UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
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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)
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Delaware |
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22-3727603 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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2315 Broadway |
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New York, New York |
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10024 |
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(Address of principal executive offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code (212) 874-8282 |
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Securities registered pursuant to Section 12(b) of the Act: |
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Title of Each Class |
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Name of Each Exchange on Which Registered |
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None |
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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.
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Yes x |
No o |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
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No o |
The aggregate market value of registrant’s common stock held by non-affiliates, based upon the closing price of the common stock on June 30, 2003, as reported by the Nasdaq National Market, was approximately $56 million. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock, based on Schedule 13G filings, have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The registrant had 27,393,602 shares of $0.01 par value common stock outstanding at March 9, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in Part III of this Form 10-K is incorporated by reference to the Proxy Statement for the registrant’s 2004 Meeting of Stockholders to be held on June 9, 2004.
TABLE OF CONTENTS
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Item 1. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
Market for Registrant’s Common Stock and Related Stockholder Matters |
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Item 6. |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Item 8. |
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Item 9. |
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Item 10. |
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Item 11. |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management |
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Item 13. |
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Item 14. |
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Item 15. |
Exhibits, Financial Statement Schedules and Reports on Form 8-K |
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All statements in this Annual Report on Form 10-K 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, the factors described under the caption “Risk Factors” and elsewhere in this Annual Report on Form 10-K. 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.
Overview
The Princeton Review provides integrated classroom-based, print and online products and services that address the needs of students, parents, educators and educational institutions. 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 2003, we and our franchisees provided test preparation courses and tutoring services for the SAT, GMAT, MCAT, LSAT, GRE and other standardized admissions tests to more than 117,000 students in over 1,000 locations in the United States and abroad.
In the last several years, The Princeton Review has transformed itself from primarily a test preparation company to an integrated provider of standardized test preparation, post-secondary admissions and K-12-focused products and services. During this period, we launched our K-12 Services division; complemented our traditional test preparation products with a range of online options; invested in and acquired new web-based admissions services capabilities and generally broadened and deepened our offerings in our core markets. While we still derive more than half of our revenue from standardized test preparation, the percentage of our revenue from our newer products and services has risen from 19% in 2001 to 30% in 2003, helping us become a more diversified and balanced company.
We operate our businesses through the following three divisions:
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The Test Preparation Services division, founded in 1981, provides classroom-based and Princeton Review Online test preparation courses and tutoring and admissions counseling services and receives royalties from our independent franchisees who provide classroom-based test preparation courses under the Princeton Review brand. |
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The K-12 Services division, founded in 1998, provides a range of services to K-12 schools and school districts to help primary and secondary school students and teachers measurably improve academic performance, including online and print-based assessment, professional development, and face-to-face instruction. |
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The Admissions Services division, founded in 1986 as our publishing division, sells web-based applications, admissions and prospect management products to educational institutions and operates our Princetonreview.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, and serves as a free, comprehensive source of academic admissions information and tools. |
We also author more than 190 print and software titles on test preparation, academic admissions and related topics 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 were incorporated in Delaware in March 2000 and are the successor to a number of affiliated entities operating under the Princeton Review name, the first of which was formed in 1981. Our Internet address is www.princetonreview.com. On our Investors web site, located at www.princetonreview.com, we post the following
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filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: Our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings on our Investors web site are available free of charge.
Our Products and Services
Test Preparation Services Division
In 2003, we and our franchisees provided test preparation courses and tutoring services to more than 117,000 students in over 1,000 course locations in 43 states and 16 countries. We provide test preparation courses to students taking the following major U.S. standardized tests:
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SAT |
LSAT (Law School Admissions Test) |
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GMAT (Graduate Management Admissions Test) |
MCAT (Medical College Admissions Test) |
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GRE (Graduate Record Examination) |
ACT (American College Test) |
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TOEFL (Test of English as a Foreign Language) |
PSAT |
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USMLE (United States Medical Licensing Examination) |
SAT II |
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. We have separate courses for students taking the current SAT (class of 2005) and students who will be taking the new SAT (class of 2006), with updated material to reflect the changes on the test. Our GMAT and GRE classes have no more than eight students in each class to maximize individual attention and grouping by similar ability.
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 Private Tutoring Offerings
The Princeton review private tutoring program is our most exclusive, customized offering. We offer one-to-one, high-end admissions counseling and tutoring service for all of the admissions tests. In addition, we provide individual assistance with academic subjects. Tutoring is chosen by students and parents who want customized instruction from our very best instructors on a flexible schedule.
Our Online Course Offerings
Launched in 2000, our award-winning online courses are of demonstrably higher quality than any of our competitors. These courses are fully interactive and are particularly attractive to students who need the flexibility to prepare at any time of the day or night and on short notice. This product line is also very profitable and is our fastest growing.
The online courses have been remapped for use by all of our classroom-based and tutoring students as well. Students can take tests, make up classes, or simply do extra work online on their own schedule. Our online tools have made all of our products deeper and more flexible, offering all Princeton Review students the ability to choose their best and most convenient way of learning as they go through our programs.
Our School-Based Course Offerings
In addition to offering our standardized test preparation courses to individual students, we also offer our SAT, SAT II and ACT test preparation services to schools and districts around the United States. In 2003, The Princeton Review worked with hundreds of such institutional clients to provide test preparation services to their students.
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These clients range from remote private schools to large urban school districts. Our institutional test preparation courses are custom designed to meet the needs of these institutional clients and their students. Using the same materials and techniques, we train our own teachers and, occasionally, district teachers to deliver test preparation, remediation and enrichment to districts of all demographics. We also offer extensive testing and professional development services.
Also in 2003, our Test Preparation Services division teamed up with our K-12 Services division to become a major provider of Supplemental Education Services (SES) under the federal No Child Left Behind Act of 2001. Using content and materials developed by our K-12 Services division and Test Preparation Services division teaching techniques and personnel, we deliver remediation and enrichment services directly to thousands of students in school districts throughout the country. Our customized SES services offer students intensive, live instruction in a small group setting in such critical areas as math, English language skills and reading.
School-based services is the Test Preparation Services division’s largest area of expected growth in the coming years.
Our Test Preparation Publications and Software
Examples of the books and educational software products developed by the Test Preparation Services division include the following:
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Cracking the SAT |
Cracking the AP Calculus |
Anatomy Coloring Book |
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Cracking the GMAT |
Cracking the AP Chemistry |
Human Brain Coloring Book |
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Cracking the LSAT |
Cracking the AP US History |
Physiology Coloring Book |
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Cracking the GRE |
Cracking the AP European History |
Cracking the Praxis |
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WordSmart |
Cracking the GED |
Cracking the ASVAB |
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MathSmart |
GMAT Math Workbook |
Crash Course for the SAT |
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GrammarSmart |
GMAT Verbal Workbook |
Crash Course for the GRE |
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The Princeton Review: Inside the SAT and ACT 2003 Edition (CD ROM software title) |
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K-12 Services Division
Services for Schools
The accountability movement, which has gained momentum over the past 10 years and has been codified by new federal laws, including the No Child Left Behind Act of 2001, places testing at the center of K-12 education. Performance on these tests carries important consequences for students, teachers and administrators alike. Students who perform poorly can face mandatory summer school, a repeated grade, or denial of a high school diploma. For teachers and school administrators, these tests exert strong pressure on teaching and learning, and class or school performance increasingly affects the direction of their careers.
The K-12 Services division partners with schools to help them meet these challenges and measurably improve academic performance. Recognizing that schools need a broad range of products and services, we offer customized solutions that include formative and benchmarking assessments, professional development, after school programs and face-to-face instruction. Research indicates that it’s the synergy of effective assessments, improvements in teacher quality, and skill-specific, standards-aligned instruction that can significantly improve student performance, and our goal is to provide schools with the right tools to achieve this result. We currently work with a number of districts across the country, comprising thousands of schools, including The Virginia Department of Education, the School District of Philadelphia, Chicago City Schools, Memphis City Schools, and The New York City Department of Education.
We provide the following four major solutions to school districts throughout the country, which we are able to combine into customized programs to meet the specific needs of each school district.
Assessments to Inform Instruction
We offer districts interim, low-stakes assessments aligned to their curriculum and state standards. These instruments can be delivered in traditional paper and pencil format or online through our Homeroom platform. Homeroom is a powerful, web-based tool that enables educators to quickly assess students’ academic strengths and
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weaknesses and provides immediate feedback and tailored educational resources for improving performance. Results are provided in a timely, usable and actionable format for teachers, administrators, parents and students.
These programs have four important features for school districts:
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Quick Turnaround. Detailed reports are delivered online soon after test administration. |
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Useful Reporting. Our reports are designed to be maximally useful for teachers to guide instruction and for students and parents to provide meaningful guidance. |
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Connection to learning resources. Teachers, students and parents have access to specific resources based on actual areas of need. These resources include proprietary Princeton Review lessons and direct links to web-based resources. |
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Ties to Professional Development. The Princeton Review works with teachers and administrators to ensure that they understand the solution, and follows up with the instructional leadership of the schools to review profiles of learning outlined by the data. In addition, The Princeton Review works with districts to provide “parent nights” to help inform the community. |
Professional Development
We provide ongoing, comprehensive professional development to help teachers ensure the academic success of their students. Our professional development programs are ongoing in order to continually build upon knowledge and to ensure proper implementation of skills and resources introduced throughout our sessions. Programs are flexible and customized.
We offer three main professional development programs:
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Ongoing data-differentiated instruction and assessment support. We implement ongoing professional development programs that focus on using data in the classroom to drive individualized instruction, with the ultimate goal being mastery in the classroom and improvements on state standardized tests. The Princeton Review works with instructional leaders to help them learn how to interpret and use reports generated through The Princeton Review’s assessments, as well as from their state standards test, to drive student instruction. |
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Individualized professional development programs. Using several data streams, from teacher self-evaluations to low stakes interim assessments, we create individualized professional development for a district’s staff. With this program, teachers work in an ongoing manner with a Princeton Review consultant who helps each teacher focus instruction on the area of his or her students’ needs. The consultants help each teacher evaluate data and reports gathered from low-stakes assessments administered throughout the program and subsequently recommend individualized professional development to expand teacher knowledge based on student performance on various skills. |
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Product Training. Training is a crucial component of any successful, comprehensive program. Every program The Princeton Review offers contains some form of training or staff development. |
After-School and Summer School Programs
We develop comprehensive Math and Reading/English Language Arts programs for after-school and summer school programs. The programs come complete with course manuals for students and teachers, benchmark assessments and staff development. The program can be built around a district’s curriculum and/or testing program. Our programs have all the tools a district needs to provide supplemental skill review to their students. We offer standardized programs, as well as the capacity to create a program specific to a district’s unique needs. We have the ability to train a district’s teachers to deliver our after school program or we can provide Princeton Review teachers to teach the course.
Face-to-Face Instruction
We provide supplemental face-to-face instruction for students who are identified as struggling to pass their state tests. As an approved SES provider, The Princeton Review delivers programs that meet the requirements of the No Child Left Behind Act of 2001.
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The Princeton Review partners with districts to deliver SES courses on-site, in school buildings across the country. Our courses focus on Math and English Language Arts, including Reading, and are customized to meet the needs of eligible students and families. With standards-based material that covers up to 40 hours of intensive, live instruction, students benefit from the most current and scientifically based material, presented in a small group setting.
Our Publications
Our K-12 Services division also authors more than 60 print titles under the Princeton Review brand, including the following:
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Roadmap to the CAHSEE (California) |
New York Roadmap Series |
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Roadmap to the FCAT (Florida) |
North Carolina Roadmap Series |
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Roadmap to the HSPA (New Jersey) |
Virginia Roadmap Series |
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Roadmap to the OPT (Ohio) |
Cracking the Virginia SOL Series |
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Roadmap to the MCAS (Massachusetts), |
Cracking the Texas End-of-Course Series |
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Roadmap to the Regents (New York) |
Smart Junior Series |
Admissions Services Division
We sell a wide range of products and services to colleges and universities, high schools and prospective college, law, medical, graduate, and business students. Our products help higher education institutions automate and manage the many phases of the student recruitment and admissions process and we work with high schools to aid them in the college and career counseling they deliver. We guide students through the entire process of researching, applying, and paying for their higher education. Princetonreview.com, our free web site for prospective students, is a comprehensive source of information that details every college and graduate school program, provides tools to help students find the right schools, gives advice about the admissions process, highlights our college partners’ online applications, serves as a meeting place for colleges and students, and walks students through the complex financial aid process. In addition, we produce more than 70 print titles that guide students and parents through the transition from high school to college, college to graduate school, and school to career.
Our Web-Based Products and Services
The following are some of the major products, services and tools available to the higher education institutions and high schools that purchase our web-based products and the students, parents and educators who use our free online resources:
For Post Secondary Institutions. We sell academic institutions a broad range of web-based products on a subscription basis.
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Online Admissions and Recruiting Forms. We provide several online application packages to assist colleges and graduate schools in making their application and recruiting processes more effective by developing, customizing and hosting online applications and recruiting forms. We develop and then post application forms on our web site and on colleges’ and graduate schools’ web sites. We facilitate the electronic submission of applications (including letters of recommendations, transcripts, and other supplemental forms) and manage the application process by sending confirmation notices and processing online payment of application fees and aiding the posting of admissions decisions online. |
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Prospect Management Solutions. Our Prospect Manager automates the entire communication process, including HTML email, paper and phone. Colleges can input their communication plan in the beginning of the admissions season, and the system will handle the rest, including dynamic functionality that reacts to actions a user may take. |
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Application Management Solutions. Our application management solutions offer admissions offices effective tools for monitoring and communicating with applicants throughout the application process. Our products enable admissions officers to evaluate their applicant pool as applications are started, as well as submitted, so that immediate adjustments in recruiting efforts may be made. Our application management solutions also permit admissions officers to communicate with prospects and applicants |
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by sending personalized e-mails about the status of applications, upcoming events and pending deadlines. |
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Interview and Event Management Tools. We assist admissions offices in scheduling and managing interviews and recruiting events. Our interview and event management products enable admissions offices to post interview and event schedules on their web sites, to facilitate online registration, and to send automated reminders, confirmations and thank you notes, and to better gauge attendance. |
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Reporting Services. For clients who purchase our marketing, prospect management, application and event services, we can deliver high quality reports that enable them to assess their yield conversions and source effectiveness. These reports can be used for planning purposes. |
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Data Integration Systems. We assist colleges and graduate schools in transferring the data generated from our prospect management and application management products into their student information systems. We provide custom data files of prospect and applicant data so that admissions officers may download data directly into their schools’ student information systems. |
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Marketing Products and Services. We offer various marketing products and services to assist colleges and graduate schools in recruiting students. Colleges and graduate schools may include an in-depth profile about their school in our books and on our web site, sponsor our user newsletters, place banner ads on our web site, and also sponsor content on our web site and in our newsletters. In addition, colleges and graduate schools can access highly targeted prospects by sponsoring our college and graduate school search on Princetonreview.com. Schools can also secure placement in our “featured school” and “featured application” promotion on three of the most highly trafficked pages on our site. We can also work with schools to send highly targeted mail and emails to Princetonreview.com users who have asked to receive information from colleges and graduate schools. Because our web site is tied to a school’s prospect management system, we can automatically generate emails to students who have inquired about a school on Princetonreview.com. In addition, all of our clients receive a detailed marketing report that outlines who is viewing their profile and receiving their school in our college and graduate search tools. This information includes demographic information and the other profiles that schools are viewing. |
For Secondary Schools and Community Organizations. We sell high schools our Education and Career Opportunities System, or ECOS, product, on a subscription basis. ECOS is a web-based program that solicits information from high school students about their career plans and choices. The product enables counselors to be actively involved in career guidance and application management by giving them access to their students’ career information and educational interests. With ECOS, counselors can review students’ interests and career plans, as well as monitor their progress on completion of applications. Counselors may also use ECOS to send targeted messages to individuals or groups with particular interests and to provide customized lists of suggested colleges. ECOS enables district and state administrators to track their entire student populations and compare the success of each class to prior classes. With ECOS, students and parents have access to current information about, and a search engine for researching, careers, colleges, majors, financial aid and life skills.
For Princetonreview.com visitors. The following is a list of just a few of the tools available on Princetonreview.com.
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Favorite Schools. Our search engine allows students to evaluate colleges and graduate schools based on a wide range of criteria, from average admissions test scores to quality-of-life ratings. We have online tools that assist users in creating a list of schools that match their interests. These tools provide detailed information about schools, including, in many cases, students’ opinions of that school’s faculty, workload, social life, sports and more. Users can then save these schools to a personalized home page that allows users to track the colleges or graduate schools they are interested in and the numerous deadlines associated with 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. Each college or graduate school’s profile includes links to its web site. |
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Counselor-O-Matic and Advanced School Search. This tool helps students narrow down their list of potential schools to consider. Users give us information about the type of school they are looking to attend, their academic history and goals, where they want to study and what they want to study, and our search tools give them a list of schools that best match their profile. |
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Student Match. After students have filled out Counselor-o-Matic, we give them the opportunity to share this information with our partner colleges and universities. Colleges can then recruit the students who best match their profile. |
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Majors Search. This tool helps students collect information about specific majors they might be interested in pursuing in college. Students enter a major and our web site provides them with information about the major, the colleges that offer the major, any preparation necessary for that major and post graduate careers associated with the major. |
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Career Quiz. This 24-question quiz asks users about their potential career preferences, and then analyzes their answers to determine their interests and work style. Based on this information, we identify corresponding careers that would be most suitable. The list of careers then links to profiles that explain a day in the life of the particular career, statistics about it, and what people who work in this sector can expect in five years, 10 years, and 15 years. Each career links to corresponding college majors and colleges that offer that major. |
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Electronic Applications. We host almost a thousand electronic applications on Princetonreview.com for admission to two-year and four-year undergraduate programs, graduate schools, business schools, law schools, medical schools, career and technical schools, and fellowship or scholarship programs. Online applications are fast, easy and secure. Once a user enters and saves his or her personal information on an electronic application, that information pre-populates all subsequent applications, saving the user significant time. |
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Pay For Area. The Pay For area on Princetonreview.com helps college and graduate school applicants and parents secure the financing to pay for school. They can obtain expert advice, get help in filling out the required forms and perform necessary calculations with customized tools. We also have electronic alternative loan applications available from our preferred partner banks and resources to help students open an online bank account, find insurance that they may need in school and apply for credit cards. |
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College and graduate school admissions discussion boards. We provide a forum for students to discuss college and graduate school admissions experiences and obtain advice from Princeton Review moderators. |
Our Publications
Our Admissions Services division also authors more than 50 print titles under the Princeton Review brand. Examples of these books include the following:
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Complete Book of Colleges |
Complete Book Law Schools |
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Internship Bible |
Complete Book Medical Schools |
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Visiting College Campuses |
Paying for College Without Going Broke |
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Best Value Colleges |
Paying for Graduate School |
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Guide to Study Abroad |
K&W Guide |
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Guide to Summer Programs |
Kids Guide to Majors/Career |
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Complete Book Business Schools |
Guide to College Majors |
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Best 345 Colleges |
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Our Franchised Operations
Our classroom-based test preparation 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. The royalties paid to us by our franchisees are comprised of a general royalty of 8% of their cash receipts collected under the Princeton Review name, an additional royalty of 2% of their cash receipts, which is allocated to an advertising fund that we also contribute to, and a per student fee for use by their students of our online supplemental course tools. Our franchisees 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 5% of our total 2003 revenue.
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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 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. We have not entered into any such royalty arrangements with our franchisees for our other web-based products and services.
As of December 31, 2003, we had eight franchisees operating 18 offices under the Princeton Review name in the United States and 25 offices operated by franchisees in 14 additional countries.
Our domestic franchisees currently provide test preparation courses and tutoring services in the following jurisdictions:
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California |
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Colorado |
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Connecticut |
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Ohio |
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Florida |
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Pennsylvania |
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Illinois |
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Puerto Rico |
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Massachusetts |
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Rhode Island |
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Michigan |
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Tennessee |
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Our international franchises are located in China, India, Israel, Japan, Malaysia, Mexico, Pakistan, the Philippines, Singapore, South Korea, Taiwan, Thailand, Turkey and The United Arab Emirates. We intend to continue to expand our international presence through the sale, in the next several years, of additional franchises, primarily in Asian and Middle Eastern markets.
We are not currently offering any new domestic franchises. Over the last several years, we completed a number of acquisitions of businesses operated by our former domestic franchisees, as more fully described below under “Acquisitions and Strategic Investments.”
Acquisitions and Strategic Investments
Recent Acquisitions
Embark
In October 2001, we acquired substantially all of the operating assets of Embark.com, Inc., a developer of online products and services for the college and graduate school admissions market. The acquired business consisted primarily of Embark’s customer contracts with academic institutions and its technological platform for submitting electronic applications and related services. The purchase price paid by us at closing consisted of 875,000 shares of our common stock valued at approximately $5.2 million, approximately $3.4 million in assumed indebtedness and approximately $2.1 million in other assumed liabilities of Embark, consisting primarily of deferred revenue relating to customer contracts assumed by us, net of acquired receivables of approximately $1.0 million. In accordance with the earn-out provisions entitling Embark to additional consideration based on the performance of the acquired business, Embark earned a payment of 9,128 shares of our common stock and approximately $1.5 million in cash, based on the revenue performance of the acquired business through June 30, 2003. In addition to the purchase price, in connection with the transaction, we made a $1.8 million loan to Embark, which was secured by 300,000 of the shares of our common stock that Embark received as part of the purchase price. The approximate $1.5 million earn-out was applied against the loan balance, which was repaid in full as of December 31, 2003.
Franchise Acquisitions
In the last three years, we also completed acquisitions of the businesses of a number of our former domestic franchisees. In July 2003, we completed a small acquisition of 77% of Princeton Review of North Carolina, Inc., the independent franchise that provided test preparation courses in North Carolina, for a purchase price of approximately $890,000, of which approximately $760,000 was financed with notes to the seller, including imputed interest. In November 2003 we purchased the remaining 23% for approximately $248,000, of which approximately $208,000 was financed with notes to the seller, including imputed interest. In October 2002, we completed a small acquisition involving the assets of Princeton Review of St. Louis, one of our franchisees that provided test preparation courses in Missouri, for a purchase price of approximately $850,000, of which approximately $470,000 was financed with a note to the sellers. In June 2001, we acquired the assets comprising the business of T.S.T.S., Inc., which offered test preparation courses in Texas, Arizona, Oklahoma, Louisiana and New Mexico under franchise agreements with us, for a purchase price of approximately $6.3 million. We financed approximately $4.8 million of the purchase price under our then existing line of credit and issued a subordinated promissory note to the seller for the remaining approximately $1.5 million. In early March 2001, we acquired the assets comprising the businesses of Princeton Review of Boston, Inc. and Princeton Review of New Jersey, Inc., at a combined purchase price of $13.8 million. We financed approximately $10.2 million of the purchase price under our then existing line of credit and issued two subordinated promissory notes for the remaining approximately $3.6 million. In early March 2001, we also 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 our then existing line of credit. Princeton Review Peninsula provided test preparation courses in several counties in California.
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Strategic Investments
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, including ownership interests in the following companies:
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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. |
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Schoolnet Inc. We currently own approximately 5% of SchoolNet, a privately held education technology solutions company. We maintain a strategic marketing relationship with SchoolNet, through which SchoolNet markets and distributes a version of our Homeroom product called “Homeroom Inside.” We have also contracted with SchoolNet to provide Enterprise Resource Planning software that monitors the use of Homeroom. |
We intend to continue to pursue strategic acquisitions that will help us further expand our product offerings or grow geographically. We expect our acquisition focus to be on companies with complementary products or services, including those businesses operated by our remaining domestic franchisees that we can acquire on favorable terms. From time to time, we may also seek to make additional investments in businesses with which we want to build strategic relationships. We anticipate that future acquisitions or strategic investments, 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 consummate additional acquisitions or investments.
Pursuant to an agreement entered into on December 31, 2003, we terminated our strategic relationship with Tutor.com, Inc., a privately held company we co-founded in 1998, and sold preferred stock we held in Tutor.com for $300,000 in cash. As consideration for the termination of certain strategic agreements and the restructuring of certain rights, we received an additional $200,000 in cash and $500,000 in notes. We retain a common stock position in Tutor.com, representing approximately 2.5% of its outstanding equity, which is valued at $0.
Sales and Marketing
The majority of our students and their parents choose our test preparation programs based on the recommendations of other students, 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, including Random House, which publishes and distributes the books we author, 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.
In the last several years, we have substantially increased our sales and marketing efforts in order to market and support our newer products and services, such as our web-based application and admissions management
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products, our K-12 products and our online and institutional test preparation offerings. Our sales and marketing activities by division are as follows:
Test Preparation Services 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 one-to-one admissions counseling and tutoring initiative is marketed to high-end customers utilizing a distinctive message and dedicated marketing resources. Our Princeton Review Online products are marketed through electronic media and e-commerce partnerships, as well as through our classroom course marketing efforts. We recently increased our sales force to conduct sales of our test preparation services to schools and other educational institutions. We expect that marketing to educational institutions will continue to constitute a major focus of the marketing activities of the Test Preparation Services division.
K-12 Services Division. We are marketing our K-12 services to schools and school districts through a number of channels, including national conferences, direct mail, electronic media and telemarketing. Our K-12 Services division has a sales and marketing force of approximately 30 people. Homeroom is also integrated in the offerings of, and sold by, our business partners such as Plato Learning, Inc. and SchoolNet.
Admissions Services Division. Admissions Services has a dedicated sales and marketing force that actively solicits secondary schools and post-secondary institutions to subscribe to our web-based products and services. Historically, we have built our user base and volume through branding efforts with other media and word-of-mouth. To attract users to our web site, we market to students, parents, counselors and admissions officers through attendance at educational trade shows and conferences, offline and online direct mail, sponsorships, keyword buys and syndicated licensing of content. Additionally, we seek to attract visitors through strategic relationships with third parties, such as MSN and Vault.com.
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.
Test Preparation Services Division. We rely on our development staff, teachers and other education experts to create and refine the materials used in our Test Preparation Services 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:
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continually updating and enhancing our test preparation materials and our teaching methods; |
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ensuring that our designated personnel take virtually every major standardized test for which we offer courses, so that our techniques and materials remain current; |
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performing quantitative and qualitative research into the preferences and needs of our customers; |
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regularly soliciting and reviewing feedback from students taking our courses; |
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enhancing the services and functionality of our online test preparation tools and content; and |
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frequently updating our standardized test preparation publications. |
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.
K-12 Services Division. We rely on a team of teachers, educational experts and developers to research, design, enhance and deliver our K-12 educational products and services, which include, live instruction, online and paper-based assessments, professional development and publications. Our programs are designed to provide customized and highly focused resources to improve student performance. Our focus in the K-12 Services division is to continue
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to expand and refine our offerings to afford schools and school districts the highest degree of flexibility possible in the mix of products they choose to purchase from us, while delivering measurable results.
Admissions Services Division. Since launching our Review.com (now Princetonreview.com) web site in 1994, we have continually expanded the material available and made improvements to its content and functionality. The online informational materials and tools 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 information and interactive tools designed to assist them with the school selection, admissions and financial aid processes. We also continually strive to provide our educational institution subscribers with more effective ways to reach potential applicants, and streamline and manage the various facets of the admissions process. To this end, we periodically refine our web-based admissions and application management solutions to provide our higher education institution customers with the most technologically advanced and flexible products possible. Finally, our publications are frequently updated by our staff and freelance authors and editors to ensure that new editions are up to date and include the most current information available on college and graduate school admissions and related subjects.
Significant Customers
In the K-12 Services division, the top two customers accounted for 27% and 21%, respectively, of revenue in that division in 2003.
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, if they have not already done so. 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:
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Test preparation companies. Our Test Preparation Services 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. |
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Companies offering web-based college information services and products. Our Admissions Services division faces competition from several companies that currently provide web-based products and services similar to ours for the higher education market. |
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Companies offering products and services focused on the K-12 education market. Our K-12 Services division faces competition from many companies that provide student assessment, tutoring and remediation services, including Internet and software based services, to schools and students in the increasingly competitive K-12 education market. |
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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 provide their products and services online or have established partnerships with Internet companies in order to do so. We expect that all of our primary competitors in this area will expand into web-based delivery if they have not already done so. |
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Non-profit and membership organizations. We also face competition from several non-profit and other organizations that offer both face-to-face and online products and services to assist individuals and educational organizations with counseling, marketing and applications. |
We believe that the principal competitive factors in our markets include the following:
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brand recognition; |
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ability to demonstrate measurable results; |
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availability of integrated online and offline solutions; |
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ability to achieve a critical mass of students, parents and educational institutions online; |
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overall quality of user experience; |
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speed in the introduction of new services; |
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quality of materials and teachers; |
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alignment of offerings with specific needs of students, parents and educators; and |
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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 Princetonreview.com web site offers higher education institutions access to a large body of potential applicants and 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 marketplace. As a result, we may not be able to maintain our competitive advantages or otherwise compete effectively with current or future competitors.
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.
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.