##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    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 incorporation or organization)
    
    (I.R.S. Employer Identification No.)2315 Broadway New York, New York
    
    10024(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (212) 874-8282
  þ o
  o þ o
  o þ




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##### Table of Contents



TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATION
    
    
    3Item 1. Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17PART II. OTHER INFORMATION
    
    
    18Item 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3. Defaults Upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    21SIGNATURES
    
    
    22EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
 (in thousands, except share data)
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETS:Current assets:Cash and cash equivalents
    
    $
    7,327
    
    
    $
    8,002Accounts receivable, net of allowance of $1,021 in 2006 and $1,601 in 2005
    
    
    23,647
    
    
    
    22,493Accounts receivable-related parties
    
    
    1,630
    
    
    
    1,591Other
receivables, principally related parties
    
    
    2,053
    
    
    
    813Inventory
    
    
    3,094
    
    
    
    2,798Prepaid expenses
    
    
    1,660
    
    
    
    2,229Other current assets
    
    
    1,785
    
    
    
    1,307Total current assets
    
    
    41,196
    
    
    
    39,233Furniture, fixtures, equipment and software development, net
    
    
    15,108
    
    
    
    16,155Goodwill
    
    
    31,506
    
    
    
    31,506Investment in affiliates
    
    
    1,889
    
    
    
    1,938Other intangibles, net
    
    
    12,946
    
    
    
    13,371Other assets
    
    
    4,873
    
    
    
    3,168Total assets
    
    $
    107,518
    
    
    $
    105,371LIABILITIES & STOCKHOLDERS EQUITY:Current liabilities:Line of credit
    
    $
    10,000
    
    
    $
    Accounts payable
    
    
    4,645
    
    
    
    10,449Accrued expenses
    
    
    11,374
    
    
    
    10,826Current maturities of long-term debt
    
    
    2,761
    
    
    
    1,530Deferred income
    
    
    21,827
    
    
    
    16,548Total current liabilities
    
    
    50,607
    
    
    
    39,353Deferred rent
    
    
    2,473
    
    
    
    2,327Long-term debt
    
    
    896
    
    
    
    2,845Series B-1 Preferred Stock, $0.01 par value; 10,000 shares authorized;
6,000 shares issued and outstanding at June 30, 2006 and
10,000 shares issued and outstanding at December 31, 2005
    
    
    6,000
    
    
    
    10,000Stockholders equityPreferred stock, $0.01 par value; 4,990,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common
stock, $0.01 par value; 100,000,000 shares authorized; 27,574,512 and 27,572,172
issued and outstanding at June 30, 2006 and December 31, 2005, respectively
    
    
    276
    
    
    
    276Additional paid-in capital
    
    
    116,590
    
    
    
    116,279Accumulated deficit
    
    
    (69,020
    )
    
    
    (65,430
    )Accumulated other comprehensive loss
    
    
    (304
    )
    
    
    (279
    )Total stockholders equity
    
    
    47,542
    
    
    
    50,846Total liabilities and stockholders equity
    
    $
    107,518
    
    
    $
    105,371
  3




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##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenueTest Prepartion Services
    
    $
    21,682
    
    
    $
    20,630
    
    
    $
    46,745
    
    
    $
    43,528K-12 Services
    
    
    9,828
    
    
    
    7,122
    
    
    
    16,701
    
    
    
    15,041Admissions Services
    
    
    2,517
    
    
    
    2,045
    
    
    
    5,691
    
    
    
    4,839Total revenue
    
    
    34,027
    
    
    
    29,797
    
    
    
    69,137
    
    
    
    63,408Cost of revenueTest Prepartion Services
    
    
    7,448
    
    
    
    6,458
    
    
    
    15,265
    
    
    
    13,475K-12 Services
    
    
    4,830
    
    
    
    2,935
    
    
    
    9,584
    
    
    
    7,003Admissions Services
    
    
    1,496
    
    
    
    1,009
    
    
    
    2,786
    
    
    
    1,783Total cost of revenue
    
    
    13,774
    
    
    
    10,402
    
    
    
    27,635
    
    
    
    22,261Gross Profit
    
    
    20,253
    
    
    
    19,395
    
    
    
    41,502
    
    
    
    41,147Operating expenses
    
    
    21,018
    
    
    
    19,772
    
    
    
    44,137
    
    
    
    41,335Loss from operations
    
    
    (765
    )
    
    
    (377
    )
    
    
    (2,635
    )
    
    
    (188
    )Interest income (expense)
    
    
    (192
    )
    
    
    3
    
    
    
    (222
    )
    
    
    (266
    )Other expense
    
    
    (377
    )
    
    
    
    
    
    
    (377
    )
    
    
    Equity in the income (loss) of affiliates
    
    
    16
    
    
    
    (94
    )
    
    
    (51
    )
    
    
    (161
    )Loss before income taxes
    
    
    (1,318
    )
    
    
    (468
    )
    
    
    (3,285
    )
    
    
    (615
    )(Provision) benefit for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (1,318
    )
    
    
    (468
    )
    
    
    (3,285
    )
    
    
    (615
    )Dividends and accretion on Series B-1 Preferred Stock
    
    
    (147
    )
    
    
    (198
    )
    
    
    (305
    )
    
    
    (393
    )Loss attributed to comon stockholders
    
    $
    (1,465
    )
    
    $
    (666
    )
    
    $
    (3,590
    )
    
    $
    (1,008
    )Basic and diluted loss per share
    
    $
    (0.05
    )
    
    $
    (0.02
    )
    
    $
    (0.13
    )
    
    $
    (0.04
    )Weighted average shares used in computing loss per share
    
    
    27,574
    
    
    
    27,570
    
    
    
    27,574
    
    
    
    27,570
  4




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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
 (unaudited)
 (in thousands)
 Six Months Ended June 30,2006
    
    
    2005Cash flows provided by (used for) operating activities:Net income (loss)
    
    $
    (3,285
    )
    
    $
    (615
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation
    
    
    1,190
    
    
    
    834Amortization
    
    
    3,413
    
    
    
    2,783Bad debt expense
    
    
    562
    
    
    
    145Write-off of deferred financing costs
    
    
    
    
    
    
    117Write-off of inventory
    
    
    265
    
    
    
    Deferred rent
    
    
    146
    
    
    
    610Stock based compensation
    
    
    300
    
    
    
    Other, net
    
    
    (169
    )
    
    
    95Net change in operating assets and liabilities:Accounts receivable
    
    
    (2,996
    )
    
    
    3,569Inventory
    
    
    (560
    )
    
    
    Prepaid expenses
    
    
    569
    
    
    
    177Other assets
    
    
    (2,306
    )
    
    
    40Accounts payable and accrued expenses
    
    
    (5,256
    )
    
    
    (3,251
    )Deferred income
    
    
    5,280
    
    
    
    (3,031
    )Net cash
provided by (used for) operating activities
    
    
    (2,847
    )
    
    
    1,473Cash provided by (used for) investing activities:Purchases of furniture, fixtures, equipment and software development
    
    
    (2,121
    )
    
    
    (3,946
    )Additions to capitalized K-12 content, capitalized course costs
    
    
    (1,010
    )
    
    
    (2,266
    )Payment of related party loan
    
    
    345
    
    
    
    Notes receivable
    
    
    516
    
    
    
    250Net cash provided by (used for) investing activities
    
    
    (2,270
    )
    
    
    (5,962
    )Cash flows provided by (used for) financing activities:Redemption of Series B-1 Preferred Stock
    
    
    (4,377
    )
    
    
    Proceeds (payments) from revolving credit facility
    
    
    10,000
    
    
    
    (2,000
    )Payment of credit facility deferred financing costs
    
    
    (168
    )
    
    
    Capital lease payments
    
    
    (402
    )
    
    
    (347
    )Dividends on Series B-1 Preferred Stock
    
    
    (305
    )
    
    
    (251
    )Notes payable related to acquisitions
    
    
    (317
    )
    
    
    (656
    )Proceeds from exercise of options
    
    
    11
    
    
    
    7Net cash provided by (used for) financing activities
    
    
    4,442
    
    
    
    (3,247
    )Net decrease in cash and cash equivalents
    
    
    (675
    )
    
    
    (7,736
    )Cash and cash equivalents, beginning of period
    
    
    8,002
    
    
    
    19,197Cash and cash equivalents, end of period
    
    $
    7,327
    
    
    $
    11,461
  5




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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
 (unaudited)
 1. Basis of Presentation
   Products and Services
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)RevenueServices
    
    $
    26,416
    
    
    $
    24,055
    
    
    $
    57,847
    
    
    $
    53,610Products
    
    
    5,563
    
    
    
    3,574
    
    
    
    7,089
    
    
    
    5,565Other
    
    
    2,048
    
    
    
    2,168
    
    
    
    4,201
    
    
    
    4,233Total revenue
    
    $
    34,027
    
    
    $
    29,797
    
    
    $
    69,137
    
    
    $
    63,408Cost of RevenueServices
    
    $
    11,457
    
    
    $
    9,520
    
    
    $
    24,317
    
    
    $
    19,806Products
    
    
    2,131
    
    
    
    733
    
    
    
    2,997
    
    
    
    2,158Other
    
    
    186
    
    
    
    149
    
    
    
    321
    
    
    
    297Total cost of revenue
    
    $
    13,774
    
    
    $
    10,402
    
    
    $
    27,635
    
    
    $
    22,261
  Stock-Based Compensation
 Accounting
for Stock Issued to Employees Accounting for Stock-Based Compensation Share-Based Payment
 6




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Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005(In thousands, except per share amounts)Net loss attributed to common stockholders, as reported
    
    $
    (666
    )
    
    $
    (1,008
    )Total stock-based employee compensation expense determined
under fair-value based method for all awards
    
    
    (445
    )
    
    
    (954
    )Pro forma net loss attributed to common stockholders
    
    $
    (1,111
    )
    
    $
    (1,962
    )Net loss per share:Basic and diluted, as reported
    
    $
    (0.02
    )
    
    $
    (0.04
    )Basic and diluted, pro forma
    
    $
    (0.04
    )
    
    $
    (0.07
    )
 Adoption of New Accounting Pronouncements
 Accounting Changes and Error Corrections  a
Replacement of APB Opinion No. 20 and FASB Statement No. 3
  
    
    Financial Accounting Standards Board (FASB) Staff Position FAS 13-1, Accounting for
Rental Costs Incurred during a Construction Period(October 2005);
    
    FASB Staff Position FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments (November 2005);
    
    FASB Staff Position FIN 45-3, Application of FASB Interpretation No. 45 to Minimum
Revenue Guarantees Granted to a Business or Its Owners (November 2005); and,
    
    FASB SFAS No. 155, Accounting for Certain Hybrid Financial Instruments  an amendment
of FASB Statements No. 133 and 140 (February 2006).
  7




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Use of Estimates
  Reclassifications
  2. Stock-Based Compensation
 Stock Incentive Plan
  Stock Options
   Six
Months Ended June 30,Assumptions
    
    2006
    
    2005Expected volatility
    
    
    43
    %
    
    
    58
    %Expected dividends
    
    
    0
    %
    
    
    0
    %Expected term (in years)
    
    
    5.0
    
    
    
    5.0Risk-free rate
    
    
    5.00
    %
    
    
    4.50
    %
  8




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##### Table of Contents



Weighted-Average
    
    
    AggregateWeighted-
    
    
    Remaining
    
    
    IntrinsicOptions
    
    
    Average
    
    
    Contractual
    
    
    ValueOutstanding
    
    
    Exercise Price
    
    
    Term
    
    
    ($000)Outstanding at January 1, 2006
    
    
    3,298,494
    
    
    $
    6.99Granted at Market
    
    
    120,400
    
    
    $
    6.20Forfeited
    
    
    (80,195
    )
    
    $
    7.67Exercised
    
    
    (2,340
    )
    
    $
    4.12Outstanding at June 30, 2006
    
    
    3,336,359
    
    
    $
    6.95
    
    
    
    6.02
    
    
    $
    631Exercisable at June 30, 2006
    
    
    2,838,933
    
    
    $
    7.06
    
    
    
    5.53
    
    
    $
    618
     Performance Stock Awards
    Restricted Stock Awards
   9




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##### Table of Contents



3. Line of Credit
  Credit Agreement
        4. Series B-1 Preferred Stock
  10




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##### Table of Contents



Redemptions
    5. Segment Information
   11




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##### Table of Contents



Three Months Ended June 30, 2006(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    21,682
    
    
    $
    9,828
    
    
    $
    2,517
    
    
    $
    
    
    
    $
    34,027Operating expense (including
depreciation
and amortization)
    
    
    10,819
    
    
    
    4,730
    
    
    
    1,744
    
    
    
    3,725
    
    
    
    21,018Operating income (loss)
    
    
    3,431
    
    
    
    268
    
    
    
    (724
    )
    
    
    (3,740
    )
    
    
    (765
    )Depreciation and amortization
    
    
    534
    
    
    
    947
    
    
    
    478
    
    
    
    531
    
    
    
    2,490Other operating (income) expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (361
    )
    
    
    (361
    )Segment EBITDA
    
    $
    3,965
    
    
    $
    1,215
    
    
    $
    (246
    )
    
    $
    (3,570
    )
    
    $
    1,364Total segment assets
    
    $
    48,199
    
    
    $
    27,795
    
    
    $
    9,660
    
    
    $
    21,864
    
    
    $
    107,518Segment goodwill
    
    $
    31,006
    
    
    $
    
    
    
    $
    500
    
    
    $
    
    
    
    $
    31,506Expenditures for long lived assets
    
    $
    50
    
    
    $
    10
    
    
    $
    
    
    
    $
    630
    
    
    $
    690
 12




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Three Months Ended June 30, 2005(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    20,630
    
    
    $
    7,122
    
    
    $
    2,045
    
    
    $
    
    
    
    $
    29,797Operating expense (including
depreciation
and amortization)
    
    
    9,837
    
    
    
    3,479
    
    
    
    1,866
    
    
    
    4,590
    
    
    
    19,772Operating income (loss)
    
    
    4,335
    
    
    
    708
    
    
    
    (830
    )
    
    
    (4,590
    )
    
    
    (377
    )Depreciation and amortization
    
    
    443
    
    
    
    693
    
    
    
    434
    
    
    
    311
    
    
    
    1,881Other operating (income) expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94
    )
    
    
    (94
    )Segment EBITDA
    
    $
    4,778
    
    
    $
    1,401
    
    
    $
    (396
    )
    
    $
    (4,373
    )
    
    $
    1,410Total segment assets
    
    $
    33,294
    
    
    $
    15,694
    
    
    $
    13,098
    
    
    $
    36,111
    
    
    $
    98,197Segment goodwill
    
    $
    31,011
    
    
    $
    
    
    
    $
    500
    
    
    $
    
    
    
    $
    31,511Expenditures for long lived assets
    
    $
    205
    
    
    $
    1,633
    
    
    $
    579
    
    
    $
    1,042
    
    
    $
    3,459
 Six Months Ended June 30, 2006(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    46,745
    
    
    $
    16,701
    
    
    $
    5,691
    
    
    $
    
    
    
    $
    69,137Operating expense (including
depreciation and
amortization)
    
    
    23,304
    
    
    
    8,851
    
    
    
    3,994
    
    
    
    7,988
    
    
    
    44,137Operating income (loss)
    
    
    8,177
    
    
    
    (1,735
    )
    
    
    (1,089
    )
    
    
    (7,988
    )
    
    
    (2,635
    )Depreciation and amortization
    
    
    1,038
    
    
    
    1,759
    
    
    
    964
    
    
    
    841
    
    
    
    4,602Other operating (income) expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (428
    )
    
    
    (428
    )Segment EBITDA
    
    $
    9,215
    
    
    $
    24
    
    
    $
    (125
    )
    
    $
    (7,575
    )
    
    $
    1,539Expenditures for long lived assets
    
    $
    405
    
    
    $
    1,070
    
    
    $
    225
    
    
    $
    1,431
    
    
    $
    3,131
 Six Months Ended June 30, 2005(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    43,528
    
    
    $
    15,041
    
    
    $
    4,839
    
    
    $
    
    
    
    $
    63,408Operating expense (including
depreciation and amortization)
    
    
    19,609
    
    
    
    8,328
    
    
    
    4,420
    
    
    
    8,978
    
    
    
    41,335Operating income (loss)
    
    
    10,442
    
    
    
    (290
    )
    
    
    (1,362
    )
    
    
    (8,978
    )
    
    
    (188
    )Depreciation and amortization
    
    
    911
    
    
    
    1,279
    
    
    
    822
    
    
    
    605
    
    
    
    3,617Other operating (income) expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (161
    )
    
    
    (161
    )Segment EBITDA
    
    $
    11,353
    
    
    $
    989
    
    
    $
    (540
    )
    
    $
    (8,534
    )
    
    $
    3,268Expenditures for long lived assets
    
    $
    225
    
    
    $
    3,788
    
    
    $
    975
    
    
    $
    1,224
    
    
    $
    6,212
 Reconciliation of operating income (loss) to net income (loss) (in thousands):
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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Total income (loss) from reportable segments
    
    $
    (765
    )
    
    $
    (377
    )
    
    $
    (2,635
    )
    
    $
    (188
    )Unallocated amounts:Interest income (expense)
    
    
    (192
    )
    
    
    3
    
    
    
    (222
    )
    
    
    (266
    )Other income (expense)
    
    
    (377
    )
    
    
    
    
    
    
    (377
    )
    
    
    Equity in loss of affiliate
    
    
    16
    
    
    
    (94
    )
    
    
    (51
    )
    
    
    (161
    )Net income (loss)
    
    $
    (1,318
    )
    
    $
    (468
    )
    
    $
    (3,285
    )
    
    $
    (615
    )
 6. Loss Per Share
 Earnings per Share
  7. Comprehensive Income (Loss)
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net income (loss) attributable to common stockholders
    
    $
    (1,465
    )
    
    $
    (666
    )
    
    $
    (3,590
    )
    
    $
    (1,008
    )Foreign currency translation adjustment
    
    
    (32
    )
    
    
    (16
    )
    
    
    (25
    )
    
    
    (21
    )Total comprehensive (loss) income
    
    $
    (1,497
    )
    
    $
    (682
    )
    
    $
    (3,615
    )
    
    $
    (1,029
    )
 8. Restructuring
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  14




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Overview
     Share-Based Payment.
  Results of Operations
 Comparison of Three Months Ended June 30, 2006 and 2005
 Revenue
   15




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##### Table of Contents



Cost of Revenue
     Operating Expenses
  
    
    Test Preparation Services operating expenses increased by
$1.1 million, or 11.2%, from
$9.7 million in 2005 to $10.9 million in 2006. Salaries and related costs, primarily one
time bonus payments, and SES sales commission increased approximately $315,000,
corporate administrative support allocations increased approximately $265,000 and there was
a restructuring charge of approximately $237,000 that was recorded.
    
    K-12 Services increased by $1.3 million, or 40.2%, from $3.4 million in 2005 to $4.7
million in 2006. Salaries and related expense increased approximately $1.0 million related
primarily to the impact of new employees that were hired during the second half of 2005. In
addition, corporate administrative support allocations increased approximately
$304,000 primarily related to legal and technical support. In addition there was a restructuring charge of approximately $150,000 that was recorded.
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##### Table of Contents




    
    Admissions Services were relatively unchanged at $1.7 million. A restructuring
charge of approximately $40,000 was recorded.
    
    Corporate decreased by $1.2 million or 24.1%, from $4.9 million in 2005 to $3.7 million
in 2006. Salaries and related costs decreased approximately $945,000 primarily related to
lower bonus accruals, contract employees and third party consulting expense. In addition,
professional fees decreased by approximately $800,000 primarily related to lower
accounting, legal and technology support charges. Offsetting these reductions was a restructuring charge of $397,000, depreciation expense of approximately $233,000
primarily related to the new Oracle ERP solution and annual franchise taxes of approximately
$131,000.
 Other expense
  Comparison of Six Months Ended June 30, 2006 and 2005
 Revenue
     Cost of Revenue.
     17




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##### Table of Contents



Operating Expenses
  
    
    Test Preparation Services increased by approximately
$4.0 million, or 20.1%, from
$19.4 million in 2005 to $23.3 million in 2006. Salaries and related costs increased by
approximately $937,000 as a result of the timing of the hiring of new employees, part
time support costs, bonus payments and third party SES commissions. Bad debt expense
increased approximately $365,000 primarily related to the write-off of a institutional
contract, advertising costs increased approximately $228,000, software maintenance
increased by approximately $200,000, professional fees increased by approximately
$203,000 and, corporate allocations
increased approximately $705,000 related to recruiting, facilities
and technology charges. A
restructuring charge of approximately $237,000 was recorded.
    
    K-12 Services increased by $734,000, or 9.0%, from
$8.1 million in 2005 to $8.8 million in 2006. Salaries and related costs increased by approximately
$1.3 million
related to 2005 second half hires and restructuring costs of approximately $150,000 were
recorded. Offsetting this increase was a decrease in software maintenance expense of
approximately $335,000.
    
    Admissions Services decreased by $213,000, or 5.1%, from $4.2 million in 2005 to $4.0
million in 2006. This decrease is primarily the result of a reduction in salary and
related costs of approximately $211,000. Restructuring costs of approximately $40,000 were
recorded.
    
    Corporate decreased by $1.6 million or 16.9%, from
$9.6 million in 2005 to $8.0 million in 2006. Professional
service fees decreased by approximately $1.4 million and
salaries and related costs decreased by approximately $620,000 primarily related to
current year bonus accruals. Restructuring costs of approximately $397,000 were recorded.
 Other expense
  Income Taxes
  Liquidity and Capital Resources
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Seasonality in Results of Operations
  19




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  20




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##### Table of Contents



Item 1A. Risk Factors
 Political hostility to No Child Left Behind mandates may curtail SES program opportunities.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
     For
    
    WithheldRichard Katzman
    
    23,699,637
    
    3,147,811Sheree T. Speakman
    
    22,066,248
    
    4,781,200
   For
    
    
    26,830,410Against
    
    
    8,070Abstain
    
    
    8,467
 21




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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
 ExhibitNumber
    
    
    
    Description10.47
    
    
    
    First Amendment to Credit Agreement, dated May 25, 2006, by and among The
Princeton Review, Inc., Princeton Review Operations L.L.C., the lender party thereto and Golub Capital
Incorporated, as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to our Current
Report on Form 8-K (File No. 000-32469), filed with the Securities and Exchange Commission on
June 1, 2006.)31.1
    
    
    
    Certification Pursuant to Rule
13a-14(a), as Adopted Pursuant
to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    
    
    Certification Pursuant to Rule
13a-14(a), as Adopted Pursuant
to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    
    
    Certification Pursuant to 18
U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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SIGNATURES
  THE PRINCETON REVIEW, INC.By:
    /s/ ANDREW J. BONANNIAndrew J. BonanniChief Financial Officer and Treasurer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)  23