##### 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 September 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
 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: CERTIFICATIONSEX-32.1: CERTIFICATION
  3




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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 per share data)
 
 September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)
    
    
    As RestatedASSETS:Current assets:Cash and cash equivalents
    
    $
    8,368
    
    
    $
    8,002Accounts receivable, net of allowance of $1,298 in 2006 and $1,601
in 2005
    
    
    20,856
    
    
    
    22,493Accounts receivable-related parties
    
    
    207
    
    
    
    1,591Other receivables, principally related parties
    
    
    624
    
    
    
    813Inventory
    
    
    2,861
    
    
    
    2,798Prepaid expenses
    
    
    1,873
    
    
    
    2,229Other current assets
    
    
    1,203
    
    
    
    1,307Total current assets
    
    
    35,992
    
    
    
    39,233Furniture, fixtures, equipment and software development, net
    
    
    16,512
    
    
    
    16,155Goodwill
    
    
    31,506
    
    
    
    31,506Investment in affiliates
    
    
    1,889
    
    
    
    1,938Other intangibles, net
    
    
    12,174
    
    
    
    13,371Other assets
    
    
    4,000
    
    
    
    3,168Total assets
    
    $
    102,073
    
    
    $
    105,371LIABILITIES & STOCKHOLDERS EQUITY:Current liabilities:Line of credit
    
    $
    10,000
    
    
    $
    Accounts payable
    
    
    3,265
    
    
    
    10,449Accrued expenses
    
    
    11,538
    
    
    
    10,826Current maturities of long-term debt
    
    
    1,264
    
    
    
    1,530Deferred income
    
    
    20,101
    
    
    
    16,548Total current liabilities
    
    
    46,168
    
    
    
    39,353Deferred rent
    
    
    2,559
    
    
    
    2,327Long-term debt
    
    
    1,945
    
    
    
    2,845Fair value of derivatives and warrants
    
    
    94
    
    
    
    393Series B-1 Preferred Stock, $0.01 par value; 10,000 shares authorized;
6,000 shares issued and outstanding at September 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;
27,577,312 and 27,572,172
issued and outstanding at September 30, 2006 and December 31,
2005, respectively
    
    
    276
    
    
    
    276Additional paid-in capital
    
    
    116,959
    
    
    
    116,279Accumulated deficit
    
    
    (71,629
    )
    
    
    (65,823
    )Accumulated other comprehensive loss
    
    
    (299
    )
    
    
    (279
    )Total stockholders equity
    
    
    45,307
    
    
    
    50,453Total liabilities and stockholders equity
    
    $
    102,073
    
    
    $
    105,371
 
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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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005As Restated
    
    
    
    
    
    
    As RestatedRevenueTest Preparation Services
    
    $
    25,008
    
    
    $
    26,748
    
    
    $
    71,753
    
    
    $
    70,263K-12 Services
    
    
    7,330
    
    
    
    5,280
    
    
    
    24,031
    
    
    
    20,322Admissions Services
    
    
    3,574
    
    
    
    2,767
    
    
    
    9,265
    
    
    
    7,606Total revenue
    
    
    35,912
    
    
    
    34,795
    
    
    
    105,049
    
    
    
    98,191Cost of revenueTest Preparation Services
    
    
    8,372
    
    
    
    7,979
    
    
    
    23,636
    
    
    
    21,441K-12 Services
    
    
    5,446
    
    
    
    2,841
    
    
    
    15,030
    
    
    
    9,845Admissions Services
    
    
    1,501
    
    
    
    1,159
    
    
    
    4,288
    
    
    
    2,942Total cost of revenue
    
    
    15,319
    
    
    
    11,979
    
    
    
    42,954
    
    
    
    34,228Gross Profit
    
    
    20,593
    
    
    
    22,816
    
    
    
    62,095
    
    
    
    63,963Operating expenses
    
    
    22,833
    
    
    
    22,154
    
    
    
    66,970
    
    
    
    63,489Income (loss) from operations
    
    
    (2,240
    )
    
    
    662
    
    
    
    (4,875
    )
    
    
    474Interest income (expense)
    
    
    (168
    )
    
    
    (44
    )
    
    
    (390
    )
    
    
    (312
    )Other income (expense)
    
    
    17
    
    
    
    942
    
    
    
    (78
    )
    
    
    1,485Equity in the income (loss) of affiliates
    
    
    
    
    
    
    (71
    )
    
    
    (51
    )
    
    
    (232
    )Income (loss) before income taxes
    
    
    (2,391
    )
    
    
    1,489
    
    
    
    (5,395
    )
    
    
    1,415(Provision) benefit for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    (2,391
    )
    
    
    1,489
    
    
    
    (5,395
    )
    
    
    1,415Dividends and accretion on Series B-1 Preferred Stock
    
    
    (106
    )
    
    
    (640
    )
    
    
    (411
    )
    
    
    (1,899
    )Income (loss) attributed to common stockholders
    
    $
    (2,497
    )
    
    $
    849
    
    
    $
    (5,806
    )
    
    $
    (483
    )Basic income (loss) per share
    
    $
    (0.09
    )
    
    $
    0.03
    
    
    $
    (0.21
    )
    
    $
    (0.02
    )Diluted income (loss) per share
    
    $
    (0.09
    )
    
    $
    0.03
    
    
    $
    (0.21
    )
    
    $
    (0.02
    )Weighted average shares used in computing loss per shareBasic income (loss) per share
    
    
    27,575
    
    
    
    27,571
    
    
    
    27,574
    
    
    
    27,570Diluted income (loss) per share
    
    
    27,575
    
    
    
    28,733
    
    
    
    27,574
    
    
    
    27,570
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THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 Nine Months Ended September 30,2006
    
    
    2005As restatedCash flows provided by (used for) operating activities:Net income (loss)
    
    $
    (5,806
    )
    
    $
    (483
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation
    
    
    1,748
    
    
    
    1,304Amortization
    
    
    5,317
    
    
    
    4,237Bad debt expense
    
    
    1,002
    
    
    
    326Write-off of deferred financing costs
    
    
    
    
    
    
    117Write-off of inventory
    
    
    280
    
    
    
    42Deferred rent
    
    
    231
    
    
    
    707Stock based compensation
    
    
    660
    
    
    
    Other, net
    
    
    718
    
    
    
    1,451Net change in operating assets and liabilities:Accounts receivable
    
    
    2,207
    
    
    
    989Inventory
    
    
    (343
    )
    
    
    (1,819
    )Prepaid expenses
    
    
    356
    
    
    
    151Other assets
    
    
    (1,648
    )
    
    
    (942
    )Accounts payable and accrued expenses
    
    
    (6,473
    )
    
    
    (3,247
    )Deferred income
    
    
    3,553
    
    
    
    (1,654
    )Net cash provided by (used for) operating activities
    
    
    1,802
    
    
    
    1,179Cash provided by (used for) investing activities:Purchases of furniture, fixtures, equipment and software development
    
    
    (5,178
    )
    
    
    (5,407
    )Additions to capitalized K-12 content, capitalized course costs
    
    
    (1,046
    )
    
    
    (3,945
    )Payment of related party loan
    
    
    491
    
    
    
    Payment of note receivable
    
    
    266
    
    
    
    Payment of loan receivable
    
    
    250
    
    
    
    250Landlord construction contribution
    
    
    
    
    
    
    892Net cash provided by (used for) investing activities
    
    
    (5,217
    )
    
    
    (8,210
    )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
    )Notes issued in connection with sale of rights to franchisees
    
    
    
    
    
    
    (703
    )Payment of credit facility deferred financing costs
    
    
    (284
    )
    
    
    Capital lease payments
    
    
    (606
    )
    
    
    (527
    )Dividends on Series B-1 Preferred Stock
    
    
    (411
    )
    
    
    (386
    )Notes payable related to acquisitions
    
    
    (561
    )
    
    
    (1,078
    )Proceeds from exercise of options
    
    
    20
    
    
    
    15Net cash provided by (used for) financing activities
    
    
    3,781
    
    
    
    (4,679
    )Net decrease in cash and cash equivalents
    
    
    366
    
    
    
    (11,710
    )Cash and cash equivalents, beginning of period
    
    
    8,002
    
    
    
    19,197Cash and cash equivalents, end of period
    
    $
    8,368
    
    
    $
    7,487
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##### Table of Contents



THE PRINCETON REVIEW, INC. AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
(unaudited)
 1. Basis of Presentation
   Products and Services
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)RevenueServices
    
    $
    31,743
    
    
    $
    30,061
    
    
    $
    89,590
    
    
    $
    83,658Products
    
    
    2,272
    
    
    
    1,987
    
    
    
    9,362
    
    
    
    7,552Other
    
    
    1,897
    
    
    
    2,747
    
    
    
    6,097
    
    
    
    6,981Total revenue
    
    $
    35,912
    
    
    $
    34,795
    
    
    $
    105,049
    
    
    $
    98,191Cost of RevenueServices
    
    $
    13,924
    
    
    $
    11,017
    
    
    $
    38,241
    
    
    $
    30,817Products
    
    
    1,368
    
    
    
    818
    
    
    
    4,365
    
    
    
    2,977Other
    
    
    27
    
    
    
    144
    
    
    
    348
    
    
    
    434Total cost of revenue
    
    $
    15,319
    
    
    $
    11,979
    
    
    $
    42,954
    
    
    $
    34,228
  Stock-Based Compensation
 Accounting
for Stock Issued to Employees Accounting for Stock-Based Compensation Share-Based Payment
 7




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Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2005
    
    
    September 30, 2005(In thousands, except per share amounts)As restatedIncome (loss) attributed to common stockholders, as reported
    
    $
    849
    
    
    $
    (483
    )Total stock-based employee compensation expense determined
under fair-value based method for all awards
    
    
    (468
    )
    
    
    (1,423
    )Pro forma
net income (loss) attributed to common stockholders
    
    $
    381
    
    
    $
    (1,906
    )Net income (loss) per share:Basic and diluted, as reported
    
    $
    0.03
    
    
    $
    (0.02
    )Basic and diluted, pro forma
    
    $
    0.01
    
    
    $
    (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).
    
    FASB FIN 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109 (June 2006).
  Use of Estimates
  8




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##### Table of Contents



Reclassifications
  2. Restatement of Prior Year Financial Statements
  
  
    
    Holder Conversion Option  The Preferred Stock
is convertible into the Companys common stock at the option of
the holder at any time. The initial conversion price was
$11.00 per common share, but was decreased to $8.0860 per
common share due to a delay in the effectiveness of the registration
statement relating to the Companys common stock issuable
upon conversion of the Preferred Stock and the subsequent
failure to keep the registration statement effective in accordance
with the agreement with the Holder. The Company may be
required to further reduce the conversion price
upon certain events such as the issuance of common stock at a price
below the conversion price or if the Company fails to keep the
registration statement current.
 
 
    
    Make Whole Provision  In the event that the Company is party to
one of several transactions classified as a business
combination, upon consummation of the transaction, the Holder is
entitled to receive (at the Holders election)
 a)
    
    the consideration to which the Holder would have been entitled had it converted
the Preferred Stock into common stock immediately prior to consummation,b)
    
    the consideration to which the Holder would have been entitled had it redeemed
the Preferred Stock for common stock immediately prior to consummation, orc)
    
    cash, initially equal to 160% of the aggregate redemption amount of the Preferred
Stock less 5% of the redemption amount for each full year the Preferred Stock was
outstanding.
 
  
  Embedded Derivatives
 Accounting for Derivatives and
Hedging Activities
   9




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Warrant
 
 Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
 
 
  
 
  
 
  
  
  
 
  As PreviouslyThree Months ended September 30, 2005(in thousands, except per share data)
    
    Reported
    
    As RestatedOther income (expense)
    
    $
    921
    
    
    $
    942Net income
    
    
    1,471
    
    
    
    1,489Dividends
and accretion on Series B-1 Preferred Stock
    
    
    (206
    )
    
    
    (640
    )Income attributable to common stockholders
    
    
    1,265
    
    
    
    849Income
(loss) per common share  basic
    
    $
    0.05
    
    
    $
    0.03Income
(loss) per common share  diluted
    
    $
    0.04
    
    
    $
    0.03
 
 
 As PreviouslyNine Months ended September 30, 2005(in thousands, except per share data)
    
    Reported
    
    As RestatedOther income (expense)
    
    $
    925
    
    
    $
    1,485Net income
    
    
    856
    
    
    
    1,415Dividends and accretion on Series B-1 Preferred Stock
    
    
    (599
    )
    
    
    (1,899
    )Net loss attributable to common stockholders
    
    
    257
    
    
    
    (483
    )Income
(loss) per common share  basic
    
    $
    0.01
    
    
    $
    (0.02
    )Income
(loss) per common share  diluted
    
    $
    0.01
    
    
    $
    (0.02
    )
 
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##### Table of Contents



As PreviouslyAs of December 31, 2005(in thousands)
    
    Reported
    
    As RestatedDerivative instruments  noncurrent liability
    
    $
    
    
    
    $
    393Total long-term liabilities
    
    
    5,172
    
    
    
    5,565Accumulated deficit
    
    
    (65,430
    )
    
    
    (65,823
    )Total stockholders equity
    
    
    50,846
    
    
    
    50,453
 As PreviouslyNine Months ended September 30, 2005(in thousands)
    
    Reported
    
    As RestatedCash flow from operating activities:Net income
    
    $
    856
    
    
    $
    (483
    )Other, net
    
    
    114
    
    
    
    1,451
 
  
 
  
 3. Stock-Based Compensation
 Stock Incentive Plan
   Stock Options
   Nine Months Ended September 30,2006
    
    2005AssumptionsExpected volatility
    
    
    42
    %
    
    
    56
    %Risk-free rate
    
    
    5.00
    %
    
    
    4.50
    %Expected dividends
    
    
    0
    %
    
    
    0
    %Expected term (in years)
    
    
    5.0
    
    
    
    5.0
  11




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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
    
    
    $
    7.00Granted at Market
    
    
    133,320
    
    
    $
    6.00Exercised
    
    
    (5,140
    )
    
    $
    2.87Forfeited
    
    
    (82,820
    )
    
    $
    7.51Outstanding at September 30, 2006
    
    
    3,343,854
    
    
    $
    6.95
    
    
    
    5.78
    
    
    $
    550Exercisable at September 30, 2006
    
    
    2,869,830
    
    
    $
    7.05
    
    
    
    5.32
    
    
    $
    544
    Performance Stock Awards
  
  
  Restricted Stock Awards
  
  
  12




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4. Line of Credit
  Credit Agreement
          13




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##### Table of Contents



5. Series B-1 Preferred Stock
 
  
   
  a)
    
    the consideration to which the holder would have been
entitled had it converted
the Series B-1 Preferred Stock into common stock immediately prior to consummation,b)
    
    the consideration to which the holder would have been entitled had it redeemed
the Series B-1 Preferred Stock for common stock immediately prior to consummation, orc)
    
    cash, initially equal to 160% of the aggregate redemption
amount of the Series B-1 Preferred
Stock less 5% of the redemption amount for each full year the Series
B-1 Preferred Stock was
outstanding.
 
 14




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##### Table of Contents



Redemptions
   6. Segment Information
     15




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##### Table of Contents






Three Months Ended September 30, 2006(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    25,008
    
    
    $
    7,330
    
    
    $
    3,574
    
    
    $
    
    
    
    $
    35,912Operating expense (including depreciation
and amortization)
    
    
    11,178
    
    
    
    4,641
    
    
    
    2,106
    
    
    
    4,908
    
    
    
    22,833Operating income (loss)
    
    
    5,458
    
    
    
    (2,756
    )
    
    
    (34
    )
    
    
    (4,908
    )
    
    
    (2,240
    )Depreciation and amortization
    
    
    421
    
    
    
    994
    
    
    
    487
    
    
    
    503
    
    
    
    2,405Other income (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    17Segment EBITDA
    
 $
    5,879
    
    
 $
    (1,763
    )
    
 $
    453
    
    
 $
    (4,387
    )
    
 $
    182Expenditures for long lived assets
    
    $
    236
    
    
    $
    1,973
    
    
    $
    238
    
    
    $
    645
    
    
    $
    3,092
 
 
 Three Months Ended September 30, 2005(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    26,748
    
    
    $
    5,280
    
    
    $
    2,767
    
    
    $
    
    
    
    $
    34,795Operating expense (including depreciation
and amortization)
    
    
    10,959
    
    
    
    3,707
    
    
    
    2,123
    
    
    
    5,365
    
    
    
    22,154Operating income (loss)
    
    
    7,810
    
    
    
    (1,268
    )
    
    
    (515
    )
    
    
    (5,365
    )
    
    
    662Depreciation and amortization
    
    
    440
    
    
    
    700
    
    
    
    466
    
    
    
    316
    
    
    
    1,922Other income
(expense) (as restated)
    
    
    
    
    
    
    990
    
    
    
    (39
    )
    
    
    (80
    )
    
    
    871Segment EBITDA
    
    $
    8,250
    
    
    $
    422
    
    
    $
    (88
    )
    
    $
    (5,129
    )
    
    $
    3,455Expenditures for long lived assets
    
    $
    424
    
    
    $
    294
    
    
    $
    279
    
    
    $
    462
    
    
    $
    1,459
 
 
 Nine Months Ended September 30, 2006(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    71,753
    
    
    $
    24,031
    
    
    $
    9,265
    
    
    $
    
    
    
    $
    105,049Operating expense (including depreciation and
amortization)
    
    
    34,482
    
    
    
    13,492
    
    
    
    6,100
    
    
    
    12,896
    
    
    
    66,970Operating income (loss)
    
    
    13,635
    
    
    
    (4,491
    )
    
    
    (1,123
    )
    
    
    (12,896
    )
    
    
    (4,875
    )Depreciation and amortization
    
    
    1,531
    
    
    
    2,732
    
    
    
    1,461
    
    
    
    1,342
    
    
    
    7,066Other income (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (129
    )
    
    
    (129
    )Segment EBITDA
    
    $
    15,166
    
    
    $
    (1,759
    )
    
    $
    338
    
    
    $
    (11,683
    )
    
    $
    2,062Expenditures for long lived assets
    
    $
    641
    
    
    $
    3,043
    
    
    $
    463
    
    
    $
    2,076
    
    
    $
    6,223
 
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##### Table of Contents






Nine Months Ended September 30, 2005(in thousands)TestPreparation
    
    
    K-12
    
    
    AdmissionsServices
    
    
    Services
    
    
    Services
    
    
    Corporate
    
    
    TotalRevenue
    
    $
    70,263
    
    
    $
    20,322
    
    
    $
    7,606
    
    
    $
    
    
    
    $
    98,191Operating expense (including depreciation and
amortization)
    
    
    30,360
    
    
    
    11,823
    
    
    
    6,330
    
    
    
    14,976
    
    
    
    63,489Operating income (loss)
    
    
    18,460
    
    
    
    (1,346
    )
    
    
    (1,664
    )
    
    
    (14,976
    )
    
    
    474Depreciation and amortization
    
    
    1,351
    
    
    
    1,979
    
    
    
    1,288
    
    
    
    921
    
    
    
    5,539Other income
(expense) (as restated)
    
    
    
    
    
    
    990
    
    
    
    (39
    )
    
    
    302
    
    
    
    1,253Segment EBITDA
    
    $
    19,811
    
    
    $
    1,623
    
    
    $
    (415
    )
    
    $
    (13,753
    )
    
    $
    7,266Expenditures for long lived assets
    
    $
    672
    
    
    $
    5,353
    
    
    $
    1,294
    
    
    $
    2,033
    
    
    $
    9,352
 
 
 Reconciliation of operating income (loss) to net income (loss) (in thousands):
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Total income (loss) from reportable segments
    
    $
    (2,240
    )
    
    $
    662
    
    
    $
    (4,875
    )
    
    $
    474Unallocated amounts:Interest income (expense)
    
    
    (168
    )
    
    
    (44
    )
    
    
    (390
    )
    
    
    (312
    )Other income (expense)
    
    
    17
    
    
    
    942
    
    
    
    (78
    )
    
    
    1,485Equity in loss of affiliate
    
    
    
    
    
    
    (71
    )
    
    
    (51
    )
    
    
    (232
    )Net income (loss)
    
    $
    (2,391
    )
    
    $
    1,489
    
    
    $
    (5,395
    )
    
    $
    1,415
 
 7. Loss Per Share
 Earnings per Share
 
  
 8. Comprehensive Income (Loss)
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)As Restated
    
    
    
    
    
    
    As RestatedNet income (loss) attributable to common stockholders
    
    $
    (2,497
    )
    
    $
    849
    
    
    $
    (5,806
    )
    
    $
    (483
    )Foreign currency translation adjustment
    
    
    5
    
    
    
    (16
    )
    
    
    (20
    )
    
    
    (39
    )Total comprehensive income (loss)
    
    $
    (2,492
    )
    
    $
    833
    
    
    $
    (5,826
    )
    
    $
    (522
    )
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##### Table of Contents



9. Restructuring
 
  
 
 
 10. Subsequent Events
 Disposition of a Business
  Amendment to Credit Facility
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
    
  
 
 Share-Based Payment.
 
 
  
 18




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##### Table of Contents



Restatement of Financial Statements
  
  
  
  
 Results of Operations
 Comparison of Three Months Ended September 30, 2006 and 2005
 Revenue
  
  
 
  
  Cost of Revenue
     Operating Expenses
  
    
    Test Preparation Services operating expenses increased by $218,000, or 2.0%, from $10.9
million in 2005 to $11.2 million in 2006. This increase is primarily related to higher SES
professional fees.
    
    K-12 Services increased by $935,000, or 25.2%, from $3.7 million in 2005 to $4.6
million in 2006. This increase is related to higher salaries and related expenses of
$675,000 and higher third party professional fees of approximately 184,000 related to
software maintenance and support.
    
    Admissions Services remained flat at $2.1 million.
    
    Corporate operating expense decreased by $457,000, or 8.5%, from $5.4 million in
2005 to $4.9 million in 2006 due to lower professional fees of approximately $467,000.
 
 Other
Income (Expense)
  Comparison of Nine Months Ended September 30, 2006 and 2005
 
 Revenue
  19




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##### Table of Contents



Cost of Revenue.
 
  
 
  
 
  
  Operating Expenses
 
  
 
    
    Test Preparation Services increased by $4.1 million, or 13.6%, from $30.4 million in
2005 to $34.5 million in 2006. Salaries and related costs increased by approximately $2.0
million as a result of the timing of the hiring of new employees, part time support costs,
bonus payments and commissions. Bad debt expense increased approximately $432,000 primarily
related to the write-off of a large institutional contract. Professional fees increased by
$811,000, due primarily to SES related legal fees and third party SES commissions. Corporate allocations increased approximately $950,000 related to technology, legal and
facility charges. A restructuring charge of approximately $237,000 was also
recorded. Depreciation increased by $180,000 over prior year.
    
    K-12 Services increased by $1.7 million, or 14.1%, from $11.8 million in 2005 to $13.5
million in 2006. Salaries and related costs increased by approximately $1.5 million related
to 2005 second half new hires, and part time employees. Restructuring costs of approximately
$150,000 were also recorded.
    
    Admissions Services decreased by $230,000, or 3.6%, from $6.3 million in 2005 to $6.1
million in 2006. This decrease is primarily the result of a reduction in salary and related
costs of approximately $140,000 and lower professional fees of $83,000. Restructuring costs
of approximately $40,000 were recorded.
    
    Corporate decreased by $2.1 million, or 13.9%, from $15.0 million in 2005 to $12.9
million in 2006. Professional service fees decreased by $2.1 million, salaries and related
expense decreased by $567,000 and restructuring costs of approximately $397,000 were
recorded. Depreciation increased by $420,000.
 20




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##### Table of Contents



Other
Income (Expense)
  Income Taxes
  Liquidity and Capital Resources
        Seasonality in Results of Operations
  21




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22




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
  Scope of the Controls Evaluation
   Conclusions
  23




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##### Table of Contents



Changes in Internal Control over Financial Reporting
 
  
 
  
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
      
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  24




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##### Table of Contents



Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 
 ExhibitNumber
    
    
    
    Description10.48
    
    
    
    Amendment to Employment Agreement,
dated September 25, 2006, between The Princeton Review, Inc. and
Andrew Bonnani (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 September 27, 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.
 25




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SIGNATURES
  THE PRINCETON REVIEW, INC.By:
    /s/ STEPHEN MELVINStephen MelvinChief Financial Officer and Treasurer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)  26