QA With Princeton Review’s John Katzman

John Katzman started The Princeton Review shortly after graduating Princeton University in 1981. Under his guidance, the company has grown from a small SAT test prep course in New York City to a leading provider of educational course, books, software and online services, and is now one of the few national education brands. In addition, Katzman is the co-author of five books on testing and admissions. His most recent book, Class Action (Random House, 1995), formed the theoretical basis for Homeroom, the Web-based subcription tool that helps students in grades 3-8 prepare for state assessment tests.

When you originally filed for your IPO last August, when was the internal time table for actually hitting the market?

We wrote the S-1 in February of 2000, but when the market fell apart in March and April we held it. Things started recovering in August and then we filed it, so this is actually for us an 18-month process. So at any given moment we hoped to move as quickly as possible but every time we would file another document or take any major step toward getting this thing done, the Nasdaq would go down another 1000 points or so.

Was that inability to go out last spring the reason you felt the need to do a private equity deal while waiting for a public market entrance?

Yes. The first step was to hedge our bets and make sure we had some money in the bank to do our plan, so we raised $27 million at the end of April in 2000. Then, we kept going and said we really want to do these acquisitions of our domestic franchise network and we had the opportunity and our options were going to expire. So we raised $25 million in debt to do those acquisitions and then we paid off the debt when we finally got the IPO done.

In your second filing, you already had the $11 to $13 stock price range listed. Did you ever consider changing that range before actually pricing?

There were two things sort of counteracting each other: the markets and the multiples were going down, but the company was hitting its numbers, giving the [underwriters?] analysts a little more comfort that the investments we?ve made in our new divisions were smart investments. So they kept us in the same range.

Why did you finally decide to push the IPO out in June?

To some degree I?m the wrong guy to ask because I?ve been bullish on going right from day one. I wanted to file it last May and get every filing done sooner and just start the road show and do it. But cooler heads prevailed.I think the feeling was that the window was open, even if only a crack, so they gave me the green light.

Princeton Review is not a dotcom, but it does have a significant online component. Were people concerned that if you went out last spring or summer that the markets would bury you because of the online offerings?

That is exactly what people were concerned about. Since we went public, it?s also what the doubters still point at.

We are not an online company, we?re an education company. In every division we have lots of offline stuff, lots of print stuff and face-to-face as well as online.

Are you seeing an increase in revenue from the online offerings?

Sure. Not only the online products but the online components of our courses. A lot of students find out about us and enroll online. In our live face-to-face offering we?re still giving tests online and makeups online. So the Internet is a major factor in our business, not only in the pure online products, but also in the hybrids.

You?re one of the few remaining education companies in your space that hasn?t been bought by a major publishing house. Do you think that going public lessens the likelihood of a future acquisition?

I?m not sure it matters. If I wanted to be acquired, there were certainly plenty of opportunities over the past couple of years. The company works very well as an independent company. I don?t think I?m being entirely pompous when I say we?re in the strategic high ground of for-profit education.

If you?re a high school kid thinking about college, the thing keeping you up at four in the morning is the SAT. Ditto if you?re going to graduate school, the admission tests are a big deal. If you?re an educator right now anywhere in K-12 education it?s the state tests and the whole accountability movement in education. In all cases, we are your best friend: a company that for 20 years has been very successful at raising test scores.

Did you spend most of your first day of trading watching the ticker?

I was on the road show right up until the evening of pricing. When we finally started trading the next morning I was at my desk trying to reacclimate myself toward running the business.

I?ve watched the stock price probably as much as anyone out there. But it?s like a lot of guys who first get married and spend a lot of time playing with their wedding band.You won?t lose it but you?ll be unbelievably aware of it, and in the same way I?m aware of our stock price? but eventually that calms down.

Speaking of the road show, what were some of the more predominant investor questions?

First is, why go public now in this market? My answer was there are great opportunities in education and you?ve got to have the cash and the currency to take advantage of it.

The other thing we got asked a lot was how much longer our new divisions would be losing money. It?s a fair question. My tolerance for losing money is as low as that of any Old Economy guy. The answer is that analysts are projecting us to be profitable at the end of Q2 2002 and I?m good with that and don?t plan on dipping back into unprofitability for a long time.

You ended up pricing at the low end of your range. How disappointed were you?

The Nasdaq matched its all-time losing streak on the last seven days of our road show, so we were very optimistic about hitting the high end, but every day it was down and it just sucks the life out of you. You?re sitting there trying to sell somebody, but both of you are aware that everything is falling apart.

Did you ever consider postponing the IPO?

No. My motto was, “Never give up, never surrender.”

Were you pleased with how JP Morgan handled the road show?

I thought Morgan did a masterful job of getting us in front of the right people and then it was our job to sell them. We gave 85 presentations on the road show and, for a company our size, that?s a lot. And it was with great funds all over the country and in Europe.

I was also impressed that we had 85 meetings and we were on time for all of them, which I don?t think I?ve ever done before in my life.

Why did you initially choose JP Morgan as your lead underwriter?

We did a beauty contest in January of 2000. The firms we chose had everything to do with their analysts, with people who we respected in the education space and who we wanted to pick their brains.

Mike Marino was terrific as the banker over at Morgan. Over at Legg Mason, we started with Bob Craig and Jerry Herman when they were over at First Union, and then First Union got rid of their education banking division and they moved over to Legg, and we moved with them. And, at Piper, Mark Morostica. They?re really smart, good guys.

What can market watchers expect from Princeton Review over the next year?

What you can expect from us is that we?re going to look a lot like we do now, just bigger. The analysts are projecting certain rates of growth and we?re comfortable with that growth. If we grow a little faster than they say, you?ll be happy and if we grow a little slower you?ll be sad. But we are about better scores and better schools and you should not expect any new initiatives to take us away from that mission.

Now that you?re public, do you find the filing of financial statements cumbersome?

So now, where everyone is a common stockholder ? including me ? I want exactly the same thing for The Princeton Review as every other stockholder, which is to grow and I want us to be profitable. And that?s a much simpler world, a world I know pretty well.

Contact Dan