legal Fees and Expenses..................................... 750,000
Printing Expenses........................................... 300,000
Blue Sky Qualification Fees and Expenses.................... 7,500
Transfer Agent's Fee........................................ 15,000
Miscellaneous............................................... 202,614
----------
Total.................................................. $2,100,000
==========
</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> 154
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 our sales of unregistered securities for
the last three years. All share and per share amounts of common stock have been
adjusted to reflect a .846-for-one reverse common stock split effected on
November 16, 2000.
(1)On December 14, 2000, we issued warrants to purchase a total of 250,000
shares of common stock at an exercise price of $0.01 per share to the
six lenders party to a loan agreement between us and Reservoir Capital
Partners, L.P., Reservoir Capital Master Fund, L.P., Reservoir Capital
Associates, L.P., SGC Partners II, LLC, Olympus Growth Fund III, L.P.
and Olympus Executive Fund, L.P. If the borrowings remain outstanding on
December 14, 2001, these warrants will be exercisable for an additional
275,000 shares, and if borrowings remain outstanding on December 14,
2002, these warrants will be exercisable for an additional 400,000
shares. Upon consummation of this offering, the outstanding 250,000
warrants will automatically convert into common stock in a cashless
exercise at the exercise price of $0.01 per share. Assuming an initial
public offering price of $12.00 per share, the outstanding warrants will
be automatically exercised for a total of 249,792 shares of common
stock. We received no proceeds from the issuance of these warrants and
will receive no proceeds from their conversion upon consummation of this
offering. We issued these warrants in reliance on the exemption provided
by Section 4(2) of the Securities Act of 1933 as transactions not
involving a public offering.
(2) On June 2, 2000, we issued two warrants in connection with the
settlement of a lawsuit against us. One warrant was issued to the
plaintiff, and the other warrant was issued to the plaintiff's law
firm. Together 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. We
received no proceeds from the issuance of these warrants and may
receive aggregate proceeds of up to $1.2 million from their exercise.
We issued these
II-2
<PAGE> 155
warrants in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933 as transactions not involving a public offering.
(3) On April 27, 2000, we sold a total of 35,008 shares of Series A
preferred stock to The Atkins Family Trust, Ajax Capital, LLC and
Howard A. Tullman, who is also one of our directors. These shares were
sold at a purchase price of $7.27 per share, and we received
approximately $254,530.00 in aggregate gross proceeds paid in cash. We
issued these shares of Series A preferred stock in reliance on the
exemption from registration provided by Section 4(2) of the Securities
Act of 1933 as transactions not involving a public offering.
(4) On April 18, 2000, we sold a total of 917,204 shares of Series A
preferred stock to SGC Capital Partners II, LLC, Olympus Growth Fund
III, L.P. and Olympus Executive Fund, L.P. These shares were sold at a
purchase price of $7.27 per share. We received approximately
$27.0 million in aggregate gross proceeds paid in cash. We issued these
shares of Series A preferred stock in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 as
transactions not involving a public offering.
(5) On April 18, 2000, we 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 $7.39 per share,
and we issued these shares pursuant to our 2000 Stock Option Plan. We
received no proceeds from these issuances. We issued 250,492 of these
shares of Class B non-voting common stock in reliance on the exemption
from registration provided by Rule 701 promulgated under Section 3(b)
of the Securities Act of 1933 as transactions pursuant to compensatory
benefit plans or contracts relating to compensation. We issued the
remaining 666,712 of these shares of Class B non-voting common stock in
reliance on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933 as transactions not involving a public
offering.
(6) Since April 1, 2000, we have granted options to our employees and
directors exercisable for a total of 1,437,364 shares of our Class B
non-voting common stock at exercise prices ranging from $1.73 to $7.39
per share. We granted each of these options pursuant to our 2000 Stock
Option Plan. We received no proceeds from these issuances. We issued
these options to acquire our Class B non-voting common stock in
reliance on the exemption from registration provided by Rule 701 as
transactions pursuant to compensatory benefit plans or contracts
relating to compensation.
(7) On April 1, 2000, we issued a total of 12,561,986 shares of our Class A
common stock and 1,820,025 shares of our Class B non-voting common
stock to all 22 of our previous equity holders in connection with the
consummation of our corporate restructuring. These shares were issued
in exchange for equity interests in our predecessor corporation and our
LLC subsidiaries. For purposes of these transactions, we valued our
stock at $7.39 per share. We received no proceeds from the exchange of
the shares, but we received aggregate proceeds of approximately
$1.1 million from the exercise of preemptive rights by our franchisees
in relation to the restructuring. We issued these shares of Class A
common stock and Class B non-voting common stock in reliance on the
exemption from registration provided by Section 4(2) of the Securities
Act of 1933 as transactions not involving a public offering.
(8) The following table lists the dates, amounts and proceeds of all sales
of Phantom Stock Units before our Phantom Stock Plan was terminated on
April 18, 2000. The per-unit prices set forth in the following table
have been adjusted to reflect our restructuring consummated on April 1,
2000 and our .846-for-one common stock split effected on November 16,
2000. We issued these Phantom Stock Units to our employees, consultants
and directors in reliance on the exemption from registration provided
by Rule 701 as transactions pursuant to compensatory benefit plans or
contracts relating to compensation.
II-3
<PAGE> 156
<TABLE>
<CAPTION>
1998 1999 2000
--------------------------------- --------------------------------- ---------------------------------
NUMBER OF PRICE PER AGGREGATE NUMBER OF PRICE PER AGGREGATE NUMBER OF PRICE PER AGGREGATE
PSUS SOLD UNIT PROCEEDS PSUS SOLD UNIT PROCEEDS PSUS SOLD UNIT PROCEEDS
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
20,660 $2.60 $53,724 14,755 $2.96 $43,600 31,972 $5.32 $170,060
15,499 2.96 45,800 12,622 5.32 67,140 -- -- --
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<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.
2.5 Option Agreement Amendment, dated as of December 14, 2000,
by and between Princeton Review Operations, LLC, Princeton
Review of Boston, Inc. and Princeton Review of New Jersey,
Inc.
2.6 Option Agreement, dated as of October 18, 2000, by and among
Princeton Review Operations, LLC, T.S.T.S., Inc., Robert O.
Case and Kevin D. Campbell.
2.7 Option Agreement, dated as of December 15, 2000, by and
between Princeton Review Operations, LLC and The Princeton
Review Peninsula, Inc.
3.1** Restated Certificate of Incorporation.
3.1.1** Amendment to Restated Certificate 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.
10.7.1** Amendment to Letter Agreement, dated September 26, 2000, by
and between Princeton Review Operations, LLC and The Chase
Manhattan Bank.
</TABLE>
II-4
<PAGE> 157
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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.
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 Stephen 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.
</TABLE>
II-5
<PAGE> 158
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.36+** Agreement, dated September 1, 1998, by and between The
Educational and Professional Publishing Group, a unit of the
McGraw-Hill Companies, Inc., and Princeton Review
Publishing, LLC.
10.37** Franchise Agreement, dated as of June 14, 1986, by and
between The Princeton Review Management Corp. and Robert
Cohen (Princeton Review of New Jersey).
10.38** Franchise Agreement, dated as of June 14, 1986, by and
between The Princeton Review Management Corp. and Matthew
Rosenthal (Princeton Review of Boston).
10.39** Franchise Agreement, dated as of July 1, 1986, by and
between The Princeton Review Management Corp. and Lloyd Eric
Cotsen (Lecomp Company, Inc.).
10.40** Franchise Agreement, dated as of September 13, 1986, by and
between The Princeton Review Management Corp. and Robert
Case, Richard McDugald and Kevin Campbell (Test Services,
Inc.).
10.41** Addendum to the Franchise Agreement, dated as of May 31,
1995, by and between The Princeton Review Management Corp.
and the persons and entities listed on the Franchisee
Joinders.
10.42** Formation Agreement, dated as of May 31, 1995, by and among
The Princeton Review Publishing Company, LLC., The Princeton
Review Publishing Co., Inc., the Princeton Review Management
Corp. and the independent franchisees.
10.43** Distance Learning Waiver, dated as of May 30, 2000, by and
among Princeton Review Management, LLC and Princeton Review
of New Jersey, Inc. and Princeton Review of Boston, Inc.
10.44** Distance Learning Waiver, dated as of June 21, 2000, by and
between Princeton Review Management, LLC and Lecomp, Inc.
10.45** Pledge and Security Agreement, dated as of September 19,
2000, by and between Steven Hodas and The Princeton Review,
Inc.
10.46** Promissory Note, dated as of September 19, 2000, made by
Steven Hodas in favor of The Princeton Review, Inc.
10.47** Commitment Letter, dated as of September 20, 2000, by and
between Excel Bank, N.A. and The Princeton Review, Inc.,
with respect to $4,500,000 line of credit.
10.48** Promissory Note, dated as of October 27, 2000, made by The
Princeton Review, Inc. in favor of Excel Bank, N.A., in the
principal amount of $4,500,000.
10.49** Security Agreement, dated as of October 27, 2000, executed
by The Princeton Review, Inc. for the benefit of Excel Bank,
N.A.
10.50** Form of Guaranty, dated as of October 27, 2000, made by each
of Princeton Review Management, L.L.C., Princeton Review
Products, L.L.C., Princeton Review Operations, L.L.C. and
Princeton Review Publishing, L.L.C., for the benefit of
Excel Bank, N.A.
10.51** Form of Subsidiary Security Agreement, dated as of October
27, 2000, made by each of Princeton Review Management,
L.L.C., Princeton Review Products, L.L.C., Princeton Review
Operations, L.L.C. and Princeton Review Publishing, L.L.C.,
for the benefit of Excel Bank, N.A.
10.52 Distance Learning Waiver, dated as of October 18, 2000, by
and between Princeton Review Management, LLC and T.S.T.S.,
Inc.
10.53 Loan Agreement, dated as of December 14, 2000, by and among
The Princeton Review, Inc. and its operating subsidiary
limited liability companies, Reservoir Capital Partners,
L.P., Reservoir Capital Master Fund, L.P., Reservoir Capital
Associates, L.P., SGC Partners II, LLC, Olympus Growth Fund
III, L.P. and Olympus Executive Fund, L.P.
10.54 Security Agreement, dated as of December 14, 2000, by and
among The Princeton Review, Inc. and its operating
subsidiary limited liability companies and Reservoir Capital
Partners, L.P.
10.55 Warrant Agreement, dated as of December 14, 2000, by and
among The Princeton Review, Inc., Reservoir Capital
Partners, L.P., Reservoir Capital Associates, L.P.,
Reservoir Capital Master Fund, L.P., SGC Partners II, LLC,
Olympus Growth Fund III, L.P. and Olympus Executive Fund,
L.P.
</TABLE>
II-6
<PAGE> 159
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.56 Subordination Agreement, dated as of December 14, 2000, by
and among The Princeton Review, Inc. and its operating
subsidiary limited liability companies, Excel Bank, N.A.,
Reservoir Capital Partners, L.P., Reservoir Capital
Associates, L.P., Reservoir Capital Master Fund, L.P., SGC
Partners II, LLC, Olympus Growth Fund III, L.P. and Olympus
Executive Fund, L.P.
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.
** Previously filed.
+ Confidential treatment requested.
(B) FINANCIAL STATEMENT SCHEDULES (SEE PAGES S-1 AND S-2).
Report of Independent Auditors on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
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.
II-7
<PAGE> 160
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-8
<PAGE> 161
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The Princeton
Review, Inc. has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in New York,
New York on December 22, 2000.
THE PRINCETON REVIEW, INC.
By: /s/ JOHN S. KATZMAN
------------------------------------
Name: John S. Katzman
Title: Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the 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 December 22, 2000
--------------------------------------------------- Officer (Principal Executive
John S. Katzman Officer)
/s/ STEPHEN MELVIN Chief Financial Officer December 22, 2000
--------------------------------------------------- (Principal Financial and
Stephen Melvin Accounting Officer)
* Director December 22, 2000
---------------------------------------------------
Richard Katzman
* Director December 22, 2000
---------------------------------------------------
V. Frank Pottow
* Director December 22, 2000
---------------------------------------------------
John C. Reid
* Director December 22, 2000
---------------------------------------------------
Richard Sarnoff
* Director December 22, 2000
---------------------------------------------------
Sheree T. Speakman
* Director December 22, 2000
---------------------------------------------------
Howard A. Tullman
</TABLE>
*By: /s/ STEPHEN MELVIN
------------------------------
Stephen Melvin
Attorney-in-fact
II-9
<PAGE> 162
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of The Princeton
Review, Inc. and Subsidiaries as of December 31, 1998 and 1999 and the related
consolidated statements of operations, stockholders' equity and redeemable stock
and cash flows for the years then ended and have issued our report thereon dated
March 16, 2000, except for Note 15, as to which the date is December 15, 2000.
Our audits also included the consolidated financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
New York, New York
March 16, 2000
S-1
<PAGE> 163
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
AND NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO FROM END OF
OF PERIOD EXPENSE ALLOWANCE PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended December 31, 1997................. 1,142,932 0 22,970 1,119,962
Year Ended December 31, 1998................. 1,119,962 482,670 932,181 670,451
Year Ended December 31, 1999................. 670,451 392,479 342,747 720,183
Nine Months Ended September 30, 2000
(unaudited)................................ 720,183 182,902 422,462 480,623
</TABLE>
S-2
<PAGE> 164
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.
2.5 Option Agreement Amendment, dated as of December 14, 2000,
by and between Princeton Review Operations, LLC, Princeton
Review of Boston, Inc. and Princeton Review of New Jersey,
Inc.
2.6 Option Agreement, dated as of October 18, 2000, by and among
Princeton Review Operations, LLC, T.S.T.S., Inc., Robert O.
Case and Kevin D. Campbell.
2.7 Option Agreement, dated as of December 15, 2000, by and
between Princeton Review Operations, LLC and The Princeton
Review Peninsula, Inc.
3.1** Restated Certificate of Incorporation.
3.1.1** Amendment to Restated Certificate 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.
10.7.1** Amendment to Letter Agreement, dated September 26, 2000, 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.
</TABLE>
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
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.
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 Stephen 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.
10.36+** Agreement, dated September 1, 1998, by and between The
Educational and Professional Publishing Group, a unit of the
McGraw-Hill Companies, Inc., and Princeton Review
Publishing, LLC.
10.37** Franchise Agreement, dated as of June 14, 1986, by and
between The Princeton Review Management Corp. and Robert
Cohen (Princeton Review of New Jersey).
</TABLE>
<PAGE> 166
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
10.38** Franchise Agreement, dated as of June 14, 1986, by and
between The Princeton Review Management Corp. and Matthew
Rosenthal (Princeton Review of Boston).
10.39** Franchise Agreement, dated as of July 1, 1986, by and
between The Princeton Review Management Corp. and Lloyd Eric
Cotsen (Lecomp Company, Inc.).
10.40** Franchise Agreement, dated as of September 13, 1986, by and
between The Princeton Review Management Corp. and Robert
Case, Richard McDugald and Kevin Campbell (Test Services,
Inc.).
10.41** Addendum to the Franchise Agreement, dated as of May 31,
1995, by and between The Princeton Review Management Corp.
and the persons and entities listed on the Franchisee
Joinders.
10.42** Formation Agreement, dated as of May 31, 1995, by and among
The Princeton Review Publishing Company, LLC., The Princeton
Review Publishing Co., Inc., the Princeton Review Management
Corp. and the independent franchisees.
10.43** Distance Learning Waiver, dated as of May 30, 2000, by and
among Princeton Review Management, LLC and Princeton Review
of New Jersey, Inc. and Princeton Review of Boston, Inc.
10.44** Distance Learning Waiver, dated as of June 21, 2000, by and
between Princeton Review Management, LLC and Lecomp, Inc.
10.45** Pledge and Security Agreement, dated as of September 19,
2000, by and between Steven Hodas and The Princeton Review,
Inc.
10.46** Promissory Note, dated as of September 19, 2000, made by
Steven Hodas in favor of The Princeton Review, Inc.
10.47** Commitment Letter, dated as of September 20, 2000, by and
between Excel Bank, N.A. and The Princeton Review, Inc.,
with respect to $4,500,000 line of credit.
10.48** Promissory Note, dated as of October 27, 2000, made by The
Princeton Review, Inc. in favor of Excel Bank, N.A., in the
principal amount of $4,500,000.
10.49** Security Agreement, dated as of October 27, 2000, executed
by The Princeton Review, Inc. for the benefit of Excel Bank,
N.A.
10.50** Form of Guaranty, dated as of October 27, 2000, made by each
of Princeton Review Management, L.L.C., Princeton Review
Products, L.L.C., Princeton Review Operations, L.L.C. and
Princeton Review Publishing, L.L.C., for the benefit of
Excel Bank, N.A.
10.51** Form of Subsidiary Security Agreement, dated as of October
27, 2000, made by each of Princeton Review Management,
L.L.C., Princeton Review Products, L.L.C., Princeton Review
Operations, L.L.C. and Princeton Review Publishing, L.L.C.,
for the benefit of Excel Bank, N.A.
10.52 Distance Learning Waiver, dated as of October 18, 2000, by
and between Princeton Review Management, LLC and T.S.T.S.,
Inc.
10.53 Loan Agreement, dated as of December 14, 2000, by and among
The Princeton Review, Inc. and its operating subsidiary
limited liability companies, Reservoir Capital Partners,
L.P., Reservoir Capital Master Fund, L.P., Reservoir Capital
Associates, L.P., SGC Partners II, LLC, Olympus Growth Fund
III, L.P. and Olympus Executive Fund, L.P.
10.54 Security Agreement, dated as of December 14, 2000, by and
among The Princeton Review, Inc. and its operating
subsidiary limited liability companies and Reservoir Capital
Partners, L.P.
10.55 Warrant Agreement, dated as of December 14, 2000, by and
among The Princeton Review, Inc., Reservoir Capital
Partners, L.P., Reservoir Capital Associates, L.P.,
Reservoir Capital Master Fund, L.P., SGC Partners II, LLC,
Olympus Growth Fund III, L.P. and Olympus Executive Fund,
L.P.
</TABLE>
<PAGE> 167
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
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<S> <C> <C>
10.56 Subordination Agreement, dated as of December 14, 2000, by
and among The Princeton Review, Inc. and its operating
subsidiary limited liability companies, Excel Bank, N.A.,
Reservoir Capital Partners, L.P., Reservoir Capital
Associates, L.P., Reservoir Capital Master Fund, L.P., SGC
Partners II, LLC, Olympus Growth Fund III, L.P. and Olympus
Executive Fund, L.P.
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>
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* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested.
