1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2001
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 000-32469
THE PRINCETON REVIEW, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3727603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2315 Broadway 10024
New York, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (212) 874-8282
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
The Company had 26,292,267 shares of $0.01 par value common stock
outstanding at August 8, 2001.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited).....................................................................2
Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000.............................................2
Consolidated Statements of Operations for the Three and Six Month Periods ended June 30, 2001 and 2000............3
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2001 and 2000.............................4
Notes to Unaudited Consolidated Financial Statements..............................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................................16
Item 2. Changes in Securities and Use of Proceeds........................................................................16
Item 3. Defaults Upon Senior Securities..................................................................................17
Item 4. Submission of Matters to a Vote of Security Holders..............................................................17
Item 5. Other Information................................................................................................17
Item 6. Exhibits and Reports on Form 8-K.................................................................................18
SIGNATURES......................................................................................................................19
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
-------- ------------
2001 2000
---- ----
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $28,052,956 $4,873,814
Accounts receivable - net 7,539,829 8,779,171
Other receivables 505,475 695,840
Prepaid expenses 931,269 493,894
Securities, available for sale 1,455,175 3,378,976
Other assets 1,786,669 5,144,523
---------------------------------
Total current assets 40,271,373 23,366,218
Furniture, fixtures, equipment and software development, net 8,331,070 7,811,234
Franchise costs-net 314,393 209,164
Territorial marketing rights-net 1,536,670 1,591,882
Publishing rights-net 1,332,600 1,369,100
Goodwill-net 29,449,542 8,300,461
Deferred income taxes 15,096,809 9,919,879
Investment in affiliates 442,578 419,458
Other assets 4,949,086 5,587,677
---------------------------------
TOTAL ASSETS $101,724,121 $58,575,073
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $1,345,635 $3,086,968
Accrued expenses 5,365,930 8,058,283
Line of credit - 4,500,000
Current maturities of long-term debt 455,138 494,385
Deferred income 9,092,996 4,187,296
Book advances 1,266,653 2,136,745
Deferred income taxes - 614,000
---------------------------------
Total current liabilities 17,526,352 23,077,677
Long-term debt 5,611,958 560,316
Series A redeemable, convertible preferred stock, $0.01 par value; none
authorized, issued and outstanding at June 30, 2001; 5,000,000 authorized and
3,748,548 issued and outstanding at December 31, 2000; liquidation
preference of $0 at June 30, 2001 and $30,758,000 at December 31, 2000 - 29,201,589
Class B redeemable nonvoting common stock, $.01 par value; none authorized,
issued and outstanding at June 30, 2001; 10,000,000 shares authorized and
2,737,229 shares issued and outstanding at December 31, 2000 - 20,571,559
STOCKHOLDERS' EQUITY (DEFICIT)
Class A common stock, $.01 par value; none authorized, issued and outstanding at
June 30, 2001; 25,000,000 shares authorized and 12,561,986 shares issued and
outstanding at December 31, 2000 - 125,620
Common stock, $0.01 par value; 100,000,000 shares authorized and 26,292,832
issued and outstanding at June 30, 2001; none authorized,
issued and outstanding at December 31, 2001 262,928 -
Additional paid-in capital 107,791,938 1,907,525
Accumulated deficit (30,438,687) (18,881,418)
Accumulated other comprehensive income 1,048,754 2,112,805
Deferred compensation (79,122) (100,600)
---------------------------------
Total stockholders' equity (deficit) 78,585,811 (14,836,068)
---------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $101,724,121 $58,575,073
=================================
See accompanying notes
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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
2001 2000 2001 2000
--------------------------------- -------------------------------
(UNAUDITED) (UNAUDITED)
REVENUE
Test Preparation Services $ 12,379,199 $ 8,536,614 $ 22,624,218 $ 16,393,250
Admissions Services 1,589,060 1,155,481 3,267,573 1,950,377
K-12 Services 1,476,026 1,203,754 2,671,616 1,889,346
--------------------------------- -------------------------------
Total revenue 15,444,285 10,895,849 28,563,407 20,232,973
--------------------------------- -------------------------------
COST OF REVENUE
Test Preparation Services 4,002,459 3,071,926 7,579,432 5,655,889
Admissions Services 635,305 318,442 966,451 399,723
K-12 Services 648,205 119,759 969,959 314,286
--------------------------------- -------------------------------
Total Cost Of Revenue 5,285,969 3,510,127 9,515,842 6,369,898
--------------------------------- -------------------------------
GROSS PROFIT 10,158,316 7,385,722 19,047,565 13,863,075
--------------------------------- -------------------------------
OPERATING EXPENSES
Selling, general and administrative expenses 13,509,568 20,527,664 26,284,392 29,855,252
Research and development 151,215 12,087 267,873 141,882
--------------------------------- -------------------------------
Total operating expenses 13,660,783 20,539,751 26,552,265 29,997,134
--------------------------------- -------------------------------
Operating loss from continuing operations (3,502,467) (13,154,029) (7,504,700) (16,134,059)
Gain on distribution/sale of securities and other assets - - - 7,597,226
Interest expense (1,069,482) (36,416) (1,658,463) (69,672)
Other income 77,577 229,135 144,160 270,937
--------------------------------- -------------------------------
Loss before minority interest, equity interest in
operations of affiliates, benefit for income
taxes and extraordinary item (4,494,372) (12,961,310) (9,019,003) (8,335,568)
Minority interests' share of income in subsidiaries - - - (50,129)
Equity interest in operations of affiliates 22,527 (36,138) 23,120 128,369
--------------------------------- -------------------------------
Loss before benefit for income taxes
and extraordinary item (4,471,845) (12,997,448) (8,995,883) (8,257,328)
Benefit for income taxes 1,890,240 6,311,323 3,527,619 5,947,165
--------------------------------- -------------------------------
Loss before extraordinary item (2,581,605) (6,686,125) (5,468,264) (2,310,163)
Extraordinary item - early extinguishment
of debt, net of taxes (1,824,456) - (1,824,456) -
--------------------------------- -------------------------------
Net loss (4,406,061) (6,686,125) (7,292,720) (2,310,163)
Accreted dividends on Series A redeemable preferred stock (1,071,859) (1,030,634) (2,308,620) (1,030,634)
Accreted dividends on Class B non-voting common stock (819,535) (1,136,394) (1,955,929) (1,136,394)
--------------------------------- -------------------------------
Net loss attributed to common stockholders $ (6,297,455) $ (8,853,153) $(11,557,269) $(4,477,191)
================================= ===============================
NET LOSS PER SHARE - BASIC AND DILUTED:
Loss attibuted to common shareholders before extraordinary item $ (0.27) $ (0.58) $ (0.61) $ (0.29)
Extraordinary item - early extinguishment of debt (0.11) (0.11)
--------------------------------- -------------------------------
Net loss per share - basic and diluted $ (0.38) $ (0.58) $ (0.72) $ (0.29)
================================= ===============================
Weighted average basic and diluted shares used in
computing net loss per share 16,766,645 15,299,215 16,033,862 15,190,959
================================= ===============================
See accompanying notes
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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
2001 2000
----------------------------------
(Unaudited)
-----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,292,720) $ (2,310,163)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 464,080 407,088
Amortization 2,367,507 607,877
Noncash interest expense 581,749 48,760
Loss on early extingishment of debt 1,824,456 -
Bad debt expense (347,694) 19,283
Gain on sale/distribution of securities - (7,427,556)
Compensation expense on PSU conversion - 6,614,330
Deferred income taxes (3,683,781) (5,512,856)
Deferred rent 69,714 (140,960)
Minority interest - 50,129
Amortization of deferred compensation 80,703 -
Equity interest in operations of affiliates (23,120) (128,369)
Net change in operating assets and liabilities:
Accounts receivable 2,735,141 599,928
Other receivables 190,365 30,897
Prepaid expenses 177,793 (33,840)
Other assets (982,486) (2,581,627)
Accounts payable (1,735,073) (1,032,796)
Accrued expenses (2,376,338) (181,771)
Deferred income 871,978 2,138,410
Book advances (869,678) (1,214,876)
-----------------------------------------
Net cash used in operating activities $ (7,947,404) $ (10,048,112)
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, fixtures, equipment and software development $ (1,242,286) (1,535,810)
Investment in affiliates/acquisition of franchises (19,445,732) (1,000,000)
Repayment of stockholder loan - (79,346)
Increase in other assets (1,699,898) (97,711)
-----------------------------------------
Net cash used in investing activities $ (22,387,916) $ (2,712,867)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit $ 24,691,000 $ -
Repayment of lines of credit (29,191,000) (700,000)
Repayment term loan, net (77,268) (18,298)
Proceeds from capital leases, net of repayments (10,336) (16,981)
Distributions to stockholders - (338,991)
Notes payable related to franchises purchased 3,625,000 -
Proceeds from investment in Series A redeemable convertible preferred stock
(net of offering costs) 25,409,488
Proceeds from sale of common stock in initial public offering, net 54,477,066
Proceeds from sale of Class B redeemable non-voting common stock - 161,097
Issuance of Princeton Review Publishing, LLC units - 1,096,855
-----------------------------------------
Net cash provided by financing activities $ 53,514,462 $ 25,593,170
-----------------------------------------
Net increase in cash and cash equivalents 23,179,142 12,832,191
Cash and cash equivalents, beginning of period 4,873,814 2,658,081
-----------------------------------------
Cash and cash equivalents, end of period $ 28,052,956 $ 15,490,272
=========================================
Supplemental disclosures of cash flow information
Cash paid during the period for:
-----------------------------------------
Interest $ 1,032,034 $69,672
=========================================
Income taxes $ 92,595 $112,115
=========================================
See accompanying notes
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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of The
Princeton Review, Inc. (the "Company") include the accounts of the Company and
its wholly-owned subsidiaries, Princeton Review Products, LLC, Princeton Review
Management, LLC, Princeton Review Publishing, LLC, Princeton Review Operations,
LLC, and The Princeton Review of Canada Inc. This financial information has been
prepared in accordance with generally accepted accounting principles for interim
financial information and reflects all adjustments, consisting only of normal
recurring accruals, that are, in the opinion of management, necessary for a fair
presentation of the interim financial statements. The interim consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes for the year ended December 31, 2000
included in the Company's Registration Statement on Form S-1 (File No.
333-43874) as filed with the Securities and Exchange Commission. The results of
operations for the three-month and six-month periods ended June 30, 2001 are not
necessarily indicative of the results to be expected for the entire fiscal year
or any future period.
2. SEGMENT INFORMATION
The Company's operations are aggregated into three reportable segments. The
operating segments reported below are the segments of the Company for which
separate financial information is available and for which operating income is
evaluated regularly by executive management in deciding how to allocate
resources and in assessing performance.
The following segment results include the allocation of certain information
technology costs, accounting services, executive management costs, office
facilities expenses, human resources expenses and other shared services which
are allocated based on consumption. Corporate consists of unallocated
administrative support functions. The Company operates its business through
three divisions. The majority of the Company's revenue is earned by the Test
Preparation Services division, which sells a range of services including test
preparation, tutoring and academic counseling. Test Preparation Services derives
its revenue from company operated locations and from royalties from and product
sales to independently-owned franchises. The Admissions Services division earns
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. The K-12 Services division earns fees
from its content development work and operates Homeroom.com, an Internet-based
subscription service for K-12 schools and parents.
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BUSINESS SEGMENTS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
REVENUE (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
- -------
Test Preparation Services $ 12,379,199 $ 8,536,614 $ 22,624,218 $ 16,393,250
Admissions Services 1,589,060 1,155,481 3,267,573 1,950,377
K-12 Services 1,476,026 1,203,754 2,671,616 1,889,346
-----------------------------------------------------------------------
TOTAL CONSOLIDATED REVENUE $ 15,444,285 $ 10,895,849 $ 28,563,407 $ 20,232,973
-----------------------------------------------------------------------
COST OF REVENUE
- ---------------
Test Preparation Services $ 4,002,459 $ 3,071,926 $ 7,579,432 $ 5,655,889
Admissions Services 635,305 318,442 966,451 399,723
K-12 Services 648,205 119,759 969,959 314,286
-----------------------------------------------------------------------
TOTAL CONSOLIDATED COST OF REVENUE $ 5,285,969 $ 3,510,127 $ 9,515,842 $ 6,369,898
-----------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Test Preparation Services $ 6,898,799 $ 8,128,316 $ 13,081,062 $ 13,177,494
Admissions Services 2,472,354 3,941,989 5,162,598 5,607,576
K-12 Services 2,523,068 2,298,651 5,323,927 4,211,622
Other Corporate 112,858 5,922,253 112,858 6,131,570
Depreciation & Amortization (Expense) 1,505,328 236,455 2,603,947 726,990
-----------------------------------------------------------------------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES $ 13,512,407 $ 20,527,664 $ 26,284,392 $ 29,855,252
Test Preparation Services - research and development $ 151,215 $ 12,087 $ 267,873 $ 141,882
Total operating expenses 13,663,622 20,539,751 26,552,265 29,997,134
-----------------------------------------------------------------------
OPERATING LOSS FROM CONTINUING OPERATIONS $ (3,505,306) $(13,154,029) $ (7,504,700) $ (16,134,059)
- ----------------------------------------- =======================================================================
JUNE 30, DECEMBER 31,
2001 2000
---- ----
Segment Assets (UNAUDITED)
Test Preparation Services $ 24,059,647 $ 6,187,841
Admissions Services 8,882,814 11,681,696
K-12 Services 7,978,957 9,900,436
Other Corporate 60,802,703 30,805,100
-------------------------------
Total Consolidated Assets $101,724,121 $ 58,575,073
===============================
3. INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share information for all periods is
presented under the requirements of SFAS No. 128, Earnings per Share. Basic net
income (loss) per share is computed by dividing net income (loss) applicable to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is determined in the same
manner as basic net income (loss) per share except that the number of shares is
increased assuming exercise of dilutive stock options, warrants and convertible
securities. The calculation of diluted net income (loss) per share excludes
potential common shares if the effect is antidilutive. During the periods
presented, certain shares of Series A preferred stock, warrants and stock
options were outstanding that would be dilutive, but were excluded because to
include them would have been antidilutive.
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4. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive loss for the three and six-month periods ended
June 30, are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
Net loss $(4,406,061) $(6,686,125) $(7,292,720) $(2,310,163)
Foreign currency gain (loss) 20,011 (37,761) 58,113 27,988
Unrealized loss on securities (209,224) (10,785,171) (1,122,164) (29,918,798)
------------ ------------- ------------ -------------
Total comprehensive loss $(4,595,274) $(17,509,057) $(8,356,771) $(32,200,973)
============ ============= ============ =============
5. LINE OF CREDIT AND LONG-TERM DEBT
On June 22, 2001, the Company terminated its 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., and repaid the $24.6 million outstanding balance
thereunder, plus accrued interest. The loan agreement provided for a line of
credit of up to $25.0 million. The interest rate under this loan agreement was
13% per year.
On June 28, 2001 the Company terminated its Line of Credit Agreement with Excel
Bank, N.A. and repaid the $4,500,000 outstanding balance thereunder, plus
accrued interest. The line of credit bore interest at a variable rate of prime
plus 1% per year.
In connection with these debt repayments, the Company wrote-off the remaining
deferred financing costs and the unamortized cost of the warrants issued to the
lenders resulting in an after-tax loss of approximately $1.8 million.
6. STOCKHOLDERS' EQUITY
SALES OF COMMON STOCK
On June 22, 2001, the Company completed its Initial Public Offering in which it
sold 5,400,000 shares of common stock at $11.00 per share. As a result of this
offering, the Company's Class A common stock, Class B non-voting common stock
and Series A preferred stock automatically converted into shares of common
stock.
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7. ACQUISITIONS OF FRANCHISEES
On June 18, 2001, the Company acquired the assets comprising the business of
T.S.T.S., Inc., which offered test preparation courses in several states under
franchise agreements with the Company, for a purchase price of approximately
$6.3 million. The Company financed approximately $4.8 million under its line of
credit and issued a subordinated promissory note to the seller for approximately
$1.5 million. In March 2001, the Company acquired the assets comprising the
businesses of two other franchisees, Princeton Review of Boston, Inc. and
Princeton Review of New Jersey, Inc., at a combined purchase price of $13.8
million. The Company financed approximately $10.2 million of the purchase price
under its line of credit and issued two subordinated promissory notes for the
remaining approximately $3.6 million. In early March 2001, the Company purchased
the assets of another franchisee, Princeton Review Peninsula, Inc., for a
purchase price of approximately $2.7 million, which was financed through
borrowings under its line of credit.
The following pro forma unaudited consolidated results of operations of the
Company for the six months ended June 30, 2001 and 2000, assume the consummation
of the acquisitions of Princeton Review of Boston and Princeton Review of New
Jersey as of January 1, 2000 (in thousands, except per share data):
SIX MONTHS ENDED JUNE 30,
2001 2000
(UNAUDITED)
Revenue $ 30,639 $24,623
Net loss $ (6,947) $(2,428)
Net loss attributed to common shareholders $(11,212) $(4,595)
Basic and diluted net loss per share $( 0.70) $(0.30)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements in this Form 10-Q that are not historical facts are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements may be identified by words
such as "believe," "intend," "expect," "may," "could," "would," "will,"
"should," "plan," "project," "contemplate," "anticipate" or similar statements.
Because these statements reflect our current views concerning future events,
these forward-looking statements are subject to risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of many factors, including, but not
limited to, demand for our products and services, our ability to compete
effectively and the other factors described under the caption "Risk Factors" in
our Registration Statement on Form S-1 filed with the Securities and Exchange
Commission, file No. 333-43874, (the "Registration Statement"). We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes for the
year ended December 31, 2000 included in our Registration Statement, as well as
in conjunction with the consolidated financial statements and related notes
appearing elsewhere in this Form 10-Q.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2000
REVENUE
Our total revenue increased from $10.9 million in 2000 to $15.4 million
in 2001, representing a 42% increase.
Test Preparation Services revenue increased from $8.5 million in 2000 to
$12.4 million in 2001, representing a 45% increase, comprised primarily of an
increase of approximately $4.5 million in revenue from our company-owned
operations. The increased revenue from company-owned operations resulted from
the inclusion of approximately $3.3 million in revenue attributable to the
operations acquired from our former franchisees, Princeton Review of Boston,
Inc., Princeton Review of New Jersey, Inc., Princeton Review Peninsula Inc., and
T.S.T.S., Inc., and an increase of approximately $1.2 million attributable to
increased enrollment at our other locations. These increases were partially
offset by a decrease of approximately $200,000 in royalties from independently
owned franchises and a decrease of approximately $500,000 in the sale of
materials to the independent franchises. These decreased royalties and sales of
materials resulted from our acquisitions of the operations of our franchisees
referred to above.
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Admissions Services revenue increased from $1.2 million in 2000 to $1.6
million in 2001, representing a 38% increase. This increase resulted primarily
from an increase of approximately $470,000 in college marketing fees.
K-12 Services revenue increased from $1.2 million in 2000 to $1.5
million in 2001 representing a 23% increase. This increase resulted primarily
from increased revenue from McGraw-Hill, consisting of an increase of
approximately $200,000 in revenue from workbooks delivered and royalties.
Revenue from subscription fees for the Homeroom.com subscription service and
related consulting fees was approximately $90,000 in the second quarter of 2001.
Homeroom.com was not yet available in the second quarter of 2000.
COST OF REVENUE
Our total cost of revenue increased from $3.5 million in 2000 to $5.3
million in 2001, representing a 51% increase.
Test Preparation Services cost of revenue increased from $3.1 million in
2000 to $4.0 million in 2001, representing a 30% increase. This increase
resulted from the inclusion of approximately $1.3 million in costs associated
with the operation of the businesses acquired from Princeton Review of Boston,
Princeton Review of New Jersey, Princeton Review Peninsula and T.S.T.S. and an
increase of approximately $250,000 in the cost to deliver courses in other
company owned locations, due in part to increased enrollment. These increases
were partially offset by a decrease of approximately $350,000 in the cost of
materials sold to our independent franchises, resulting from our acquisitions of
the operations of Princeton Review of Boston, Princeton Review of New Jersey,
Princeton Review Peninsula and T.S.T.S.
Admissions Services cost of revenue increased from $318,000 in 2000 to
$635,000 in 2001, representing a 100% increase. This increase resulted primarily
from an increase of approximately $146,000 in costs associated with the
operation of our Review.com Web site and an increase of approximately $171,000
in costs associated with our book publication business.
K-12 Services cost of revenue increased from $120,000 in 2000 to
$648,000 in 2001, representing a 441% increase. This increase is attributable to
an increase in costs incurred to service the McGraw Hill contract, as well as
approximately $122,000 of expense related to the amortization of capitalized
costs associated with the development of our Homeroom.com question pool.
OPERATING EXPENSES
Selling, general and administrative expenses decreased from $20.5
million in 2000 to $13.5 million in 2001, representing a 34% decrease, primarily
due to the absence in 2001 of approximately $9.0 million of expenses incurred in
connection with the termination of our PSU and SAR plans in 2000, as well as
approximately $1.5 million in settlement costs and legal fees associated with a
lawsuit settled in 2000. This decrease was partially offset by the following
increases:
- - an increase of approximately $1.7 million in salaries and payroll taxes,
approximately $700,000 of which is due to the acquisition of Princeton
Review of Boston, Princeton Review of New
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Jersey, Princeton Review Peninsula and T.S.T.S., and the balance of which
is due to headcount and salary increases throughout the company;
- - an increase of approximately $650,000 in advertising and marketing
expenses;
- - an increase of approximately $500,000 attributable primarily to personnel
related costs, including office rent and expenses, travel and
entertainment, employee benefits and recruiting fees; and
- - an increase of approximately $166,000 in Web site technology and
development expenses resulting primarily from the development of
Homeroom.com and Review.com.
INTEREST EXPENSE
Interest expense increased from $36,000 in 2000 to $1.1 million in 2001.
This increase resulted from interest expense incurred under our lines of credit
with Excel Bank, N.A. and Reservoir Capital Partners, L.P., which we obtained in
the fourth quarter of 2000 and from interest expense associated with the
amortization of the cost of warrants issued in the fourth quarter of 2000 in
connection with the Reservoir Capital Partners loan agreement.
OTHER INCOME
Other income decreased from $229,000 in 2000 to $78,000 in 2001,
representing a 66% decrease. This decrease resulted primarily from decreased
interest income earned on outstanding cash balances.
EXTRAORDINARY ITEMS
The extraordinary item of $1.8 million in 2001 represents costs
associated with the early extinguishment of indebtedness outstanding under our
line of credit with Reservoir Capital Partners, L.P., including the write-off of
the deferred financing expenses and the unamortized cost of the warrants issued
in connection with the establishment of the line of credit.
NET INCOME (LOSS)
We incurred a net loss of $6.7 million in 2000, as compared with a net
loss of $4.4 million in 2001. The lower loss resulted from lower operating
expenses and increased gross profits.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000
REVENUE
Our total revenue increased from $20.2 million in 2000 to $28.6 million
in 2001, representing a 41% increase.
Test Preparation Services revenue increased from $16.4 million in 2000
to $22.6 million in 2001, representing a 38% increase, comprised primarily of an
increase of approximately $6.5 million in revenue from our company-owned
operations. The increased revenue from company-
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owned operations resulted from the inclusion of approximately $4.8 million in
revenue attributable to the operations acquired from Princeton Review of Boston,
Princeton Review of New Jersey, Princeton Review Peninsula and T.S.T.S., and an
increase of approximately $1.7 million attributable to increased enrollment at
our other locations. These increases were partially offset by a decrease of
approximately $220,000 in royalties from independently owned franchises and a
decrease of approximately $500,000 in the sale of materials to the independent
franchises. These decreased royalties and sales of materials resulted from our
acquisitions of our franchises referred to above.
Admissions Services revenue increased from $2.0 million in 2000 to $3.3
million in 2001, representing a 68% increase. This increase resulted primarily
from increased Internet-based advertising revenue of approximately $800,000 and
college marketing fees of approximately $825,000. These increases were partially
offset by a decrease in book and publication fees of approximately $120,000 and
a decrease of approximately $200,000 in miscellaneous revenue.
K-12 Services revenue increased from $1.9 million in 2000 to $2.7
million in 2001, representing a 41% increase. This increase resulted primarily
from increases of approximately $650,000 in McGraw-Hill workbook development
fees and royalties. In addition we had $128,000 in new revenue from subscription
fees to Homeroom.com and related consulting fees in 2001.
COST OF REVENUE
Our total cost of revenue increased from $6.4 million in 2000 to $9.5
million in 2001, representing a 49% increase.
Test Preparation Services cost of revenue increased from $5.7 million in
2000 to $7.6 million in 2001, representing a 34% increase. This increase
resulted from the inclusion of approximately $1.9 million in costs associated
with the operation of the businesses acquired from Princeton Review of Boston,
Princeton Review of New Jersey, Princeton Review Peninsula and T.S.T.S. and an
increase of approximately $432,000 in the cost to deliver courses in other
company owned locations, due in part to increased enrollment. The increase was
partially offset by a decrease of approximately $115,000 in the cost of
materials sold to our independent franchises.
Admissions Services cost of revenue increased from $400,000 in 2000 to
$966,000 in 2001, representing a 142% increase. Approximately $300,000 of this
increase resulted from costs associated with the increased college marketing and
advertising revenues and approximately $260,000 was due to costs of producing
book manuscripts delivered to Random House.
K-12 Services cost of revenue increased from $314,000 in 2000 to
$970,000 in 2001, representing a 209% increase. Approximately $230,000 of this
increase is attributable to increased sales of workbooks to McGraw-Hill during
2001 and approximately $230,000 is due to amortization of the Homeroom.com
question pool costs, which we began to amortize in the fourth quarter of 2000.
The remaining increase is primarily due to the costs of providing McGraw-Hill
with questions for their question pool and costs related to the Homeroom.com Web
site.
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OPERATING EXPENSES
Selling, general and administrative expenses decreased from $29.9
million in 2000 to $26.3 million in 2001, representing a 12% decrease. The
decrease resulted from the absence in 2001 of non-recurring charges incurred in
2000, consisting of a charge of approximately $10.6 million representing the
cost associated with the termination of our PSU and SAR plans and the related
distribution of stock to our employees, and a charge of approximately $1.6
million relating to fees and settlement costs relating to a lawsuit against us.
These decreases were partially offset by the following increases:
- - an increase of approximately $4.3 million in salaries and payroll taxes,
approximately $800,000 of which is due to the acquisition of Princeton
Review of Boston, Princeton Review of New Jersey, Princeton Review
Peninsula and T.S.T.S., with the remaining increases primarily related to
added personnel primarily in product development, sales and marketing and
information technology positions, as well as annual salary increases;
- - an increase of approximately $1.9 million attributable primarily to
personnel related costs, including office rent and expenses, travel and
entertainment, employee benefits and recruiting fees;
- - an increase of approximately $1.3 million in advertising and marketing
expenses; and
- - an increase in Web site technology and development expenses of
approximately $870,000 resulting primarily from the development of
Homeroom.com and Review.com.
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 stock of Student Advantage, Inc. to our stockholders and
employees in connection with our restructuring. There have been no distributions
of Student Advantage stock in 2001.
INTEREST EXPENSE
Interest expense increased from approximately $70,000 in 2000 to $1.7
million in 2001, representing a 2280% increase. This increase resulted from
increases in equipment lease balances, balances outstanding under our credit
facilities and interest expense associated with the amortization of the cost of
warrants issued in connection with a loan agreement entered into in December
2000.
OTHER INCOME
Other income decreased from $271,000 in 2000 to $144,000 in 2001,
representing a 47% decrease. This represents interest income earned on the
company's cash balances which increased substantially in 2000 primarily as a
result of the proceeds received from the sale of our Series A preferred stock
and then declined in the latter part of 2000 and the first half of 2001 as the
funds were used to finance development and expansion.
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NET INCOME (LOSS)
Net loss increased from $2.3 million in 2000 to $7.3 million in 2001,
representing a 216% increase. This increase resulted primarily from the
write-off associated with the early extinguishment of debt and the fact that we
did not record any gain on the distribution of stock in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the six months ended June
30, 2001 was $7.9 million, resulting primarily from the net loss from
operations. Net cash used in investing activities during the six months ended
June 30, 2001 was $22.4 million, resulting primarily from our acquisitions of
the operations of Princeton Review of Boston, Princeton Review of New Jersey,
Princeton Review Peninsula and T.S.T.S. Net cash provided by financing
activities during the six months ended June 30, 2001 was $53.5 million,
resulting primarily from our receipt of the net proceeds from our initial public
offering, partially offset by our repayment of borrowings under our lines of
credit.
On June 22, 2001, we completed our initial public offering, selling
5,400,000 shares of common stock at $11.00 per share. The initial public
offering resulted in proceeds to the company of approximately $51.8 million, net
of underwriters' commissions and other expenses associated with the offering.
In June 2001 we terminated our lines of credit with Excel Bank, N.A. and
Reservoir Capital Partners, L.P. and the other lenders thereunder and repaid all
amounts outstanding under these lines of credit, which payment totaled
approximately $29.9 million, including accrued interest. At June 30, 2001, we
had approximately $28.1 million of cash and cash equivalents. We anticipate that
our cash balances, together with cash generated from operations, will be
sufficient to meet our normal operating requirements for at least the next 12
months. We may also seek to obtain a new credit facility as a source of
additional liquidity and to fund a portion of the purchase price of any future
acquisitions of the businesses of our franchisees.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations" and Statement No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have infinite lives will no
longer be amortized but will be subject to annual impairment tests. Other
intangible assets will continue to be amortized over their useful lives. We are
currently reviewing the impact of these Statements and will be performing a fair
value analysis at a later date in connection with the adoption of Statement No.
142 on January 1, 2002.
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IMPACT OF INFLATION
Inflation has not had a significant impact on our historical operations.
SEASONALITY IN RESULTS OF OPERATIONS
We 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. We
typically generate the largest portion of our Test Preparation Services revenue
in the third quarter. Since our Homeroom.com subscription service has not yet
generated significant revenue, it is difficult for us to predict the impact of
seasonal factors on this business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our portfolio of marketable securities includes primarily short term money
market funds. The fair value of our portfolio of marketable securities would not
be significantly impacted by either a 100 basis point increase or decrease in
interest rates due primarily to the short-term nature of the portfolio. Our
outstanding long-term debt bears interest at fixed rates. We do not currently
hold or issue derivative financial instruments.
Royalty payments from our international franchisees constitute an insignificant
percentage of our revenue. Accordingly, our exposure to exchange rate
fluctuations is minimal.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in legal proceedings incidental to
the conduct of our business. We are not currently a party to any legal
proceeding which, in the opinion of our management, is likely to have a material
adverse effect on us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
CHANGES IN CONSTITUENT INSTRUMENTS DEFINING THE RIGHTS OF SECURITYHOLDERS
On June 22, 2001, in connection with the closing of our initial public
offering, our new Amended and Restated Certificate of Incorporation, Amended and
Restated By-laws, and new form of common stock certificate became effective.
Upon the closing of the initial public offering, all of our outstanding
preferred stock automatically converted into an aggregate of 5,341,981 shares of
common stock and all of our outstanding shares of Class A common stock and Class
B non-voting common stock automatically converted into shares of common stock on
a one-for-one basis.
INITIAL PUBLIC OFFERING AND USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES
Our Registration Statement on Form S-1 (File No. 333-43874) related to
our initial public offering was declared effective by the Securities and
Exchange Commission on June 18, 2001. A total of 6,210,000 shares of our common
stock was registered with the SEC (including 810,000 shares subject to the
underwriters' over allotment option) with an aggregate registered offering price
of $80,730,000, all of which shares were registered on our behalf. The public
offering commenced on June 19, 2001 and 5,400,000 shares of common stock were
sold at $11.00 per share, for an aggregate initial public offering price of
$59,400,000, through a syndicate of underwriters managed by J.P. Morgan
Securities Inc., U.S. Bancorp Piper Jaffray Inc. and Legg Mason Wood Walker,
Incorporated.
We paid to the underwriters underwriting discounts and commissions
totaling $4,158,000 in connection with the offering. In addition, we estimate
that we incurred additional expenses of approximately $3.4 million in connection
with the offering, which when added to the underwriting discounts and
commissions paid by us, amounts to total estimated expenses of $7.5 million.
Thus, the net offering proceeds to us (after deducting underwriting discounts
and commissions and offering expenses) were approximately $51.8 million. No
offering expenses were paid directly or indirectly to any of our directors or
officers (or their associates), or persons owning ten percent (10%) or more of
any class of our equity securities or to any other affiliates.
Through the date of this report on Form 10-Q, we have used $29.9 million
of the net proceeds to repay outstanding indebtedness, including accrued
interest, under our credit facilities. Of the proceeds used to repay outstanding
indebtedness under our credit facilities $5.1 million was paid to SGC Partners
II, LLC in it's capacity as one of the lenders thereunder. SGC Partners II, LLC
holds more than 10% of our common stock. In addition, V. Frank Pottow, one of
our directors, is 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, LLC.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 21, 2001, our stockholders approved an amendment to our 2000
Stock Incentive Plan increasing the total number of shares authorized for
issuance under the plan by 846,000 and ratified an earlier amendment to the plan
which increased the total number of shares authorized for issuance under the
plan by 211,500 and permitted consultants to the company to receive awards under
the plan.
On May 21, 2001, our stockholders approved our Amended and Restated
Certificate of Incorporation, which became effective upon the closing of our
initial public offering, and elected our then existing directors into the
following classes, effective upon the closing of our initial public offering:
CLASS I CLASS II CLASS III
- ------- -------- ---------
(term expiring at annual meeting of (term expiring at annual meeting of (term expiring at annual meeting of
- ------------------------------------ ------------------------------------ -----------------------------------
stockholders to be held in 2002) stockholders to be held in 2003) stockholders to be held in 2004)
- -------------------------------- -------------------------------- --------------------------------
John S. Katzman
V. Frank Pottow Richard Katzman Richard Sarnoff
John C. Reid Sheree T. Speakman Howard A. Tullman
Each of the foregoing actions were approved by the written consent of
stockholders holding an aggregate of 16,415,877 shares of common stock (which
number reflects the automatic conversion of our preferred stock into common
stock upon the closing of our initial public offering). No votes were cast
against the foregoing actions and there were no abstentions.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1.2 to the Registrant's registration
statement on form S-1 (File No. 333-43874)).
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.3.1 to the Registrant's registration statement on form
S-1 (File No. 333-43874)).
10.1 Asset Purchase Agreement, dated June 18, 2001, among Princeton
Review Operations, LLC, Princeton Review Management, LLC,
T.S.T.S., Inc., Robert O. Case and Kevin D. Campbell.
10.2 Subordinated Promissory Note, dated June 18, 2001, made by
Princeton Review Operations, LLC in favor of T.S.T.S., Inc., in
the principal amount of $1,475,000.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by The Princeton Review, Inc.
during the period covered by this report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Princeton Review, Inc.
By: /s/ Stephen Melvin
----------------------------------
Stephen Melvin
Chief Financial Officer and
Treasurer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
August 8, 2001
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