The Princeton Review, Inc.

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The Princeton Review, Inc.

2315 Broadway, 2nd Floor
New York, New York 10024
U.S.A.
Telephone: (212) 874-8282
Fax: (212) 874-0775
Web site: http://www.princetonreview.com

Public Company
Founded: 1981
Employees: 1,758
Sales: $40.3 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: REVU
NAIC: 611691 Exam Preparation and Tutoring

Originally established to coach high school students taking the Scholastic Aptitude Test (SAT), The Princeton Review, Inc. has grown to provide preparation materials for a wide variety of tests for undergraduate and graduate admissions, as well as professional licensing. The company is known as a maverick in the test preparation industry, a reputation it earned in the early 1980s when it first began to teach students how to outwit the design of the SAT, in contrast to arch-rival Kaplan, which acted more like a traditional tutor. Because it openly derided the SAT and questioned the validity of the test, Princeton Review was viewed by many high school students as their champion. On the other hand, Educational Testing Service (ETS), the producers of the SAT, had virtually nothing positive to say about the company. Close to 100,000 students annually take Princeton Review classes or receive private tutoring at some 500 sites located across the United States and in 12 countries. In addition to test-preparation software, Princeton Review also publishes an extensive list of educational reference books through Random House, which also owns approximately 15 percent of the company. After taking Princeton Review public in 2001, founder John S. Katzman remains the majority shareholder. In recent years the company has diversified beyond test-preparation materials to offer college and career counseling services, relying in large part on Internet delivery. As states have increasingly turned to testing for K-12 students, Princeton Review has also expanded the reach of its business to service that market.

Admissions Testing in the Early 1900s

In 1901 the nonprofit College Entrance Examination Board began conducting essay-based admissions tests for a small number of colleges. It was not until 1926 that the Scholastic Aptitude Test and its multiple choice format was added to the College Boards. By 1942 essays were scrapped completely, a decision the College Board attributed to a labor shortage caused by World War II. Because essays were more difficult to create than multiple choice exams and more expensive to grade, the war was more a pretext than the reason behind the move, which had been under consideration for several years. In 1947 the College Board joined forces with two other nonprofit testing operations, the American Council on Education and the Carnegie Foundation for the Advancement of Teaching, to create a central test-giving organization. The result was ETS, which in 1948 started out by administering the SAT to 75,000 high school students. The organization grew rapidly, doubling its sales every five years from 1948 through the early 1970s. It broadened its scope to include a variety of tests and other educational activities, and grew more powerful than the College Board, which became more of a rubber stamp than a parent of ETS. The organization essentially answered to no one, despite the enormous power it wielded over the fate of countless high school students, who were denied the right to verify that their tests had been accurately scored. In 1979, in spite of intense ETS lobbying efforts, the New York State legislature passed the Educational Testing Act, the so-called “truth in testing” law that went into effect a year later. It not only allowed students to review their tests, it required ETS to be more forthcoming about its methods.

Because ETS was forced to make old SAT tests available, test coaches were given a better opportunity to study the structure of the SAT. For years wealthy students had been receiving private tutoring to prepare for the test. Former high school teacher Stanley Kaplan became the founder of the test-preparation industry when in 1938 he began operating out of a Brooklyn basement. His method to raise SAT scores was heavy on the basics, relying on concerted study of vocabulary, reading comprehension, and math. Kaplan embraced the SAT and in turn was viewed as an ally by ETS, which was far from the reception John Katzman and the Princeton Review received after Katzman began to challenge both ETS and Kaplan in the early 1980s.

Katzman was the product of a self-described entrepreneurial family. His grandfather invented the electric vaporizer and his father ran the manufacturing operation for the device. While raising three children, his mother also worked as a part-time interior decorator. Interested in computers as a youth, he first majored in electrical engineering at Princeton University (after scoring 1,500 out of a possible 1,600 on his SAT exam). He graduated from Princeton with a degree in architecture. To earn extra money at college he worked for an SAT coaching school, Pre-test Review, operated by Bob Scheller, a Wharton Business School graduate. Scheller was able to take old SAT tests made available by New York’s Education Testing Act and conduct computer analysis to find ways to outwit the test makers. Upon graduation in 1981, Katzman went to work in the computer department of a Wall Street firm, lasting only six weeks before he quit. With a $3,000 loan from his parents and the use of their Manhattan apartment he started his own SAT coaching school, The Princeton Review, an allusion to his alma mater.

First Princeton Review Classes: 1981

Katzman started out with 19 students in the fall of 1981. Word of mouth would increase the number to 43 for his spring class and lead his mother to evict the blossoming business, which eventually resorted to renting rooms at Hunter College on the Upper East Side of Manhattan. As Katzman’s students continued to improve their test scores, his class size grew as well. He laid claim to producing the best results of any SAT course in the city, a boast that came to the attention of an area tutor named Adam Robinson who telephoned Katzman to dispute the matter. Robinson had worked for Scheller before Katzman and had developed some of the techniques that Katzman was using. Rather than remaining rivals, however, they decided to work together. To support the expanding company, they also began the practice of hiring ex-students. Not only were these employees happy to work as part-timers, they were familiar with the techniques and had become true believers in the developing mission of Princeton Review: to expose the SAT as a sham, a test that merely tested a student’s ability to take the test.

Essentially Katzman and Robinson taught their students how the SAT was constructed. Questions had to be designed so that the highest-scoring students would know the answers while the lowest-scoring students would not be able to arrive at the right answer by applying the wrong method. The test makers offered choices that were meant to trap the average test taker. Robinson invented a character he called Joe Bloggs, the average target for these lures. Princeton Review taught its students how to think like Joe Bloggs in order to eliminate deceptive choices. Instructors also helped students to spot experimental sections, which did not count in the final score but were simply included as a way to develop future test questions. In the days before ETS took coun-termeasures, for instance, the experimental math section was always six pages while the actual math section was four pages. Princeton Review students simply filled in the answers of the experimental section at random. They were also taught the 100 most likely vocabulary words that would appear on the SAT, what Robinson called the “Hit Parade.” They learned how to solve geometry questions using the edge of the test booklet as a ruler and protractor. In short, Princeton Review made the SAT a puzzle to crack rather than a wealth of material to master.

Katzman and Robinson were not alone in their contempt for ETS and the SAT. Writer David Owen took on ETS in a 1983 article for Harper’s. Not only did Owen believe that the SAT measured nothing of value, he was one of the first critics to charge that the test was culturally biased, that the people best suited to score well on the test were those students who shared the same prep school background and mindset as the people who made up the SAT. Owen then authored a book on the subject, None of the Above: The Truth Behind the SATs, in which he wrote positively about the Princeton Review. That section of the book was excerpted in Rolling Stone in March 1985. According to Katzman, Owen “made me look more political than I was. But the response by ETS was so strong that I sort of became that political.”

ETS was not reluctant to express its low opinion of Katzman and Robinson. Princeton Review had gotten into trouble with ETS in 1982 when Robinson was charged with taking an SAT booklet from a test site. The company agreed to refrain from using SAT material, but in 1985 ETS went to court to obtain a restraining order to prevent both Princeton Review and Pre-test Review from using copyrighted material. The matter would not be settled until December 1987 when a U.S. District Court judge ordered Princeton Review to stop violating copyrights on SAT questions and awarded Kaplan $52,000 in damages. The fact that ETS failed to put Princeton Review out of business, however, was viewed as a victory by Katzman. Scheller’s Pretest Review, on the other hand, ceased operations in 1987. Despite its victory, ETS was losing credibility, due in large part to Princeton Review, and was forced to make changes to the SAT, which it soon renamed the Scholastic Assessment Test. No matter how much ETS adjusted the SAT, critics insisted that the underlying nature of the test would remain the same—namely, it measured nothing of value. Princeton Review also received its share of criticism from people who agreed that the SAT was severely flawed. They argued that by teaching affluent students how to beat the SAT, Princeton Review was simply helping the rich to attend the better schools at the expense of the less fortunate. Katzman did, however, make Princeton Review services available to low income and minority students, as well as set up a foundation to serve as an advocate and legal adviser to parents and students on testing issues.

Company Perspectives:

The Princeton Review helps millions of students each year to navigate standardized tests and the college and graduate school admissions process through our courses, books, software, and websites .

In some ways, drawing the ire of ETS was good for business. In 1985 Princeton Review taught 5,000 students at ten sites. The next year it would have 30 sites and revenues of $8 million, according to the company. In 1987 the number of sites increased to 35 and revenues reached $12 million. Katzman grew the business by franchising. In the early years of Princeton Review, he charged between $15,000 and $150,000 for a franchise, depending on the size of the area, plus 8 percent in annual royalties. He also sold test materials to the franchises. Princeton Review expanded so rapidly that in 1988 Inc. listed it as the 106th fastest growing company in the United States. It was soon outpacing Kaplan in enrollment, at least in the SAT business. Having already turned down a $1 million offer for the company from publisher Harcourt Brace Jovanovich, Katzman as early as 1987 was reported to be thinking about taking Princeton Review public.

Katzman and Robinson, Parting Ways: 1989

Not only did Katzman and Robinson squabble with ETS and pick fights with Kaplan, they also bickered with each other. At times, according to the Wall Street Journal, they refused to speak to one another for weeks at a time. Nevertheless they collaborated with Owen to write a book about the Princeton Review method, Cracking the SAT. It became a bestseller, prompting Robinson to envision a line of books as well as tapes and computer software. Afraid they would simply cannibalize their course enrollment, Katzman kept the spinoffs to a minimum. By 1989 Katzman and Robinson decided to finally formalize the nature of their partnership. Katzman offered Robinson a salary of $100,000 per year plus a 3 percent equity stake. Expecting at least 10 percent, Robinson was insulted. Eventually they agreed on 4 percent, then on the advice of his attorney Robinson cashed in his share of the business for $200,000 and severed his relationship with Princeton Review. The two men remained co-authors, however. When Katzman decided to expand that part of the business in 1991, he arranged a royalty deal in order to use Robinson’s techniques in future book projects. In 1994, when publisher Random House was looking to acquire a 20 percent stake in Princeton Review, Katzman wanted to gain complete control of his company’s backlist of titles. He bought out the rights of Owen and the partners’ literary agent, but Robinson refused to consider a $2 million offer until he saw an accounting of Princeton Review’s publishing efforts. Nevertheless, Katzman finalized the Random House deal. The unresolved issue with Robinson would result in a court case that would not be settled for several more years.

In the late 1980s Princeton Review began a concerted effort to expand beyond SAT preparation, adding the ACT (the equivalent of the SAT in a number of midwestern states), the LSAT, GM AT, MC AT, and GRE. In 1993 the company began to develop a software product, Inside the SAT, which would become a bestseller. It also gained an early presence on the Internet. In 1996 the company launched Princeton Review Publishing, dramatically increasing its number of book titles and the range of subject matter. Kaplan, still the test-preparation industry leader, found itself playing catch-up with its SAT and book business.

In many ways, Princeton Review owed a great deal of its success to Kaplan. In the beginning it could simply play off the Kaplan model, using its rate as a floor in order to establish a premium price, as well as offering smaller class sizes. It positioned itself with its target high school audience as the rebel taking on the SAT, while portraying Kaplan as the establishment toady. Kaplan responded by changing its style and spending considerable advertising dollars on attacking Princeton Review. The two companies became bitter rivals. In 1994 Princeton Review appropriated the Internet address Kaplan.com before Kaplan thought to register it. The supposed joke ended up in court, where Kaplan was eventually awarded the use of the name. The two companies also wrangled over advertising claims, threatening court action. Both regularly sent spies to attend one another’s classes. Despite being leading companies, however, neither seemed to be enjoying robust financial health in the late 1990s. Kaplan’s financial numbers were difficult to assess because they were included as part of a unit in the balance sheet of The Washington Post Company, its corporate parent. Princeton Review remained a private company, but according to press reports it was losing money in the mid-1990s, showed a profit in 1998, then began posting significant losses as it tried to build up its Internet business. After losing $2 million in 1999, Princeton Review lost an additional $8.2 million on revenues of $43.9 million in 2000.

Both Princeton Review and Kaplan faced stiff competition for new online businesses, which provided electronic college application services and Internet guidance counselor services. In 1999 Princeton Review rolled out Homeroom.com to help K-12 students improve scores on state mandated exams. With the election of George W. Bush as president in 2000, the prospect for increased testing boded well for Princeton Review in this segment. The company already ran Review.com, which targeted college-bound students and college students applying to graduate schools.

Key Dates:

1926:: SAT first uses multiple choice test format.
1979:: New York passes truth in testing law, making SAT exams publicly available.
1981:: Princeton Review is started by John R. Katzman.
1984:: Cracking the SAT becomes a New York Times bestseller.
1993:: Princeton Review launches its first Internet web site.
1995:: Random House acquires a stake in the company.
1996:: Princeton Review Publishing is established.
1999:: Princeton Review launches Homeroom.com.
2001:: Company makes an initial public offering of stock.

In August 2000 Princeton Review announced that it would make a public offering of stock to raise money to pay off debt and fund the growth of its Internet business. It hoped to sell 5.4 million shares of stock at $11 to $13 each. Some analysts questioned the IPO, maintaining that there was no compelling reason to own the stock. Nevertheless, the company arranged a $25 million line of credit in order to buy back franchises in preparation of the offering. Princeton Review, which ran 450 sites itself, also had 16 franchisees operating some 40 sites in the United States and an additional 13 sites in ten other countries. The offering, conducted in June 2001, proved to be somewhat disappointing. Shares sold at the lower end of the $11 to $13 range, resulting in $59.4 million. Trading on the NASDAQ, the stock showed no strength, quickly losing value. Princeton Review, now 20 years old, had established brand recognition, and the nation’s increased penchant for testing its youth appeared likely to boost business. Whether the company would be able to prosper going forward, however, remained very much open to question.