School's winding down for most students, but over at test-prep-meister Princeton Review (Nasdaq: REVU), the new year is just getting started. This Motley Fool Hidden Gems recommendation turned in its Q1 2008 final exam on Thursday. Let's run it through the ol' Scantron and see how the Review performed.

The stock's up about 5% since the news broke, which seems strange at first glance, because the news was far from spectacular. Revenue eked out a bare 3% increase in comparison to yesteryear, and the company swung to a $0.06-per-share loss.

CEO Michael Perik assured investors that Princeton is progressing toward "profitability and positive cash flow." Nothing against Mr. Perik, but I'd rather see a cash flow statement supporting that opinion than take it on faith. Unfortunately, Princeton is keeping the "Teacher's Edition" of its workbook locked in a desk drawer for the time being. The earnings release neither described the company's free cash flow in prose form, nor included a cash flow statement -- or for that matter, even a balance sheet!

For the record, though, not all companies do include such information, even if we think they should. Princeton rivals The Washington Post (NYSE: WPO) and McGraw-Hill (NYSE: MHP) share seats with it at the back of the class in this respect. On the other hand, Reed Elsevier (Nasdaq: ENL), Pearson (NYSE: PSO), and Plato Learning (Nasdaq: TUTR) all get gold stars for their stellar disclosure policies.

Make-up work
Minimal sales growth, a GAAP loss, and no proof of positive free cash flow -- hardly what you've come to expect out of our Motley Fool Hidden Gems recommendations, eh? But hold on, because there is some good news to report in Princeton's, um, report. Gross margins marched upwards. Q1 saw Princeton grossing 58.3% on its revenue, a 350-basis point improvement over last year. Meanwhile, operating margins held steady at (negative) 1.5%. While that may not sound good, it's actually an improvement over the trend of worsening operating margins that we've seen at Princeton the past couple quarters.

Long story short, I see some basis for Perik's assertion that Princeton is working toward earning a passing grade. But I also see a whole lot of room for further improvement.

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