U. S. SECURITIES AND EXCHANGE COMMISSION
Form 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2004
Commission File Number 1-31923
UNIVERSAL TECHNICAL INSTITUTE, INC.
| Delaware | 86-0226984 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
| 20410 North 19th Avenue, Suite 200 | ||
| Phoenix, Arizona 85027 | (623) 445-9500 | |
| (Address of principal executive offices) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Name of each exchange on which registered: | |
| Common Stock, $0.0001 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No x
As of December 15, 2004, 27,825,868 shares of common stock were outstanding. The aggregate market value of the shares of common stock held by non-affiliates of the registrant on the last business day of the registrant’s most recently completed second fiscal quarter (March 31, 2004) was approximately $581,212,809 (based upon the closing price of the common stock on such date as reported by the New York Stock Exchange). For purposes of this calculation, the Company has excluded the market value of all common stock beneficially owned by all executive officers and directors of the Company.
Documents Incorporated by Reference
Portions of the proxy statement for the 2005 Annual Meeting of Stockholders are incorporated by reference into Part II (Item 5) and Part III of this Form 10-K.
UNIVERSAL TECHNICAL INSTITUTE, INC.
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2004
PART I
ITEM 1. BUSINESS
Overview
We are a leading provider of post-secondary education for students seeking
careers as professional automotive, diesel, collision repair, motorcycle and
marine technicians, as measured by total undergraduate enrollment and number of
graduates. We offer undergraduate degree, diploma and certificate programs at
eight campuses across the United States, and manufacturer-sponsored advanced
programs at 22 dedicated training centers. For the twelve months ended
September 30, 2004, our average undergraduate enrollments were 13,076 full-time
students. We have provided technical education for nearly 40 years.
We believe that the market for qualified service technicians is large and
growing. In 2002, the U.S. Department of Labor estimated that there were
approximately 818,000 working automotive technicians in the United States, and
that this number was expected to increase by 12% from 2002 to 2012. Other 2002
estimates provided by the U.S. Department of Labor indicate that, from 2002 to
2012, the number of technicians in the other industries we serve, including
diesel repair, collision repair, motorcycle repair and marine repair are
expected to increase by 14%, 13%, 19% and 18%, respectively. This increasing
need for technicians is due to a variety of factors, including technological
advancement in the industries our graduates enter, a continued increase in the
number of automobiles, trucks, motorcycles and boats in service, as well as an
aging and retiring workforce that generally requires retraining to keep up with
technological advancements and maintain its technical competency. As a result
of these factors, there will be an annual average of approximately
50,800 new
job openings for new entrants from 2002 to 2012 in the fields we serve,
according to data collected by the U.S. Department of Labor. In addition to
the increase in demand for newly qualified technicians, manufacturers are
increasingly outsourcing their training functions, seeking preferred education
partners that can offer high quality curricula and that have a national
presence to meet the employment and advanced retraining needs of their national
dealer networks.
We work closely with leading original equipment manufacturers (OEMs) in
the automotive, diesel, motorcycle and marine industries to understand their
needs for qualified service professionals. By staying current on the equipment
and technology employed by OEMs, we are able to continuously refine and expand
our programs and curricula. We believe that our industry-oriented educational
philosophy and national presence have enabled us to develop valuable industry
relationships that provide us with a significant competitive strength and
support our market leadership. We are a primary, and often the sole, provider
of manufacturer-based training programs pursuant to written agreements with
various OEMs whereby we provide technician training programs using their
vehicles, equipment, specialty tools and curricula. These OEMs include: Audi
of America; American Honda Motor Co., Inc. (for marine applications); BMW of
North America, LLC; Ford Motor Co.; International Truck and Engine Corp.;
Jaguar Cars, Inc.; Mercedes-Benz USA, LLC; Mercury Marine; Porsche Cars of
North America, Inc.; Toyota Motor Sales, U.S.A., Inc.; Volkswagen of America,
Inc.; and Volvo Cars of North America, Inc. In addition, we provide technician
training programs pursuant to oral agreements with the following OEMs:
American Honda Motor Co., Inc. (for motorcycle applications); American Suzuki
Motor Corp.; Harley-Davidson Motor Co.; Kawasaki Motors Corp. U.S.A.; Volvo
Penta of the Americas, Inc.; and Yamaha Motor Corp., USA.
Through our campus-based undergraduate programs, we offer specialized
technical education under the banner of several well-known brands, including
Universal Technical Institute (UTI), Motorcycle Mechanics Institute and Marine
Mechanics Institute (collectively, MMI) and NASCAR Technical Institute (NTI).
The majority of our undergraduate programs are designed to be completed in 12
to 18 months and culminate in an occupational associate’s degree, diploma or
certificate, depending on the program and campus. Tuition ranges from
approximately $18,000 to $34,000 per program, primarily depending on the nature
and length of the program. Upon completion of one of our automotive or diesel
undergraduate programs, qualifying students have the opportunity to enroll in
one of the manufacturer-sponsored advanced training programs that we offer.
These training programs are manufacturer-specific and are offered in a facility
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in which the OEM supplies the vehicles, equipment, specialty tools and
curricula. Tuition for these advanced training programs is paid by each
participating OEM or dealer in return for a commitment by the student to work
for a dealer of that OEM upon graduation. We also provide continuing education
and retraining to experienced technicians at our customers’ sites or in our
training facilities.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available
on our website (www.uticorp.com under the “Company Info – Investor Relations –
SEC Filings” captions) as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission (SEC). Reports of our executive officers, directors and
any other persons required to file securities ownership reports under Section
16(a) of the Securities Exchange Act of 1934 are also available through our
website. Information contained on our website is not a part of this Report.
In Part II (Item 5) and Part III of this Form 10-K, we “incorporate by
reference” certain information from parts of other documents filed with the
SEC, specifically our proxy statement for the 2005 Annual Meeting of
Stockholders. The SEC allows us to disclose important information by referring
to it in that manner. Please refer to such information. We anticipate that on
or before January 14, 2005, our proxy statement for the 2005 Annual Meeting of
Stockholders will be available on our website (www.uticorp.com) under the
“Company Info – Investor Relations – SEC Filings” captions.
Information relating to corporate governance at UTI, including our Code of
Conduct for all of our employees and our Supplemental Code of Ethics for Chief
Executive Officer and Senior Financial Officers, and information concerning
Board Committees, including Committee charters, is available on our website at
www.uticorp.com under the “Company Info – Investor Relations – Corporate
Governance” captions. We will provide any of the foregoing information without
charge upon written request to Universal Technical Institute, Inc., 20410 North
19th Avenue, Suite 200, Phoenix, Arizona 85027.
Business Strategy
Our goal is to maintain and strengthen our role as a leading provider of
technical education services. We intend to pursue the following strategies to
attain this goal:
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Schools and Programs
Through our campus-based school system, we offer specialized technical
education programs under the banner of several well-known brands, including
Universal Technical Institute (UTI), Motorcycle Mechanics Institute and Marine
Mechanics Institute (collectively, MMI) and NASCAR Technical Institute (NTI).
The majority of our undergraduate programs are designed to be completed in 12
to 18 months and culminate in an occupational associate’s degree, diploma or
certificate, depending on the program and campus. Tuition ranges from
approximately $18,000 to $34,000 per program, primarily depending on the nature
and length of the program. Undergraduate programs at seven of our campuses are
accredited and eligible for federal Title IV financial aid funding. The
undergraduate programs offered at our Exton, Pennsylvania campus, which opened
in July 2004, are not yet eligible to participate in Title IV financial aid
funding. We completed our application with the Department of Education for
Title IV funding for our Exton, Pennsylvania campus in October 2004 and are
awaiting approval. Upon completion of one of our automotive or diesel
undergraduate programs, qualifying students have the opportunity to enroll in
one of our advanced, manufacturer-specific training programs. These programs
are offered in facilities in which OEMs supply the vehicles, equipment,
specialty tools and curricula. Tuition for the advanced training programs is
paid by each participating OEM or dealer in return for a commitment by the
student to work for a dealer of that OEM upon graduation. We also provide
continuing education and retraining to experienced technicians.
Our undergraduate schools and programs are summarized in the following
table:
In addition, we have announced plans for a new automotive technician
training campus in the Boston, Massachusetts suburb of Norwood, which we
anticipate will open in the fourth quarter of our 2005 fiscal year, and a new
automotive technician training campus in Sacramento, California, which we
anticipate will open in the first half of our 2006 fiscal year.
Universal Technical Institute (UTI)
UTI offers automotive, diesel & industrial, and collision repair and
refinishing programs that are master certified by the National Automotive
Technicians Education Foundation (NATEF), a division of the Institute for
Automotive Service Excellence (ASE). Currently, our new Exton, Pennsylvania
campus and our FlexTech program are not NATEF certified. All UTI programs are
accredited and culminate in an occupational associate’s degree or diploma,
depending on the program and campus. Students also have the option to enhance
their core program through the Ford Accelerated Credential Training (FACT)
elective at each of our UTI campuses. In addition, we offer the Toyota
Professional Automotive Technician (TPAT) elective at our Glendale Heights,
Illinois campus and the Toyota Professional Collision Training (TPCT) elective
at our Houston, Texas campus.
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Motorcycle Mechanics Institute and Marine Mechanics Institute
(collectively, MMI)
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NASCAR Technical Institute (NTI)
Established in 2002, NTI offers the same type of automotive training as
UTI does, but with additional NASCAR-specific courses. In addition to the
training received in our Automotive Technology program, students are able to
learn first-hand on NASCAR engines and equipment and to learn specific skills
required for entry-level positions in NASCAR-related career opportunities. The
program ranges from 48 to 78 weeks in duration and tuition ranges from $23,000
to $33,700. Similar to graduates of the Automotive Technology program, NTI
graduates are qualified to work as entry-level service technicians in
automotive repair facilities or automotive dealer service departments. A small
percentage of these graduates may have the opportunity to work as technicians
on NASCAR teams.
Manufacturer-Sponsored Programs
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These programs are intended to offer in-depth instruction on specific
manufacturers’ products, qualifying a graduate for employment with a dealer
seeking highly specialized, entry-level technicians with brand-specific skills.
The programs range from 12 to 27 weeks in duration, and tuition is paid by the
manufacturer or dealer. The manufacturer also supplies equipment for the
courses.
Industry Relationships
We have a network of industry relationships that provide a wide range of
strategic and financial benefits, including product/financial support,
licensing and manufacturer training.
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An example of a product/financial support relationship is:
An example of a licensing arrangement is:
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Examples of manufacturer training relationships include:
Student Recruitment Model
We strive to increase our school enrollment and profitability through a
dual pronged sales and marketing effort designed to maximize market
penetration. Our strategy is to recruit a geographically dispersed and
demographically diverse student body, including both recent high school
graduates and adults. Due to the diverse backgrounds and locations of students
who attend our schools, we utilize a variety of marketing techniques to recruit
applicants to our programs, including:
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Student Admissions and Retention
We currently employ approximately 235 field- and campus-based education
representatives who work directly with prospective students to facilitate the
enrollment process. At each campus, student admissions are overseen by an
admissions department that reviews each application. We screen prospective
student applications to increase the likelihood that all admitted students are
capable of completing the requisite coursework and are ready to obtain
employment following graduation. Different programs have varying admissions
standards. For example, applicants for our UTI Avondale location, which offers
an associate of occupational studies (AOS) degree, must be at least 16 years of
age and have a high school diploma (or its equivalent) or certification of high
school equivalency (G.E.D.). Applicants at all other locations must either be
at least 16 years of age and have a high school diploma (or its equivalent) or
G.E.D. or be at least 21 years of age and have the ability to benefit from the
training as demonstrated by personal interviews and performance on the
Wonderlic Scholastic Level Exam.
To maximize student persistence, we have student services professionals
and other resources to assist and advise students regarding academic,
financial, personal and employment matters. Our consolidated student
completion rate is typically above 70%, which we believe compares favorably
with the student completion rates of other providers of comparable
educational/training programs.
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Enrollment
We enroll students continuously throughout the year. For the twelve
months ended September 30, 2004, we had an average enrollment of 13,076
full-time undergraduate students, representing an increase of approximately
23.7% as compared to the twelve months ended September 30, 2003 and making us
the largest provider of post-secondary education in our fields of study in the
United States. Currently, our student body is geographically diverse, with a
majority of our students at most campuses having relocated to attend our
programs. For the twelve months ended September 30, 2002, 2003 and 2004, we
had average undergraduate enrollments of 8,277, 10,568 and 13,076 full-time
undergraduate students, respectively.
Graduate Placement
We believe that securing employment for our graduates is critical to our
ability to attract high quality prospective students. In addition, high
placement rates are directly correlated to low student loan default rates, an
important requirement for continuing participation in Title IV federal funding
programs. Accordingly, we dedicate significant resources to maintaining an
efficient graduate placement program. We recently completed a system
conversion relating to our graduate placement statistics. As a result of the
conversion, we have elected to change our calculation of placement to include
our manufacturer-specific advanced training (MSAT) programs and to limit the
calculation period to 12 months beyond core program graduation and six months
beyond MSAT completion. Using this calculation, our placement rate for fiscal
2003 was 87%. Under our previous placement calculation, our placement rate for
fiscal 2003 was 89%.
Our schools develop job opportunities and referrals. During the course of
each program, students receive instruction on job search and interviewing
skills and have available reference materials and assistance with the
composition of resumes.
Employers may participate in the Tuition Reimbursement Incentive Program
(TRIP), whereby employers of our graduates make some or all of the graduates’
monthly student loan payments for as long as they employ the graduate or until
the loan is paid in full, whichever is earlier. We believe that TRIP provides
us with a more compelling value proposition to prospective students and further
enhances our relationship with our OEM partners.
Faculty and Employees
Faculty members are hired nationally in accordance with established
criteria, applicable accreditation standards and applicable state regulations.
Members of our faculty are primarily industry professionals and are hired based
on their prior work and educational experience. We require a specific level of
industry experience in order to enhance the quality of the programs that we
offer and to address current and industry-specific issues in the course
content. We provide intensive instructional training and continuing education
to our faculty members to maintain the quality of instruction in all fields of
study. Generally, our existing instructors have between four and seven years
teaching experience and our average undergraduate student-to-teacher ratio is
approximately 22-to-1.
The support team of each school includes a school director, a director of
graduate placement, an education director, a director of student services, a
financial-aid director, a division controller and a director of admissions. As
of September 30, 2004, we had approximately 1,800 full-time employees,
including approximately 420 student support employees and approximately 780
full-time instructors.
Our employees are not represented by labor unions and are not subject to
collective bargaining agreements. We have never experienced a work stoppage,
and we believe that we have a good relationship with our employees. However,
as we open or acquire campuses in new geographic areas, we may encounter
employees who desire or maintain union representation.
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Competition
The career-oriented school industry is highly fragmented, with no one
provider or public institution controlling a significant market share.
Generally, there is limited direct competition between career-oriented schools
and traditional four-year colleges or universities. Our main competitors are
traditional public and private two-year junior and community colleges, other
proprietary career-oriented schools and technical schools, including Lincoln
Technical Institute and Wyoming Technical Institute, which is owned by
Corinthian Colleges, Inc. We compete at a local and regional level based
primarily on the content, visibility and accessibility of academic programs,
the quality of instruction and the time necessary to enter the workforce. We
believe that we are superior to our competitors in size, industry
relationships, brand, reputation and recruiting capability.
Environmental Matters
We use hazardous materials at our training facilities and campuses, and
generate small quantities of waste such as used oil, antifreeze, paint and car
batteries. As a result, our facilities and operations are subject to a variety
of environmental laws and regulations governing, among other things, the use,
storage and disposal of solid and hazardous substances and waste, and the
clean-up of contamination at our facilities or off-site locations to which we
send or have sent waste for disposal. We are also required to obtain permits
for our air emissions, and to meet operational and maintenance requirements,
including periodic testing, for an underground storage tank located at one of
our properties. In the event we do not maintain compliance with any of these
laws and regulations, or are responsible for a spill or release of hazardous
materials, we could incur significant costs for clean-up, damages, and fines or
penalties.
Regulatory Environment
Our schools and students participate in a variety of government-sponsored
financial aid programs to assist students in paying the cost of their
education. The largest source of such support is the federal programs of
student financial assistance under Title IV of the Higher Education Act of
1965, as amended, commonly referred to as Title IV Programs, which are
administered by the U.S. Department of Education or ED. In our 2004 fiscal
year, we derived approximately 72% of our net revenues from Title IV Programs.
To participate in Title IV Programs, a school must be authorized to offer
its programs of instruction by relevant state education agencies, be accredited
by an accrediting commission recognized by ED, and be certified as an eligible
institution by ED. For this reason, our schools are subject to extensive
regulatory requirements imposed by all of these entities.
State Authorization
Each of our schools must be authorized by the applicable state education
agency of the state in which the school is located in order to operate and to
grant degrees, diplomas or certificates to its students. Our schools are
subject to extensive, ongoing regulation by each of these states. State
authorization is also required for an institution to become and remain eligible
to participate in Title IV Programs. In addition, our schools are required to
be authorized by the applicable state education agencies of certain other
states in which our schools recruit students. Currently, each of our schools
is authorized by the applicable state education agency or agencies.
The level of regulatory oversight varies substantially from state to
state, and is very extensive in some states. State laws typically establish
standards for instruction, qualifications of faculty, location and nature of
facilities and equipment, administrative procedures, marketing, recruiting,
financial operations and other operational matters. State laws and regulations
may limit our ability to offer educational programs and to award degrees,
diplomas or certificates. Some states prescribe standards of financial
responsibility that are different from, and in certain cases more stringent
than, those prescribed by ED, and some states require schools to post a surety
bond. Currently, we have posted surety bonds on behalf of our schools and
education representatives with multiple states in a total amount of
approximately $13.3 million.
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We believe that each of our schools is in substantial compliance with
state education agency requirements. If any one of our schools lost its
authorization from the education agency of the state in which the school is
located, that school would be unable to offer its programs and we could be
forced to close that school. If one of our schools lost its state
authorization from a state other than the state in which the school is located,
the school would not be able to recruit students in that state.
Due to state budget constraints in some of the states in which we operate,
such as Illinois, Texas and California, it is possible that those states may
reduce the number of employees in, or curtail the operations of, the state
education agencies that authorize our schools. A delay or refusal by any state
education agency in approving any changes in our operations that require state
approval, such as the opening of a new campus, the introduction of new
programs, a change of control or the hiring or placement of new education
representatives, could prevent us from making such changes or could delay our
ability to make such changes.
Accreditation
Accreditation is a non-governmental process through which a school submits
to ongoing qualitative review by an organization of peer institutions.
Accrediting commissions primarily examine the academic quality of the school’s
instructional programs, and a grant of accreditation is generally viewed as
confirmation that the school’s programs meet generally accepted academic
standards. Accrediting commissions also review the administrative and
financial operations of the schools they accredit to ensure that each school
has the resources necessary to perform its educational mission.
Accreditation by an accrediting commission recognized by ED is required
for an institution to be certified to participate in Title IV Programs. In
order to be recognized by ED, accrediting commissions must adopt specific
standards for their review of educational institutions. All of our schools are
accredited by the Accrediting Commission of Career Schools and Colleges of
Technology, or ACCSCT, an accrediting commission recognized by ED. We believe
that each of our schools is in substantial compliance with ACCSCT accreditation
standards. If any one of our schools lost its accreditation, students
attending that school would no longer be eligible to receive Title IV Program
funding, and we could be forced to close that school. An accrediting
commission may place a school on “reporting status” to monitor one or more
specified areas of performance in relation to the accreditation standards. A
school placed on reporting status is required to report periodically to the
accrediting commission on that school’s performance in the area or areas
specified by the commission.
Nature of Federal and State Support for Post-Secondary Education
The federal government provides a substantial part of its support for
post-secondary education through Title IV Programs, in the form of grants and
loans to students who can use those funds at any institution that has been
certified as eligible by ED. Most aid under Title IV Programs is awarded on
the basis of financial need, generally defined as the difference between the
cost of attending the institution and the amount a student can reasonably
contribute to that cost. All recipients of Title IV Program funds must
maintain a satisfactory grade point average and progress in a timely manner
toward completion of their program of study. In addition, each school must
ensure that Title IV Program funds are properly accounted for and disbursed in
the correct amounts to eligible students.
Students at our schools receive grants and loans to fund their education
under the following Title IV Programs: (1) the Federal Family Education Loan,
or FFEL, program, (2) the Federal Pell Grant, or Pell, program, (3) the Federal
Supplemental Educational Opportunity Grant, or FSEOG, program, and (4) the
Federal Perkins Loan, or Perkins, program.
FFEL
. Under the FFEL program, banks and other lending institutions make
loans to students or their parents. If a student or parent defaults on a loan,
payment is guaranteed by a federally recognized guaranty agency, which is then
reimbursed by ED. Students with financial need qualify for interest subsidies
while in school and during grace periods. In our 2004 fiscal year, we derived
more than 62% of our net revenues from the FFEL program.
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Pell
. Under the Pell program, ED makes grants to students who demonstrate
financial need. In our 2004 fiscal year, we derived approximately 9% of our
net revenues from the Pell program.
FSEOG
. FSEOG grants are designed to supplement Pell grants for students
with the greatest financial need. We are required to provide funding for 25%
of all awards made under this program. In our 2004 fiscal year, we derived
less than 1% of our net revenues from the FSEOG program.
Perkins
. Perkins loans are made from a revolving institutional account in
which 75% of new funding is capitalized by ED and the remainder by the
institution. Each institution is responsible for collecting payments on
Perkins loans from its former students and lending those funds to currently
enrolled students. Defaults by students on their Perkins loans reduce the
amount of funds available in the applicable school’s revolving account to make
loans to additional students, but the school does not have any obligation to
guarantee the loans or repay the defaulted amounts. In our 2004 fiscal year,
we derived less than 1% of our net revenues from the Perkins program.
Some of our students receive financial aid from federal sources other than
Title IV Programs, such as the programs administered by the U.S. Department of
Veterans Affairs and under the Workforce Investment Act. In addition, many
states also provide financial aid to our students in the form of grants, loans
or scholarships. The eligibility requirements for state financial aid and
these other federal aid programs vary among the funding agencies and by
program. Several states that provide financial aid to our students, including
California, are facing significant budgetary constraints. We believe that the
overall level of state financial aid for our students is likely to decrease in
the near term, but we cannot predict how significant any such reductions will
be or how long they will last.
Regulation of Federal Student Financial Aid Programs
To participate in Title IV Programs, an institution must be authorized to
offer its programs by the relevant state education agencies, be accredited by
an accrediting commission recognized by ED and be certified as eligible by ED.
ED will certify an institution to participate in Title IV Programs only after
the institution has demonstrated compliance with the Higher Education Act and
ED’s extensive regulations regarding institutional eligibility. An institution
must also demonstrate its compliance to ED on an ongoing basis. These
standards are applied primarily on an institutional basis, with an institution
defined by ED as a main campus and its additional locations, if any. Under
this definition, for ED purposes, we presently have the following three
institutions:
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All of our schools except our new Exton, Pennsylvania campus, which has
received its state authorization and accreditation from the ACCSCT, are
currently certified by ED to participate in Title IV Programs. We have applied
to ED to have our new Exton, Pennsylvania campus certified for participation in
Title IV Programs, and have sought approval for it to be designated as an
additional location of our UTI/Houston campus.
The substantial amount of federal funds disbursed through Title IV
Programs, the large number of students and institutions participating in those
programs and instances of fraud and abuse by some schools and students in the
past have caused Congress to require ED to increase its level of regulatory
oversight. Accrediting commissions and state education agencies also have
responsibilities for overseeing compliance of institutions with Title IV
Program requirements. As a result, each of our institutions is subject to
detailed oversight and review, and must comply with a complex framework of laws
and regulations. Because ED periodically revises its regulations and changes
its interpretation of existing laws and regulations, we cannot predict with
certainty how the Title IV Program requirements will be applied in all
circumstances.
Significant factors relating to Title IV Programs that could adversely
affect us include the following:
Congressional Action
. Political and budgetary concerns significantly
affect Title IV Programs. Congress must reauthorize the Higher Education Act
approximately every six years. The last reauthorization took place in 1998.
Consequently, Congress has begun the process of reviewing and reauthorizing the
Higher Education Act again, a process that is expected to be concluded in 2005.
We believe that this reauthorization will likely result in numerous changes to
the Higher Education Act. At this time, we cannot determine what changes
Congress will make.
In addition, Congress reviews and determines federal appropriations for
Title IV Programs on an annual basis. Congress can also make changes in the
laws affecting Title IV Programs in the annual appropriations bills and in
other laws it enacts between the Higher Education Act reauthorizations. Since
a significant percentage of our net revenues is derived from Title IV Programs,
any action by Congress that significantly reduces Title IV Program funding or
the ability of our schools or students to participate in Title IV Programs
could reduce our student enrollment and net revenues. Congressional action may
also increase our administrative costs and require us to modify our practices
in order for our schools to comply fully with Title IV Program requirements.
The “90/10 Rule.”
A proprietary institution, such as each of our
institutions, loses its eligibility to participate in Title IV Programs if, on
a cash accounting basis, it derives more than 90% of its revenue for any fiscal
year from Title IV Programs. Any institution that violates this rule becomes
ineligible to participate in Title IV Programs as of the first day of the
fiscal year following the fiscal year in which it exceeds 90%, and is unable to
apply to regain its eligibility until the next fiscal year. If one of our
institutions violated the 90/10 Rule and became ineligible to participate in
Title IV Programs but continued to disburse Title IV Program funds, ED would
require the institution to repay all Title IV Program funds received by the
institution after the effective date of the loss of eligibility.
We have calculated that, for each of our 2002, 2003 and 2004 fiscal years,
none of our institutions derived more than 80.5% of its revenue from Title IV
Programs for any fiscal year. For our 2004 fiscal year, our institutions’
90/10 Rule percentages ranged from 71.8% to 76.3%. We regularly monitor
compliance with this requirement to minimize the risk that any of our
institutions would derive more than the maximum percentage of its revenue from
Title IV Programs for any fiscal year.
Student Loan Defaults
. An institution may lose its eligibility to
participate in some or all Title IV Programs if the rates at which the
institution’s current and former students default on their federal student
loans exceed specified
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percentages. ED calculates these rates based on the number of students
who have defaulted, not the dollar amount of such defaults. ED calculates an
institution’s cohort default rate on an annual basis as the rate at which
borrowers scheduled to begin repayment on their loans in one year default on
those loans by the end of the next year. An institution whose FFEL cohort
default rate is 25% or greater for three consecutive federal fiscal years
ending September 30th loses eligibility to participate in the FFEL and Pell
programs for the remainder of the federal fiscal year in which ED determines
that such institution has lost its eligibility and for the two subsequent
federal fiscal years. An institution whose FFEL cohort default rate for any
single federal fiscal year exceeds 40% may have its eligibility to participate
in all Title IV Programs limited, suspended or terminated by ED.
None of our institutions has had an FFEL cohort default rate of 25% or
greater for any of the federal fiscal years 2000, 2001 and 2002, the three
most recent years for which ED has published such rates. The following table
sets forth the FFEL cohort default rates for our institutions for those years.
An institution whose cohort default rate under the FFEL program is 25% or
greater for any one of the three most recent federal fiscal years, or whose
cohort default rate under the Perkins program exceeds 15% for any federal award
year (the twelve-month period from July 1 through June 30), may be placed on
provisional certification status by ED for up to four years. In recertifying
all of our institutions for continued participation in Title IV Programs in
July 2003, ED did not place any of our institutions on provisional
certification for their FFEL or Perkins cohort default rates. All of our
institutions have Perkins cohort default rates less than 15% for students who
were scheduled to begin repayment in the 2001-2002 federal award year, the most
recent federal award year for which ED has published such rates.
An institution whose Perkins cohort default rate is 50% or greater for
three consecutive federal award years loses eligibility to participate in the
Perkins program for the remainder of the federal award year in which ED
determines that the institution has lost its eligibility and for the two
subsequent federal award years. None of our institutions has had a Perkins
cohort default rate of 50% or greater for any of the last three federal award
years. ED also will not provide any additional federal funds to an institution
for Perkins loans in any federal award year in which the institution’s Perkins
cohort default rate is 25% or greater. None of our institutions has had its
federal Perkins funding eliminated for the last two federal award years for
this reason.
Financial Responsibility Standards
. All institutions participating in
Title IV Programs must satisfy specific standards of financial responsibility.
ED evaluates institutions for compliance with these standards each year, based
on the institution’s annual audited financial statements, as well as following
a change of control of the institution.
The most significant financial responsibility measurement is the
institution’s composite score, which is calculated by ED based on three ratios:
ED assigns a strength factor to the results of each of these ratios on a
scale from negative 1.0 to positive 3.0, with negative 1.0 reflecting financial
weakness and positive 3.0 reflecting financial strength. ED then assigns a
weighting
16
percentage to each ratio and adds the weighted scores for the three ratios
together to produce a composite score for the institution. The composite score
must be at least 1.5 for the institution to be deemed financially responsible
without the need for further oversight. If ED determines that an institution
does not satisfy ED’s financial responsibility standards, depending on its
composite score and other factors, that institution may establish its financial
responsibility on an alternative basis by, among other things:
ED evaluates the financial condition of our institutions on a consolidated
basis based on the financial statements of Universal Technical Institute, Inc.,
as the parent company. ED’s regulations permit ED to examine the financial
statements of Universal Technical Institute, Inc., the financial statements of
each institution and the financial statements of any related party.
Based on its review of the financial statements of Universal Technical
Institute, Inc. for our fiscal years 2001, 2002 and 2003, ED found that we did
not have a composite score of 1.5 or higher. Consequently, we are required to
post a letter of credit on behalf of our institutions in favor of ED and to
accept provisional certification and additional ED reporting and monitoring
procedures, including the submission of monthly financial and performance
reports to ED. We currently have posted a letter of credit in the amount of
$14.4 million, representing approximately 10% of the total Title IV Program
funds received by our institutions in our 2003 fiscal year, as calculated by
ED. In addition, all of our institutions are provisionally certified and are
required to credit their students’ accounts before requesting and receiving
Title IV Program funds on behalf of their students, and two of our institutions
are required to file additional reports with ED regarding their receipt of
Title IV Program funds. Based on the results of our initial public offering
and our financial performance for fiscal year 2004, we believe that we will
satisfy ED’s financial responsibility standards based on our audited financial
statements for our 2004 fiscal year, which we anticipate filing with ED in
early 2005. However, a release from the requirement to post a letter of credit
is discretionary and we have no assurance that this requirement will be
released by ED.
Return of Title IV Funds
. A school participating in Title IV Programs
must calculate the amount of unearned Title IV Program funds that have been
disbursed to students who withdraw from their educational programs before
completing them, and must return those unearned funds to ED or the applicable
lending institution in a timely manner, which is generally within 30 days from
the date the institution determines that the student has withdrawn.
If an institution is cited in an audit or program review for returning
Title IV Program funds late for 5% or more of the students in the audit or
program review sample of students for whom refunds should have been made, the
institution must post a letter of credit in favor of ED in an amount equal to
25% of the total amount of Title IV Program funds that should have been
returned for students who withdrew in the institution’s previous fiscal year.
Our 2002 fiscal year Title IV compliance audits cited UTI/Texas and MMI for
exceeding the 5% late payment threshold. While ordinarily we would be required
to post letters of credit for this reason, ED informed us that we were not
required to post these additional letters of credit because we had already
posted a larger letter of credit as a result of our financial responsibility
composite score being less than 1.5. Our 2003 and 2004 fiscal year Title IV
compliance audits did not cite any of our institutions for exceeding the 5%
late payment threshold.
17
School Acquisitions
. When a company acquires a school that is eligible to
participate in Title IV Programs, that school undergoes a change of ownership
resulting in a change of control as defined by ED. Upon such a change of
control, a school’s eligibility to participate in Title IV Programs is
generally suspended until it has applied for recertification by ED as an
eligible school under its new ownership, which requires that the school also
re-establish its state authorization and accreditation. ED may temporarily and
provisionally certify an institution seeking approval of a change of control
under certain circumstances while ED reviews the institution’s application.
The time required for ED to act on such an application may vary substantially.
ED’s recertification of an institution following a change of control will be on
a provisional basis. Our expansion plans are based, in part, on our ability to
acquire additional schools and have them certified by ED to participate in
Title IV Programs. Our expansion plans take into account the approval
requirements of ED and the relevant state education agencies and accrediting
commissions.
Change of Control
. In addition to school acquisitions, other types of
transactions can also cause a change of control. ED, most state education
agencies and our accrediting commission all have standards pertaining to the
change of control of schools, but these standards are not uniform. ED’s
regulations describe some transactions that constitute a change of control,
including the transfer of a controlling interest in the voting stock of an
institution or the institution’s parent corporation. With respect to a
publicly-traded corporation, such as us, ED regulations provide that a change
of control occurs in one of two ways: (a) if there is an event that would
obligate the corporation to file a Current Report on Form 8-K with the
Securities and Exchange Commission disclosing a change of control or (b) if the
corporation has a stockholder that owns at least 25% of the total outstanding
voting stock of the corporation and is the largest stockholder of the
corporation, and that stockholder ceases to own at least 25% of such stock or
ceases to be the largest stockholder. These change of control standards are
subject to interpretation by ED. Most of the states and our accrediting
commission include the sale of a controlling interest of common stock in the
definition of a change of control. A change of control under the definition of
one of these agencies would require the affected school to reaffirm its state
authorization or accreditation. The requirements to obtain such reaffirmation
from the states and our accrediting commission vary widely.
A change of control could occur as a result of future transactions in
which our company or schools are involved. Some corporate reorganizations and
some changes in the board of directors are examples of such transactions.
Moreover, the potential adverse effects of a change of control could influence
future decisions by us and our stockholders regarding the sale, purchase,
transfer, issuance or redemption of our stock. If a future transaction results
in a change of control of our company or our schools, we believe that we will
be able to obtain all necessary approvals from ED, our accrediting commission
and the applicable state education agencies. However, we cannot assure you
that all such approvals can be obtained at all or in a timely manner that will
not delay or reduce the availability of Title IV Program funds for our students
and schools.
Opening Additional Schools and Adding Educational Programs
. For-profit
educational institutions must be authorized by their state education agencies
and fully operational for two years before applying to ED to participate in
Title IV Programs. However, an institution that is certified to participate in
Title IV Programs may establish an additional location and apply to participate
in Title IV Programs at that location without reference to the two-year
requirement, if such additional location satisfies all other applicable ED
eligibility requirements. Our expansion plans are based, in part, on our
ability to open new schools as additional locations of our existing
institutions and take into account ED’s approval requirements. We have applied
to ED to have our new Exton, Pennsylvania campus certified for participation in
Title IV Programs and have sought approval for it to be designated as an
additional location of our UTI/Houston campus.
A student may use Title IV Program funds only to pay the costs associated
with enrollment in an eligible educational program offered by an institution
participating in Title IV Programs. Generally, an institution that is eligible
to participate in Title IV Programs may add a new educational program without
ED approval if that new program leads to an associate level or higher degree
and the institution already offers programs at that level, or if that program
prepares students for gainful employment in the same or a related occupation as
an educational program that has previously been designated as an eligible
program at that institution and meets minimum length requirements. If an
institution erroneously determines that an educational program is eligible for
purposes of Title IV Programs, the institution would likely be liable for
repayment of Title IV Program funds provided to students in that educational
program. Our expansion plans are
18
based, in part, on our ability to add new educational programs at our
existing schools. We do not believe that current ED regulations will create
significant obstacles to our plans to add new programs.
Some of the state education agencies and our accrediting commission also
have requirements that may affect our schools’ ability to open a new campus,
establish an additional location of an existing institution or begin offering a
new educational program. We do not believe that these standards will create
significant obstacles to our expansion plans.
Administrative Capability
. ED assesses the administrative capability of
each institution that participates in Title IV Programs under a series of
separate standards. Failure to satisfy any of the standards may lead ED to
find the institution ineligible to participate in Title IV Programs or to place
the institution on provisional certification as a condition of its
participation. One standard that applies to programs with the stated objective
of preparing students for employment requires the institution to show a
reasonable relationship between the length of the program and the entry-level
job requirements of the relevant field of employment. We believe we have made
the required showing for each of our applicable programs.
Other standards provide that an institution may be found to lack
administrative capability and be placed on provisional certification if its
student loan default rate under the FFEL program is 25% or greater for any of
the three most recent federal fiscal years, or if its Perkins cohort default
rate exceeds 15% for any federal award year. In recertifying all of our
institutions for continued participation in Title IV Programs in July 2003, ED
did not find that any of our institutions lacked administrative capability and
did not impose provisional certification requirements on any of our
institutions for their student loan default rates.
Restrictions on Payment of Commissions, Bonuses and Other Incentive
Payments
. An institution participating in Title IV Programs may not provide
any commission, bonus or other incentive payment based directly or indirectly
on success in securing enrollments or financial aid to any person or entity
engaged in any student recruiting or admission activities or in making
decisions regarding the awarding of Title IV Program funds. In November 2002,
ED published new regulations, which took effect in July 2003, to attempt to
clarify this so-called “incentive compensation” law. The new regulations
identify twelve compensation arrangements that ED has determined are not in
violation of the incentive compensation law, including the payment and
adjustment of salaries, bonuses and commissions in certain circumstances. ED’s
new regulations do not establish clear criteria for compliance in all
circumstances, and ED has announced that it will no longer review and approve
individual schools’ compensation plans. Nonetheless, we believe that our
current compensation plans are in compliance with the Higher Education Act and
ED’s new regulations, although we cannot assure you that ED will not find
deficiencies in our compensation plans.
Eligibility and Certification Procedures
. Each institution must apply to
ED for continued certification to participate in Title IV Programs at least
every six years, or when it undergoes a change of control, and an institution
may come under ED review when it expands its activities in certain ways, such
as opening an additional location or raising the highest academic credential it
offers. ED may place an institution on provisional certification status if it
finds that the institution does not fully satisfy all of the eligibility and
certification standards. ED may withdraw an institution’s provisional
certification without advance notice if ED determines that the institution is
not fulfilling all material requirements. In addition, ED may more closely
review an institution that is provisionally certified if it applies for
approval to open a new location, add an educational program, acquire another
school or make any other significant change. Provisional certification does
not otherwise limit an institution’s access to Title IV Program funds.
All of our institutions were recertified by ED in July 2003 for continued
participation in Title IV Programs through June 2006. All of the
recertifications were on a provisional basis, based on our composite score at
the parent company level under ED’s financial responsibility formula. In
addition, ED has informed us that it intends to issue revised certification
documents to our institutions to clarify the corporate ownership structure of
our institutions and campuses participating in the Title IV Programs, and we
have provided additional information to ED for this purpose.
19
Compliance with Regulatory Standards and Effect of Regulatory Violations
.
Our schools are subject to audits and program compliance reviews by various
external agencies, including ED, ED’s Office of Inspector General, state
education agencies, student loan guaranty agencies, the U.S. Department of
Veterans Affairs and our accrediting commission. Each of our institutions’
administration of Title IV Program funds must also be audited annually by an
independent accounting firm, and the resulting audit report submitted to ED for
review. If ED or another regulatory agency determined that one of our
institutions improperly disbursed Title IV Program funds or violated a
provision of the Higher Education Act or ED’s regulations, that institution
could be required to repay such funds and could be assessed an administrative
fine. ED could also transfer the institution to the reimbursement system of
receiving Title IV Program funds, under which an institution must disburse its
own funds to students and document the students’ eligibility for Title IV
Program funds before receiving such funds from ED. Violations of Title IV
Program requirements could also subject us or our schools to other civil and
criminal penalties.
Significant violations of Title IV Program requirements by us or any of
our institutions could be the basis for a proceeding by ED to limit, suspend or
terminate the participation of the affected institution in Title IV Programs.
Generally, such a termination extends for 18 months before the institution may
apply for reinstatement of its participation. There is no ED proceeding
pending to fine any of our institutions or to limit, suspend or terminate any
of our institutions’ participation in Title IV Programs, and we have no reason
to believe that any such proceeding is contemplated.
We and our schools are also subject to complaints and lawsuits relating to
regulatory compliance brought not only by our regulatory agencies, but also by
other government agencies and third parties, such as present or former students
or employees and other members of the public. If we are unable to successfully
resolve or defend against any such complaint or lawsuit, we may be required to
pay money damages or be subject to fines, limitations, loss of federal funding,
injunctions or other penalties. Moreover, even if we successfully resolve or
defend against any such complaint or lawsuit, we may have to devote significant
financial and management resources in order to reach such a result.
Predominant Use of One Lender and One Guaranty Agency.
Our students have
traditionally received their FFEL student loans from a limited number of
lending institutions. For example, in our 2004 fiscal year, one lending
institution, Sallie Mae, provided more than 95% of the FFEL loans that our
students received. In addition, in our 2004 fiscal year, one student loan
guaranty agency, EdFund, guaranteed more than 95% of the FFEL loans made to our
students. Sallie Mae and EdFund are among the largest student loan lending
institutions and guaranty agencies, respectively, in the United States in terms
of loan volume. We do not believe that either one intends to withdraw from the
student loan field or reduce the volume of loans it makes or guarantees in the
near future. If loans by our primary lender or guarantees by our primary
guaranty agency were significantly reduced or no longer available, we believe
that we would be able to identify other lenders and guarantors to make and
guarantee those loans for our students because the student loan industry is
highly competitive and we are frequently approached by other lenders and
guarantors seeking our business. If we were not able to timely identify other
lenders and guarantors to make and guarantee those loans for our students, that
could delay our students’ receipt of their loans, extend our tuition collection
cycle and reduce our student population and net revenues.
Cautionary Factors That May Affect Future Results
Cautionary Statements Under the Private Securities Litigation Reform Act
of 1995:
Our disclosure and analysis in this 2004
Form 10-K
contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, which include information relating to future events,
future financial performance, strategies, expectations, competitive
environment, regulation and availability of resources. From time to time, we
also provide forward-looking statements in other materials we release to the
public as well as oral forward-looking statements. These forward-looking
statements include, without limitation, statements regarding: proposed new
programs; scheduled openings of new campuses and campus expansions;
expectations that regulatory developments or other matters will not have a
material adverse effect on our consolidated financial position, results of
operations or liquidity; statements concerning projections, predictions, expectations,
estimates or forecasts as to our business, financial
20
and operational results
and future economic performance; and statements of management’s goals and
objectives and other similar expressions. Such statements give our current
expectations or forecasts of future events; they do not relate strictly to
historical or current facts. Words such as “may,” “will,” “should,” “could,”
“would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,”
“future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions,
as well as statements in future tense, identify forward-looking statements.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and
potentially inaccurate assumptions. Should known or unknown risks or
uncertainties materialize, or should underlying assumptions prove inaccurate,
actual results could differ materially from past results and those anticipated,
estimated or projected. You should bear this in mind as you consider
forward-looking statements.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related
subjects in our
Form 10-Q
and 8-K reports to the SEC. Also note that we
provide the following cautionary discussion of risks, uncertainties and
possibly inaccurate assumptions relevant to our business. These are factors
that, individually or in the aggregate, we think could cause our actual results
to differ materially from expected and historical results. We note these
factors for investors as permitted by the Private Securities Litigation Reform
Act of 1995. You should understand that it is not possible to predict or
identify all such factors. Consequently, you should not consider the following
to be a complete discussion of all potential risks or uncertainties.
Risks Related to Our Industry
Failure of our schools to comply with the extensive regulatory requirements for
school operations could result in financial penalties, restrictions on our
operations and loss of external financial aid funding.
In our 2004 fiscal year, we derived approximately 72% of our net revenues
from federal student financial aid programs, referred to in this report as
Title IV Programs, administered by the U.S. Department of Education, or ED. To
participate in Title IV Programs, a school must receive and maintain
authorization by the appropriate state education agencies, be accredited by an
accrediting commission recognized by ED and be certified as an eligible
institution by ED. As a result, our undergraduate schools are subject to
extensive regulation by the state education agencies, our accrediting
commission and ED. These regulatory requirements cover the vast majority of
our operations, including our undergraduate educational programs, facilities,
instructional and administrative staff, administrative procedures, marketing,
recruiting, financial operations and financial condition. These regulatory
requirements also affect our ability to acquire or open additional schools, add
new, or expand our existing, undergraduate educational programs and change our
corporate structure and ownership. Most ED requirements are applied on an
institutional basis, with an institution defined by ED as a main campus and its
additional locations, if any. Under ED’s definition, we have three such
institutions. The state education agencies, our accrediting commission and ED
periodically revise their requirements and modify their interpretations of
existing requirements.
If our schools failed to comply with any of these regulatory requirements,
our regulatory agencies could impose monetary penalties, place limitations on
our schools’ operations, terminate our schools’ ability to grant degrees,
diplomas and certificates, revoke our schools’ accreditation or terminate their
eligibility to receive Title IV Program funds, each of which could adversely
affect our financial condition and results of operations and impose significant
operating restrictions upon us. In addition, the loss by any of our
institutions of its accreditation necessary for Title IV Program eligibility,
or the cancellation of any such institution’s ability to participate in Title
IV Programs, in each case that is not cured within a specified period,
constitutes an event of default under our credit facility agreement. We cannot
predict with certainty how all of these regulatory requirements will be applied
or whether each of our schools will be able to comply with all of the
requirements in the future. We have described some of the most significant
regulatory risks that apply to our schools in the following paragraphs.
21
Congress may change the law or reduce funding for Title IV Programs, which
could reduce our student population, net revenues and/or profit margin.
Congress periodically revises the Higher Education Act of 1965, as
amended, and other laws governing Title IV Programs and annually determines the
funding level for each Title IV Program. Congress began the process of
reviewing and reauthorizing the Higher Education Act in 2003 and is expected to
conclude the process in 2005, which will likely result in numerous changes to
the law. Any action by Congress that significantly reduces funding for Title
IV Programs or the ability of our schools or students to receive funding
through these programs could reduce our student population and net revenues.
Congressional action may also require us to modify our practices in ways that
could result in increased administrative costs and decreased profit margin.
If our schools do not maintain their state authorizations, they may not operate
or participate in Title IV Programs.
A school that grants degrees, diplomas or certificates must be authorized
by the relevant education agency of the state in which it is located.
Requirements for authorization vary substantially among states. State
authorization is also required for students to be eligible for funding under
Title IV Programs. Loss of state authorization by any of our schools from the
education agency of the state in which the school is located would end that
school’s eligibility to participate in Title IV Programs and could cause us to
close the school.
If our schools do not maintain their accreditation, they may not participate in
Title IV Programs.
A school must be accredited by an accrediting commission recognized by ED
in order to participate in Title IV Programs. Loss of accreditation by any of
our schools would end that school’s participation in Title IV Programs and
could cause us to close the school.
We are subject to sanctions if we fail to correctly calculate and timely return
Title IV Program funds for students who withdraw before completing their
educational program.
A school participating in Title IV Programs must correctly calculate the
amount of unearned Title IV Program funds that has been disbursed to students
who withdraw from their educational programs before completing them and must
return those unearned funds in a timely manner, generally within 30 days of the
date the school determines that the student has withdrawn. If the unearned
funds are not properly calculated and timely returned, we may have to post a
letter of credit in favor of ED or be otherwise sanctioned by ED, which could
increase our cost of regulatory compliance and adversely affect our results of
operations. With respect to our 2002 fiscal year, two of our institutions made
late returns of Title IV Program funds in excess of ED’s prescribed threshold
but were not required to post letters of credit because we had already posted a
letter of credit for a greater amount as a result of our failure to satisfy
ED’s financial responsibility formula. Based on our 2003 and 2004 fiscal year
Title IV compliance audits, none of our institutions made late returns of Title
IV Program funds in excess of ED’s prescribed threshold.
Our schools may lose eligibility to participate in Title IV Programs if the
percentage of their revenue derived from those programs is too high, which
could reduce our student population.
A for-profit institution loses its eligibility to participate in Title IV
Programs if, on a cash accounting basis, it derives more than 90% of its
revenue from those programs in any fiscal year. In our 2004 fiscal year, under
the regulatory formula prescribed by ED, none of our institutions derived more
than 77% of its revenues from Title IV Programs. If any of our institutions
loses eligibility to participate in Title IV Programs, that loss would
adversely affect our students’ access to various government-sponsored student
financial aid programs, which could reduce our student population.
22
Our schools may lose eligibility to participate in Title IV Programs if their
student loan default rates are too high, which could reduce our student
population.
An institution may lose its eligibility to participate in some or all
Title IV Programs if its former students default on the repayment of their
federal student loans in excess of specified levels. Based upon the most
recent official student loan default rates published by ED, none of our
institutions has student loan default rates that exceed the specified levels.
If any of our institutions loses eligibility to participate in Title IV
Programs because of high student loan default rates, that loss would adversely
affect our students’ access to various government-sponsored student financial
aid programs, which could reduce our student population.
If we or our schools do not meet the financial responsibility standards
prescribed by ED, we may be required to post letters of credit or our
eligibility to participate in Title IV Programs could be terminated or limited,
which could reduce our student population.
To participate in Title IV Programs, an institution must satisfy specific
measures of financial responsibility prescribed by ED or post a letter of
credit in favor of ED and possibly accept other conditions on its participation
in Title IV Programs. Currently, due to our failure as a parent company to
satisfy ED’s financial responsibility formula for our 2003 fiscal year, we have
posted a letter of credit in the amount of $14.4 million for all of our
schools, representing 10% of Title IV Program funds received by our
institutions in our 2003 fiscal year. We may be required to increase the
amount of the existing letter of credit or post additional letters of credit in
the future. Our obligation to post one or more letters of credit could
increase our costs of regulatory compliance. Our inability to obtain a
required letter of credit or other limitations on our participation in Title IV
Programs could limit our students’ access to various government-sponsored
student financial aid programs, which could reduce our student population.
We are subject to sanctions if we pay impermissible commissions, bonuses or
other incentive payments to individuals involved in certain recruiting,
admissions or financial aid activities.
A school participating in Title IV Programs may not provide any
commission, bonus or other incentive payment based on success in enrolling
students or securing financial aid to any person involved in any student
recruiting or admission activities or in making decisions regarding the
awarding of Title IV Program funds. The law and regulations governing this
requirement do not establish clear criteria for compliance in all
circumstances. If we violate this law, we could be fined or otherwise
sanctioned by ED.
If regulators do not approve our acquisition of a school that participates in
Title IV funding, the acquired school would not be permitted to participate in
Title IV Programs, which could impair our ability to operate the acquired
school as planned or to realize the anticipated benefits from the acquisition
of that school.
If we acquire a school that participates in Title IV funding, we must
obtain approval from ED and applicable state education agencies and accrediting
commissions in order for the school to be able to continue operating and
participating in Title IV Programs. An acquisition can result in the temporary
suspension of the acquired school’s participation in Title IV Programs unless
we submit a timely and materially complete application for recertification to
ED and ED grants a temporary certification. If we were unable to timely
re-establish the state authorization, accreditation or ED certification of the
acquired school, our ability to operate the acquired school as planned or to
realize the anticipated benefits from the acquisition of that school could be
impaired.
If regulators do not approve or delay their approval of transactions involving
a change of control of our company or any of our schools, our ability to
participate in Title IV Programs may be impaired.
If we or any of our schools experience a change of control under the
standards of applicable state education agencies, our accrediting commission or
ED, we or the affected schools must seek the approval of the relevant
regulatory agencies. Transactions or events that constitute a change of
control include significant acquisitions or dispositions of our
23
common stock or significant changes in the composition of our board of
directors. Some of these transactions or events may be beyond our control.
Our failure to obtain, or a delay in receiving, approval of any change of
control from ED, our accrediting commission or any state in which our schools
are located could impair our ability to participate in Title IV Programs. Our
failure to obtain, or a delay in obtaining, approval of any change of control
from any state in which we do not have a school but in which we recruit
students could require us to suspend our recruitment of students in that state
until we receive the required approval. The potential adverse effects of a
change of control with respect to participation in Title IV Programs could
influence future decisions by us and our stockholders regarding the sale,
purchase, transfer, issuance or redemption of our stock.
Government and regulatory agencies and third parties may conduct compliance
reviews, bring claims or initiate litigation against us.
Because we operate in a highly regulated industry, we are subject to
compliance reviews and claims of non-compliance and lawsuits by government
agencies, regulatory agencies and third parties. While we are committed to
strict compliance with all applicable laws, regulations and accrediting
standards, if the results of government, regulatory or third party reviews or
proceedings are unfavorable to us, or if we are unable to defend successfully
against lawsuits or claims, we may be required to pay money damages or be
subject to fines, limitations, loss of federal funding, injunctions or other
penalties. Even if we adequately address issues raised by an agency review or
successfully defend a lawsuit or claim, we may have to divert significant
financial and management resources from our ongoing business operations to
address issues raised by those reviews or defend those lawsuits or claims.
Our business and stock price could be adversely affected as a result of
regulatory investigations of, or actions commenced against, other companies in
our industry.
Over the last year, the operations of a number of companies in the
education and training services industry have been subject to intense
regulatory scrutiny. In some cases, allegations of wrongdoing on the part of
such companies have resulted in formal or informal investigations by the U.S.
Department of Justice and/or ED, which in turn have caused a significant
decline in the stock price of such companies. These investigations of specific
companies in the education and training services industry could have a negative
impact on our industry as a whole and on our stock price. Furthermore, the
outcome of such investigations and any accompanying adverse publicity could
negatively affect our business.
A high percentage of the Title IV student loans our students receive are made
by one lender and guaranteed by one guaranty agency.
In our 2004 fiscal year, one lender, Sallie Mae, provided more than 95% of
all the federally guaranteed Title IV student loans that our students received,
and one student loan guaranty agency, EdFund, guaranteed more than 95% of those
loans made to our students. Sallie Mae is one of the largest lenders of
federally guaranteed Title IV student loans in the United States in terms of
dollar volume, and EdFund is one of the largest guaranty agencies in the United
States. If loans by Sallie Mae or guarantees by EdFund were significantly
reduced or no longer available and we were not able to timely identify other
lenders and guarantors to make or guarantee Title IV Program loans for our
students, there could be a delay in our students’ receipt of their loan funds
or in our tuition collection, which would reduce our student population.
Budget constraints in some states may affect our ability to obtain necessary
authorizations or approvals from those states to conduct or change our
operations.
Due to state budget constraints in some of the states in which we operate,
such as Illinois, Texas and California, it is possible that those states may
reduce the number of employees in, or curtail the operations of, the state
education agencies that authorize our schools. A delay or refusal by any state
education agency in approving any changes in our operations that require state
approval, such as the opening of a new campus, the introduction of new
programs, a change of control or the hiring or placement of new education
representatives, could prevent us from making such changes or could delay our
ability to make such changes.
24
Budget constraints in states that provide state financial aid to our students
could reduce the amount of such financial aid that is available to our
students, which could reduce our student population.
A significant number of states are facing budget constraints that are
causing them to reduce state appropriations in a number of areas. Those states
include California, which is one of the states that provide financial aid to
our students. We expect that California and other states may decide to reduce
the amount of state financial aid that they provide to students, but we cannot
predict how significant any of these reductions will be or how long they will
last. If the level of state funding for our students decreases and our
students are not able to secure alternative sources of funding, our student
population could be reduced.
Risks Related to Our Business
If we fail to effectively manage our growth, we may incur higher costs and
expenses than we anticipate in connection with our growth.
We have experienced a period of significant growth since 1998. Our
continued growth may strain our management, operations, employees or other
resources. We may not be able to maintain or accelerate our current growth
rate, effectively manage our expanding operations or achieve planned growth on
a timely or profitable basis. If we are unable to manage our growth
effectively while maintaining appropriate internal controls, we may experience
operating inefficiencies that likely will increase our costs more than we had
planned.
Failure on our part to maintain and expand existing industry relationships and
develop new industry relationships with our industry customers could impair our
ability to attract and retain students.
We have an extensive set of industry relationships that we believe affords
us a significant competitive strength and supports our market leadership.
These types of relationships enable us to further drive undergraduate
enrollment by attracting students through brand name recognition and the
associated prospect of high-quality employment opportunities. Additionally,
these relationships allow us to diversify funding sources, expand the scope and
increase the number of programs we offer and reduce our costs and capital
expenditures due to the fact that, pursuant to the terms of the underlying
contracts, we provide a variety of specialized training programs and typically
do so using tools, equipment and vehicles provided by the OEMs. These
relationships also provide additional incremental revenue opportunities from
retraining the employees of our industry customers. Our success, therefore,
depends in part on our ability to maintain and expand our existing industry
relationships and to enter into new industry relationships. Certain of our
existing industry relationships, including those with American Suzuki Motor
Corp., Harley-Davidson Motor Co., Kawasaki Motors Corp., U.S.A., Volvo Penta of
the Americas, Inc. and Yamaha Motor Corp., USA, as well as the motorcycle
training agreement with American Honda Co., Inc., are not memorialized in
writing and are based on oral understandings. As a result, the rights of the
parties under these arrangements are less clearly defined than they would be
were they in writing. Additionally, certain of our existing industry
relationship agreements expire within the next six months. We are currently
negotiating to renew these agreements and intend to renew them to the extent we
can do so on satisfactory terms. The reduction or elimination of, or failure
to renew any of our existing industry relationships, or our failure to enter
into new industry relationships, could impair our ability to attract and retain
students. As a result, our market share and net revenues could decrease.
Failure on our part to effectively identify, establish and operate additional
schools or campuses could reduce our ability to implement our growth strategy.
As part of our business strategy, we anticipate opening and operating new
schools or campuses. Establishing new schools or campuses poses unique
challenges and requires us to make investments in management and capital
expenditures, incur marketing expenses and devote other resources that are
different, and in some cases greater, than those required with respect to the
operation of acquired schools. Accordingly, when we open new schools, initial
investments could reduce our profitability. To open a new school or campus, we
would be required to obtain appropriate state and
25
accrediting commission approvals, which may be conditioned or delayed in a
manner that could significantly affect our growth plans. In addition, to be
eligible for federal Title IV student financial aid programs, a new school or
campus would have to be certified by ED. We cannot be sure that we will be
able to identify suitable expansion opportunities to maintain or accelerate our
current growth rate or that we will be able to successfully integrate or
profitably operate any new schools or campuses. A failure by us to effectively
identify, establish and manage the operations of newly established schools or
campuses could slow our growth and make any newly established schools or
campuses more costly to operate than we had planned.
Our success depends in part on our ability to update and expand the content of
existing programs and develop new programs in a cost-effective manner and on a
timely basis.
Increasingly, prospective employers of our graduates demand that their
entry-level employees possess appropriate technological skills. These skills
are becoming more sophisticated in line with technological advancements in the
automotive, diesel, collision repair, motorcycle and marine industries.
Accordingly, educational programs at our schools should keep pace with those
technological advancements. The expansion of our existing programs and the
development of new programs may not be accepted by our students, prospective
employers or the technical education market. Even if we are able to develop
acceptable new programs, we may not be able to introduce these new programs as
quickly as the industries we serve require or as quickly as our competitors do.
If we are unable to adequately respond to changes in market requirements due
to financial constraints, unusually rapid technological changes or other
factors, our ability to attract and retain students could be impaired and our
placement rates could suffer.
We may not be able to retain our key personnel or hire and retain the personnel
we need to sustain and grow our business.
Our success to date has depended, and will continue to depend, largely on
the skills, efforts and motivation of our executive officers who generally have
significant experience with our company and within the technical education
industry. Our success also depends in large part upon our ability to attract
and retain highly qualified faculty, school directors, administrators and
corporate management. Due to the nature of our business, we face significant
competition in the attraction and retention of personnel who possess the skill
sets that we seek. In addition, key personnel may leave us and subsequently
compete against us. Furthermore, we do not currently carry “key man” life
insurance. The loss of the services of any of our key personnel, or our
failure to attract and retain other qualified and experienced personnel on
acceptable terms, could impair our ability to successfully manage our business.
If we are unable to hire, retain and continue to develop and train our
education representatives, the effectiveness of our student recruiting efforts
would be adversely affected.
In order to support revenue growth, we need to hire new education
representatives, retain and continue to develop and train our education
representatives, who are our employees dedicated to student recruitment. Our
ability to develop a strong education representative team may be affected by a
number of factors, including our ability to integrate and motivate our
education representatives; our ability to effectively train our education
representatives; the length of time it takes new education representatives to
become productive; restrictions on the method of compensating education
representatives imposed by regulatory bodies; the competition we face from
other companies in hiring and retaining education representatives; and our
ability to effectively manage a multi-location educational organization. If we
are unable to hire, develop or retain our education representatives, the
effectiveness of our student recruiting efforts would be adversely affected.
Competition could decrease our market share and put downward pressure on our
tuition rates.
The post-secondary education market is highly competitive. Some
traditional public and private colleges and universities, as well as other
private career-oriented schools, offer programs that may be perceived by
students to be similar to ours. Most public institutions are able to charge
lower tuition than our schools are, due in part to government
26
subsidies and other financial sources not available to for-profit schools.
Some of our competitors, such as Corinthian Colleges, Inc., also have
substantially greater financial and other resources than we have which may,
among other things, allow them to secure industry relationships with some or
all of our existing strategic partners or develop other high profile industry
relationships or devote more resources to expanding their programs and their
school network, all of which could affect the success of our marketing
programs. In addition, some of our competitors already have a more extended or
dense network of schools and campuses than we do, thus enabling them to recruit
students more effectively from a wider geographical area.
We may be required to reduce tuition or increase spending in response to
competition in order to retain or attract students or pursue new market
opportunities. As a result, our market share, net revenues and operating
margin may be decreased. We cannot be sure that we will be able to compete
successfully against current or future competitors or that competitive
pressures faced by us will not adversely affect our business, financial
condition or results of operations.
Our financial performance depends in part on our ability to continue to develop
awareness and acceptance of our programs among high school graduates and
working adults looking to return to school.
The awareness of our programs among high school graduates and working
adults looking to return to school is critical to the continued acceptance and
growth of our programs. Our inability to continue to develop awareness of our
programs could reduce our enrollments and impair our ability to increase net
revenues or maintain profitability. The following are some of the factors that
could prevent us from successfully marketing our programs:
An increase in interest rates could adversely affect our ability to attract and
retain students.
Interest rates have reached historical lows in recent years, creating a
favorable borrowing environment for our students. Much of the financing our
students receive is tied to floating interest rates. Therefore, any future
increase in interest rates will result in a corresponding increase in the cost
to our existing and prospective students of financing their studies, which
could result in a reduction in our student population and net revenues. Higher
interest rates could also contribute to higher default rates with respect to
our students’ repayment of their education loans. Higher default rates may in
turn adversely impact our eligibility for Title IV Program participation, which
could result in a reduction in our student population.
Seasonal and other fluctuations in our results of operations could adversely
affect the trading price of our common stock.
In reviewing our results of operations, you should not focus on
quarter-to-quarter comparisons. Our results in any quarter may not indicate
the results we may achieve in any subsequent quarter or for the full year. Our
net revenues normally fluctuate as a result of seasonal variations in our
business, principally due to changes in total student population. Student
population varies as a result of new student enrollments, graduations and
student attrition. Historically, our schools have had lower student
populations in our third fiscal quarter than in the remainder of our fiscal
year because fewer students are enrolled during the summer months. Our
expenses, however, do not generally vary at the same rate as changes in our
student population and net revenues and, as a result, such expenses do not
fluctuate significantly on a
27
quarterly basis. We expect quarterly fluctuations in results of
operations to continue as a result of seasonal enrollment patterns. Such
patterns may change, however, as a result of acquisitions, new school openings,
new program introductions and increased enrollments of adult students. In
addition, our net revenues for our first fiscal quarter are adversely affected
by the fact that we do not recognize revenue during the calendar year-end
holiday break, which falls primarily in that quarter. These fluctuations may
result in volatility or have an adverse effect on the market price of our
common stock.
Our assessment of the effectiveness of our internal control over financial
reporting as required by Section 404 of Sarbanes-Oxley may identify material
weaknesses and may result in an attestation with an adverse opinion from our auditors, each of which may adversely affect the trading price
of our common stock.
Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to include in our future Form 10-K
filings, beginning with our Form 10-K for our fiscal year ending September 30,
2005, a report by our management on our internal control over financial
reporting. In addition, a report by our independent auditors attesting as to
management’s internal control report is required at that time.
We have undertaken a program, using internal and external resources, to document, test and assess the effectiveness
of our internal control over financial reporting. However, there can be no assurance
that we will complete our documentation, testing and assessment by the filing
date for our 2005 Form 10-K. We are focusing our efforts on those control
processes that are most significant to our business and financial reporting.
There can be no assurance, however, that there will be sufficient time and
resources available before the filing date for our 2005 Form 10-K for our
auditors and us to complete the assessment, testing and remediation of all of our key
business processes. If our internal control assessment identifies material weaknesses, we may receive an
attestation with an adverse opinion from our independent
auditors as to the adequacy of our internal control over financial reporting.
Each of these consequences of our Section 404 assessment may have an adverse
effect on student and market perceptions of UTI and cause a decline in the
market price of our common stock.
We may be unable to successfully complete or integrate future acquisitions.
We may consider selective acquisitions in the future. We may not be able
to complete any acquisitions on favorable terms or, even if we do, we may not
be able to successfully integrate the acquired businesses into our business.
Integration challenges include, among others, regulatory approvals, significant
capital expenditures, assumption of known and unknown liabilities and our
ability to control costs. The successful integration of future acquisitions
may also require substantial attention from our senior management and the
senior management of the acquired schools, which could decrease the time that
they devote to the day-to-day management of our business. If we do not
successfully address risks and challenges associated with acquisitions,
including integration, future acquisitions could harm, rather than enhance, our
operating performance.
In addition, if we consummate an acquisition, our capitalization and
results of operations may change significantly. A future acquisition could
result in the incurrence of debt and contingent liabilities, an increase in
interest expense, amortization expenses, goodwill and other intangible assets,
charges relating to integration costs or an increase in the number of shares
outstanding. These results could have a material adverse effect on our results
of operations or financial condition or result in dilution to current
stockholders.
We have recorded a significant amount of goodwill, which may become impaired
and subject to a write-down.
Our acquisition of the parent company of MMI in January 1998 resulted in
the recording of goodwill. Goodwill, which relates to the excess of cost over
the fair value of the net assets of the business acquired, was approximately
$20.6 million at September 30, 2004, representing approximately 15.1% of our
total assets at that date.
28
Goodwill is recorded at fair value on the date of the acquisition and,
under SFAS No. 142, “Goodwill and Other Intangible Assets,” is reviewed at
least annually for impairment. Impairment may result from, among other things,
deterioration in the performance of the acquired business, adverse market
conditions, adverse changes in applicable laws or regulations, including
changes that restrict the activities of the acquired business, and a variety of
other circumstances. The amount of any impairment must be recognized as an
expense in the period in which we determine that such impairment has occurred.
Any future determination requiring the write-off of a significant portion of
goodwill would have an adverse effect on our results of operations during the
financial reporting period in which the write-off occurs.
29
Terrorist attacks and the possibility of wider armed conflicts may adversely
affect the U.S. economy and may disrupt our provision of educational services.
Terrorist attacks and other acts of violence or war, such as those that
took place on September 11, 2001 and the war between the U.S.-led coalition
forces and Iraq, could disrupt our operations. Attacks or armed conflicts that
directly impact our physical facilities or ability to recruit and retain
students could significantly affect our ability to provide educational services
to our students and thereby impair our ability to achieve our expected results.
Furthermore, violent acts and threats of future attacks could adversely affect
the U.S. and world economies. Finally, future terrorist acts could cause the
United States to enter into a wider armed conflict that could further impact
our operations and result in prospective students, as well as our current
students and personnel, entering the armed services. These factors could cause
significant declines in our student population.
ITEM 2. PROPERTIES
Campuses and Other Properties
The following chart provides information relating to our leased campuses
and other leased properties:
30
In addition, we have announced plans for new automotive technician
training campuses in the Boston, Massachusetts suburb of Norwood,
Massachusetts, which we anticipate will open in the fourth quarter of our 2005
fiscal year, and Sacramento, California, which we anticipate will open in the
first half of our 2006 fiscal year.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary conduct of our business, we are periodically subject to
lawsuits, investigations and claims, including, but not limited to, claims
involving students or graduates and routine employment matters. Although we
cannot predict with certainty the ultimate resolution of lawsuits,
investigations and claims asserted against us, we do not believe that any
currently pending legal proceeding to which we are a party will have a material
adverse effect on our business, results of operations, cash flows or financial
condition.
In April 2004, we received a letter on behalf of nine former employees of
National Technology Transfer, Inc. (NTT), an entity that we purchased in 1998
and subsequently sold, making a demand for an aggregate payment of
approximately $284,900 and 19,756 shares of our common stock. The claim is
based on the assertion that the former owner of NTT promised them such payments
upon completion of a public offering of our common stock. We believe the
demand for payment is without merit. On May 14, 2004, plaintiffs filed suit in
Boulder County, Colorado District Court seeking payment in accordance with
their demand. We filed a motion to dismiss due to lack of personal
jurisdiction and improper venue. On November 10, 2004, the Colorado District
Court dismissed the suit on the basis that the forum selection clause in the
agreement, under which plaintiffs claimed they were owed payment, specified
that any action arising under the agreement must be brought in state or federal
court in Phoenix, Arizona.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF UNIVERSAL TECHNICAL INSTITUTE, INC.
The executive officers of the Company are set forth in this table. Each
holds the offices indicated until his or her successor is chosen and qualified
at the regular meeting of the Board of Directors to be held immediately
following the 2005 Annual Meeting of Stockholders.
Robert D. Hartman has served as UTI’s Chairman of the Board since October
1, 2003. From 1990 to September 30, 2003, Mr. Hartman served as UTI’s Chief
Executive Officer, and from April 2002 to September 30, 2003, Mr. Hartman
served as the Co-Chairman of the Board. Mr. Hartman has been a member of the
Board since 1985. From 1979 to 1990, Mr. Hartman held several positions with
UTI, including Student Services Director, Controller, School
Director and President. He was appointed by the Governor of Arizona to
the Arizona State Board for Private Post-secondary Education in 1990 and served
until 1995. In addition, he has served on the Advisory Council for the Arizona
31
Educational Loan Program, representing the private career school sector. He
was founder and former Chairman of the Western Council of Private Career
Schools. Mr. Hartman received a BA in General Business from Michigan State
University and an MBA in Finance from DePaul University in Chicago.
John C. White has served as UTI’s Chief Strategic Planning Officer and
Vice Chairman since October 1, 2003. From April 2002 to September 30, 2003,
Mr. White served as UTI’s Chief Strategic Planning Officer and Co-Chairman of
the Board. From 1998 to March 2002, Mr. White served as UTI’s Chief Strategic
Planning Officer and Chairman of the Board. Mr. White served as the President
of Clinton Harley Corporation (which operates under the name Motorcycle
Mechanics Institute and Marine Mechanics Institute) from 1977 until it was
acquired by UTI in 1998. Prior to 1977, Mr. White was a marketing
representative with International Business Machines Corporation. Mr. White was
appointed by the Arizona Senate to serve as a member of the Joint Legislative
Committee on Private Regionally Accredited Degree Granting Colleges and
Universities and Private Nationally Accredited Degree Granting and Vocational
Institutions in 1990. He was appointed by the Governor of Arizona to the
Arizona State Board for Private Post-secondary Education, where he was a member
and Complaint Committee Chairman from 1993-2001. Mr. White received a BS in
Engineering from the University of Illinois. Mr. White is the uncle of David
K. Miller, UTI’s Senior Vice President of Admissions.
Kimberly J. McWaters has served as UTI’s Chief Executive Officer since
October 1, 2003. Ms. McWaters has served as UTI’s President since 2000 and
served on UTI’s Board from 2002 to 2003. From 1984 to 2000, Ms. McWaters held
several positions with UTI, including Vice President of Marketing and Vice
President of Sales and Marketing. Ms. McWaters also serves as a director of
United Auto Group, Inc. Ms. McWaters received a BS in Business Administration
from the University of Phoenix.
Jennifer L. Haslip has served as UTI’s Senior Vice President, Chief
Financial Officer and Treasurer since 2002. From 2002 to 2004, Ms. Haslip
served as UTI’s Secretary. From 1998 to 2002, Ms. Haslip served as UTI’s
Director of Accounting, Director of Financial Planning and Vice President of
Finance. From 1993 to 1998, she was employed in public accounting at Toback
CPAs P.C. Ms. Haslip received a BS in Accounting from Western International
University. She is a certified public accountant in Arizona.
David K. Miller has served as UTI’s Senior Vice President of Admissions
since 2002. From 1998 to 2002, Mr. Miller served as UTI’s Vice President of
Campus Admissions. From 1979 to 1998, Mr. Miller served in various positions
at MMI, including Admissions Representative, Admissions Director and National
Director. Mr. Miller joined Motorcycle Mechanics Institute in 1979 as an
education representative. He has served on the board of the Arizona Private
School Association and was a team leader for the Accrediting Commission. Mr.
Miller received a BS in Marketing from Arizona State University. Mr. Miller is
the nephew of John White, UTI’s Chief Strategic Planning Officer and Vice
Chairman of the Board.
Roger L. Speer has served as UTI’s Senior Vice President of
Operations/Education since 2002. From 1988 to 2002, Mr. Speer held several
positions with UTI, including Director of Graduate Employment at the UTI
Phoenix Campus, Corporate Director of Graduate Employment, School Director of
the UTI Glendale Heights Campus and Vice President of Operations. Mr. Speer
received a BS in Human Resource Management from Arizona State University.
32
Table of Contents
•
Open New Campuses
. We continue to identify new markets that we
believe will complement our established campus network and support
further growth. We believe that there are a number of local markets,
in regions where we do not currently have a campus, with both pools
of interested prospective students and career opportunities for
graduates. By establishing campuses in these locations, we believe
that we will be able to supply skilled technicians to local
employers, as well as provide educational opportunities for students
otherwise unwilling to relocate to acquire a post-secondary
education. Additional locations will also provide us with an
opportunity to expand our relationships with OEMs by providing a
graduate population with greater geographic reach. We opened our
Exton, Pennsylvania campus in July 2004 where we are initially
offering programs in automotive technology. In addition, we have
entered into a real estate purchase agreement and an agreement to
retrofit the existing building for a campus to be located near
Boston, Massachusetts. We have also entered into a long-term, real
property lease agreement for an additional campus that we intend to
open in Sacramento, California. These new campus locations are
expected to open for operations in the next 9 to 15 months.
•
Increase Recruitment and Marketing
. Since our founding in
1965, we have grown our business and expanded our campus platform to
establish a national presence. Through the UTI, MMI and NTI brands,
our undergraduate campuses and advanced training centers currently
provide us with local representation covering several geographic
regions across the United States. Supporting our campuses, we
maintain a
Table of Contents
national recruiting network of approximately 235 education
representatives who are able to identify, advise and enroll students
from all 50 states. We plan to hire additional education
representatives to enhance our recruitment coverage in territories
where we are currently active in recruiting students and to expand into
new regions and cities. We believe that additional education
representatives, combined with increased marketing spending, will
increase our national presence and enable us to better target the
prospective student pool from which we recruit. We support our
education representatives’ recruiting efforts with a national
multimedia marketing strategy that includes television, enthusiast
magazines, direct mail and the internet.
•
Seek Additional Industry Relationships
. We work closely with
OEMs to develop brand-specific education programs. Participating
manufacturers typically assist us in developing course content and
curricula, and provide us with equipment, specialty tools and parts
at no charge. In addition, the manufacturer or dealer pays the full
tuition of each student enrolled in our advanced training programs.
Our collaboration with OEMs enables us to provide highly specialized
education to our students, resulting in improved employment
opportunities and the potential for higher wages for graduates. We
actively seek to develop new relationships with leading OEMs,
dealership networks and other industry participants. Securing such
relationships will enable us to further drive undergraduate
enrollment growth, diversify funding sources and expand the scope and
increase the number of the programs we offer. We believe that these
relationships are also valuable to our industry partners since our
programs provide them with a steady supply of highly trained service
technicians and are a cost-effective alternative to in-house
training. Therefore, we believe that these relationships will also
provide us additional incremental revenue opportunities from
retraining OEMs’ existing employees.
In addition to our curriculum-based relationships with OEMs, we develop
and maintain a variety of complementary relationships with parts and
tools suppliers, enthusiast organizations and other participants in the
industries we serve. These relationships provide us with a variety of
strategic and financial benefits, including equipment sponsorship, new
product support, licensing and branding opportunities, and selected
financial sponsorship for our campuses and students. We believe that
these relationships improve the quality of our educational programs,
reduce our investment cost of equipping classrooms, enable us to expand
the scope of our programs, strengthen our graduate placements and
enhance our overall image within the industry.
•
Expand Program Offerings
. As the industries we serve become
more technologically advanced, the requisite training for qualified
technicians continues to increase. We continually work with our
industry customers to expand and adapt our course offerings to meet
their needs for skilled technicians. We also intend to increase the
number of specialized or manufacturer-specific electives we offer in
our undergraduate programs, such as our Hot Rod U high performance
series and our Ford-certified elective. During our 2004 fiscal year,
we successfully added the Toyota Professional Automotive Training
(TPAT) program as a manufacturer-specific elective for our
undergraduate students at our Glendale Heights, Illinois campus. In
September 2004, we began providing a pilot online automotive training
program under the brand FlexTech. FlexTech is a blended online and
onsite program offered at our Avondale, Arizona campus, which
provides flexibility for our students and increases campus capacity.
Additionally, we expanded the program offerings at our Orlando,
Florida campus, which previously only provided motorcycle and marine
technician training, to include an automotive technology program.
•
Consider Strategic Acquisitions
. We selectively consider
acquisition opportunities that, among other factors, would complement
our program offerings, benefit from our expertise and scale in
marketing and administration and could be integrated into our
existing operations.
Table of Contents
Date
Training
School
Location
Commenced
Principal Programs
Avondale, Arizona
1965
Automotive; Diesel & Industrial; Automotive/Diesel;
Automotive/Diesel & Industrial; FlexTech
Houston, Texas
1983
Automotive; Diesel & Industrial; Automotive/Diesel;
Automotive/Diesel & Industrial; Collision Repair and Refinishing
Glendale Heights, Illinois
1988
Automotive; Diesel & Industrial; Automotive/Diesel;
Automotive/Diesel & Industrial
Rancho Cucamonga, California
1998
Automotive
Exton, Pennsylvania
2004
Automotive
Phoenix, Arizona
1973
Motorcycle
Orlando, Florida
1986
Automotive; Motorcycle; Marine
Mooresville, North Carolina
2002
Automotive with NASCAR
Table of Contents
•
Automotive Technology
. Established in 1965, the Automotive
Technology program is designed to teach students how to diagnose,
service and repair automobiles. The program ranges from 51 to 68
weeks in duration, and tuition ranges from $19,500 to $29,950.
Graduates of this program are qualified to work as entry-level
service technicians in automotive repair facilities or automotive
dealer service departments.
•
Diesel & Industrial Technology
. Established in 1968, the
Diesel & Industrial Technology program is designed to teach students
how to diagnose, service and repair diesel systems and industrial
equipment. The program is 45 weeks in duration and tuition ranges
from $19,600 to $20,200. Graduates of this program are qualified to
work as entry-level service technicians in medium and heavy truck
facilities, truck dealerships, or in service and repair facilities
for marine diesel engines and equipment utilized in various
industrial applications, including materials handling, construction,
transport refrigeration or farming.
•
Automotive/Diesel Technology
. Established in 1970, the
Automotive/Diesel Technology program is designed to teach students
how to diagnose, service and repair automobiles and diesel systems.
The program ranges from 69 to 84 weeks in duration and tuition ranges
from approximately $25,800 to $32,350. Graduates of this program
typically can work as entry-level service technicians in automotive
repair facilities, automotive dealer service departments, diesel
engine repair facilities, medium and heavy truck facilities or truck
dealerships.
•
Automotive/Diesel & Industrial Technology
. Established in
1970, the Automotive/Diesel & Industrial Technology program is
designed to teach students how to diagnose, service and repair
automobiles, diesel systems and industrial equipment. The program
ranges from 75 to 90 weeks in duration and tuition ranges from
$26,850 to $33,500. Graduates of this program are qualified to work
as entry-level service technicians in automotive repair facilities,
automotive dealer service departments, diesel engine repair
facilities, medium and heavy truck facilities, truck dealerships, or
in service and repair facilities for marine diesel engines and
equipment utilized in various industrial applications, including
material handling, construction, transport refrigeration or farming.
•
Collision Repair and Refinishing Technology (CRRT)
.
Established in 1999, the CRRT program teaches students how to repair
non-structural and structural automobile damage as well as how to
prepare cost estimates on all phases of repair and refinishing. The
program is from 54 to 57 weeks in duration and tuition ranges from
$22,700 to $23,800. Graduates of this program are qualified to work
as entry-level technicians at OEM dealerships and independent repair
facilities.
•
Motorcycle
. Established in 1973, this MMI program is designed
to teach students how to diagnose, service and repair motorcycles and
all-terrain vehicles. The program ranges from 57 to 81 weeks in
duration and tuition ranges from $18,200 to $24,900. Graduates of
this program are qualified to work as entry-level service technicians
in motorcycle dealerships and independent repair facilities. MMI is
supported by all five major motorcycle manufacturers. We have oral
understandings with American Honda Motor Co., Inc., American Suzuki
Motor Corp., Harley-Davidson Motor Co., Kawasaki Motors Corp., U.S.A.
and Yamaha Motor Corp., USA. These motorcycle manufacturers support
us through their endorsement of our curricula content, assisting our
course development, equipment and product donation, and instructor
training. Our oral understandings with these manufacturers may be
terminated without cause by either party at any time.
•
Marine
. Established in 1991, this MMI program is designed to
teach students how to diagnose, service and repair boats and personal
watercraft. The program is 60 weeks in duration and tuition is
approximately $21,200. Graduates of this program are qualified to
work as entry-level service technicians for marine dealerships and
independent repair shops, as well as for marinas, boat yards and
yacht clubs. MMI is supported by several marine manufacturers. We
have oral agreements for manufacturer-specific training
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offered to our students as required courses with American
Honda Motor Co., Inc., Mercury Marine, American Suzuki Motor Corp. and
Yamaha Motor Corp., USA. We have written agreements for dealer
training with American Honda Motor Co. Inc. that expires on March 31,
2005 and Mercury Marine that expires on August 30, 2006. In addition
we are continuing to provide dealer training under an agreement with
Volvo Penta of the Americas, Inc. that expired on October 31, 2004.
These marine manufacturers support us through their endorsement of our
curricula content, assisting our course development, equipment and
product donation, and instructor training. Our oral understanding with
these manufacturers may be terminated without cause by either party at
any time.
•
Automotive
. In July 2004, we expanded the UTI Automotive
Technology program to our Orlando, Florida MMI campus. The program
is 51 weeks in duration and the tuition is $21,650. Graduates of
this program are qualified to work as entry-level service technicians
in automotive repair facilities or automotive dealer service
departments.
•
Advanced Training Programs
. Pursuant to written agreements, we
offer manufacturer-specific advanced training programs for the
following companies: Audi of America; BMW of North America, LLC;
International Truck and Engine Corp.; Jaguar Cars, Inc.;
Mercedes-Benz USA, LLC; Porsche Cars of North America, Inc.;
Volkswagen of America, Inc.; and Volvo Cars of North America, Inc.
•
Audi and Volkswagen
. We have a written agreement with
Audi of America and Volkswagen of America, Inc. whereby we provide
Audi Academy training programs at our Avondale, Arizona, Glendale
Heights, Illinois and Allentown, Pennsylvania training facilities
using tools, equipment and vehicles provided by Audi. In
addition, we provide Volkswagen Academy Technician Recruitment
Program (VATRP) training at our Rancho Cucamonga, California,
Glendale Heights, Illinois and Allentown, Pennsylvania training
facilities using tools, equipment and vehicles provided by
Volkswagen. This agreement expires on December 31, 2006 and may
be terminated for cause by either party.
•
BMW
. We have a written agreement with BMW of North
America, LLC whereby we provide BMW’s Service Technician Education
Program (STEP) at our Avondale, Arizona, Orlando, Florida, Upper
Saddle River, New Jersey and our Houston, Texas training
facilities and at BMW’s Ontario, California training facility,
using tools, equipment and vehicles provided by BMW. This
agreement expires on December 31, 2004, and may be terminated for
cause by either party. This agreement is not exclusive, though,
for the duration of its term, BMW may not enter into a similar
agreement with any other institution that would conduct such
program within 100 miles of an existing UTI program; and we may
not provide manufacturer-specific training for any other
automotive manufacturer at our BMW training facilities.
•
International Truck
. We have a written agreement with
International Truck and Engine Corp. whereby we provide the
International Technician Education Program (ITEP) training program
at our training facility in Carol Stream, Illinois, using tools,
equipment and vehicles provided by International Truck.
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This agreement expires on December 31, 2005 and may be terminated
without cause by either party upon 180 days written notice.
•
Jaguar
. We have a written agreement with Jaguar Cars,
Inc. whereby we provide the Professional Automotive Career
Education (PACE) training program at our training facility in
Orlando, Florida using tools, equipment and vehicles provided by
Jaguar. This agreement expires on May 31, 2006 and may be
terminated for cause by either party. This agreement is not
exclusive, though Jaguar may not enter into a similar agreement
with any other institution that would conduct a program within 100
miles of an existing UTI program.
•
Mercedes-Benz.
We have a written agreement with
Mercedes-Benz USA, LLC whereby we provide the Mercedes-Benz ELITE
training program at our Rancho Cucamonga, California, Houston,
Texas, Orlando, Florida and Glendale Heights, Illinois training
facilities as well as our training center in Allentown,
Pennsylvania using tools, equipment and vehicles provided by
Mercedes-Benz. We also provide the Mercedes-Benz ELITE Collision
Repair Training (CRT) program at our Houston, Texas facility. The
agreement expires on May 31, 2006 for the Houston, Texas location
and September 30, 2005 for all other locations. The agreement is
not exclusive and may be terminated at any time upon 60 days
written notice.
•
Porsche
. We have a written agreement with Porsche Cars
of North America, Inc. whereby we provide the Porsche Technician
Apprenticeship Program (PTAP) at a Porsche Training Center in
Atlanta, Georgia, using tools, equipment and vehicles provided by
Porsche. This agreement expires on August 31, 2005, is exclusive
of all other institutions and may be terminated without cause by
Porsche upon 30 days written notice.
•
Volvo
. We have a written agreement with Volvo Cars of
North America, Inc. whereby we conduct Volvo’s Service Automotive
Factory Education (SAFE) program training at our training centers
in Glendale Heights, Illinois and Avondale, Arizona using training
and course materials approved by Volvo and training vehicles and
tools provided by Volvo. This agreement expires on October 31,
2006 and may be terminated by Volvo prior to the expiration date,
provided that Volvo would compensate us for all ongoing SAFE
classes at the time of such early termination.
•
Retraining
. Technicians in all of the industries we serve are
in regular need of retraining or certification on new technologies.
Increasingly, manufacturers such as American Honda Motor Co., Inc.;
BMW of North America, LLC; Mercedes-Benz USA, LLC; Mercury Marine;
Volkswagen of America, Inc. and Volvo Penta of the Americas, Inc. are
outsourcing a portion of this training to education providers such as
our company.
•
Product/Financial Support
. Product/financial support is an
integral component of our business strategy and is present throughout
our schools. In these relationships, sponsors provide their
products, including equipment and supplies, at reduced or no cost to
us in return for our use of those products in the classroom. In
addition, they may provide financial sponsorship to either us or our
students. Product/financial support is an attractive marketing
channel for sponsors because our classrooms provide them with early
access to the
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future end-users of their products. As students become familiar with a
manufacturer’s products during training, they may be more likely to
continue to use the same products upon graduation. Our product support
relationships allow us to minimize the equipment and supply costs in
each of our classrooms and significantly reduces the capital outlay
necessary for operating and equipping our campuses.
•
Snap-on Tools
. At various stages in our
undergraduate programs, students receive a Snap-on Tools
entry-level tool set having an approximate retail value of
$1,000. We purchase these tool sets from Snap-on Tools at a
discount from their list price pursuant to a written agreement.
This agreement expires in January 2009. In the context of this
relationship, we have granted Snap-on Tools exclusive access to
our campuses and display advertising and we have agreed to use
Snap-on tools to train our students. We receive credits from
Snap-on Tools for student tool kits purchased by UTI and any
additional purchases made by our students. We can then redeem
those credits to purchase Snap-on Tools equipment and tools for
our campuses at the full retail list price.
•
Licensing
. Licensing encompasses our affiliation with key
industry brands. We pay a licensing fee and, in return, receive the
right to use a particular industry participant’s name or logo in our
promotional materials and on our campuses. We believe that our
current and potential students generally identify favorably with the
recognized brand names licensed to us, enhancing our reputation and
the effectiveness of our marketing efforts.
•
NASCAR
. In July 1999, we entered into a licensing
arrangement with NASCAR and became its exclusive education
provider for automotive technicians. This written agreement
expires on June 30, 2007 and may be terminated for cause by
either party at any time prior to its expiration. In July 2002,
the NASCAR Technical Institute opened in Mooresville, North
Carolina. More than 1,500 students currently attend this campus.
This relationship provides us with access to the network of
NASCAR sponsors, presenting us with the opportunity to enhance
our product support relationships. The popular NASCAR brand name
combined with the opportunity to learn on high-performance cars
is a powerful recruiting and retention tool for a broad group of
potential students.
•
Manufacturer Training
. Manufacturer training relationships
provide benefits to us that impact each of our education programs.
These relationships support entry-level training tailored to the
needs of a specific manufacturer, as well as continuing education and
retraining of experienced technicians. In our entry-level programs,
students receive training and certification on a given manufacturer’s
products. In return, the manufacturer supplies equipment, specialty
tools and parts, and assistance in developing curricula. Students
who receive this training are often certified to work on that
manufacturer’s products when they complete the program. The
certification typically leads to both improved employment
opportunities and the potential for higher wages. Manufacturer
training relationships lower the capital investment necessary to
equip our classrooms and provide us with a significant marketing
advantage. In addition, through these relationships, manufacturers
are able to increase the pool of skilled resources available to
service and repair their products.
We actively seek to extend our relationship with a given manufacturer
by providing the manufacturer’s retraining. Like the advanced training,
these programs are built on a training relationship under which the
manufacturer not only provides the equipment and curricula but also
pays for the students’ tuition. These retraining courses often take
place within our existing facilities, allowing the manufacturer to
avoid the costs associated with establishing its own dedicated
facility.
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•
American Honda Motor Co., Inc.
We provide continuing
marine and motorcycle training for experienced American Honda
technicians utilizing training materials and curricula provided
by American Honda. Pursuant to a written agreement, our
instructors provide marine training at American Honda-authorized
training centers across the United States. The marine training
agreement expires on March 31, 2005. This agreement may be
terminated for cause by American Honda at any time prior to its
expiration. Pursuant to an oral agreement, we oversee the
administration of the motorcycle training program, including
technician enrollment. Our instructors provide the motorcycle
training at American Honda-authorized training centers across
the United States. The motorcycle training agreement expired
upon completion of the final class taught in September 2004 and
the program is operating under the terms and conditions of the
expired agreement. We are currently in negotiation for the
renewal of the contract. Pursuant to two oral agreements,
American Honda Motor Co., Inc. supports our campus training
program called HonTech® by donating equipment and providing
curricula.
•
Ford Motor Company.
Pursuant to a written agreement,
we offer the Ford Accelerated Credential Training (FACT)
elective to all of the students in our Automotive,
Automotive/Diesel and Automotive/Diesel & Industrial programs.
The FACT elective is a 15-week course in Ford-specific training,
during which students are able to earn Ford certifications. Ford
Motor Company provides the curriculum, vehicles, specialty
equipment and other training aids required in this elective.
This agreement has an indefinite term and may be terminated
without cause by either party upon six months written notice.
•
Mercedes-Benz USA, LLC.
Pursuant to a written
agreement, we offer the Mercedes-Benz ELITE training program.
This 16-week advanced training program enables students to earn
Mercedes-Benz training credits in service maintenance, diagnosis
and repair of most Mercedes-Benz vehicle systems. Highly ranked
graduates of UTI’s Automotive and Automotive/Diesel programs
may apply for acceptance into the Mercedes-Benz ELITE training
program. Tuition for the program is paid by the manufacturer.
All curricula, vehicles, specialty tools and training aids are
provided by Mercedes-Benz. This agreement expires on September
30, 2005 and may be terminated without cause by Mercedes-Benz
upon 60 days written notice. Pursuant to an addendum to our
agreement with Mercedes-Benz that expires on May 31, 2006, we
renewed the Mercedes-Benz ELITE training program for graduates
of the CRRT program. In addition, we provide training for
Mercedes-Benz factory technicians on a regular basis at our
Houston, Texas facility.
•
Toyota.
We have a written agreement with Toyota
Motor Sales, U.S.A., Inc. to offer the Toyota Professional
Automotive Technician (TPAT) program, a Toyota and Lexus
brand-specific training program. The program uses training and
course materials as well as training vehicles and equipment
provided by Toyota. This agreement expires on March 31, 2008 and
may be terminated without cause by either party upon 30 days
written notice, provided that TPAT training courses for enrolled
students will continue to completion.
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•
Field-Based Representatives
. Our field-based education
representatives recruit prospective students from high schools across
the country. Over the last three fiscal years, approximately 60% of
our student population has been recruited directly out of high
school. Currently, we have approximately 150 field-based education
representatives with assigned territories covering the United States
and U.S. territories. Our field-based education representatives
recruit students by making career presentations at high schools and
direct presentations at the homes of prospective students.
Our reputation in local, regional and national business communities,
endorsements from high school guidance counselors and the
recommendations of satisfied graduates are some of our most effective
recruiting tools. Accordingly, we strive to build relationships with
the people who influence the career decisions of prospective students,
such as vocational instructors and high school guidance counselors.
Every year, we conduct seminars for high school career counselors and
instructors at our training facilities and campuses as a means of
further educating these individuals on the merits of our programs.
•
Campus-Based Representatives
. In addition to our field-based
education representatives, we use campus-based representatives to
recruit students. These representatives respond to targeted
marketing leads and inbound inquiries to directly recruit new
students — typically adults returning to school — from anywhere
across the United States. Currently, we have approximately 85
campus-based education representatives. Since working adults tend to
start our programs throughout the year instead of in the fall as is
most typical of traditional school calendars, these students help
balance our enrollment throughout the year.
•
Marketing and Advertising
. We make use of multiple direct and
indirect marketing and advertising channels aimed at prompting
enthusiasts and underemployed or unemployed prospective students to
contact us. We select various advertising methods on a national,
regional and local basis to drive enrollments at our campuses. We
utilize television advertising on national cable networks such as
Speed Channel, Fox Sports Net, Spike TV (formerly known as TNN) and
Outdoor Life Network, as well as on local stations. We advertise in
both national and regional automotive, motorcycle and marine
enthusiast publications, including Harley-Davidson’s enthusiast
publication which has a circulation of over 1,100,000. We also
employ direct mailings and maintain a proprietary database that
enables us to target both high school students and working adults
throughout the year.
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•
Universal Technical Institute of Arizona
•
Clinton Technical Institute
Main campus: Motorcycle Mechanics Institute, Phoenix, Arizona
Additional location: Motorcycle and Marine Mechanics Institute, Orlando, Florida
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•
Universal Technical Institute of Texas
Main campus: Universal Technical Institute, Houston, Texas
Additional location: Universal Technical Institute, Exton, Pennsylvania
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FFEL Cohort Default Rate
School
2000
2001
2002
6.7
%
4.4
%
7.5
%
8.7
%
5.9
%
7.4
%
15.6
%
8.1
%
11.2
%
•
the equity ratio, which measures the institution’s capital
resources, ability to borrow and financial viability;
•
the primary reserve ratio, which measures the institution’s
ability to support current operations from expendable resources; and
•
the net income ratio, which measures the institution’s ability
to operate at a profit.
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•
posting a letter of credit in an amount equal to at least 50%
of the total Title IV Program funds received by the institution
during the institution’s most recently completed fiscal year;
•
posting a letter of credit in an amount equal to at least 10%
of such prior year’s Title IV Program funds, accepting provisional
certification, complying with additional ED monitoring requirements
and agreeing to receive Title IV Program funds under an arrangement
other than ED’s standard advance funding arrangement; or
•
complying with additional ED monitoring requirements and
agreeing to receive Title IV Program funds under an arrangement other
than ED’s standard advance funding arrangement.
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•
student dissatisfaction with our programs and services;
•
diminished access to high school student population;
•
our failure to maintain or expand our brand or other factors
related to our marketing or advertising practices; and
•
our inability to maintain relationships with automotive,
diesel, collision repair, motorcycle and marine manufacturers and
suppliers.
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Approximate
School/Program
Location
Square Footage
UTI
Avondale, Arizona
247,700
UTI
Houston, Texas
178,000
UTI
Glendale Heights, Illinois
125,000
UTI
Rancho Cucamonga, California
173,100
UTI
Exton, Pennsylvania
160,000
MMI
Phoenix, Arizona
118,000
MMI/UTI
(1)
Orlando, Florida
168,000
NTI
Mooresville, North Carolina
146,000
Headquarters
Phoenix, Arizona
60,000
Audi Academy
Avondale, Arizona
9,600
Audi Academy
Glendale Heights, Illinois
6,500
Audi Academy
Allentown, Pennsylvania
6,200
BMW STEP
Avondale, Arizona
9,400
BMW STEP
Houston, Texas
7,500
BMW STEP
Upper Saddle River, New Jersey
7,500
BMW STEP
Orlando, Florida
13,300
Jaguar PACE
Orlando, Florida
13,300
International Tech
Carol Stream, Illinois
7,100
Education Program
Mercedes-Benz ELITE
Rancho Cucamonga, California
8,100
Mercedes-Benz ELITE
Orlando, Florida
10,100
Mercedes-Benz ELITE
Houston, Texas
27,600
Mercedes-Benz ELITE
Glendale Heights, Illinois
11,900
Mercedes-Benz ELITE
Allentown, Pennsylvania
10,600
Volkswagen VATRP
Glendale Heights, Illinois
6,900
Volkswagen VATRP
Allentown, Pennsylvania
6,900
Volkswagen VATRP
Rancho Cucamonga, California
8,800
Volvo SAFE
Glendale Heights, Illinois
11,000
Volvo SAFE
Avondale, Arizona
8,300
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(1)
The square footage includes approximately 60,000 square feet we took
occupancy of in October 2004 to accommodate the addition of an automotive
technology program.
Name
Age
Position
56
Chairman of the Board
56
40
Chief Executive Officer and President
39
46
Senior Vice President of Admissions
46
Senior Vice President of Operations/Education
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has been listed on the New York Stock Exchange (NYSE)
under the symbol “UTI” since December 17, 2003 upon our initial
public offering. Prior to that time, there was no public market for our common
stock.
The following table sets forth the range of high and low sales prices per
share for our common stock, as reported by the NYSE, for the periods indicated.
The closing price of our common stock as reported by the NYSE on December
15, 2004, was $38.05 per share. As of December 15, 2004 there were
approximately 55 holders of record of our common stock.
We do not anticipate declaring or paying any dividends on our common stock
in the foreseeable future. Instead, we currently anticipate that we will retain
all of our future earnings, if any, to fund the operation and expansion of our
business and to use as working capital and for other general corporate
purposes. Our board of directors will determine whether to pay dividends in
the future based on conditions then existing, including our earnings, financial
condition and capital requirements, the availability of third-party financing
and the financial responsibility standards prescribed by ED, as well as any
economic and other conditions that our board of directors may deem relevant.
Equity Compensation Plan Information
The information set forth in our proxy statement for the 2005 Annual
Meeting of Stockholders under the heading “Equity Compensation Plan
Information” is incorporated herein by reference.
33
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial and
operating data as of and for the periods indicated. You should read the
selected financial data set forth below together with “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our
consolidated financial statements included elsewhere in this Report on Form
10-K. The selected consolidated statement of operations data and the selected
consolidated balance sheet data as of each of the five years ended September
30, 2000, 2001, 2002, 2003 and 2004 have been derived from our audited
consolidated financial statements.
34
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion together with the Selected
Financial Data and the consolidated financial statements and the related notes
included elsewhere in this Report on
Form 10-K
. This discussion contains
forward-looking statements that are based on management’s current expectations,
estimates and projections about our business and operations. Our actual
results may differ materially from those currently anticipated and expressed in
such forward-looking statements as a result of a number of factors, including
those we discuss under “Cautionary Factors That May Affect Future Results” and
elsewhere in this Report on
Form 10-K
.
General Overview
We are a leading provider of post-secondary education for students seeking
careers as professional automotive, diesel, collision repair, motorcycle and
marine technicians. We offer undergraduate degree, diploma or certificate
programs at eight campuses across the United States, and manufacturer-sponsored
advanced programs at 22 dedicated training centers. We have provided technical
education for nearly 40 years.
Our revenues consist principally of student tuition and fees derived from
the programs we provide and are presented as net revenues after reductions
related to guarantees and scholarships we sponsor and refunds for students who
withdraw from our programs prior to specified dates. We recognize tuition
revenue and fees ratably over the terms of the various programs we offer. We
supplement our core revenues with additional revenues from sales of textbooks
and program supplies, student housing provided by us and other revenues, all of
which are recognized as sales occur or services are performed. In aggregate,
these additional revenues represented less than 10% of our total net revenues
in each fiscal year in the three-year period ended September 30, 2004. Tuition
revenue and fees generally vary based on the average number of students
enrolled and average tuition charge per program.
Average student enrollments vary depending on, among other factors, the
number of (i) continuing students at the beginning of a fiscal period, (ii) new
student enrollments during the fiscal period, (iii) students who have
previously withdrawn but decide to re-enroll during the fiscal period, and (iv)
graduations and withdrawals during the fiscal period. We believe that our
average student enrollments are influenced by the number of graduating high
school students, the attractiveness of our program offerings to high school
graduates and potential adult students, the effectiveness of our marketing
efforts, the depth of our industry relationships, the strength of employment
markets and long term career prospects, the quality of our instructors and
student services professionals, the persistence of our students, the length of
our education programs, the availability of federal funding for our
programs, the number of graduates of our programs who elect to attend the
advanced training programs we offer and general economic conditions. Our
introduction of additional program offerings at existing schools and
establishment of new schools (either through acquisition or start-up) are
expected to significantly influence our average student enrollment. Our
average undergraduate student enrollments
35
have grown at a compounded annual
growth rate of 25.7% over the past three full fiscal years. This growth can
largely be attributed to the demand for our graduates and the expansion of our
capacity. We currently offer start dates at our campuses that range from every
three to six weeks throughout the year in our various undergraduate programs.
The number of start dates of advanced programs varies by the duration of those
programs and the needs of the manufacturers who sponsor them.
Our tuition charges vary by type or length of our programs and the program
level, such as undergraduate or advanced training. Tuition has increased by
approximately 3% to 5% per annum in each fiscal year in the three-year period
ended September 30, 2004. Tuition increases are generally consistent across our
schools and programs; however, changes in operating costs may impact price
increases at individual locations. We believe that we can continue to increase
tuition as the demand for our graduates remains strong and tuition at other
post-secondary institutions continues to rise, although any of those increases
may be less than past increases.
Most students at our campuses rely on funds received under various
government-sponsored student financial aid programs, predominantly Title IV
Programs, to pay a substantial portion of their tuition and other
education-related expenses. In our 2004 fiscal year, approximately 72% of our
net revenues were derived from federal student financial aid programs.
We extend credit for tuition and fees to the majority of our students that
are in attendance at our campuses. Our credit risk is mitigated through the
students’ participation in federally funded financial aid programs unless
students withdraw prior to the receipt by us of Title IV funds for those
students. Any remaining tuition receivable is comprised of smaller individual
amounts due from students across the United States.
We categorize our operating expenses as (i) educational services and
facilities and (ii) selling, general and administrative.
Major components of educational services and facilities expenses include
faculty compensation and benefits, compensation and benefits of other campus
administration employees, facility rent, maintenance, utilities, depreciation
and amortization of property and equipment used in the provision of educational
services, royalties payable to licensors under our licensing arrangements and
other costs directly associated with teaching our programs and providing
educational services to our students.
Selling, general and administrative expenses include compensation and
benefits of employees who are not directly associated with the provision of
educational services (such as executive management, finance and central
accounting, legal, human resources and business development), marketing and
student enrollment expenses (including compensation and benefits of personnel
employed in sales and marketing and student admissions), costs of professional
services, bad debt expense, costs associated with the implementation and
operation of our student management and reporting system, rent for our home
office, depreciation and amortization of property and equipment that is not
used in the provision of educational services and other costs that are
incidental to our operations. All marketing and student enrollment expenses
are recognized in the period incurred. Costs related to the opening of new
facilities, excluding related capital expenditures, are expensed in the period
incurred.
Costs associated with the implementation of our student management and
reporting system have increased over the last several years as we installed a
new integrated information network that tracks inquiries from potential
students and supports our student enrollment and processing of data as it
relates to our student activities. We anticipate that we will need to further
upgrade our student management and reporting system and expect additional costs
will be incurred in connection with such an upgrade. We believe that the
investment in our student management and reporting system has
improved services to students and our ability to track student inquiries
and may facilitate the integration of new schools into our operations, if and
when new schools are opened or acquired.
In December 2003, we sold 3,250,000 shares of our common stock in an
initial public offering for approximately
36
$59.0 million in net cash proceeds,
after deducting underwriting commissions and offering expenses of approximately
$7.6 million. In conjunction with our initial public offering, we effected a
4,350-to-one stock split. Certain stockholders sold 5,375,000 shares of our
common stock in the initial public offering. In addition, our outstanding
series D preferred stock automatically converted to common stock upon the
consummation of our initial public offering. Accordingly, the approximately
2,357 outstanding shares of series D preferred stock representing a liquidation
value of $45.5 million were converted into an equivalent number of shares of
our common stock which, upon giving effect to the stock split, amounted to
10,253,797 shares of common stock. Also in December 2003, we consummated an
exchange offer pursuant to which we offered to exchange the then outstanding
shares of our series A, series B and series C preferred stock for shares of our
common stock at an exchange price per share equal to our initial public
offering price of $20.50. An aggregate of 6,499 shares of series A, series B
and series C preferred stock, representing a liquidation value of approximately
$6.5 million, were presented for exchange and we issued an aggregate of 317,006
shares of our common stock in connection with that exchange. We used $25.5
million of the net proceeds from the initial public offering to redeem all of
the outstanding shares of series A, series B and series C preferred stock that
were not exchanged for shares of common stock and to pay all the accrued and
unpaid dividends on all the series of our preferred stock, whether or not
exchanged.
Critical Accounting Policies and Estimates
Our discussion of our financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States, or GAAP.
During the preparation of these financial statements, we are required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates and
assumptions, including those related to revenue recognition, bad debts,
property and equipment, long-lived assets, including goodwill, income taxes and
contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable
under the circumstances. The results of our analysis form the basis for making
assumptions about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, and the impact of such
differences may be material to our consolidated financial statements.
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements:
Revenue recognition.
Net revenues consist primarily of student tuition
and fees derived from the programs we provide after reductions are made for
guarantees and scholarships we sponsor. Tuition and fee revenue is recognized
on a pro-rata (straight-line) basis over the term of the course or program
offered. If a student withdraws from a program prior to a specified date, any
paid but unearned tuition is refunded. Approximately 95% of our net revenues
for the fiscal year 2002, 96% of our net revenues for the fiscal year 2003 and
96% of our net revenues for the fiscal year 2004, consisted of tuition. Our
net revenues vary from period to period in conjunction with our average student
population. The majority of our undergraduate programs are typically designed
to be completed in 12 to 18 months and our advanced training programs range
from 12 to 27 weeks in duration. We supplement our core revenues with sales of
textbooks and program supplies, student housing provided by us and other
revenues. Sales of textbooks and program supplies, revenue related to student
housing and other revenue are each recognized as sales occur or services are
performed. Deferred tuition represents the excess of tuition payments received
as compared to tuition earned and is reflected as a current liability in our
consolidated financial statements because it is expected to be earned within
the following twelve-month period.
Allowance for uncollectible accounts.
We maintain an allowance for
uncollectible accounts for estimated losses resulting from the inability,
failure or refusal of our students to make required payments. We offer a
variety of payment plans to help students pay that portion of their education
expenses not covered by financial aid programs which are
unsecured and not guaranteed. Management analyzes accounts receivable,
historical percentages of uncollectible accounts, customer credit worthiness,
when applicable, and changes in payment history when evaluating the adequacy of
the allowance for uncollectible accounts. We use an internal group of
collectors, augmented by third party collectors as deemed appropriate, in our
collection efforts. Although we believe that our reserves are adequate, if the
financial
37
condition of our students deteriorates, resulting in an impairment of
their ability to make payments, or if we underestimate the allowances required,
additional allowances may be necessary, which will result in increased selling,
general and administrative expenses in the period such determination is made.
Healthcare and workers’ compensation costs.
Claims and insurance costs
which primarily relate to health insurance and workers’ compensation are
accrued using current information and, in the case of healthcare costs, future
estimates provided by consultants to reasonably measure the current cost
incurred for services provided but not yet invoiced. Although we believe our
estimated liability recorded for healthcare and workers’ compensation costs are
reasonable, actual results could differ and require adjustment of the recorded
balance.
Bonus costs.
We accrue the estimated cost of our bonus programs using
current financial and statistical information as compared to targeted financial
achievements and actual student graduation outcomes. Although we believe our
estimated liability recorded for bonuses is reasonable, actual results could
differ and require adjustment of the recorded balance.
Tool sets.
We accrue the estimated cost of promotional tool sets offered
to students at the time of enrollment and provided at a future date based upon
satisfaction of certain criteria, including completion of certain course work.
We accrue these costs based upon current student information and an estimate of
the number of students that will complete the requisite coursework. Although
we believe our estimated liability for tool sets is reasonable, actual results
could differ and require adjustment of the recorded balance.
Long-lived assets.
We record our long-lived assets, such as property and
equipment, at cost. We review the carrying value of our long-lived assets for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable in accordance with the
provisions of Statement of Financial Accounting Standards, or SFAS, No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” We evaluate
these assets to determine if their current recorded value is impaired by
examining estimated future cash flows. These cash flows are evaluated by using
weighted probability techniques as well as comparisons of past performance
against projections. Assets may also be evaluated by identifying independent
market values. If we determine that an asset’s carrying value is impaired, we
will record a write-down of the carrying value of the identified asset and
charge the impairment as an operating expense in the period in which the
determination is made. Although we believe that the carrying value of our
long-lived assets are appropriately stated, changes in strategy or market
conditions or significant technological developments could significantly impact
these judgments and require adjustments to recorded asset balances.
Goodwill.
We assess the impairment of goodwill in accordance with SFAS
No. 142, “Goodwill and Other Intangible Assets.” Accordingly, we test our
goodwill for impairment annually during the fourth quarter, or whenever events
or changes in circumstances indicate an impairment may have occurred, by
comparing its fair value to its carrying value. Impairment may result from,
among other things, deterioration in the performance of the acquired business,
adverse market conditions, adverse changes in applicable laws or regulations,
including changes that restrict the activities of the acquired business, and a
variety of other circumstances. If we determine that an impairment has
occurred, we are required to record a write-down of the carrying value and
charge the impairment as an operating expense in the period the determination
is made. Goodwill represents a significant portion of our total assets. At
September 30, 2004, goodwill represented approximately 15.1% of our total
assets, or $20.6 million, and was a result of our acquisition of the parent
company of our MMI operation in January 1998. Although we believe goodwill is
appropriately stated in our consolidated financial statements, changes in
strategy or market conditions could significantly impact these judgments and
require an adjustment to the recorded balance.
Stock-based compensation.
We account for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related Interpretations, and comply with the disclosure
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Several
companies recently elected to change their accounting policies and record the
fair value of
38
options as an expense. We currently are not required to record
stock-based compensation charges if the employee stock option exercise price or
restricted stock purchase price equals or exceeds the deemed fair value of our
common stock at the grant date. If we had estimated the fair value of
the options on the date of grant using the Black-Scholes pricing
model and then amortized this estimated fair value over the vesting
period of the options, our net income (loss) would have been
adversely affected, as shown in the table below.
Accounting for income taxes.
In preparing our consolidated financial
statements, we assess the likelihood that our deferred tax assets will be
realized from future taxable income. We establish a valuation allowance if we
determine that it is more likely than not that some portion or all of the net
deferred tax assets will not be realized. Changes in the valuation allowance
are included in our statement of operations as a provision for or benefit from
income taxes. We exercise significant judgment in determining our provisions
for income taxes, our deferred tax assets and liabilities and our future
taxable income for purposes of assessing our ability to utilize any future tax
benefit from our deferred tax assets. Although we believe that our tax
estimates are reasonable, the ultimate tax determination involves significant
judgments that could become subject to audit by tax authorities in the ordinary
course of business.
As of September 30, 2004, we had a valuation allowance of $16.1 million to
reduce our deferred tax assets to an amount that management believes is more
likely than not realizable. The valuation allowance primarily relates to a
deferred tax asset arising from a capital loss carryforward from the sale of a
discontinued business and expires in 2005. Should we incur capital gains in
the future, we would be able to realize all or part of the capital loss
carryforward against which we have applied the valuation allowance. In that
event, our current income tax expense would be reduced or our income tax
benefits would be increased, resulting in an increase in net income or a
reduction in net loss.
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46R (FIN 46R), “Consolidation of Variable Interest
Entities, an Interpretation of ARB 51.” FIN 46R replaces the same titled FIN 46
that was issued in January 2003. FIN 46R provides guidance on when certain
entities should be consolidated or the interest in those entities should be
disclosed by enterprises that do not control them through majority voting
interest. Under FIN 46R, entities are required to be consolidated by
enterprises that lack majority voting interest when equity investors of those
entities have insignificant capital at risk or they lack voting rights, the
obligation to absorb expected losses, or the right to receive expected returns.
Entities identified with these characteristics are called variable interest
entities, or “VIEs,” and the interests that enterprises have in these
entities are called variable interests. These interests can derive from
certain guarantees, leases, loans or other arrangements that result in risks
and rewards that are disproportionate to the voting interests in the entities.
39
The
provisions of FIN 46R must be applied for VIEs created after
January 31, 2003 and for variable interests in entities commonly referred to as
“special purpose entities.” For all other VIEs, implementation is required by
March 31, 2004. Our adoption of FIN 46R did not have a material impact on our
consolidated financial statements or disclosures.
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.”
This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation”
and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”
and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and
Disclosure.” SFAS No. 123R requires the measurement and recording of the cost of employee
services received in exchange for an award of equity instruments to be based on
the grant-date fair value of the award. That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. SFAS No. 123R is effective for all awards granted
or modified after June 15, 2005 and provides transition guidance
for recording expense related to employee service for the fair value
of awards granted prior to the adoption of SFAS No. 123R, and measured in
accordance with the previously issued SFAS No. 123 as amended by SFAS No. 148. SFAS No. 123R is effective at the beginning of the first
interim or annual reporting period beginning after June 15,
2005. We estimate that the effect of adopting SFAS No. 123R, based upon
outstanding equity awards as of September 30, 2004 will be
approximately $0.7 million for the fourth quarter of our 2005
fiscal year. This estimate does not include the impact of additional
equity awards which may be granted or forfeitures which may occur
subsequent to September 30, 2004 and prior to our adoption of
SFAS No. 123R.
Results of Operations
The following table sets forth selected statement of operations data as a
percentage of net revenues for each of the periods indicated.
Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended September
30, 2003
Net revenues.
Our net revenues for the year ended September 30, 2004 were
$255.1 million, representing an increase of $58.7 million, or 29.9%, as
compared to net revenues of $196.5 million for the year ended September 30,
2003. This increase was primarily due to a 23.7% increase in the average
undergraduate full-time student enrollment and an increase in the average
tuition charge per student resulting from tuition increases of between 3% and
5%, depending on the program. For the year ended September 30, 2004, the
average undergraduate full-time student enrollment was 13,076, compared with
10,568 for the year ended September 30, 2003. We have accommodated the
increase in average student enrollment by improving the utilization of our
existing facilities, opening our new Exton, Pennsylvania campus in July 2004
and expansion efforts at four of our existing facilities.
Educational services and facilities expenses.
Our educational services
and facilities expenses for the year ended September 30, 2004 were $116.7
million, representing an increase of $24.3 million, or 26.3%, as compared to
educational services and facilities expenses of $92.4 million for the year
ended September 30, 2003. This increase was primarily due to incremental
education expenses related to higher average student enrollments, including
additional costs of $2.1 million incurred in connection with the start-up and
operation of our new Exton, Pennsylvania campus that we opened in July 2004, an
additional charge of approximately $1.2 million for depreciation related to a
change in the estimated useful life of leasehold improvements and a $0.6
million charge for the early exit of a lease for a campus that we relocated in
September 2004 to provide additional capacity. The increases in educational
services and facilities expenses is partially
offset by a $0.8 million reduction in estimated tool set expenses.
Educational services and facilities expenses as a percentage of net revenues
decreased to 45.8% for the year ended September 30, 2004 as compared to 47.0%
for the year
40
ended September 30, 2003. The decrease in educational services
and facilities expenses as a percentage of net revenues is attributable to
increased revenues and operating efficiencies resulting from increased average
student enrollments at our existing facilities and a favorable adjustment of
our estimated tool set expense, partially offset by the costs attributable to
the opening and operation of the new Exton, Pennsylvania campus and accelerated
depreciation of leasehold improvements related to a campus relocation.
Selling, general and administrative expenses.
Our selling, general and
administrative expenses for the year ended September 30, 2004 were $88.3
million, an increase of $20.4 million, or 30.0%, as compared to selling,
general and administrative expenses of $67.9 million for the year ended
September 30, 2003. This increase was primarily due to incremental
compensation and fringe expenses related to additional sales representatives to
support new applicants and administrative personnel to support the growth in
operations, advertising expenses associated with student leads, administrative
expenses for operations as a public company, legal costs and employee training
initiatives. This increase also includes approximately $3.6 million in costs
associated with the start-up of our new Exton, Pennsylvania campus. Selling,
general and administrative expenses as a percentage of revenue remained flat at
34.6% for the years ended September 30, 2004 and September 30, 2003.
Interest expense.
Our interest expense for the year ended September 30,
2004 was $1.4 million, representing a decrease of $2.8 million, or 67.1%,
compared to interest expense of $4.1 million for the year ended September 30,
2003. The decrease was primarily due to a reduction in the average debt
balance outstanding as a result of our early repayment of approximately $31.5
million in term debt using proceeds received from our initial public offering
in December 2003.
Other expenses.
Our other expenses for the year ended September 30, 2004
represent the write-off of unamortized deferred financing costs of
approximately $1.1 million related to the early repayment of the term loans
under our senior credit facilities with proceeds received from our initial
public offering completed in December 2003 and the termination of our credit
facility at September 30, 2004.
Income taxes.
Our provision for income taxes for the year ended September
30, 2004 was $19.1 million, or 39.9% of pretax income, compared to $12.4
million, or 37.7% of pretax income, for the year ended September 30, 2003. The
higher effective tax rate for the year ended September 30, 2004 is primarily
attributable to the non-deductible costs related to the secondary offering of
our common stock and an increase in tax reserves.
Income from continuing operations.
As a result of the foregoing, we
reported income from continuing operations for the year ended September 30,
2004 of $28.8 million, as compared to income from continuing operations of
$20.4 million for the year ended September 30, 2003.
Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September
30, 2002
Net revenues.
Our net revenues for the year ended September 30, 2003 were
$196.5 million, representing an increase of $52.1 million, or 36.1%, as
compared to net revenues of $144.4 million for the year ended September 30,
2002. This increase was primarily due to a 27.7% increase in the average
undergraduate full-time student enrollment during the year ended September 30,
2003 and an increase in the average tuition charge per student resulting from
tuition increases of between 3% and 5%, depending on the program, and a shift
in the mix of average student enrollments toward higher priced programs,
particularly following the introduction of our higher-priced NASCAR programs at
our new Mooresville, North Carolina NTI campus opened in July 2002. For the
year ended September 30, 2003, the average undergraduate full-time student
enrollment was 10,568, compared with 8,277 for the year ended September 30,
2002. We have been able to accommodate the increase in student enrollments by
improving the utilization of our existing facilities, opening our new NTI
campus in July 2002 and expanding many of our existing facilities.
Educational services and facilities expenses.
Our educational services
and facilities expenses for the year ended
September 30, 2003 were $92.4 million, representing an increase of $21.6
million, or 30.5%, as compared to educational services and facilities expenses
of $70.8 million for the year ended September 30, 2002. This increase was
primarily due
41
to incremental education expenses related to higher average
student enrollments, including additional costs of $7.0 million incurred in
connection with the start-up and operation of our new NTI campus that we opened
in July 2002. Educational services and facilities expenses as a percentage of
net revenues decreased to 47.0% of net revenues for the year ended September
30, 2003 from 49.0% for the year ended September 30, 2002, primarily due to
cost and operating efficiencies resulting from increased enrollments at our
existing campuses, partially offset by the costs attributable to the opening
and operation of the new NTI campus.
Selling, general and administrative expenses.
Our selling, general and
administrative expenses for the year ended September 30, 2003 were $67.9
million, representing an increase of $16.4 million, or 31.7%, as compared to
selling, general and administrative expenses of $51.5 million for the year
ended September 30, 2002. This increase was due in large measure to the
incremental increase in marketing and student enrollment expenses in the 2003
period to support future growth in student enrollments, which includes
additional costs of $3.9 million relating to the new NTI campus that we opened
in July 2002. Selling, general and administrative expenses as a percentage of
net revenues decreased to 34.6% of net revenues in the year ended September 30,
2003 compared to 35.7% of net revenues in the year ended September 30, 2002.
This decrease is primarily due to operating efficiencies resulting from
increased enrollments at our existing facilities, partly offset by the costs
attributable to the opening of our new campus.
Interest expense.
Our interest expense for the year ended September 30,
2003 was $4.1 million, representing a decrease of $2.6 million, or 38.9%,
compared to interest expense of $6.8 million for the year ended September 30,
2002. This decrease was due primarily to a reduction in the average debt
balance outstanding and a decrease in the average interest rate paid on our
indebtedness to 6.1% for the year ended September 30, 2003 from 6.5% for the
year ended September 30, 2002. The reduction in the average debt balance
outstanding was principally due to the repayment of $23.4 million of 13.5%
subordinated notes and repayment of $17.9 million of long term debt under our
existing senior credit facilities with proceeds received from the issuance of
our series D convertible preferred stock in April 2002, as well as scheduled
repayments under the senior credit facilities and repayment of $15.0 million of
long-term debt under our existing senior credit facilities with available cash
on hand during July 2003. We also repaid approximately $7.0 million of a
subordinated convertible promissory note at a 10% discount in August 2003. The
decrease in the average rate of interest we paid on our indebtedness was
primarily attributable to the repayment of the 13.5% subordinated notes that
carried a higher fixed interest rate, decreases in the LIBOR rates and a
reduction in the applicable interest margin under our senior credit facilities
as a result of our improved financial condition and the amendment of our senior
credit facilities.
Other expenses.
Our other expenses for the year ended September 30, 2002
represent the write-off of unamortized deferred financing costs of
approximately $1.0 million as a result of the amendment of our senior credit
facilities in April 2002.
Income taxes.
Our provision for income taxes for the year ended September
30, 2003 was $12.4 million, or 37.7% of pretax income, compared to $5.2
million, or 35.0% of pretax income, for the year ended September 30, 2002. The
increase in the effective rate is primarily attributable to higher state taxes
for the year ended September 30, 2003, as all available state net operating
loss carryforwards were utilized in the year ended September 30, 2002. In
addition, a higher federal statutory rate applied to the year ended September
30, 2003, as well as an increase in our state tax rates that primarily impacted
deferred tax items for the year ended September 30, 2003.
Income from continuing operations.
As a result of the foregoing, we reported
income from continuing operations for the year ended September 30, 2003 of
$20.4 million, as compared to income from continuing operations of $9.7 million
for the year ended September 30, 2002.
Liquidity and Capital Resources
We finance our operating activities and our internal growth through cash
generated from operations. Our net cash
from operations was $47.7 million in fiscal 2004, $36.4 million in fiscal
2003 and $20.5 million in fiscal 2002.
42
A majority of our net revenues are derived from Title IV Programs.
Federal regulations dictate the timing of disbursements of funds under Title IV
Programs. Students must apply for a new loan for each academic year
(thirty-week periods). Loan funds are generally provided by lenders in two
disbursements for each academic year. The first disbursement is usually
received 30 days after the start of a student’s academic year and the second
disbursement is typically received at the beginning of the sixteenth week from
the start of the student’s academic year. Certain types of grants and other
funding are not subject to a 30-day delay. Our undergraduate programs are
typically designed to be completed in 12 to 18 months. These factors, together
with the timing of when our students begin their programs, affect our operating
cash flow.
Net cash from operations increased $11.2 million, or 30.9%, from $36.4
million to $47.7 million for the fiscal year ended September 30, 2004. This
increase was primarily attributable to increased operating performance of
approximately $8.4 million, which includes the effect of increased depreciation
expense and other non-cash charges, the timing of tuition funding and other
working capital changes. The timing of tuition funding resulted in an increase
in accounts receivable of $2.6 million and an increase in deferred revenue of
$8.8 million resulting in a combined positive cash flow of approximately $6.2
million. This represents an increase in cash flow of approximately $10.8
million from the comparable year ended September 30, 2003 and is attributable
to an increase in average student enrollments partially offset by the increase
of approximately $1.7 million related to our new Exton, Pennsylvania campus as we
await Title IV approval for this location. In addition to the timing of
tuition funding and increased operating performance, cash flow from operations
was also impacted as a result of providing $10.4 million in cash to
collateralize our issued letter of credit to ED, offset partially by increased
accounts payable and accrued expenses attributable to the increased level of
operations necessary to support average student growth.
Net cash from operations increased approximately $16.0 million, or 77.9%,
from $20.5 million to $36.4 million for the year ended September 30, 2003.
This increase was primarily due to increased operating performance, accounts
payable, accrued expenses related to the purchase of supplies and equipment as
a result of the increase in average student enrollments, accrued salaries and
related benefits and accrued health care benefits from a self-insured benefit
plan.
Capital Expenditures
Our cash used in investing activities is primarily related to the purchase
of property and equipment and capital improvements. Our capital expenditures
primarily result from the addition of new and the expansion of existing
facilities, ongoing replacements of equipment related to student training, our
computer network and student management and reporting systems. Net cash used
in investing activities amounted to $16.9 million in fiscal year 2004 compared
to $11.7 million in fiscal 2003 and $5.8 million in fiscal 2002. The increase
in cash flows used in investing activities during the 2004 fiscal year was
primarily attributable to a new facility, relocation and expansion efforts,
investment in tools, classroom technology and other equipment that support our
programs.
During fiscal 2004, we incurred approximately $2.1 million in capital
expenditures to equip classrooms, labs and administrative office space at our
new Exton, Pennsylvania campus, approximately $2.2 million in capital
improvements as we completed expansion efforts at our Glendale Heights,
Illinois campus and approximately $0.5 million in capital expenditures related
to leasehold improvements and training equipment for the addition of an
automotive training program at our existing Orlando, Florida campus.
The increase in cash flow used in investing activities during the 2003
fiscal year was primarily attributable to the acquisition of additional
training aids and equipment related to student training to support the growth
of our student population, including approximately $2.0 million related to our
campus in Mooresville, North Carolina which was opened in July 2002.
Capital expenditures are expected to increase as we upgrade and expand
current equipment and facilities or open new facilities to meet increased
student enrollments. We expect to be able to fund these capital expenditures
with cash generated from operations.
43
The following is a summary of our current material capital expenditure
commitments:
Our strategy includes considering strategic acquisitions in the future.
To the extent that potential acquisitions are large enough to require financing
beyond cash from operations and available borrowings under our credit facility,
we may incur additional debt, resulting in increased interest expense.
Debt Service
Our total debt was $60.9 million as of September 30, 2002, $57.3 million
as of September 30, 2003 and $43.0 thousand as of September 30, 2004.
The following schedule sets forth our long-term debt obligations as of the
fiscal years ended September 30, 2002, 2003 and 2004:
44
Effective September 30, 2004, we terminated our revolving credit facility
which had previously provided us the availability of $30.0 million to be used
for working capital, capital expenditures and other general corporate purposes
and to support letters of credit issued under the facility. There were no
outstanding borrowings under the revolving credit facility and we had an
outstanding letter of credit of $9.9 million issued to ED at the time of
termination. In connection with the termination of the credit facility, we
provided $10.4 million in cash collateral for the $9.9 million letter of
credit, which expired on November 9, 2004.
On October 26, 2004, we entered into a new credit agreement with a bank
for a revolving line of credit in the amount of $30.0 million and a standby
letter of credit facility for up to $20.0 million. We have the option to issue
letters of credit either under the revolving line of credit, which reduces our
borrowing ability or under the standby letter of credit facility. The standby
letter of credit facility is collateralized by a cash collateral account equal to the
advance rate, as defined and dependent upon the underlying collateral
investment, multiplied by the issued and outstanding letters of credit.
Effective November 1, 2004, we issued a letter of credit in the amount of $14.4
million in favor of ED to replace the previously issued $9.9 million letter of
credit maturing on November 9, 2004. The new letter of credit is
collateralized in the amount of $15.8 million held in U.S. Government
guaranteed bonds. The increase in the letter of credit is attributable to the
increase in Title IV funds that we received during our 2003 fiscal year as a
result of the growth in our average student enrollment.
The new credit agreement requires interest to be paid quarterly in arrears
on outstanding amounts borrowed under the revolving line of credit.
The interest rate is based upon
the lender’s prime interest rate less 0.50% per annum or LIBOR plus 0.625% per
annum, at our option. The revolving line of credit also requires an unused
commitment fee payable quarterly in arrears equal to 0.125% per annum. Issued
letters of credit bear fees of 0.625% per annum under the revolving line of
credit and 0.375% per annum under the standby letter of credit facility.
Fees for issued letters of credit are payable quarterly in advance.
Our new credit agreement contains various financial and non-financial
covenants. The facility, among other things, restricts our ability to: incur
additional indebtedness, grant liens or other security interest, make certain
investments, become liable for contingent obligations or dispose of assets or
stock of our subsidiaries. Our new credit agreement also requires us to comply
with specified financial ratios and tests, which are adjusted over
time, as
follows:
Furthermore, our new credit agreement contains customary events of default
as well as an event of default in the event that any of our institutions loses
any accreditation necessary for Title IV Program eligibility, or the ability of
any
45
such institution to participate in Title IV Programs is cancelled.
During the year ended September 30, 2004, we generated cash from financing
activities of $3.0 million, an increase of $32.4 million as compared to cash
used in financing activities of $29.4 million for the year ended September 30,
2003. The increase in cash provided from financing activities is attributable
to net proceeds from our initial public offering of approximately $59.0 million
which were used to repay the outstanding balance of our term loans of $31.5
million, redeem all outstanding shares of series A, series B and series C
preferred stock that were not exchanged for shares of our common stock totaling
approximately $12.9 million and pay all accrued and unpaid
dividends on each
series of our preferred stock, whether or not exchanged, totaling approximately
$12.6 million.
During
the year ended September 30, 2003, we used cash for financing
activities of $29.4 million, an increase of $24.9 million, as compared to cash
used for financing activities of $4.5 million in the year ended September 30,
2002. The increase in cash used for financing activities is attributable to
using cash on hand to reduce the overall level of debt outstanding. In July
2003, we prepaid without penalty, $15.0 million of borrowings under our term
loan B facility, which had been a part of a senior credit facility. In August
2003, we retired at a 10% discount, a subordinated convertible promissory note
having a principal amount of approximately $7.0 million. Also in August 2003,
we repaid in full, including all accrued interest, a promissory note in the
principal sum of $4.0 million that we had issued in September 1997 in favor of
Whites’ Family Company, LLC, an entity controlled by John C. White, an
executive officer and member of our board of directors. This note bore interest
at approximately 6.6% and was due on or before September 2023. Immediately
following this repayment, Whites’ Family Company, LLC remitted to us
approximately $4.0 million in satisfaction of the principal amount of, and
accrued interest on, a subscription note receivable bearing interest at
approximately 6.1%.
In October 2003, we received a waiver from our lender related to a
non-financial covenant for financial reporting which we have met subsequently.
Dividends
In September 2003, we paid a dividend in the aggregate of $5.0 million to
our common stockholders and the holders of our series D preferred stock. We do
not expect to pay any dividends on our common stock for the foreseeable future.
Future Liquidity Sources
Based on our current level of operations and anticipated growth, we
believe that our cash flow from operations and other available sources of
liquidity, including borrowings available under the new revolving credit
facility, will provide adequate funds for ongoing operations, expansion to new
locations and planned capital expenditures for the next 12 to 18 months.
Contractual Obligations
The following table sets forth, as of September 30, 2004, the aggregate
amounts of our significant contractual obligations and commitments with
definitive payment terms that will require significant cash outlays in the
future.
46
47
Related Party Transactions
In connection with our initial public offering in December 2003, we
exchanged for shares of our common stock or redeemed for cash, at the holder’s
election, our series A preferred stock, series B preferred stock and series C
preferred stock. We used $25.5 million of the net proceeds from that public
offering to redeem all outstanding shares of our series A, series B and series
C preferred stock that were not exchanged for shares of common stock and to pay
all the accrued and unpaid dividends on all the series of our preferred stock,
whether or not exchanged. The following table shows the amounts that our
executive officers and directors received in connection with such redemption
and payment of dividends.
We lease some of our properties from entities controlled by John C. White,
our Chief Strategic Planning Officer and Vice Chairman of our board of
directors. A portion of the property comprising our Orlando location is
occupied pursuant to a lease with the John C. and Cynthia L. White 1989 Family
Trust, with the lease term expiring on August 19, 2022. The annual base lease
payments for the first year under this lease total approximately $326,000, with
annual adjustments based on the higher of (i) an amount equal to 4% of the
total annual rent for the immediately preceding year or (ii) the percentage of
increase in the Consumer Price Index. Another portion of the property
comprising our Orlando location is occupied pursuant to a lease with Delegates
LLC, an entity controlled by the White Family Trust, with the lease term
expiring on July 1, 2016. The beneficiaries of this trust are Mr. White’s
children, and the trustee of the trust is not related to Mr. White. Annual base
lease payments under this lease are approximately $680,000, with annual
adjustments based on the higher of (i) an amount equal to 4% of the total
annual rent for the immediately preceding year or (ii) the percentage of
increase in the Consumer Price Index. Additionally, we lease two of our
Phoenix properties under one lease from City Park LLC, a successor in interest
of 2844 West Deer Valley L.L.C. and in which the John C. and Cynthia L. White
1989 Family Trust holds a 25% interest. The lease expires on February 28,
2015, and the annual base lease payments under this lease, as amended, are
approximately $463,000, with annual adjustments based on the higher of (i) an
amount equal to 4% of the total annual rent for the immediately preceding year
or (ii) the percentage of increase in the Consumer Price Index. The table below
sets forth the total payments that we made in fiscal 2002, 2003 and 2004 under
these leases:
We believe that the rental rates under these leases approximate the fair
market rental value of the properties at the time the lease agreements were
negotiated.
For a description of additional related party transactions, see “Item 13.
Certain Relationships and Related Transactions.”
48
Seasonality
Our net revenues and operating results normally fluctuate as a result of
seasonal variations in our business, principally due to changes in total
student population and costs associated with opening or expanding our campuses.
Student population varies as a result of new student enrollments, graduations
and student attrition. Historically, our schools have had lower student
populations in our third fiscal quarter than in the remainder of our fiscal
year because fewer students are enrolled during the summer months. Our
expenses, however, do not vary significantly with changes in student population
and net revenues and, as a result, such expenses do not fluctuate significantly
on a quarterly basis. The second and third quarters of our fiscal year ended
September 30, 2003 were favorably impacted by an increase in student population
at our NTI campus, which resulted in increased revenue and operational
efficiencies during those two quarters. We expect quarterly fluctuations in
operating results to continue as a result of seasonal enrollment patterns.
Such patterns may change, however, as a result of acquisitions, new school
openings, new program introductions and increased enrollments of adult
students. In addition, our net revenues for the first fiscal quarter are
adversely affected by the fact that we do not recognize revenue during the
calendar year end holiday break, which falls primarily in that quarter.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Historically, our principal exposure to market risk relates to changes in
interest rates. However, we repaid substantially all of our long-term debt in
December 2003 with a portion of the net proceeds of our initial public
offering. Consequently, we believe that we currently have minimal financial
exposure to market risk.
Effect of Inflation
To date, inflation has not had a significant effect on our operations.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the company and its subsidiaries are
included below on pages F-2 to F-32 of this report:
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of
the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective. There were no changes in our
internal control over financial reporting during the quarter ended September
30, 2004 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
50
Price Rage of
Common Stock
High
Low
$
30.40
$
24.00
43.36
28.55
48.50
38.25
40.09
24.26
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Year Ended September 30,
2000
2001
2002
2003
2004
(dollars in thousands, except per share amounts)
$
92,079
$
109,493
$
144,372
$
196,495
$
255,149
48,523
59,554
70,813
92,443
116,730
33,893
38,332
51,541
67,896
88,297
82,416
97,886
122,354
160,339
205,027
9,663
11,607
22,018
36,156
50,122
11,877
10,674
6,254
3,658
1,031
—
—
847
(234
)
1,134
(2,214
)
933
14,917
32,732
47,957
(431
)
820
5,228
12,353
19,137
(1,783
)
113
9,689
20,379
28,820
(34,437
)
(8,536
)
—
—
—
—
(1,316
)
—
—
—
(36,220
)
(9,739
)
9,689
20,379
28,820
(1,166
)
(1,166
)
(2,872
)
(6,413
)
(776
)
$
(37,386
)
$
(10,905
)
$
6,817
$
13,966
$
28,044
$
(0.22
)
$
(0.08
)
$
0.51
$
1.03
$
1.14
$
(0.22
)
$
(0.08
)
$
0.44
$
0.79
$
1.04
13,432
13,402
13,402
13,543
24,659
13,432
13,402
20,244
25,051
27,585
$
3,887
$
4,532
$
4,948
$
6,382
$
8,812
6
6
7
7
8
5,866
6,710
8,277
10,568
13,076
$
3,326
$
3,353
$
13,554
$
8,925
$
42,602
$
21,051
$
16,477
$
29,278
$
31,819
$
77,128
$
(12,987
)
$
(29,187
)
$
(14,577
)
$
(29,240
)
$
6,612
$
68,845
$
63,086
$
76,886
$
84,099
$
136,316
$
104,122
$
97,336
$
57,886
$
53,476
$
6
$
109,294
$
104,578
$
60,902
$
57,336
$
43
$
18,296
$
19,414
$
64,395
$
47,161
$
—
$
(92,071
)
$
(102,976
)
$
(96,159
)
$
(83,152
)
$
55,025
(1)
Depreciation and amortization includes amortization of deferred financing
fees previously capitalized in connection with obtaining financing and
goodwill acquired in connection with the acquisition of a business.
Amortization of
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deferred financing fees was $0.6 million, $0.6 million,
$1.1 million, $0.5 million and $0.2 million for the fiscal years ended
September 30, 2000, 2001, 2002, 2003 and 2004, respectively. Amortization
of goodwill was $0.6 million in each of the fiscal years ended September
30, 2000 and 2001. We adopted Statement of Financial Accounting Standard
(SFAS) No. 142, “Goodwill and Other Intangible Assets” effective October
1, 2001. In accordance with SFAS No. 142, goodwill is no longer amortized
and instead is tested for impairment on an annual basis.
(2)
Working capital (deficit) is defined as current assets less current
liabilities.
(3)
We adopted SFAS 150 “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity,” effective July 1, 2003.
Accordingly, we reclassified as a liability the mandatory redeemable
series A, series B and series C preferred stock totaling $25.5 million at
September 30, 2003. On December 22, 2003, in connection with our
completed initial public offering, we either redeemed series A, series B
and series C preferred stock or exchanged our preferred stock for shares
of common stock.
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•
In September 2004, we entered into a real estate purchase agreement
and an agreement to retrofit the existing building for a campus to be
located in the Boston suburb of Norwood, Massachusetts. A new
undergraduate automotive technician training program is planned to be offered at
this campus. The purchase price is approximately $12.4 million and
approximately $10.0 million to $12.0 million is expected to be spent to
retrofit the existing building prior to the planned opening in the
fourth quarter of our 2005 fiscal year. The campus is planned to provide
approximately 170,000 square feet of classroom and lab space on a total
of 24.5 acres. The campus is planned to accommodate approximately 1,900 students
at maturity.
•
In the next fiscal year, we will continue to equip our new Exton,
Pennsylvania and Orlando, Florida automotive programs. In addition, we
intend to expand certain of our existing programs. Capital expenditures
related to these activities are estimated to be $4.0 million.
Year Ended September 30,
2002
2003
2004
(In thousands)
$
—
$
—
$
—
19,150
16,950
—
29,850
14,550
—
—
15,202
—
—
5,531
—
—
4,729
—
4,000
—
—
7,011
—
—
891
374
43
60,902
57,336
43
3,016
3,860
37
$
57,886
$
53,476
$
6
(1)
On September 30, 2004, we terminated our $30.0 million revolving credit
facility and on October 26, 2004 replaced it with a new $30.0 million
revolving credit facility and a $20.0 million standby letter of credit
facility.
(2)
On December 23, 2003, we used proceeds received from our initial public
offering to repay all of the then outstanding term debt totaling $31.5
million.
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(3)
We adopted SFAS 150 “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity,” effective July 1, 2003.
Accordingly, we reclassified as a liability the mandatory redeemable
series A, series B and series C preferred stock totaling $25.5 million at
September 30, 2003. On December 22, 2003, in connection with our
completed initial public offering, we either redeemed this preferred stock
or exchanged such stock for shares of common stock.
•
We are required to have minimum quarterly net income of $3.5 million
•
We are required to maintain a minimum tangible net worth equal to our
tangible net worth at September 30, 2004, which was $34.4 million.
•
We are required to maintain a total liabilities to tangible net worth
ratio, as defined in the agreement, of 3.5 to 1.0 at December 31,
2004, which decreases to 2.0 to 1.0 at September 30, 2005 and 1.5 to
1.0 at September 30, 2006 and thereafter.
•
We are required to maintain a current ratio of 0.4 to 1.0 at December
31, 2004, which increases to 0.50 to 1.0 at September 30, 2005 and
0.60 to 1.0 at September 30, 2006 and thereafter.
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Minimum rental commitments. These amounts do not include property taxes,
insurance or normal recurring repairs and maintenance.
In October 2004, we entered into a long-term, real property lease
agreement for a 22.5 acre parcel of land in Sacramento, California. A new
undergraduate automotive technician training campus is planned to be
constructed on the land. The initial term of the lease is fifty years
with two renewal periods of ten years each. Lease payments begin upon the
earlier of our occupancy of the planned campus or September 1, 2005 with
minimum lease payments of approximately $0.4 million per annum adjusted
every three years during the initial term based upon the consumer price
index. Minimum lease payments in each of the renewal periods will be
based upon the then current fair market value of the real property. We
expect to open the campus in the first half of our 2006 fiscal year. The
new campus is planned to be approximately 110,000 square feet of classroom
and lab space and is expected to initially accommodate approximately 1,100
students with the potential to construct additional facilities for program
expansion or add new curricula.
Includes all agreements to purchase goods or services of either a fixed
or minimum quantity that are enforceable and legally binding. Where the
obligation to purchase goods or services is noncancelable, the entire
value of the contract was included in the table. Additionally, purchase
orders outstanding as of September 30, 2004, employment contracts and
minimum payments under licensing and royalty agreements are included.
In September 2004, we entered into an agreement to purchase 24.5 acres of
land and a building in the Boston suburb of Norwood, Massachusetts. The
purchase price is approximately $12.4 million and approximately $0.6
million was deposited into escrow at September 30, 2004. We intend to
open a new undergraduate automotive technician training campus in the
fourth quarter of our 2005 fiscal year. The new campus will provide
approximately 170,000 square feet of classroom and lab space and will
accommodate approximately 1,900 students at maturity. We estimate
completion of this transaction during the second quarter of our 2005
fiscal year.
Includes deferred facility rent liabilities, tax reserves, deferred
compensation and other obligations.
Consists of a letter of credit in the amount of $9.9 million in favor of
ED collateralized by cash. In November 2004, the letter of credit was
increased to $14.4 million and is collateralized by $15.8 million held in
U.S. Government guaranteed bonds.
Represents surety bonds posted on behalf of our schools and education
representatives with multiple state education agencies.
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Preferred Stock
Redemption Amount
(In thousands)
$
3,663
$
1,558
$
50
$
4
$
15
John C. and Cynthia
City Park LLC
1989 Family Trust
Delegates LLC
$
462,567
$
364,508
$
644,715
$
495,040
$
399,901
$
796,015
$
551,775
$
447,205
$
924,307
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F-2
F-3
F-4
F-5
F-6
F-8
F-32
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in our proxy statement for the 2005 Annual
Meeting of Stockholders under the headings “Election of Directors” and “Code of
Conduct; Corporate Governance Guidelines” is incorporated herein by reference.
Information regarding executive officers of the Company is set forth under the
caption “Executive Officers of Universal Technical Institute, Inc.” in Part I
hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in our proxy statement for the 2005 Annual
Meeting of Stockholders under the heading “Executive Compensation” is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information set forth in our proxy statement for the 2005 Annual
Meeting of Stockholders under the headings “Equity Compensation Plan
Information” and “Security Ownership of Certain Beneficial Owners and
Management” is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in our proxy statement for the 2005 Annual
Meeting of Stockholders under the heading “Certain Relationships and Related
Transactions” is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth in our proxy statement for the 2005 Annual
Meeting of Stockholders under the heading “Fees Paid to PricewaterhouseCoopers
LLP” is incorporated herein by reference.
51
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Annual Report on Form 10-K:
52
53
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: December 23, 2004
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert D. Hartman and Jennifer L. Haslip, or
either of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K and any documents related to this report and filed pursuant
to the Securities Exchange Act of 1934, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite
and necessary to be done in connection therewith as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
S-1
S-2
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
F-1
Exhibit
Number
Description
Restated Certificate of Incorporation of Registrant. (Filed herewith.)
Amended and Restated Bylaws of Registrant. (Incorporated by reference
to Exhibit 3.4 to the Registrant’s Registration Statement on Form S-1
dated October 3, 2003, or an amendment thereto (No. 333-109430).)
Specimen Certificate evidencing shares of common stock. (Incorporated
by reference to Exhibit 4.1 to the Registrant’s Registration Statement
on Form S-1 dated October 3, 2003, or an amendment thereto (No.
333-109430).)
Registration Rights Agreement, dated December 16, 2003, between
Registrant and certain stockholders signatory thereto. (Incorporated
by reference to Exhibit 4.2 to the Registrant’s Registration Statement
on Form S-1 dated October 3, 2003, or an amendment thereto (No.
333-109430).)
Credit Agreement, dated October 26, 2004, by and between the
Registrant and Wells Fargo Bank, National Association. (Filed
herewith.)
Universal Technical Institute Executive Benefit Plan, effective March
1, 1997. (Incorporated by reference to Exhibit 10.2 to the
Registrant’s Registration Statement on Form S-1 dated October 3, 2003,
or an amendment thereto (No. 333-109430).)
1997 Restricted Stock Plan. (Incorporated by reference to Exhibit
10.3 to the Registrant’s Registration Statement on Form S-1 dated
October 3, 2003, or an amendment thereto (No. 333-109430).)
Management 1999 Option Program. (Incorporated by reference to Exhibit
10.4 to the Registrant’s Registration Statement on Form S-1 dated
October 3, 2003, or an amendment thereto (No. 333-109430).)
Management 2002 Option Program. (Incorporated by reference to Exhibit
10.5 to the Registrant’s Registration Statement on Form S-1 dated
October 3, 2003, or an amendment thereto (No. 333-109430).)
2003 Stock Incentive Plan. (Incorporated by reference to Exhibit 10.1
to the Registrant’s Registration Statement on Form S-8 dated January
13, 2004 (No. 333-111900).)
2003 Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8
dated January 13, 2004 (No. 333-111898).)
Amended and Restated Employment and Non-Interference Agreement, dated
April 1, 2002, between Registrant and Robert D. Hartman, as amended.
(Incorporated by reference to Exhibit 10.8 to the Registrant’s
Registration Statement on Form S-1 dated October 3, 2003, or an
amendment thereto (No. 333-109430).)
Employment and Non-Interference Agreement, dated April 1, 2002,
between Registrant and John C.
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Exhibit
Number
Description
White, as amended. (Incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement
on Form S-1 dated October 3, 2003, or an amendment thereto (No.
333-109430).)
Employment and Non-Interference Agreement, dated April 1, 2002,
between Registrant and Kimberly J. McWaters, as amended.
(Incorporated by reference to Exhibit 10.10 to the Registrant’s
Registration Statement on Form S-1 dated October 3, 2003, or an
amendment thereto (No. 333-109430).)
Employment Agreement, dated November 30, 2003, between Registrant and
Jennifer L. Haslip. (Incorporated by reference to Exhibit 10.11 to
the Registrant’s Registration Statement on Form S-1 dated October 3,
2003, or an amendment thereto (No. 333-109430).)
Form of Severance Agreement between Registrant and certain executive
officers. (Incorporated by reference to Exhibit 10.12 to the
Registrant’s Registration Statement on Form S-1 dated October 3, 2003,
or an amendment thereto (No. 333-109430).)
Lease Agreement, dated April 1, 1994, as amended, between City Park
LLC, as successor in interest to 2844 West Deer Valley L.L.C., as
landlord, and The Clinton Harley Corporation, as tenant.
(Incorporated by reference to Exhibit 10.13 to the Registrant’s
Registration Statement on Form S-1 dated October 3, 2003, or an
amendment thereto (No. 333-109430).)
Lease Agreement, dated July 2, 2001, as amended, between John C. and
Cynthia L. White, as trustees of the John C. and Cynthia L. White 1989
Family Trust, as landlord, and The Clinton Harley Corporation, as
tenant. (Incorporated by reference to Exhibit 10.14 to the
Registrant’s Registration Statement on Form S-1 dated October 3, 2003,
or an amendment thereto (No. 333-109430).)
Lease Agreement, dated July 2, 2001, between Delegates LLC, as
landlord, and The Clinton Harley Corporation, as tenant.
(Incorporated by reference to Exhibit 10.15 to the Registrant’s
Registration Statement on Form S-1 dated October 3, 2003, or an
amendment thereto (No. 333-109430).)
Form of Indemnification Agreement by and between Registrant and its
directors and officers. (Incorporated by reference to Exhibit 10.16
to the Registrant’s Registration Statement on Form S-1 dated April 5,
2004, or an amendment thereto (No. 333-114185).)
Subsidiaries of Registrant. (Filed herewith.)
Consent of PricewaterhouseCoopers LLP. (Filed herewith.)
Power of Attorney. (Included on signature page.)
Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Filed herewith.)
Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Filed herewith.)
Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(Filed herewith.)
Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(Filed herewith.)
Current Reports on Form 8-K were filed on the following dates for the items indicated:
August 11, 2004, Items 7 and 12 regarding results of operations and
financial condition for the quarter ended June 30, 2004.
September 24, 2004, Item 1.01 regarding our entry into a definitive
agreement for the purchase of property in Norwood, Massachusetts.
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UNIVERSAL TECHNICAL INSTITUTE, INC.
By:
/s/ Robert D. Hartman
ROBERT D. HARTMAN
Chairman of the Board
SIGNATURE
TITLE
DATE
Robert D. Hartman
Chairman of the Board
December 23, 2004
John C. White
Chief Strategic Planning Officer
and Vice Chairman of the Board
December 23, 2004
Kimberly J. McWaters
President and Chief Executive
Officer (Principal Executive Officer)
December 23, 2004
Jennifer L. Haslip
Senior Vice President, Chief Financial
Officer and Treasurer (Principal Financial Officer)
December 23, 2004
Lawrence A. Eisel
Controller (Principal Accounting Officer)
December 23, 2004
A. Richard Caputo, Jr.
Director
December 23, 2004
Conrad A. Conrad
Director
December 23, 2004
Michael R. Eisenson
Director
December 23, 2004
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SIGNATURE
TITLE
DATE
/s/ Kevin P. Knight
Kevin P. Knight
Director
December 23, 2004
/s/ Roger S. Penske
Roger S. Penske
Director
December 23, 2004
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Page
Number
F-2
F-3
F-4
F-5
F-6
F-8
F-32
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Universal Technical Institute, Inc. and its subsidiaries at
September 30, 2003 and 2004, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 2004
in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 15 to the consolidated financial statements, effective
July 1, 2003 the Company adopted Statement of Financial Accounting Standards
No. 150 “Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity.”
PricewaterhouseCoopers
LLP
F-2
of Universal Technical Institute, Inc.:
November 22, 2004
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UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
|
September 30,
|
||||||||||||
|
2003
|
2004
|
|||||||||||
|
Assets
|
||||||||||||
|
Current assets:
|
||||||||||||
|
Cash and cash equivalents
|
$ | 8,925 | $ | 42,602 | ||||||||
|
Restricted cash
|
— | 10,395 | ||||||||||
|
Receivables, net
|
19,856 | 20,124 | ||||||||||
|
Deferred tax asset
|
875 | 785 | ||||||||||
|
Prepaid expenses and other assets
|
2,163 | 3,222 | ||||||||||
|
|
|
|
||||||||||
|
Total current assets
|
31,819 | 77,128 | ||||||||||
|
Property and equipment, net
|
27,446 | 36,925 | ||||||||||
|
Investment in land
|
71 | 71 | ||||||||||
|
Goodwill
|
20,579 | 20,579 | ||||||||||
|
Deferred finance fees, net
|
1,300 | — | ||||||||||
|
Deferred tax asset
|
155 | — | ||||||||||
|
Other assets
|
2,729 | 1,613 | ||||||||||
|
|
|
|
||||||||||
|
Total assets
|
$ | 84,099 | $ | 136,316 | ||||||||
|
|
|
|
||||||||||
|
Liabilities,
Redeemable Preferred Stock and Shareholders’ Equity (Deficit)
|
||||||||||||
|
Current liabilities:
|
||||||||||||
|
Accounts payable and accrued expenses
|
$ | 25,005 | $ | 32,816 | ||||||||
|
Current portion of long-term debt and capital leases
|
3,860 | 37 | ||||||||||
|
Deferred revenue
|
25,692 | 34,523 | ||||||||||
|
Accrued tool sets
|
3,523 | 2,852 | ||||||||||
|
Other current liabilities
|
2,979 | 288 | ||||||||||
|
|
|
|
||||||||||
|
Total current liabilities
|
61,059 | 70,516 | ||||||||||
|
Long-term debt and capital leases
|
28,014 | 6 | ||||||||||
|
Mandatory redeemable preferred stock (redemption value of $25,941 at September
30, 2003)
|
25,462 | — | ||||||||||
|
Distributions payable to shareholders
|
71 | 71 | ||||||||||
|
Deferred tax liability
|
— | 3,054 | ||||||||||
|
Other liabilities
|
5,484 | 7,644 | ||||||||||
|
|
|
|
||||||||||
|
Total liabilities
|
120,090 | 81,291 | ||||||||||
|
|
|
|
||||||||||
|
Commitments and contingencies (Note 12)
|
||||||||||||
|
Preferred stock, $.0001 par value, 10,000,000 shares authorized; 0 shares
issued and outstanding
|
— | — | ||||||||||
|
|
|
|
||||||||||
|
Redeemable convertible preferred stock, 2,357 shares issued and outstanding at
September 30, 2003 and 0 shares issued and outstanding at September 30, 2004
(redemption value of $50,618 at September 30, 2003)
|
47,161 | — | ||||||||||
|
|
|
|
||||||||||
|
Shareholders’ equity (deficit):
|
||||||||||||
|
Common stock, $.0001 par value, 100,000,000 shares authorized, 13,936,295
shares issued and outstanding at September 30, 2003 and 27,781,068 shares
issued outstanding at September 30, 2004
|
1 | 1 | ||||||||||
|
Paid-in capital
|
— | 110,105 | ||||||||||
|
Accumulated deficit
|
(83,125 | ) | (55,081 | ) | ||||||||
|
Subscriptions receivable
|
(28 | ) | — | |||||||||
|
|
|
|
||||||||||
|
Total
shareholders’ equity (deficit)
|
(83,152 | ) | 55,025 | |||||||||
|
|
|
|
||||||||||
|
Total liabilities, redeemable preferred stock and shareholders’equity (deficit)
|
$ | 84,099 | $ | 136,316 | ||||||||
|
|
|
|
||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
|
Year Ended September 30,
|
||||||||||||
|
2002
|
2003
|
2004
|
||||||||||
|
Net Revenues
|
$ | 144,372 | $ | 196,495 | $ | 255,149 | ||||||
|
Operating expenses:
|
||||||||||||
|
Educational services and facilities
|
70,813 | 92,443 | 116,730 | |||||||||
|
Selling, general and administrative
|
51,541 | 67,896 | 88,297 | |||||||||
|
|
|
|
|
|||||||||
|
Total operating expenses
|
122,354 | 160,339 | 205,027 | |||||||||
|
|
|
|
|
|||||||||
|
Income from operations
|
22,018 | 36,156 | 50,122 | |||||||||
|
|
|
|
|
|||||||||
|
Other expense (income):
|
||||||||||||
|
Interest income
|
(508 | ) | (475 | ) | (328 | ) | ||||||
|
Interest expense
|
6,213 | 3,601 | 1,263 | |||||||||
|
Interest expense related parties
|
549 | 532 | 96 | |||||||||
|
Other expense (income)
|
847 | (234 | ) | 1,134 | ||||||||
|
|
|
|
|
|||||||||
|
Total other expense
|
7,101 | 3,424 | 2,165 | |||||||||
|
|
|
|
|
|||||||||
|
Income before income taxes
|
14,917 | 32,732 | 47,957 | |||||||||
|
Income tax expense
|
5,228 | 12,353 | 19,137 | |||||||||
|
|
|
|
|
|||||||||
|
Net income
|
9,689 | 20,379 | 28,820 | |||||||||
|
Preferred stock dividends
|
(2,872 | ) | (6,413 | ) | (776 | ) | ||||||
|
|
|
|
|
|||||||||
|
Net income available to common shareholders
|
$ | 6,817 | $ | 13,966 | $ | 28,044 | ||||||
|
|
|
|
|
|||||||||
|
Earning per
share - basic:
|
||||||||||||
|
Net income
per share - basic
|
$ | 0.51 | $ | 1.03 | $ | 1.14 | ||||||
|
|
|
|
|
|||||||||
|
Net income
per share - diluted
|
$ | 0.44 | $ | 0.79 | $ | 1.04 | ||||||
|
|
|
|
|
|||||||||
|
Weighted average number of common shares outstanding:
|
||||||||||||
|
Basic
|
13,402 | 13,543 | 24,659 | |||||||||
|
|
|
|
|
|||||||||
|
Diluted
|
20,244 | 25,051 | 27,585 | |||||||||
|
|
|
|
|
|||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands, except per share amounts)
| Total | ||||||||||||||||||||||||||||
| Common Stock | Paid-in | Treasury | Accumulated | Subscriptions | Shareholders’ | |||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Stock
|
Deficit
|
Receivable
|
Equity (Deficit)
|
||||||||||||||||||||||
|
Balance at September 30, 2001
|
13,466 | $ | 1 | $ | — | $ | (15 | ) | $ | (102,476 | ) | $ | (486 | ) | $ | (102,976 | ) | |||||||||||
|
Net income
|
— | — | — | — | 9,689 | — | 9,689 | |||||||||||||||||||||
|
Dividends on preferred stock
|
— | — | — | — | (2,872 | ) | — | (2,872 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Balance at September 30, 2002
|
13,466 | 1 | — | (15 | ) | (95,659 | ) | (486 | ) | (96,159 | ) | |||||||||||||||||
|
Net income
|
— | — | — | — | 20,379 | — | 20,379 | |||||||||||||||||||||
|
Exercise of stock options
|
470 | — | 108 | — | — | (108 | ) | — | ||||||||||||||||||||
|
Proceeds paid on subscription receivable
|
— | — | — | — | — | 566 | 566 | |||||||||||||||||||||
|
Tax benefit from employee stock option plan
|
— | — | 1,287 | — | — | — | 1,287 | |||||||||||||||||||||
|
Stock option compensation recorded
|
— | — | 63 | — | — | — | 63 | |||||||||||||||||||||
|
Dividends on preferred stock
|
— | — | (1,458 | ) | — | (2,830 | ) | — | (4,288 | ) | ||||||||||||||||||
|
Cash dividends:
|
||||||||||||||||||||||||||||
|
Preferred Series D @ $901 .495 per share
|
— | — | — | — | (2,125 | ) | — | (2,125 | ) | |||||||||||||||||||
|
Common stock @ $0.207 per share
|
— | — | — | — | (2,875 | ) | — | (2,875 | ) | |||||||||||||||||||
|
Retirement of treasury stock
|
(63 | ) | — | — | 15 | (15 | ) | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Balance at September 30, 2003
|
13,873 | 1 | — | — | (83,125 | ) | (28 | ) | (83,152 | ) | ||||||||||||||||||
|
Net income
|
— | — | — | — | 28,820 | — | 28,820 | |||||||||||||||||||||
|
Issuance of common stock, net
|
3,250 | — | 58,977 | — | — | — | 58,977 | |||||||||||||||||||||
|
Conversion of preferred stock
|
10,571 | — | 48,540 | — | — | — | 48,540 | |||||||||||||||||||||
|
Proceeds received on subscription receivable
|
— | — | — | — | — | 28 | 28 | |||||||||||||||||||||
|
Issuance of common stock under employee
plans
|
82 | — | 1,285 | — | — | — | 1,285 | |||||||||||||||||||||
|
Tax benefit from employee stock plans
|
— | — | 495 | — | — | — | 495 | |||||||||||||||||||||
|
Stock compensation
|
5 | — | 808 | — | — | — | 808 | |||||||||||||||||||||
|
Dividends on preferred stock
|
— | — | — | — | (776 | ) | — | (776 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Balance at September 30, 2004
|
27,781 | $ | 1 | $ | 110,105 | $ | — | $ | (55,081 | ) | $ | — | $ | 55,025 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
Year Ended September 30,
|
||||||||||||
|
2002
|
2003
|
2004
|
||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$ | 9,689 | $ | 20,379 | $ | 28,820 | ||||||
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
||||||||||||
|
Depreciation and amortization
|
4,948 | 6,382 | 8,812 | |||||||||
|
Bad debt expense
|
2,681 | 2,470 | 2,295 | |||||||||
|
Tax benefit from option exercise
|
— | 1,287 | 495 | |||||||||
|
Stock compensation
|
— | 63 | 808 | |||||||||
|
Deferred income taxes
|
2,045 | 484 | 3,299 | |||||||||
|
Write-off of deferred financing fees
|
970 | 467 | 1,099 | |||||||||
|
Loss on sale of property and equipment
|
232 | 122 | 325 | |||||||||
|
Preferred stock interest expense
|
— | 292 | 265 | |||||||||
|
Gain on early retirement of debt
|
— | (701 | ) | — | ||||||||
|
Changes in assets and liabilities:
|
||||||||||||
|
Restricted cash
|
— | — | (10,395 | ) | ||||||||
|
Receivables
|
(4,910 | ) | (9,799 | ) | (2,563 | ) | ||||||
|
Prepaid expenses and other assets
|
(278 | ) | (108 | ) | (1,059 | ) | ||||||
|
Other assets
|
1,120 | (2,012 | ) | 1,496 | ||||||||
|
Accounts payable and accrued expenses
|
619 | 8,184 | 6,578 | |||||||||
|
Deferred revenue
|
5,350 | 5,265 | 8,831 | |||||||||
|
Accrued tool sets and other current liabilities
|
(2,143 | ) | 2,564 | (3,362 | ) | |||||||
|
Other liabilities
|
148 | 1,077 | 1,917 | |||||||||
|
|
|
|
|
|||||||||
|
Net cash provided by operating activities
|
20,471 | 36,416 | 47,661 | |||||||||
|
|
|
|
|
|||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Purchase of property and equipment
|
(11,772 | ) | (11,977 | ) | (16,975 | ) | ||||||
|
Proceeds from sale of property and equipment
|
5,869 | 20 | 36 | |||||||||
|
Proceeds from the sale of land
|
— | 303 | — | |||||||||
|
Proceeds from sale of securities
|
123 | — | — | |||||||||
|
|
|
|
|
|||||||||
|
Net cash used in investing activities
|
(5,780 | ) | (11,654 | ) | (16,939 | ) | ||||||
|
|
|
|
|
|||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Proceeds from issuance of common stock, net of issuance costs of
$7,648
|
— | — | 58,977 | |||||||||
|
Proceeds
from issuance of preferred stock, net of issuance costs of $3,457
|
42,043 | — | — | |||||||||
|
Proceeds from long-term debt borrowings, net of issuance costs of
$2,462
|
16,819 | — | — | |||||||||
|
Proceeds from issuance of common stock under employee plans
|
— | — | 1,285 | |||||||||
|
Repayment of long-term debt borrowings
|
(39,952 | ) | (18,017 | ) | (31,831 | ) | ||||||
|
Repayment of subordinated debt
|
(23,400 | ) | (10,310 | ) | — | |||||||
|
Distribution to stockholders
|
— | (303 | ) | — | ||||||||
|
Redemption of mandatory redeemable preferred stock
|
— | — | (12,946 | ) | ||||||||
|
Dividends paid
|
— | (5,000 | ) | (12,558 | ) | |||||||
|
Proceeds from subscriptions receivable
|
— | 4,239 | 28 | |||||||||
|
|
|
|
|
|||||||||
|
Net cash (used in) provided by financing activities
|
(4,490 | ) | (29,391 | ) | 2,955 | |||||||
|
|
|
|
|
|||||||||
|
Net increase in cash and cash equivalents
|
10,201 | (4,629 | ) | 33,677 | ||||||||
|
Cash and cash equivalents, beginning of year
|
3,353 | 13,554 | 8,925 | |||||||||
|
|
|
|
|
|||||||||
|
Cash and cash equivalents, end of year
|
$ | 13,554 | $ | 8,925 | $ | 42,602 | ||||||
|
|
|
|
|
|||||||||
The accompanying notes are an integral part of the these consolidated financial statements.
F-6
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS, continued
(In thousands)
|
Year Ended September 30,
|
||||||||||||
|
2002
|
2003
|
2004
|
||||||||||
|
Supplemental Disclosure of Cash Flow Information:
|
||||||||||||
|
Interest Paid
|
$ | 6,831 | $ | 4,744 | $ | 1,219 | ||||||
|
|
|
|
|
|||||||||
|
Debt issued in lieu of interest
|
$ | 395 | $ | — | $ | — | ||||||
|
|
|
|
|
|||||||||
|
Preferred dividends accrued but unpaid
|
$ | 2,872 | $ | 4,288 | $ | — | ||||||
|
|
|
|
|
|||||||||
|
Taxes paid (received)
|
$ | (3,088 | ) | $ | 8,177 | $ | 18,037 | |||||
|
|
|
|
|
|||||||||
|
Training equipment obtained in exchange for services
|
$ | 945 | $ | 1,475 | $ | 1,496 | ||||||
|
|
|
|
|
|||||||||
|
Construction in progress financed by construction liability
|
$ | 2,064 | $ | — | $ | — | ||||||
|
|
|
|
|
|||||||||
|
Construction liability recognized as operating lease
|
$ | — | $ | (2,064 | ) | $ | — | |||||
|
|
|
|
|
|||||||||
|
Exercise of stock options
|
$ | — | $ | 108 | $ | — | ||||||
|
|
|
|
|
|||||||||
|
Exchange of preferred stock for common stock
|
$ | — | $ | — | $ | 48,540 | ||||||
|
|
|
|
|
|||||||||
The accompanying notes are an integral part of the these consolidated financial statements.
F-7
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business
Business Description
We are a provider of post-secondary education for students seeking careers
as professional automotive, diesel, collision repair, motorcycle and marine
technicians. We offer undergraduate degree, diploma and certificate programs
at eight campuses and manufacturer-sponsored advanced programs at 22 dedicated
training centers. We work closely with leading original equipment
manufacturers (OEMs) in the automotive, diesel, motorcycle and marine
industries to understand their needs for qualified service professionals.
The accompanying consolidated financial statements include all the
accounts of Universal Technical Institute, Inc. (a Delaware corporation) and
each of its wholly-owned subsidiaries (collectively “we” and “our”). All
significant intercompany accounts and transactions have been eliminated.
On November 11, 2003 we approved a 4,350-to-1 stock split of our common
shares to be effective immediately prior to the consummation of an initial
public offering which occurred on December 17, 2003. All share and per share
amounts in the financial statements have been adjusted to reflect the stock
split.
2. Government Regulation and Financial Aid
Our schools and students participate in a variety of government-sponsored
financial aid programs that assist students in paying the cost of their
education. The largest source of such support is the federal programs of
student financial assistance under Title IV of the Higher Education Act of
1965, as amended, commonly referred to as the Title IV Programs, which are
administered by the U.S. Department of Education (ED). During the years ended
September 30, 2002, 2003 and 2004, approximately 65%, 68%, and 72%,
respectively, of our net revenues were indirectly derived from funds
distributed under Title IV Programs.
To participate in Title IV Programs, a school must be authorized to offer
its programs of instruction by relevant state education agencies, be accredited
by an accrediting commission recognized by ED and be certified as an eligible
institution by ED. For this reason, our schools are subject to extensive
regulatory requirements imposed by all of these entities. After our schools
receive the required certifications by the appropriate entities, our schools
must demonstrate their compliance with the ED regulations of the Title IV
Programs on an ongoing basis. Included in these regulations is the requirement
that we must satisfy specific standards of financial responsibility. ED
evaluates institutions for compliance with these standards each year, based
upon the institutions’ annual audited financial statements, as well as
following a change in ownership of the institution. Under regulations which
took effect July 1, 1998, ED calculates the institution’s composite score for
financial responsibility based on its (i) equity ratio, which measures the
institution’s capital resources, ability to borrow and financial viability;
(ii) primary reserve ratio, which measures the institution’s ability to support
current operations from expendable resources; and (iii) net income ratio, which
measures the institution’s ability to operate at a profit.
An institution that does not meet ED’s minimum composite score
requirements may establish its financial responsibility as follows:
• by posting a letter of credit in favor of ED in an amount up to 50%
of the Title IV Program funds received by the institution during the
institution’s most recently completed fiscal year;
F-8
(In thousands, except share and per share amounts)
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
| • | by posting a letter of credit in an amount equal to at least 10% of the Title IV Program funds received during the institution’s most recent fiscal year, accepting provisional certification, complying with additional ED monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than ED’s standard advance funding arrangement; or | |||
| • | by complying with additional ED monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than ED’s standard advance funding arrangement. | |||
Based on its review of our financial statements for our fiscal years 2001, 2002 and 2003, ED determined that we did not have a composite score of 1.5 or higher. Consequently, since November 2000, we have been required to post a letter of credit on behalf of our institutions in favor of ED and to accept provisional certification and additional ED reporting and monitoring procedures. At September 30, 2004, we have an outstanding letter of credit in the amount of $9.9 million, representing approximately 10% of the total Title IV Program funds received by our institutions in the year ended September 30, 2002, as calculated by ED. This letter of credit was increased to $14.4 million in November 2004 which is attributable to increased funds received under Title IV Programs during our 2003 fiscal year. Additionally, we are required to credit students’ accounts before requesting and receiving Title IV Program funds and two of our institutions are required to file additional reports with ED regarding their receipt of Title IV Program funds. Based upon our financial position at September 30, 2004, our composite score is 1.5 and we believe we will meet the minimum requirement for ED. However, a release from the requirement to post a letter of credit is discretionary and we have no assurance that this requirement will be released by ED.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Universal Technical Institute, Inc. and each of its wholly-owned subsidiaries (collectively “we” and “our”). All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition
Net revenues consist primarily of student tuition and fees derived from the programs we provide after reductions are made for guarantees and scholarships we sponsor. Tuition and fee revenue is recognized on a pro-rata (straight-line) basis over the term of the course or program offered. If a student withdraws from a program prior to a specified date, any paid but unearned tuition is refunded. Approximately 95% of our net revenues for the fiscal year ended 2002, 96% of our net revenues for the fiscal year ended 2003 and 97% of our net revenues for the 2004 fiscal year consisted of tuition. Our undergraduate programs are typically designed to be completed in 12 to 18 months and our advanced training programs range from 12 to 27 weeks in duration. We supplement our core revenues with sales of textbooks and program supplies, student housing provided by us and other revenues. Sales of textbooks and program supplies, revenue related to student housing and other revenue are each recognized as sales occur or services are performed. In aggregate, these additional revenues represented less than 10% of total net revenues in each year in the three-year period ended September 30, 2004. Deferred revenue represents the excess of tuition and fee payments received as compared to tuition and a fee earned and is reflected as a current liability in our consolidated financial statements because it is expected to be earned within the twelve-month period immediately following the date on which such liability is reflected in our consolidated financial statements.
F-9
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash represents the amount provided as collateral to the issuer of our letter of credit in favor of ED. At September 30, 2004, we had an outstanding letter of credit to ED in the amount of $9.9 million, for which $10.4 million in cash was held by the issuer as collateral. See additional discussion in Note 8.
Deferred Financing Fees
Costs incurred in connection with obtaining financing are capitalized and amortized using the effective interest method over the term of the related debt. Amortization of deferred financing fees was $1.1 million for the year ended September 30, 2002, $0.5 million for the year ended September 30, 2003 and $0.2 million for the year ended September 30, 2004. In the year ended September 30, 2002, we wrote off approximately $1.0 million in deferred finance costs related to the restructuring of our senior credit facility. In the year ended September 30, 2003, we wrote off approximately $0.5 million in deferred finance costs related to the early repayment of term debt. In the year ended September 30, 2004, we wrote off an additional $0.7 million in deferred financing costs related to the early payoff of term debt and $0.4 million related to the early termination of our credit facility. These amounts have been included in other income and expense for all periods presented.
Property and Equipment
Property, equipment and leasehold improvements are recorded at cost. Amortization of equipment under capital leases and leasehold improvements are calculated using the straight-line method over the remaining useful life of the asset or term of lease, whichever is shorter. Equipment under capital leases totaled $1.8 million with accumulated amortization of $1.5 million at September 30, 2003 and totaled approximately $1.8 million with accumulated amortization of approximately $1.7 million at September 30, 2004. Depreciation is calculated using the straight-line method over the estimated useful life. The estimated useful life of our training, office and computer equipment ranges from 3 years to 7 years. The estimated useful life of our vehicles is 5 years.
Depreciation and amortization related to our property and equipment was $3.8 million for the year ended September 30, 2002, $5.9 million for the year ended September 30, 2003 and $8.6 million for the year ended September 30, 2004. Maintenance and repairs are expensed as incurred.
Software Development Costs
We capitalize certain internal software development costs which are amortized using the straight-line method over the estimated lives of the software (not to exceed 7 years). Capitalized costs include external direct costs of materials and services consumed in developing or obtaining internal-use software and payroll and payroll related costs for employees who are directly associated with the internal software development project. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose. Depreciation related to internally developed software was $0.2 million for the year ended September 30, 2003 and $0.3 million for the year ended September 30, 2004.
F-10
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of the acquired businesses over the fair market value of the acquired net assets. We account for our goodwill in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” In accordance with SFAS No. 142, goodwill is no longer amortized and instead is tested for impairment on an annual basis. We completed our impairment test of goodwill during the fourth quarter of 2003 and 2004 and determined there was no impairment at that time.
Impairment of Long-Lived Assets
We review the carrying value of our long-lived assets and identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In accordance with SFAS No. 144, we assess the potential impairment of property and equipment and identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We evaluate our long-lived assets for impairment by examining estimated future cash flows. These cash flows are evaluated by using weighted probability techniques as well as comparisons of past performance against projections. Assets may also be evaluated by identifying independent market values. If we determine that an asset’s carrying value is impaired, we will record a write-down of the carrying value of the asset and charge the impairment as an operating expense in the period in which the determination is made. For the year ended September 30, 2004, we recognized in accordance with SFAS No. 144, a charge of $1.2 million related to the write-off of leasehold improvements for a campus we relocated in September 2004.
Advertising Costs
Costs related to advertising are expensed as incurred and totaled approximately $5.7 million for the year ended September 30, 2002, $7.9 million for the year ended September 30, 2003 and $12.0 million for the year ended September 30, 2004.
Start-up Costs
Costs related to the start-up of new campuses are expensed as incurred.
Stock-Based Compensation
We account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, and comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — An Amendment of SFAS No. 123,” which defines a fair value based method and addresses common stock and options awarded to employees as well as those awarded to non-employees in exchange for products and services. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123:
F-11
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
|
Years Ending September 30,
|
||||||||||||
|
2002
|
2003
|
2004
|
||||||||||
|
Net income available to common shareholder — as reported
|
$ | 6,817 | $ | 13,966 | $ | 28,044 | ||||||
|
Add stock-based compensation expense included in
reported net income,
net of taxes
|
— | 39 | 371 | |||||||||
|
Deduct total stock-based employee compensation expenses
determined
using the fair value based method, net of taxes
|
(72 | ) | (163 | ) | (1,808 | ) | ||||||
|
|
|
|
|
|||||||||
|
Net income (loss) — pro forma
|
$ | 6,745 | $ | 13,842 | $ | 26,607 | ||||||
|
|
|
|
|
|||||||||
|
Earnings per share — basic — as reported
|
$ | 0.51 | $ | 1.03 | $ | 1.14 | ||||||
|
|
|
|
|
|||||||||
|
Earnings per share — diluted — as reported
|
$ | 0.44 | $ | 0.79 | $ | 1.04 | ||||||
|
|
|
|
|
|||||||||
|
Earnings per shares — basic — pro forma
|
$ | 0.50 | $ | 1.02 | $ | 1.08 | ||||||
|
|
|
|
|
|||||||||
|
Earnings per shares — diluted — pro forma
|
$ | 0.44 | $ | 0.78 | $ | 0.99 | ||||||
|
|
|
|
|
|||||||||
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model. The following table illustrates
the assumptions used for grants made during each of the years ended September
30, 2002, 2003 and 2004.
Years Ending September 30,
2002
2003
2004
5 years
5 years
5 years
5.02
%
3.25
%
3.25
%
—
—
—
—
—
34.48
%
Income Taxes
We account for income taxes as prescribed by SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires recognition of deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. Deferred tax assets are reduced through the establishment of a valuation allowance at the time, based upon available evidence, if it is more likely than not that the deferred tax assets will not be realized.
Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income,” requires that all items that meet the definition of components of comprehensive income be reported in a financial statement for the period in which they are recognized. Components of comprehensive income include revenues, expenses, gains, and losses that under accounting principles generally accepted in the United States are included in comprehensive income but excluded from net income. There are no differences between our net income, as reported, and comprehensive income, as defined for the periods presented.
F-12
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
Concentration of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and receivables.
We place our cash and cash equivalents with high quality financial institutions. Accounts at these institutions are insured by the Federal Deposit Insurance Corporation up to $0.1 million.
We extend credit for tuition and fees to the majority of our students that are in attendance at our campuses. Our credit risk with respect to these accounts receivable is partially mitigated through the students’ participation in federally funded financial aid programs unless students withdraw prior to the receipt by us of Title IV funds for those students. In addition, our remaining tuition receivable is primarily comprised of smaller individual amounts due from students throughout the United States.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, bad debts, healthcare and workers’ compensation costs, bonus costs, tool set costs, fixed assets, long-lived assets including goodwill, income taxes and contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements.
Fair Value of Financial Instruments
The carrying value of cash equivalents, restricted cash, accounts receivable and payable, accrued liabilities and deferred tuition approximates their fair value at September 30, 2003 and 2004 due to the short-term nature of these instruments.
The carrying value of our long-term variable rate debt at September 30, 2003 reflects its fair value as such long-term debt is subject to fees and interest rates, which adjust regularly to reflect current market rates.
The carrying value of the portion of our long-term debt with stated interest rates reflects its fair value based on current rates offered to us on debt with similar maturities and characteristics.
Earnings per Common Share
SFAS No 128, “Earnings Per Share,” requires the dual presentation of basic and diluted earnings per share on the face of the income statement and the disclosure of the reconciliation between the numerators and denominators of basic and diluted earnings per share calculations. The weighted average number of common shares used in determining basic and diluted earnings per share for the years ended September 30, 2002, 2003 and 2004 are as follows:
F-13
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
|
Year Ended September 30,
|
||||||||||||
|
2002
|
2003
|
2004
|
||||||||||
|
Basic earnings per share:
|
||||||||||||
|
Net income
|
$ | 9,689 | $ | 20,379 | $ | 28,820 | ||||||
|
Less preferred stock dividends:
|
||||||||||||
|
Mandatory redeemable preferred stock
|
1,166 | 876 | — | |||||||||
|
Redeemable convertible preferred stock
|
1,706 | 5,537 | 776 | |||||||||
|
|
|
|
|
|||||||||
|
|
2,872 | 6,413 | 776 | |||||||||
|
|
|
|
|
|||||||||
|
Income available to common shareholders
|
$ | 6,817 | $ | 13,966 | $ | 28,044 | ||||||
|
|
|
|
|
|||||||||
|
Weighted average shares outstanding (in thousands)
|
13,402 | 13,543 | 24,659 | |||||||||
|
|
|
|
|
|||||||||
|
Basic earnings per share
|
$ | 0.51 | $ | 1.03 | $ | 1.14 | ||||||
|
|
|
|
|
|||||||||
|
Diluted earnings per share:
|
||||||||||||
|
Income available to common shareholders
|
$ | 6,817 | $ | 13,966 | $ | 28,044 | ||||||
|
Add redeemable convertible preferred
stock dividends
|
1,706 | 5,537 | 776 | |||||||||
|
Add convertible promissory note interest
expense, net of taxes
|
325 | 320 | — | |||||||||
|
|
|
|
|
|||||||||
|
Income available to common shareholders
|
$ | 8,848 | $ | 19,823 | $ | 28,820 | ||||||
|
|
|
|
|
|||||||||
|
Weighted average number of shares (in thousands):
|
||||||||||||
|
Basic shares outstanding
|
13,402 | 13,543 | 24,659 | |||||||||
|
Dilutive effect of:
|
||||||||||||
|
Options related to the purchase of common stock
|
387 | 667 | 614 | |||||||||
|
Convertible promissory note payable
|
1,314 | 587 | — | |||||||||
|
Convertible preferred stock
|
5,141 | 10,254 | 2,312 | |||||||||
|
|
|
|
|
|||||||||
|
Diluted shares outstanding
|
20,244 | 25,051 | 27,585 | |||||||||
|
|
|
|
|
|||||||||
|
Diluted earnings per share
|
$ | 0.44 | $ | 0.79 | $ | 1.04 | ||||||
|
|
|
|
|
|||||||||
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46R (FIN 46R), “Consolidation of Variable Interest Entities, an Interpretation of ARB 51.” FIN 46R replaces the same titled FIN 46 that was issued in January 2003. FIN 46R provides guidance on when certain entities should be consolidated or the interest in those entities should be disclosed by enterprises that do not control them through majority voting interest. Under FIN 46R, entities are required to be consolidated by enterprises that lack majority voting interest when equity investors of those entities have insignificant capital at risk or they lack voting rights, the obligation to absorb expected losses, or the right to receive expected returns. Entities identified with these characteristics are called variable interest entities, or “VIEs,” and the interests that enterprises have in these entities are called variable interests. These interests can derive from certain guarantees, leases, loans or other arrangements that result in risks and rewards that are disproportionate to the voting interests in the entities.
The provisions of FIN 46R must be applied for VIEs created after January 31, 2003 and for variable interests in entities commonly referred to as “special purpose entities.” For all other VIEs, implementation is required by March 31, 2004. Our adoption of FIN 46R did not have a material impact on our consolidated financial statements or disclosures.
F-14
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 123R requires the measurement and recording of the cost of employee services received in exchange for an award of equity instruments to be based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. SFAS No. 123R is effective for all awards granted or modified after June 15, 2005 and provides transition guidance for recording expense related to employee service for the fair value of awards granted prior to the adoption of SFAS No. 123R, and measured in accordance with the previously issued SFAS No. 123 as amended by SFAS No. 148. SFAS No. 123R is effective at the beginning of the first interim or annual reporting period beginning after June 15, 2005. We estimate that the effect of adopting SFAS No. 123R, based upon outstanding equity awards as of September 30, 2004 will be approximately $0.7 million for the fourth quarter of our 2005 fiscal year. This estimate does not include the impact of additional equity awards which may be granted or forfeitures which may occur subsequent to September 30, 2004 and prior to our adoption of SFAS No. 123R.
4. Receivables
Receivables, net consist of the following:
|
September 30,
|
||||||||
|
2003
|
2004
|
|||||||
|
Tuition receivables
|
$ | 21,051 | $ | 19,148 | ||||
|
Other receivables
|
1,126 | 2,997 | ||||||
|
|
|
|
||||||
|
Receivables
|
22,177 | 22,145 | ||||||
|
Less allowance for uncollectible accounts
|
(2,321 | ) | (2,021 | ) | ||||
|
|
|
|
||||||
|
|
$ | 19,856 | $ | 20,124 | ||||
|
|
|
|
||||||
5. Property and Equipment
Property and equipment, net consist of the following:
In September 2004, we entered into an agreement to purchase 24.5 acres of land and a 170,000 square foot building in the Boston suburb of Norwood, Massachusetts. The purchase price is approximately $12.4 million of which approximately $0.6 million was deposited into escrow at September 30, 2004. We anticipate the completion of the land and building purchase during the second quarter of fiscal year 2005.
F-15
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
|
September 30,
|
||||||||
|
2003
|
2004
|
|||||||
|
Accounts payable
|
$ | 5,059 | $ | 6,897 | ||||
|
Accrued compensation and benefits
|
13,507 | 19,332 | ||||||
|
Other accrued expenses
|
6,439 | 6,587 | ||||||
|
|
|
|
||||||
|
|
$ | 25,005 | $ | 32,816 | ||||
|
|
|
|
||||||
7. Investment in Land
We previously acquired land in Phoenix, Arizona for possible future expansion. We did not make formal plans for the development of the land and have placed the land for sale. The land parcels are valued at the lower of cost or market value less selling costs. In connection with our 1999 recapitalization in which we issued additional common stock and our Series C preferred stock, we agreed to distribute any proceeds received from the sale of the land to the participating common shareholders. The carrying value of the land was $0.1 million at September 30, 2003 and September 30, 2004. We also have recorded a corresponding long-term liability in the accompanying Consolidated Balance Sheets to reflect the required distribution payable to shareholders.
During the year ended September 30, 2003, we sold certain parcels of the land held for sale. Total proceeds from the sale were $0.3 million and were distributed to our common shareholders.
8. Revolving Credit Facility
Effective September 30, 2004, we terminated our Second Amendment and Restatement of Credit Agreement (the Old Credit Agreement) which had provided a revolving credit facility of $30.0 million which could be used for working capital needs and the issuance of letters of credit. There were no outstanding borrowings under the revolving credit facility and we had an outstanding letter of credit of $9.9 million issued to the ED at the time of termination. In connection with the termination of the Old Credit Agreement, we provided $10.4 million in cash collateral for the $9.9 million issued and outstanding letter of credit which expired on November 9, 2004. As a result of our termination of the Old Credit Agreement, we recognized approximately $0.4 million in other expense related to the write-off of previously recorded and unamortized deferred financing and administrative fees. As discussed in Note 9, we also recognized a charge of approximately $0.7 million for the write-off of unamortized deferred financing fees associated with the early repayment of term debt.
The Old Credit Agreement was collateralized by a security interest in substantially all the assets of UTI Holdings, Inc., the borrower under the Old Credit Agreement. UTI Holdings, Inc. owns 100% of the capital stock of all of our operating subsidiaries. In July 2003, we amended our credit agreement. The amendment increased our available borrowing under our revolving credit facility from $20.0 million to $30.0 million, increased the limit for letters of credit issued under the revolving credit facility from the greater of (a) $10.0 million and (b) an amount, not exceeding $15.0 million, equal to 10% of Title IV funding received by us to the greater of (x) $15.0 million and (y) an amount, not exceeding $22.5 million, equal to 10% of Title IV funding received by us. The amendment also increased the level of permitted capital expenditures, reduced the interest rate from the alternate base rate plus 1.50% to 2.25% or LIBOR plus 2.75% to 3.5% to the alternate base rate plus 1.25% to 2.25% or LIBOR plus 2.50% to 3.50%, in each case depending on our leverage ratio during the applicable interest period and approved certain restricted cash payments. In connection with the amendment, we were required to repay $15.0 million on our Term B loan facility discussed in Note 9.
F-16
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
In addition to paying interest on outstanding principal under the revolving credit facility, we were required to pay a commitment fee to the lenders under the revolving credit facility with respect to the unused commitments at a rate equal to 0.5% per year, and a risk participation fee equal to 1.5% per year to the issuers of letters of credit under our revolving credit facility with respect to the amount of such letters of credit. Interest was payable quarterly. The alternate base rate was 5.25% at September 30, 2003 and 6.00% at September 30, 2004. LIBOR was 1.188% at September 30, 2003 and 2.196% at September 30, 2004. Issued and outstanding letters of credit were $15.6 million at September 30, 2003 and $9.9 million at September 30, 2004.
The Old Credit Agreement contained certain restrictive covenants, including but not limited to maintenance of certain financial ratios and restrictions on capital expenditures, indebtedness, contingent obligations, investments and certain payments. At September 30, 2003, we were not in compliance with a non-financial covenant related to financial reporting for which we received a waiver of violation from our lender.
On October 26, 2004, we entered into a new credit agreement with a bank for a revolving line of credit in the amount of $30.0 million and a standby letter of credit facility in the amount of $20.0 million. We have the option to issue letters of credit under either the revolving line of credit thereby reducing our borrowing availability or under the standby letter of credit facility. The revolving line of credit is guaranteed by UTI Holdings, Inc. and each of it’s wholly owned subsidiaries. The standby letter of credit facility is collateralized by a cash collateral account equal to the advance rate, as defined, multiplied by the issued and outstanding letters of credit. Effective November 1, 2004, we issued a letter of credit in the amount of $14.4 million and provided cash collateral in the amount of $15.8 million.
The new credit agreement requires interest to be paid quarterly in arrears on the revolving line of credit based upon the lender’s interest rate less 0.50% per annum or LIBOR plus 0.625% per annum, at our option. The revolving line of credit also requires an unused commitment fee payable quarterly in arrears equal to 0.125% per annum. Issued letters of credit bear fees of 0.625% per annum under the revolving line of credit and 0.375% per annum under the standby letter of credit facility. Interest on issued letters of credit is payable quarterly in advance.
The new credit agreement contains certain restrictive covenants, including but not limited to maintenance of certain financial ratios and restrictions on indebtedness, contingent obligations and investments. In addition, the credit agreement requires that we maintain our accreditation and eligibility for receiving Title IV funds.
9. Long-Term Debt and Capital Leases
In conjunction with our initial public offering, we entered into an amendment to the Old Credit Agreement that provided that the net proceeds received from our initial public offering be applied on a pro-rata basis against all remaining scheduled payment installments on the term notes then outstanding under the Old Credit Agreement. On December 23, 2003, we used proceeds received from our initial public offering to repay all of the then outstanding term debt totaling $31.5 million. In addition, as a result of the early payment of term debt, we recognized a charge of approximately $0.7 million related to the write off of unamortized deferred financing fees. As discussed in Note 8, the Old Credit Agreement was terminated effective September 30, 2004, at which time we recognized an additional charge of approximately $0.4 million related to the write-off of remaining unamortized deferred financing and administrative fees.
Prior to the repayment of term debt with the proceeds from our initial public offering, we had two term notes outstanding. Interest on these term notes was required to be paid quarterly. As discussed in Note 8, in July 2003, we amended our credit agreement. Among other things, the amendment reduced the interest rate on our Term A loan from the alternate base rate plus 1.50% to 2.25% or LIBOR plus 2.75% to 3.5% to the alternate base rate plus 1.25% to 2.25% or LIBOR plus 2.50% to 3.50% and reduced the interest rate on our Term B loan from the alternate base rate plus 2.0% to
F-17
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
2.75% or LIBOR plus 3.25% to 4.0% to the alternate base rate plus 1.75% to 2.75% or LIBOR plus 3.0% to 4.0%, in each case depending on our leverage ratio during the applicable interest period. In connection with the amendment, we were required to repay $15.0 million on our Term B loan facility. Our Term A loan had a scheduled maturity of March 31, 2007 and our Term B loan had a scheduled maturity of March 31, 2009. There were no penalties for early repayment of our Term A and Term B loan facilities.
Borrowings under our Term A and Term B loan facilities were collateralized by a security interest in substantially all the assets of UTI Holdings, Inc., the borrower under the Old Credit Agreement. UTI Holdings, Inc. owns 100% of the capital stock of all our operating subsidiaries.
Our alternate base rate was 5.25% at September 30, 2003 and 6.00% at September 30, 2004. The LIBOR rate was 1.188% at September 30, 2003 and 2.196% at September 30, 2004. As discussed in Note 8, the Old Credit Agreement contained certain restrictive covenants. At September 30, 2003, we were not in compliance with a non-financial covenant related to financial reporting, for which we received a waiver from our lender.
We have various capital leases related to training equipment utilized in our campus classrooms and office equipment. These capital leases bear interest at rates from 6.0% to 14.2% and are collateralized by the underlying equipment.
Long-term debt and capital leases consist of the following:
Future minimum lease payments under our capital lease agreements are as follows:
F-18
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
10. Income Taxes
The components of income tax expense are as follows:
|
Year Ended September 30,
|
||||||||||||
|
2002
|
2003
|
2004
|
||||||||||
|
Current expense
|
$ | 1,964 | $ | 10,582 | $ | 15,343 | ||||||
|
Deferred expense
|
3,264 | 484 | 3,299 | |||||||||
|
Charge in lieu of taxes attributable to stock option exercise
|
— | 1,287 | 495 | |||||||||
|
|
|
|
|
|||||||||
|
Total provision for income taxes
|
$ | 5,228 | $ | 12,353 | $ | 19,137 | ||||||
|
|
|
|
|
|||||||||
The income tax provision differs from the tax that would result from application of the statutory federal tax rate. The reasons for the differences are as follows:
The components of the deferred tax assets (liabilities) are recorded in the accompanying Consolidated Balance Sheets as follows:
F-19
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
|
September 30,
|
||||||||
|
2003
|
2004
|
|||||||
|
Gross deferred tax liabilities:
|
||||||||
|
Amortization of goodwill and intangibles
|
(2,292 | ) | (3,259 | ) | ||||
|
Depreciation and amortization of property and
equipment
|
(2,570 | ) | (5,525 | ) | ||||
|
Other
|
(317 | ) | (668 | ) | ||||
|
|
|
|
||||||
|
Total gross deferred tax liabilities
|
(5,179 | ) | (9,452 | ) | ||||
|
|
|
|
||||||
|
Net deferred tax asset (liability)
|
$ | 1,030 | $ | (2,269 | ) | |||
|
|
|
|
||||||
The deferred tax assets (liabilities) are reflected in the accompanying Consolidated Balance Sheets as follows:
|
September 30,
|
||||||||
|
2003
|
2004
|
|||||||
|
Current deferred tax assets, net
|
$ | 875 | $ | 785 | ||||
|
Noncurrent deferred tax assets (liabilities), net
|
155 | (3,054 | ) | |||||
|
|
|
|
||||||
|
Net deferred tax asset (liability)
|
$ | 1,030 | $ | (2,269 | ) | |||
|
|
|
|
||||||
At September 30, 2004, we had a valuation allowance of $16.1 million to reduce our deferred tax assets to an amount that management believes is more likely than not to be realized. The valuation allowance primarily relates to a deferred tax asset arising from a capital loss carryforward from the sale of a discontinued business. The utilization of capital loss carryforwards may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. Our capital loss carryforward expires in 2005.
11. Noncompete and Consulting Agreements
Our management consulting agreement with certain private equity investors terminated with the consummation of our initial public offering in December 2003. We have recorded and paid management consulting fees of $0.5 million for the year ended September 30, 2002, $0.8 million for the year ended September 30, 2003 and $0.2 million for the year ended September 30, 2004.
12. Commitments and Contingencies
Operating Leases
We lease our facilities and certain equipment under non-cancelable operating leases, some of which contain renewal options, escalation clauses and requirements to pay other fees associated with the leases. We recognize rent expense on a straight line basis. Two of our campus facilities are leased from a related party. Future minimum rental commitments at September 30, 2004 for all non-cancelable operating leases for each of the years ending September 30 are as follows:
F-20
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
|
Year ending September 30,
|
||||
|
2005
|
$ | 17,237 | ||
|
2006
|
17,147 | |||
|
2007
|
16,929 | |||
|
2008
|
16,811 | |||
|
2009
|
16,654 | |||
|
Thereafter
|
144,529 | |||
|
|
|
|||
|
|
$ | 229,307 | ||
|
|
|
Rent expense for operating leases was approximately $8.6 million, $11.0 million and $14.3 million for the years ended September 30, 2002, 2003 and 2004, respectively. Rent paid to related parties was approximately $2.3 million, $1.7 million, and $1.9 million for the years ended September 30, 2002, 2003 and 2004, respectively.
In October 2004, we entered into a long-term, real property lease agreement for a 22.5 acre parcel of land in Sacramento, California. A new undergraduate automotive technician training campus is planned to be constructed on the land. The initial term of the lease is fifty years with two renewal periods of ten years each. Lease payments begin upon the earlier of our occupancy of the planned facility or September 1, 2005 with minimum lease payments of approximately $0.4 million per annum adjusted every three years during the initial term based upon the consumer price index. Minimum lease payments in each of the renewal periods will be based upon the then current fair market value of the real property. We expect to open the campus in the first half of our 2006 fiscal year.
Licensing Agreement
In 1997, we entered into a licensing agreement that gives us the right to use certain materials and trademarks in the development of our courses and delivery of services on our campuses. The agreement was amended in May 2004. Under the terms of the amended license agreement, we are committed to pay royalties based upon a flat per student fee for students who elect and attend the licensed program. Minimum payments are required as follows: $0.2 million for calendar years 2002 and 2003; $0.3 million for calendar years 2004 and 2005; $0.4 million for calendar year 2006; and $0.5 million for calendar year 2007. A license fee is also payable based upon a percentage of net sales related to the sale of any product which bears the licensed trademark. In addition, we are required to pay a minimum marketing and advertising fee for which in return we receive the right to utilize certain advertising space in the licensor’s published periodicals. The minimum marketing and advertising fee is as follows: $0.3 million for calendar years 2002 and 2003; $0.4 million for the calendar year 2004; $0.6 million for calendar year 2005 and 2006; and $0.7 million for calendar year 2007. The agreement expires December 31, 2007.
In 1999, we entered into a licensing agreement that gives us the right to use certain materials and trademarks in the development of our courses. Under the terms of the agreement, we are required to pay a flat per student fee for each three week phase a student completes of the total 3 phases offered in connection with this license agreement. There are no minimum license fees required to be paid. The agreement terminates upon the written notice of either party providing not less than six months notification of intent to terminate. In addition, the agreement may be terminated by the licensor after notification to us of a contractual breach if such breach remains uncured for more than 30 days.
In 2001, we entered into a licensing agreement that gives us the right to use certain trademarks in connection with the development and operation of our campuses and courses. We are committed to pay royalties based upon net revenue, as defined in the agreement, commencing in calendar year 2001 and ending upon the expiration of the agreement in calendar year 2006. The agreement requires minimum royalty payments of $0.4 million in calendar year 2002 and $0.5 million each year thereafter.
F-21
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
Vendor Relationship
In 1998, we entered into an agreement with Snap-on Tools. Our agreement with Snap-on Tools was renewed in December 2004 and expires in January 2009. The agreement provides that we may purchase promotional tool kits for our students from Snap-on Tools at a discount from their list price. In addition, we earn credits that are redeemable for equipment we use in our business. Credits are earned on our purchases as well as purchases made by students enrolled at our campuses. We have agreed to grant Snap-on Tools exclusive access to our campuses and display advertising as well as to use Snap-on tools to train our students. The credits earned under this agreement may be redeemed for Snap-on tools or equipment at the full retail list price, which is more than we would be required to pay using cash.
Students are each promised the receipt of a tool kit upon completing certain coursework. The cost of the tool kits (net of the credit) is accrued during the time period in which the students begin attending school until they have reached the phase in which the promotional tool kits are provided.
As we have opened new campuses, Snap-on has historically advanced us credits for the purchase of their tools or equipment that support our new campus growth. At September 30, 2003, our net Snap-on liability resulting from using credits in excess of credits earned was $0.7 million, and at September 30, 2004 that liability was $1.1 million.
Upon termination of the agreement, we continue to earn credits relative to promotional tool kits we purchase or additional tools our active students purchase. We continue to earn these credits until a tool kit is provided to the last student eligible under the agreement.
Student Loan Guarantee
In April 2004, we entered into an agreement with a third party lender to provide an alternative loan option to our students who do not qualify for other available student loan options we provide. Under the terms of the agreement, we are required to provide a guarantee equal to 40% of the loans issued under this program. Under the terms of the agreement we have a funding limit of $10.0 million through June 30, 2005. We are required to pay the guarantee amount to the lender twice monthly based upon loan proceeds received. The funding of our guarantee for loans issued under this program may be used for the full and prompt payment of 100% of outstanding principle, accrued interest and other charges and fees for loans that default, as defined in the agreement.
In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Indebtedness of Others” (FIN 45). This interpretation elaborates on the accounting for and disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees it has issued. In accordance with FIN 45, we have recognized a liability for the full 40% guarantee based upon the present value of expected cash flows under this guarantee agreement because similar loan programs which we have not guaranteed experience a historical default rate greater than 40%. Accordingly, for the year ended September 30, 2004 we have recognized a guarantee liability of $129 which is recognized as a reduction of tuition revenue over the matriculation of the student through their program. At September 30, 2004, the unfunded portion of the guarantee liability was $15 and is classified as a current liability in the accompanying balance sheet.
Executive Employment Agreements
We have entered into employment contracts with key executives that provide for the continuation of salary if terminated for reasons other than cause, as defined in the agreements. At September 30, 2004, the future employment
F-22
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
contract commitments for such employees were approximately $1.0 million for the fiscal year ending September 30, 2005 and approximately $0.7 million for the fiscal year ending 2006.
Change in Control Agreements
We have entered into severance agreements with key executives that provide for the continuation of salary if the employees are terminated for any reason within twelve months subsequent to a change in corporate structure that results in a change in control. Under the terms of the severance agreements, these employees are entitled to twelve months salary at their highest rate during the previous twelve months. In addition, the employees are eligible to receive their unearned portion of the target bonus in effect in the year termination occurs and would be eligible to receive medical benefits under the plans maintained by us at no cost. The agreements expire in 2007 with an automatic one year renewal if notice of intent to terminate is not provided by us 90 days prior to expiration. At September 30, 2004, the future employment contract commitments for such employees were approximately $1.0 million.
Surety Bonds
Each of our campuses must be authorized by the applicable state education agency of the state in which the campus is located in order to operate and to grant degrees, diplomas or certificates to its students. Our campuses are subject to extensive, ongoing regulation by each of these states. In addition, our campuses are required to be authorized by the applicable state education agencies of certain other states in which our campuses recruit students. We are required to post surety bonds on behalf of our campuses and education representatives with multiple states to maintain authorization to conduct our business. At September 30, 2004, we have posted surety bonds in the total amount of approximately $13.3 million.
Legal
In the ordinary conduct of our business, we are periodically subject to lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, results of operations, cash flows or financial condition.
In April 2004, we received a letter on behalf of nine former employees of National Technology Transfer, Inc. (NTT), an entity that we purchased in 1998 and subsequently sold, making a demand for an aggregate payment of approximately $0.3 million and 19,756 shares of our common stock. The claim is based on the assertion that the former owner of NTT promised them such payments upon completion of a public offering of our common stock. We believe the demand for payment is without merit. On May 14, 2004, plaintiffs filed suit in Boulder County, Colorado District Court seeking payment in accordance with their demand. We filed a motion to dismiss due to lack of personal jurisdiction and improper venue. On November 10, 2004, the Colorado District Court dismissed the suit on the basis that the forum selection clause in the agreement, under which plaintiffs claimed they were owed payment, specified that any action arising under the agreement must be brought in state or federal court in Phoenix, Arizona.
13. Employee Benefit Plans
401(k) Plan
We sponsor a defined contribution 401(k) plan, under which our employees elect to withhold specified amounts from their wages to contribute to the plan and we have a fiduciary responsibility with respect to the plan. The plan
F-23
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
provides for matching a portion of employees’ contributions at management’s discretion. All contributions and matches by us are invested at the direction of the employee in one or more mutual funds or cash. We made contributions totaling approximately $0.5 million for the year ended September 30, 2002, $0.7 million for the year ended September 30, 2003 and $0.9 million for the year ended September 30, 2004.
Deferred Compensation Plan
We have entered into deferred compensation agreements with six of our employees, providing for the payment of deferred compensation to each employee in the event that the employee is no longer employed by us. Under each agreement, the employee shall receive an amount equal to the compensation the employee would have earned if the employee had repeated the employment performance of the prior twelve months. We will pay the deferred compensation in a lump sum or over the period in which the employee would typically have earned the compensation had the employee been actively employed, at our option. Our commitment under the deferred compensation agreements was approximately $1.5 million as of September 30, 2003 and approximately $1.2 million as of September 30, 2004.
Executive Benefit Plan
We sponsored the Universal Technical Institute Executive Benefit Plan.
The Plan provided for the annual deferral of all or part of certain executive
bonuses into the plan as well as amounts withheld from executives’ wages, where
applicable. We could elect to match contributions on an annual basis. All
amounts were fully vested when deferred and matched. Effective September 30,
2004, the Plan was terminated and approximately $0.8 million in Plan liabilities were
extinguished at that time. In October, 2004, the remaining Plan liability of
approximately $0.5 million was extinguished through the distribution of
remaining Plan assets of $0.3 million and $0.2 million in cash provided by us.
The obligations under the Plan and assets held by the Plan for each of the
fiscal years ending September 30, are reflected in the accompanying balance
sheet as follows:
2003
2004
$
249
$
—
$
—
$
262
$
888
$
—
$
—
$
460
14. Common Stock
Holders of our common stock shall be entitled to receive dividends when and as declared by the board of directors. In September 2003, we paid a dividend in the aggregate of $5.0 million to our common stockholders and the holders of our series D preferred stock. The common stock is not redeemable. The holder of each share of common stock has the right to one vote per share owned. At September 30, 2003, we had outstanding subscriptions receivable of $28.
On December 17, 2003, we sold approximately 3.3 million shares of our common stock in an initial public offering for approximately $59.0 million in net cash proceeds, after deducting underwriting commission and offering expenses of approximately $7.7 million. On December 22, 2003, we consummated an exchange offer pursuant to which we offered to exchange the outstanding shares of our series A, series B and series C preferred stock for shares of our common stock at an exchange price equal to our initial public offering price. An aggregate total of approximately 6,500 shares of series A, series B and series C preferred stock were presented for exchange, representing a face value of
F-24
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
approximately $6.5 million, and we issued an aggregate of approximately 0.3 million shares of our common stock. In addition, our series D preferred stock automatically converted to common stock upon the consummation of our initial public offering. Accordingly, the approximately 2,357 shares of series D preferred stock representing a face value of $45.5 million were converted into approximately 10.3 million shares of common stock.
The $59.0 million in net proceeds received from the sale of our common stock was used to repay all our outstanding term debt totaling $31.5 million, redeem the remaining series A, series B and series C preferred stock totaling $12.9 million and pay the accrued dividends related to the series A, series B, series C and series D preferred stock totaling $12.6 million.
Upon the consummation of our initial public offering, our Amended and Restated Certificate of Incorporation became effective. The Amended and Restated Certificate of Incorporation increased the number of authorized common shares from approximately 37.0 million shares to 100.0 million shares and increased the number of authorized preferred shares from 25,000 shares to 10.0 million shares. In addition, our board of directors and shareholders approved the Universal Technical Institute, Inc. 2003 Employee Stock Purchase Plan (ESPP) and the Universal Technical Institute, Inc. 2003 Stock Incentive Plan (SIP), effective upon the consummation of our initial public offering, whereby we have reserved 0.3 million shares of common stock for the ESPP and approximately 4.4 million shares of common stock for the SIP.
15. Preferred Stock
At September 30, 2003, preferred stock consisted of the following:
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 changes the accounting and disclosure requirements for certain financial instruments that, under previous guidance, could be classified as equity. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Upon adoption of SFAS No. 150, effective July 1, 2003, we classified as a liability our redeemable convertible preferred stock series A, B and C with a combined carrying value of approximately $25.5 million. Additionally, effective July 1, 2003, the dividends on these securities are included as a component of interest expense instead of preferred stock dividends in the consolidated statement of operations. SFAS
F-25
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
No. 150 prohibits restatement of financial statements for periods prior to adoption, accordingly these changes have been made prospectively.
The following table presents a comparison of net income as if SFAS 150 had been adopted at the beginning of the earliest period presented:
|
Year Ended September 30,
|
||||||||||||
|
2002
|
2003
|
2004
|
||||||||||
|
Reported net income
|
$ | 9,689 | $ | 20,379 | $ | 28,820 | ||||||
|
Less preferred stock dividend for Series A, Series B and
Series C preferred stock
|
1,166 | 876 | — | |||||||||
|
|
|
|
|
|||||||||
|
Adjusted net income
|
8,523 | 19,503 | 28,820 | |||||||||
|
Less preferred stock dividend for Series D preferred stock
|
1,706 | 5,537 | 776 | |||||||||
|
|
|
|
|
|||||||||
|
Net income
available for common shareholders
|
$ | 6,817 | $ | 13,966 | $ | 28,044 | ||||||
|
|
|
|
|
|||||||||
Series A and Series B Preferred Stock
In January 1998, we issued 11,178 shares of series A preferred stock (Series A) and 4,067 shares of series B preferred stock (Series B), each with a par value of $.0001. The Series A and Series B provided for cumulative annual dividends of 6%, whether or not declared, payable on June 30 of each year. The Series A and Series B were subject to mandatory redemption on March 31, 2010 and October 15, 2017, respectively. The liquidation value was equal to one thousand dollars per share. The redemption value was equal to the liquidation value plus accrued and unpaid dividends.
In August 2003, we collected, in its entirety, the subscription receivable from a shareholder and related party with a face value of approximately $3.7 million.
Series C Preferred Stock
In September 1999, in conjunction with a recapitalization transaction, we issued 4,200 shares of series C preferred stock (Series C) with a par value of $.0001. The stock was recorded at its fair value on the date of issuance. The Series C provided for cumulative annual dividends of 6%, whether or not declared, payable on September 30 of each year. The Series C was subject to mandatory redemption on March 31, 2010, The liquidation value was equal to one thousand dollars per share. The redemption value was equal to the liquidation value plus accrued and unpaid dividends.
We owned the UTI Tax-Deferred Trust (UTI Trust), which was set up to facilitate the provision of deferred compensation to our executives (Note 13). The UTI Trust held 386 shares of Series C at September 30, 2002 and 2003. The UTI Tax-Deferred Trust was terminated effective September 30, 2004. The carrying value of these shares, including accrued and unpaid dividends, was $0.5 million at September 2003 and is reflected as a reduction of the total carrying value of Series C in the accompanying Consolidated Balance Sheet.
Series D Preferred Stock
In April 2002, in conjunction with a recapitalization transaction, we issued 2,357 shares of $.0001 par value convertible series D preferred stock (Series D) for aggregate gross proceeds of $45.5 million. The Series D was recorded at $42.0 million, net of its issuance costs of $3.5 million. The Series D provided for annual dividends of 7.5% which were cumulative, whether or not declared, payable on September 30 of each year. Series D was convertible on a one for one basis and redeemable, at the holder’s option, upon a change in control, as more particularly described in the certificate of
F-26
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
designation. In addition, Series D converted automatically into shares of common stock upon a qualified initial public offering as that term was defined in the certificate of designation.
In September 2003, we amended our Certificate of Incorporation to accelerate the payment to our Series D preferred stockholders of their proportional share of common stock dividends that they would receive upon the conversion of the Series D preferred stock into common stock. Accordingly, we distributed additional dividends totaling $2.1 million to our Series D preferred shareholders in September 2003.
Preferred Stock Exchange and Redemption
In November 2003, we offered to all holders of Series A, Series B and Series C preferred stock the ability to exchange their preferred stock for shares of our common stock pursuant to an exchange agreement. The number of shares of common stock that were issued in exchange for each share of the preferred stock was equal to the liquidation value of the preferred stock ($1,000 per share) divided by the initial public offering price of our common stock. On December 22, 2003, we completed our initial public offering with an offering price for our common stock of $20.50 per share. Upon consummation of our initial public offering, we exchanged approximately 6,500 shares of Series A, Series B and Series C preferred stock and 2,357 shares of Series D preferred stock for an aggregate 10.6 million shares of common stock. In addition, we redeemed the remaining Series A, Series B and Series C preferred stock totaling $12.9 million and paid the accrued dividends related to the Series A, Series B, Series C and Series D preferred stock totaling $12.6 million. In connection with the preferred stock redemption, officers of the Company received approximately $5.3 million.
16. Employee Stock Plans
Management Stock Option Plans
We have three stock option plans, which we refer to as the Management 1999 Option Program (1999 Plan), the Management 2002 Option Program (2002 Plan) and the 2003 Stock Incentive Plan (2003 Plan).
On September 30, 1999, we granted non-qualified options to purchase 469,800 shares of common stock at an exercise price of $0.23 per share, the fair market value of our common stock as of that date. All grants were immediately vested. In June 2003, all outstanding options issued under the 1999 Plan were exercised by tender of 6% subscription notes receivable which were repaid in August 2003.
The 2002 Plan was approved and adopted on April 1, 2002 and authorized the issuance of options to purchase 746,022 shares of our common stock. Options to acquire 609,251 shares were granted on April 1, 2002 at an exercise price of $4.40 per share, the fair market value of our common stock as of that date. On February 25, 2003, our board of directors authorized an additional 36,978 shares to be issued under options to purchase our common stock and granted options on an additional 150,075 shares at an exercise price of $7.31 per share, which was less than the fair market value of $10.18 at that date. In accordance with APB 25, we have recorded approximately $0.1 million of expense in the year ended September 30, 2003 and $0.1 million of expense in the year ended September 30, 2004 related to the 2002 Plan option grants. Options issued under the 2002 Plan vest ratably each year over a four-year period.
The expiration date of options granted under the 2002 Plan is the earlier of the ten-year anniversary of the grant date; the one-year anniversary of the termination of the participant’s employment by reason of death or disability; thirty days after the date of the participant’s termination of employment if caused by reasons other than death, disability, cause, material breach or unsatisfactory performance or on the termination date if termination occurs for reasons of cause, material breach or unsatisfactory performance. We do not intend to grant any additional options under the 2002 Plan.
F-27
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
The 2003 Plan was approved and adopted effective December 22, 2003 upon consummation of the initial public offering. The 2003 Plan authorized the issuance of options to purchase 4.4 million shares of our common stock. During the year ended September 30, 2004, we recognized our employees and awarded options to purchase approximately 1.5 million shares of our common stock. All options issued during our 2004 fiscal year were issued at the fair market value of our common stock as of the grant date and typically vest ratably over a four-year period. During the 2004 fiscal year, we modified two option grant agreements and provided for an acceleration of vesting. In accordance with APB 25, in connection with these modifications, we recorded additional compensation expense totaling approximately $0.5 million. In addition, in accordance with our Board of Directors compensation policy, we granted 1,000 shares each to our five non-employee members of our board of directors and recognized board of director compensation expense of approximately $0.2 million in accordance with APB 25.
The expiration date of options granted under the 2003 Plan is the earlier of the ten-year anniversary of the grant date; the one-year anniversary of the termination of the participant’s employment by reason of death or disability; ninety days after the date of the participant’s termination of employment if caused by reasons other than death, disability, cause, material breach or unsatisfactory performance or on the termination date if termination occurs for reasons of cause, material breach or unsatisfactory performance.
The following table summarizes stock option activity for 2003 and 2004:
Year ended
Year Ended
September 30, 2003
September 30, 2004
Stock
Weighted Average
Stock
Weighted Average
Options
Exercise Price
Options
Exercise Price
1,079,052
$
2.48
759,327
$
4.97
150,075
$
7.31
1,550,581
$
20.97
(469,800
)
$
0.23
(46,920
)
$
10.38
—
$
—
(140,254
)
$
14.06
759,327
$
4.97
2,122,734
$
15.93
152,313
$
4.40
321,025
$
4.94
The following table summarizes information about stock options outstanding and exercisable at September 30, 2004:
F-28
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
Employee Stock Purchase Plan
We have an employee stock purchase plan that allows eligible employees of the company to purchase our common stock up to an aggregate of 300,000 shares at semi-annual intervals through periodic payroll deduction. The number of shares of common stock issued under this plan was 35,572 shares in fiscal year 2004. The purchase price is based upon the lesser of the closing stock price on the first day of the offering period or the last day of the offering period at a 15% discount.
17. Segment Information
We follow SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” SFAS No. 131 establishes standards for the way that public business enterprises report certain information about operating segments in their financial reports. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in assessing performance of the segment and in deciding how to allocate resources to an individual segment. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers.
Our principal business is providing post-secondary education. We also provide manufacturer-specific training, and these operations are managed separately from our campus operations. These operations do not currently meet the quantitative criteria for segments and therefore are not deemed reportable under SFAS No. 131 and are reflected in the Other category. Corporate expenses are allocated to Post-Secondary Education and the Other category.
Summary information by reportable segment is as follows as of and for the
years ended September 30:
2002
Post-
Secondary
Education
Other
Total
$
132,607
$
11,765
$
144,372
$
23,329
$
(1,311
)
$
22,018
$
4,622
$
326
$
4,948
$
20,579
$
—
$
20,579
$
73,227
$
3,659
$
76,886
2003
Post-
Secondary
Education
Other
Total
$
182,610
$
13,885
$
196,495
$
36,030
$
126
$
36,156
$
5,964
$
418
$
6,382
$
20,579
$
—
$
20,579
$
80,195
$
3,904
$
84,099
F-29
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
|
2004
|
||||||||||||
| Post- | ||||||||||||
| Secondary | ||||||||||||
|
Education
|
Other
|
Total
|
||||||||||
|
Net revenues
|
$ | 240,291 | $ | 14,858 | $ | 255,149 | ||||||
|
Operating income (loss)
|
$ | 50,412 | $ | (290 | ) | $ | 50,122 | |||||
|
Depreciation and amortization
|
$ | 8,415 | $ | 397 | $ | 8,812 | ||||||
|
Goodwill
|
$ | 20,579 | $ | — | $ | 20,579 | ||||||
|
Assets
|
$ | 133,148 | $ | 3,168 | $ | 136,316 | ||||||
18. Quarterly Financial Summary (Unaudited)
First
Second
Third
Fourth
Fiscal
Fiscal 2002
Quarter
Quarter
Quarter
Quarter
Year
$
34,405
$
35,483
$
35,540
$
38,944
$
144,372
$
6,249
$
6,096
$
4,766
$
4,907
$
22,018
$
2,355
$
2,374
$
557
$
1,531
$
6,817
$
0.18
$
0.18
$
0.04
$
0.11
$
0.51
$
0.16
$
0.16
$
0.04
$
0.10
$
0.44
First
Second
Third
Fourth
Fiscal
Fiscal 2003
Quarter
Quarter
Quarter
Quarter
Year
$
45,374
$
47,358
$
48,910
$
54,853
$
196,495
$
8,240
$
9,482
$
9,171
$
9,263
$
36,156
$
3,501
$
4,257
$
3,948
$
2,260
$
13,966
$
0.26
$
0.32
$
0.29
$
0.16
$
1.03
$
0.18
$
0.21
$
0.20
$
0.16
$
0.79
First
Second
Third
Fourth
Fiscal
Fiscal 2004
Quarter
Quarter
Quarter
Quarter
Year
$
59,043
$
63,684
$
62,947
$
69,475
$
255,149
$
14,015
$
13,494
$
10,865
$
11,748
$
50,122
$
6,677
$
8,056
$
6,636
$
6,675
$
28,044
$
0.43
$
0.29
$
0.24
$
0.24
$
1.14
$
0.30
$
0.28
$
0.23
$
0.23
$
1.04
F-30
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(In thousands, except share and per share amounts)
Net income available to common shareholders for the year ended September 30, 2003 includes the effect of the Series D preferred stock proportional share of a $5.0 million common stock dividend. The series D preferred stock proportional share amounted to approximately $2.1 million.
The summation of quarterly net income per share, and quarterly net income per share assuming dilution, does not equate to the calculation for the full fiscal year as quarterly calculations are performed on a discrete basis. In addition, securities may have an anti-dilutive effect during individual quarters but not for the full year.
F-31
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
| Balance at | Additions | |||||||||||||||
| Beginning of | Charged to | Balance at | ||||||||||||||
|
Period
|
Expense
|
Write-offs
|
End of Period
|
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Allowance accounts for the
years ended:
|
||||||||||||||||
|
September 30, 2002
|
||||||||||||||||
|
Uncollectible accounts
receivable
|
$ | 1,548 | 2,465 | 2,437 | $ | 1,576 | ||||||||||
|
Deferred tax asset valuation
|
$ | 16,416 | — | — | $ | 16,416 | ||||||||||
|
September 30, 2003
|
||||||||||||||||
|
Uncollectible accounts
receivable
|
$ | 1,576 | 2,470 | 1,725 | $ | 2,321 | ||||||||||
|
Deferred tax asset valuation
|
$ | 16,416 | — | — | $ | 16,416 | ||||||||||
|
September 30, 2004
|
||||||||||||||||
|
Uncollectible accounts
receivable
|
$ | 2,321 | 3,688 | 3,988 | $ | 2,021 | ||||||||||
|
Deferred tax asset valuation
|
$ | 16,416 | — | 333 | $ | 16,083 | ||||||||||
|
Inventory reserve
|
$ | — | $ | 23 | — | $ | 23 | |||||||||
F-32
EXHIBIT INDEX
| Exhibit | ||
|
Number
|
Description
|
|
|
3.1
|
Restated Certificate of Incorporation of Registrant. (Filed herewith.) | |
|
|
||
|
3.4
|
Amended and Restated Bylaws of Registrant. (Incorporated by reference to Exhibit 3.4 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).) | |
|
|
||
|
4.1
|
Specimen Certificate evidencing shares of common stock. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).) | |
|
|
||
|
4.2
|
Registration Rights Agreement, dated December 16, 2003, between Registrant and certain stockholders signatory thereto. (Incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).) | |
|
|
||
|
10.1
|
Credit Agreement, dated October 26, 2004, by and between the Registrant and Wells Fargo Bank, National Association. (Filed herewith.) | |
|
|
||
|
10.2
|
Universal Technical Institute Executive Benefit Plan, effective March 1, 1997. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).) | |
|
|
||
|
10.3
|
1997 Restricted Stock Plan. (Incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).) | |
|
|
||
|
10.4
|
Management 1999 Option Program. (Incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).) | |
|
|
||
|
10.5
|
Management 2002 Option Program. (Incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).) | |
|
|
||
|
10.6
|
2003 Stock Incentive Plan. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 dated January 13, 2004 (No. 333-111900).) | |
|
|
||
|
10.7
|
2003 Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 dated January 13, 2004 (No. 333-111898).) | |
|
|
||
|
10.8
|
Amended and Restated Employment and Non-Interference Agreement, dated April 1, 2002, between Registrant and Robert D. Hartman, as amended. (Incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).) | |
|
|
||
|
10.9
|
Employment and Non-Interference Agreement, dated April 1, 2002, between Registrant and John C. |
Exhibit
Number
Description
White, as amended. (Incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement
on Form S-1 dated October 3, 2003, or an amendment thereto (No.
333-109430).)
Employment and Non-Interference Agreement, dated April 1, 2002,
between Registrant and Kimberly J. McWaters, as amended.
(Incorporated by reference to Exhibit 10.10 to the Registrant’s
Registration Statement on Form S-1 dated October 3, 2003, or an
amendment thereto (No. 333-109430).)
Employment Agreement, dated November 30, 2003, between Registrant and
Jennifer L. Haslip. (Incorporated by reference to Exhibit 10.11 to
the Registrant’s Registration Statement on Form S-1 dated October 3,
2003, or an amendment thereto (No. 333-109430).)
Form of Severance Agreement between Registrant and certain executive
officers. (Incorporated by reference to Exhibit 10.12 to the
Registrant’s Registration Statement on Form S-1 dated October 3, 2003,
or an amendment thereto (No. 333-109430).)
Lease Agreement, dated April 1, 1994, as amended, between City Park
LLC, as successor in interest to 2844 West Deer Valley L.L.C., as
landlord, and The Clinton Harley Corporation, as tenant.
(Incorporated by reference to Exhibit 10.13 to the Registrant’s
Registration Statement on Form S-1 dated October 3, 2003, or an
amendment thereto (No. 333-109430).)
Lease Agreement, dated July 2, 2001, as amended, between John C. and
Cynthia L. White, as trustees of the John C. and Cynthia L. White 1989
Family Trust, as landlord, and The Clinton Harley Corporation, as
tenant. (Incorporated by reference to Exhibit 10.14 to the
Registrant’s Registration Statement on Form S-1 dated October 3, 2003,
or an amendment thereto (No. 333-109430).)
Lease Agreement, dated July 2, 2001, between Delegates LLC, as
landlord, and The Clinton Harley Corporation, as tenant.
(Incorporated by reference to Exhibit 10.15 to the Registrant’s
Registration Statement on Form S-1 dated October 3, 2003, or an
amendment thereto (No. 333-109430).)
Form of Indemnification Agreement by and between Registrant and its
directors and officers. (Incorporated by reference to Exhibit 10.16
to the Registrant’s Registration Statement on Form S-1 dated April 5,
2004, or an amendment thereto (No. 333-114185).)
Subsidiaries of Registrant. (Filed herewith.)
Consent of PricewaterhouseCoopers LLP. (Filed herewith.)
Power of Attorney. (Included on signature page.)
Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Filed herewith.)
Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (Filed herewith.)
Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(Filed herewith.)
Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(Filed herewith.)
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
UNIVERSAL TECHNICAL INSTITUTE, INC.
DATED SEPTEMBER 29, 2004
It is hereby certified that:
1. The present name of the corporation (herein called the "Corporation") is UNIVERSAL TECHNICAL INSTITUTE, INC., which is the name under which the Corporation was originally incorporated; and the date of filing the original Certificate of Incorporation of the Corporation with the Secretary of State of Delaware is September 10, 1997. The Corporation filed a Restated Certificate of Incorporation with the Secretary of State of Delaware on September 29, 1997. The Corporation filed the Certificate of Designation of Preferences and Rights of Series A Preferred Stock and Series B Preferred Stock with the Secretary of State of Delaware on September 30, 1997. The Corporation filed an Amendment No. 1 to the Restated Certificate of Incorporation and the Certificate of Designation of Series C Preferred Stock with the Secretary of State of the State of Delaware on September 29, 1999. The Corporation filed a Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware on March 28, 2002. The Corporation filed an Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware on December 15, 2003. The Corporation filed Certificates of Elimination with respect to its Series A, B, C and D Preferred Stock with the Secretary of State of Delaware on May 10, 2004.
2. The Amended and Restated Certificate of Incorporation of the Corporation as heretofore amended and/or supplemented is hereby restated in its entirety as set forth in the Restated Certificate of Incorporation herein provided for.
3. The provisions of the Amended and Restated Certificate of Incorporation of the Corporation as heretofore amended or supplemented, are hereby restated and integrated into the single instrument which is hereinafter set forth, and which is entitled Restated Certificate of Incorporation of Universal Technical Institute, Inc., without any further amendments and without any discrepancy between the provisions of the Amended and Restated Certificate of Incorporation as heretofore amended and supplemented and the provisions of the said single instrument hereinafter set forth.
4. The Restated Certificate of Incorporation has been duly adopted by the Board of Directors in accordance with the provisions of Section 245(b) of the General Corporation law of the State of Delaware.
5. The Certificate of Incorporation of the Corporation, as restated herein, shall at the effective time of this Restated Certificate of Incorporation, read as follows:
RESTATED
CERTIFICATE OF INCORPORATION
OF
UNIVERSAL TECHNICAL INSTITUTE, INC.
ARTICLE I
The name of the Corporation is: Universal Technical Institute, Inc. The Corporation shall have perpetual existence.
ARTICLE II
The address of its registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle 19801. The name of its registered agent at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.
ARTICLE IV
1. AUTHORIZED STOCK.
The total number of shares of all classes of stock which the Corporation shall have authority to issue is 110,000,000 shares, consisting of (i) 100,000,000. shares of Common Stock, $0.0001 par value per share ("Common Stock"), and (ii)10,000,000. shares of Preferred Stock, $0.0001 par value per share ("Preferred Stock").
2. COMMON STOCK.
The powers, preferences and rights, and the qualifications, limitations and restrictions, of the Common Stock are as follows:
(a) NO CUMULATIVE VOTING. The holders of shares of Common Stock shall have no cumulative voting rights.
(b) DIVIDENDS; STOCK SPLITS. Subject to the rights of the holders of Preferred Stock, and subject to any other provisions of this Restated Certificate of Incorporation, as it may be amended from time to time, the holders of Common Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of the Corporation when, as and if declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor.
The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote
of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of Delaware.
(c) LIQUIDATION, DISSOLUTION, ETC. In the event of any liquidation, dissolution or winding up (either voluntary or involuntary) of the Corporation, holders of shares of Common Stock shall be entitled to receive all assets of the Corporation available for distribution after payments to creditors and to the holders of any Preferred Stock of the Corporation that may at the time be outstanding, in proportion to the number of shares held by them, respectively. For purpose of this paragraph 2(c), the voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of stock, securities, or other consideration) of all or substantially all of the assets of the Corporation or a consolidation or merger of the Corporation with one or more other corporations or other persons (whether or not the Corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary.
(d) MERGER, ETC. In the event of a merger or consolidation of the Corporation with or into another entity (whether or not the Corporation is the surviving entity), the holders of each share of Common Stock shall be entitled to receive the same per share consideration on a per share basis.
(e) VOTING. At every meeting of the stockholders of the Corporation in connection with the election of directors and all other matters submitted to a vote of stockholders, every holder of Common Stock is entitled to one vote in person or by proxy for each share of Common Stock registered in the name of the holder on the transfer books of the Corporation. Except as otherwise required by law, the holders of Common Stock shall vote together as a single class, subject to any right that may be conferred upon holders of Preferred Stock to vote together with holders of Common Stock on all matters submitted to a vote of stockholders of the Corporation.
(f) NO PREEMPTIVE OR SUBSCRIPTION RIGHTS. No holder of shares of Common Stock shall be entitled to preemptive or subscription rights.
3. PREFERRED STOCK.
(a) RIGHTS, PREFERENCES AND PRIVILEGES. Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to provide for the issuance of shares of Preferred Stock in a class or series and, by filing a certificate pursuant to the applicable law of the State of Delaware (a "Preferred Stock Designation"), to establish from time to time the number of shares to be include in each such class or series, and to fix the designation, powers, preferences and rights of the shares of each such class or series and the qualification, limitations and restrictions thereof. The authority of the Board of Directors with respect to each class or series shall include, but not be limited to, determination of the following:
(i) The designation of the class or series, which may be by distinguishing number, letter or title;
(ii) The number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the Preferred Stock
Designation) increase or decrease (but not below the number of shares thereof then outstanding);
(iii) Whether dividends, if any, shall be cumulative or non-cumulative and the dividend rate of the class or series;
(iv) The dates on which dividends, if any, shall be payable;
(v) The redemption rights and price or prices, if any, for shares of the class or series;
(vi) The terms and amount of any sinking fund provided for the purchase or redemption of shares of the class or series;
(vii) The amounts payable on, and the preferences, if any, of, shares of the class or series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation;
(viii) Whether the shares of the class or series shall be convertible into shares of any other class or series, or any other security, of the Corporation or any other corporation, and, if so, the specification of such other class or series of such other security, the conversion price or prices or rate or rates, any adjustments thereof, the date or dates at which such shares shall be convertible and all other terms and conditions upon which such conversion may be made;
(ix) Restrictions on the issuance of shares of the same class or series or of any other class or series; and
(x) The voting rights, if any, of the holders of shares of the class or series.
(b) NUMBER OF AUTHORIZED SHARES. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of the holders of a majority of the voting power of Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of the applicable Preferred Stock Designation.
4. POWER TO SELL AND PURCHASE SHARES.
Subject to the requirements of applicable law, the Corporation shall have the power to issue and sell all or any part of any shares of any class of stock hereon or hereafter authorized to such persons, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not greater consideration could be received upon the issue or sale of the same number of shares of another class, and as otherwise permitted by law. Subject to the requirements of applicable law, and except as expressly provided otherwise in Section 6.9 of the Bylaws, the Corporation shall have the power to purchase any shares of any class of stock herein or hereafter authorized from such persons, and for such consideration, as the Board of
Directors shall from time to time, in its discretion, determine, whether or not less consideration could be paid upon the purchase of the same number of shares of another class, and as otherwise permitted by law.
ARTICLE V
For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that:
1. BOARD OF DIRECTORS.
The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by the Board of Directors in the manner provided in the Bylaws of the Corporation.
2. NUMBER AND ELECTION OF DIRECTORS.
The number of directors of the Corporation shall not be less than three or more than eleven. Election of directors need not be by written ballot, except as and to the extent provided in the Bylaws of the Corporation.
3. CLASSES OF DIRECTORS.
The Board of Directors, other than those who may be elected by the holders of any class or series of Preferred Stock issued by the Corporation, shall be divided into three classes: Class I, Class II and Class III as nearly equal in number as may be, to serve staggered three-year terms on the Board of Directors. No one class shall have more than one director more than any other class.
4. TERMS OF OFFICES.
Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which such director was elected; provided, however, the directors first serving as Class I directors shall serve for a term expiring at the annual meeting next following September 30, 2003, the directors first serving as Class II directors shall serve for a term expiring at the second annual meeting next following September 30, 2003, and the directors first serving as Class III directors shall serve for a term expiring at the third annual meeting next following September 30, 2003. A director shall hold office until the annual meeting for the year in which his or her term expires or until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office.
5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASE OR DECREASE IN THE NUMBER OF DIRECTORS.
Subject to applicable law and the terms of any one or more outstanding classes or series of Preferred Stock, any vacancy on the Board or Directors that results from an increase in the number of directors or resulting from the death, resignation, removal from office or any other cause may be filled by a majority of the Board of Directors then in office, although less than a quorum, or by a sole remaining director, and not by the stockholders. Any director of any class elected to fill a vacancy resulting from an increase in the number of directors of such class shall hold office for a term that shall coincide with the remaining term of that class. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. Subject to applicable law and the rights, if any, of the holders of shares of Preferred Stock then outstanding, any or all of the directors of the Corporation may be removed from office at any time by the stockholders only for cause and only by the affirmative vote of at least the majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. A director may not be removed by the stockholders at a meeting unless the notice of the meeting states that the purpose, or one of the purposes, of the meeting is the removal of the director. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorship shall be governed by the terms of this Restated Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article V unless expressly provided otherwise by such terms.
6. AMENDMENTS TO BYLAWS.
The Board of Directors may from time to time adopt, amend or repeal Bylaws. Stockholders may adopt, amend or repeal the Bylaws of the Corporation only on the recommendation of the Board.
7. ADVANCE NOTICE.
Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation.
8. IN GENERAL.
In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the Delaware General Corporation Law, this Restated Certificate of Incorporation, and any Bylaws adopted by the stockholders; provided, however that no Bylaws hereafter adopted by the stockholders shall invalidate any prior act of the directors which would have been valid if such Bylaws had not been adopted. Notwithstanding any other provisions of law, this
Restated Certificate of Incorporation or the Bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the votes which all the stockholders would be entitled to cast in any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article V.
ARTICLE VI
1. LIMITATION OF LIABILITY.
To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director.
2. INDEMNIFICATION.
The Corporation may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action, suit or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that such person or his or her testator in intestate is or was a director, officer, employee or agent of the Corporation, or any predecessor of the Corporation, or serves or served at any other enterprise as a director, officer, employee or agent at the request of the Corporation or any predecessor to the Corporation.
3. GOOD FAITH RELIANCE.
The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided in this Restated Certificate of Incorporation or by applicable law.
4. AMENDMENTS.
Neither any amendment nor repeal of this Article VI, nor the adoption of any provision of the Corporation's certificate of incorporation inconsistent with this Article VI, shall eliminate or reduce the effect of this Article VI, in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VI, would accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent provision.
ARTICLE VII
Unless otherwise required by law, special meetings of stockholders, for any purpose or purposes, may be called at any time only by the Chairman of the Board of Directors or a committee of the Board that has been duly designated by the Board, and shall be called by the Secretary at the written request, or by resolution adopted by the affirmative vote, of a majority of the Board of Directors. Stockholders shall not have the right to call a special meeting of stockholders.
ARTICLE VIII
Any actions required or permitted to be taken by stockholders of the Corporation shall be effected at a duly called annual or special meeting of stockholders of the Corporation, and the ability of the stockholders to consent in writing to the taking of any action is hereby specifically denied, provided, however, that the holders of Preferred Stock may act by written consent to the extent expressly provided in the applicable Preferred Stock Designation authorizing the issuance of particular series of Preferred Stock pursuant to Article IV of this Restated Certificate of Incorporation.
ARTICLE IX
Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation.
ARTICLE X
The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Restated Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation; provided, however, that notwithstanding any other provision of this Restated Certificate of Incorporation (and in addition to any other vote that may be required by law), the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation, voting together as a single class, shall be required to amend, alter, change or repeal, or to adopt any provisions as part of this Restated Certificate of Incorporation inconsistent with the purposes and intent of Article V, Article VI, Article VII, Article VIII and this Article X.
IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of Incorporation to be signed by its Chief Executive Officer this 29th day of September, 2004.
UNIVERSAL TECHNICAL INSTITUTE, INC.
/s/ Robert D. Hartman Robert D. Hartman Chief Executive Officer |
EXHIBIT 10.1
CREDIT AGREEMENT
THIS CREDIT AGREEMENT ("Agreement") is entered into as of October 26, 2004, by and between UNIVERSAL TECHNICAL INSTITUTE, INC., a Delaware corporation ("Borrower"), dba UNIVERSAL TECHNICAL INSTITUTE OF DELAWARE, and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
Borrower has requested that Bank extend or continue credit to Borrower as described below, and Bank has agreed to provide such credit to Borrower on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I.
CREDIT TERMS
SECTION 1.1 LINE OF CREDIT.
(a) Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time under a line of credit ("Line of Credit"), up to and including the Line of Credit Maturity Date, not to exceed at any time the aggregate principal amount of the Line of Credit Commitment, the proceeds of which shall be used for working capital and other general corporate purposes. Borrower's obligation to repay advances under the Line of Credit shall be evidenced by a promissory note substantially in the form of Exhibit "B" attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference.
(b) Limitation on Borrowings. Outstanding borrowings under the Line of Credit shall not at any time exceed an aggregate of the Line of Credit Commitment.
(c) Letter of Credit Subfeature. As a subfeature under the Line of Credit, Bank agrees from time to time during the term thereof up to and including the Line of Credit Maturity Date to issue or cause an affiliate to issue standby letters of credit for the account of Borrower to finance its operating and business requirements or those of its Subsidiaries (each, a "Letter of Credit" and collectively, "Letters of Credit"); provided, however, that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed the amount of the Line of Credit Commitment. The form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion. Each Letter of Credit shall be issued for a term not to exceed three hundred sixty-five (365) days, as designated by Borrower and, if no Event of Default has occurred and is continuing, Bank agrees to extend the term of any Letter of Credit for up to another three hundred sixty-five (365) days upon receipt from Borrower of a written request to do so not later than thirty (30) days before the expiration date; provided, however, that no Letter of Credit shall have an expiration date subsequent to the Line of Credit Maturity Date. The undrawn amount of all Letters of Credit shall be reserved under the Line of
Credit and shall not be available for borrowings thereunder. Each Letter of Credit shall be subject to the additional terms and conditions of the Letter of Credit agreements, applications and any related documents required by Bank in connection with the issuance thereof. Each draft paid under a Letter of Credit shall be deemed an advance under the Line of Credit and shall be repaid by Borrower in accordance with the terms and conditions of this Agreement applicable to such advances; provided, however, that if advances under the Line of Credit are not available, for any reason, at the time any draft is paid, then Borrower shall immediately pay to Bank the full amount of such draft, together with interest thereon from the date such draft is paid to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances under the Line of Credit. In such event Borrower agrees that Bank, in its sole discretion, may debit any account maintained by Borrower with Bank (other than any financial aid trust account maintained by Borrower with Bank) for the amount of any such draft; at the time of said debit, Bank agrees to notify Borrower of said debit.
(d) Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided, however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. If at any time the total outstanding borrowings under the Line of Credit exceed the Line of Credit Commitment, such excess shall be immediately due and payable.
SECTION 1.2 STANDBY LETTER OF CREDIT.
(a) Standby Letter of Credit. Subject to the terms and conditions of this Agreement, in addition to any Letter of Credit issued pursuant to Section 1.1(c) hereof, Bank hereby agrees up to and including the Line of Credit Maturity Date to issue or cause an affiliate to issue one or more standby letters of credit for the account of Borrower to finance any corporate purpose (collectively, as amended, modified and/or supplemented from time to time, the "Standby Letter of Credit") in the aggregate principal amount not to exceed TWENTY MILLION AND NO/100 DOLLARS ($20,000,000.00). The form and substance of each Standby Letter of Credit shall be subject to approval by Bank, in its sole discretion. Each Standby Letter of Credit shall be issued for a term not to exceed three hundred sixty-five (365) days, as designated by Borrower and, if no Event of Default has occurred and is continuing, Bank agrees to extend the term of any Standby Letter of Credit for up to another three hundred sixty-five (365) days upon receipt from Borrower of a written request to do so not later than thirty (30) days before the expiration date; provided, however, that no Standby Letter of Credit shall have an expiration date subsequent to the Line of Credit Maturity Date. Each Standby Letter of Credit shall be subject to the additional terms of the Letter of Credit agreement, application and any related documents required by Bank in connection with the issuance thereof (the "Standby Letter of Credit Agreement").
(b) Repayment of Drafts. Each drawing paid under the Standby Letter of Credit shall be repaid by Borrower in accordance with the provisions of the Standby Letter of Credit Agreement.
SECTION 1.3 INTEREST/FEES.
(a) Interest. The outstanding principal balance of the Line of Credit shall bear interest, and the amount of each drawing paid under any Letter of Credit shall bear interest from the date such drawing is paid to the date such amount is fully repaid by Borrower, at the rate of interest set forth in the Line of Credit Note or other instrument or document executed in connection therewith. The amount of each drawing paid under the Standby Letter of Credit shall bear interest from the date such delivery is paid to the date such amount is fully repaid by Borrower at a rate per annum provided in the Standby Letter of Credit Agreement.
(b) Prime Rate. The term "Prime Rate" shall mean at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof in such internal publication or publications as Bank may designate. Each change in the rate of interest shall become effective on the date each Prime Rate change is announced within Bank.
(c) Computation and Payment. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in each promissory note or other instrument required hereby.
(d) Standby Letter of Credit Fee. Borrower shall pay to Bank quarterly in advance a non-refundable fee for each Standby Letter of Credit equal to three-eighths percent (0.375%) per annum of the face amount thereof, which fee shall be due and payable quarterly in advance.
(e) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to one-eighth percent (0.125%) per annum (computed on the basis of a 360-day year, actual days elapsed) on the average daily unused amount of the Line of Credit, and shall be due and payable by Borrower in arrears on the last day of the pertinent quarter by a debit to the Borrower's deposit account. For purposes of the fee calculation, Letters of Credit issued under the Line of Credit shall be considered outstanding.
(f) Letter of Credit Fees. Borrower shall pay to Bank (i) fees for each Letter of Credit equal to five-eighths percent (0.625%) per annum (computed on the basis of a 360-day year, actual days elapsed) of the face amount thereof quarterly in advance and, upon any increase in the amount of a Letter of Credit, a fee equal to five-eighths percent (0.625%) per annum on the amount of such increase, and (ii) fees upon the payment or negotiation of each draft under any Letter of Credit and fees upon the occurrence of any other activity with respect to any Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Letter of Credit) determined in accordance with Bank's standard fees and charges then in effect for such activity.
SECTION 1.4 COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal, interest and fees due under each credit subject hereto by charging Borrower's deposit account number 4121052344 with Bank, or any other deposit account maintained by
Borrower with Bank (other than any financial aid trust account maintained by Borrower with Bank), for the full amount thereof. Should there be insufficient funds in any such deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower.
SECTION 1.5 COLLATERAL. As security for all indebtedness of Borrower to
Bank under the Standby Letter of Credit issued pursuant to Section 1.2(a),
Borrower hereby grants to Bank security interests of first priority in that
certain L/C Collateral Account No. 1281-1865 account maintained by Borrower (the
"Collateral Account") with Bank acting through Wells Fargo Brokerage Services,
LLC. All amounts held therein shall be valued periodically by Bank (the
"Collateral Value") based on the Advance Rates that are generally in effect
within the Bank from time to time. At no time shall the Collateral Value of the
Collateral Account be less than the aggregate face amount of the Standby Letter
of Credit.
All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals and audits.
SECTION 1.6 GUARANTIES. All indebtedness of Borrower to Bank under the Loans shall be guaranteed jointly and severally by the Guarantors, as evidenced by and subject to the terms of guaranties in form and substance satisfactory to Bank.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement.
SECTION 2.1 LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the State of Delaware, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower.
SECTION 2.2 AUTHORIZATION AND VALIDITY. This Agreement and each promissory note, contract, instrument and other document required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms.
SECTION 2.3 NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Certificate of Incorporation or By-Laws of Borrower, or result in
any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound.
SECTION 2.4 LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof.
SECTION 2.5 CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated June 30, 2004, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) has been prepared in accordance with generally accepted accounting principles consistently applied and presents fairly the financial condition of Borrower, and (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent. Since the date of such financial statements there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank, or as disclosed to Bank, or as permitted pursuant to Section 5.9, or as otherwise permitted by Bank in writing.
SECTION 2.6 INCOME TAX RETURNS. Borrower has no knowledge of any pending material assessments or adjustments of its income tax payable with respect to any year.
SECTION 2.7 NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower.
SECTION 2.8 PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all material permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law.
SECTION 2.9 ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles.
SECTION 2.10 OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation.
SECTION 2.11 ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment.
SECTION 2.12 SUBSIDIARIES. Attached as Exhibit "C" hereto is a complete list of all Subsidiaries of Borrower.
ARTICLE III.
CONDITIONS
SECTION 3.1 CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this Agreement is subject to the fulfillment to Bank's satisfaction of all of the following conditions:
(a) Approval of Bank Counsel. All legal matters incidental to the extension of credit by Bank shall be satisfactory to Bank's counsel.
(b) Documentation. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed:
(i) This Agreement.
(ii) The Line of Credit Note.
(iii) With respect to the Standby Letter of Credit issued pursuant to Section 1.2(a) hereof, Security Agreement: Securities Account, Securities Account Control Agreement and UCC-1 Financing Statement as to the Collateral Account.
(iv) The Guaranties executed by the Guarantors.
(v) Authorizations as to the Loan Documents for Borrower and Guarantors to the extent required by Bank.
(vi) A completed compliance certificate as of June 30, 2004.
(vii) Evidence that the loan from GE to Borrower has been fully paid and terminated and all UCC financing statements for the benefit of GE have
been released, other than with respect to the outstanding letter of credit issued by GE for the account of UTI Holdings, Inc.
(viii) Such other documents as Bank may require under any other Section of this Agreement.
(c) Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower or any Guarantor, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower or any such guarantor.
(d) Insurance. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank.
(e) Legal Opinions. A legal opinion from counsel to Borrower and each Guarantor delivered to Bank in such form as reasonably requested by Bank.
SECTION 3.2 CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions:
(a) Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist.
(b) Documentation. Bank shall have received all additional documents which may be required in connection with such extension of credit.
ARTICLE IV.
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing:
SECTION 4.1 PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein, and immediately upon demand by Bank, the amount by which the outstanding principal balance of any credit subject hereto at any time exceeds any limitation on borrowings applicable thereto.
SECTION 4.2 ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time after a two week notice, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower.
SECTION 4.3 FINANCIAL STATEMENTS. Provide to Bank all of the following:
(a) not later than one hundred twenty (120) days after and as of the end of each fiscal year, a copy of Borrower's annual 10K as filed with the SEC;
(b) not later than forty-five (45) days after and as of the end of each fiscal quarter, a copy of Borrower's 10Q as filed with the SEC;
(c) contemporaneously with each annual and quarterly financial statement of Borrower required hereby, a compliance certificate (substantially in the form of Exhibit "D") of the chief financial officer of Borrower, certifying that said financial statements are accurate and have been prepared in accordance with generally accepted accounting principles and that there exists no Event of Default nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default and showing Borrower's compliance with Section 4.9; and
(d) from time to time such other information as Bank may reasonably request.
SECTION 4.4 COMPLIANCE. Preserve and maintain all material licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; cause its Subsidiaries to retain their state accreditations and their qualifications for Title IV Programs; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business.
SECTION 4.5 INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts customarily carried in lines of business similar to that of Borrower, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect.
SECTION 4.6 FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be reasonably preserved and maintained.
SECTION 4.7 TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, consistent with generally accepted
accounting principles, for eventual payment thereof in the event Borrower is obligated to make such payment.
SECTION 4.8 LITIGATION. Promptly give notice in writing to Bank of any litigation pending against Borrower with a claim in excess of $2,500,000.00 that is not covered by insurance.
SECTION 4.9 FINANCIAL CONDITION. Maintain Borrower's financial condition at the end of each fiscal quarter as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein), with compliance determined commencing with Borrower's financial statements for the period ending June 30, 2004:
(a) Net income after taxes determined for any fiscal quarter of not less than $3,500,000.00 for such quarter.
(b) Total Liabilities divided by Tangible Net Worth determined for any fiscal quarter of not greater than the DNW Ratio, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities excluding EITF 97-10 Liabilities up to $30,000,000.00 less subordinated debt, with "Tangible Net Worth" defined as total assets less Total Liabilities and less any intangible assets, and with "DNW Ratio" defined as 3.50 to 1.00 on December 31, 2004 to June 30, 2005, as 2.00 to 1.00 on September 30, 2005 to June 30, 2006, and as 1.50 to 1.00 on September 30, 2006 and thereafter.
(c) Current Ratio determined for any fiscal quarter of less than the CR Requirement. "Current Ratio" is defined as total current assets (excluding any cash in the Collateral Account and any cash of Borrower held by GE in a controlled account) divided by total current liabilities which shall include without limitation any outstanding balance on the Line of Credit, outstanding surety bonds and any outstanding Letters of Credit under the Line of Credit Commitment), with "CR Requirement" defined as 0.40 to 1.0 on December 31, 2004 to June 30, 2005, 0.50 to 1.00 on September 30, 2005 to June 30, 2006, and 0.60 to 1.0 on September 30, 2006 and thereafter.
(d) Tangible Net Worth (as defined in Paragraph (b) above) determined as of any fiscal quarter of not less than the greater of (i) Tangible Net Worth as of September 30, 2004, as published in Borrower's 10K as filed with the SEC, or (ii) $33,000,000.00.
SECTION 4.10 NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the entity structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain.
SECTION 4.11 TITLE IV PROGRAMS. Cause all Subsidiaries eligible for Title IV Programs to maintain as to themselves and their operating institutions any and all state
accreditations and all other requirements necessary to maintain their eligibility for Title IV Programs; provided that if any operating institution is a new campus intended to participate in Title IV Programs, this requirement shall not be applicable for the first twelve (12) months of its operation.
SECTION 4.12 FUTURE SUBSIDIARIES. Cause any Subsidiary not a Guarantor to execute and deliver, within thirty (30) days of its becoming a Subsidiary, to Bank a Guaranty together with such organizational documents and resolutions as Bank may reasonably request.
SECTION 4.13 OPERATING ACCOUNTS. Maintain, no later than ninety (90) days after the Closing Date and thereafter, its primary operating accounts with the Bank.
ARTICLE V.
NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not, and will not allow any Guarantor, without Bank's prior written consent:
SECTION 5.1 USE OF FUNDS. Use any of the proceeds of any credit extended hereunder except for the purposes stated in Article I hereof.
SECTION 5.2 [Intentionally left blank].
SECTION 5.3 NEGATIVE PLEDGE AGREEMENT. Covenant with another creditor not to pledge any portion of its assets to Bank.
SECTION 5.4 OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, (b) purchase money obligations up to $10,000,000.00, (c) EITF 97-10 Liabilities up to $30,000,000.00, and (d) any other material liabilities of Borrower existing as of, and disclosed to, and deemed acceptable by, Bank prior to, the Closing Date hereof.
SECTION 5.5 MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with, or be totally acquired by, any other entity that is not a Subsidiary of Borrower or a Guarantor; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity except as permitted pursuant to Section 5.7 hereof; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business.
SECTION 5.6 GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other
person or entity, except for guaranties of operating leases, guaranties for liabilities or obligations of a Subsidiary, guaranties to bonding agents as required to obtain the necessary surety bonds to license Borrower's sales representatives, or guaranties of student loans up to $4,000,000.00 to Sallie Mae.
SECTION 5.7 LOANS, ADVANCES, INVESTMENTS, ACQUISITIONS. Make any loans or advances to or investments in any person or entity, except for (i) any of the foregoing existing as of, and disclosed to, and deemed acceptable to, Bank prior to the Closing Date, (ii) acquisitions not exceeding $10,000,000.00 in any fiscal year, (iii) any investment in a joint venture not exceeding $10,000,000.00 in cash and/or non-cash value, but without limit as to the amount of any intellectual property owned and contributed to the joint venture by Borrower (which property may be licensed to such joint venture without transferring Borrower's ownership rights thereto), (iv) loans or advances to employees in the ordinary course of business, and (v) loans to students not exceeding $23,000,000.00 in the aggregate outstanding at any time.
SECTION 5.8 PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any material portion of Borrower's assets now owned or hereafter acquired, except for Permitted Liens.
ARTICLE VI.
EVENTS OF DEFAULT
SECTION 6.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents and such failure shall continue for a period of five (5) Business Days from its occurrence.
(b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in other subsections of this Section 6.1), and with respect to any such default which by its nature can be cured, such default shall continue for a period of thirty (30) days from its occurrence.
(d) A default or event of default shall occur (and continue beyond any applicable grace period) under any note, agreement or instrument evidencing any other indebtedness of the Borrower or any of its Subsidiaries, which default or event of default permits the acceleration of its maturity, provided that the aggregate principal amount of all such indebtedness for which the default or event of default has occurred exceeds $750,000.00.
(e) The filing of a notice of judgment lien against Borrower or any guarantor hereunder; or the recording of any abstract of judgment against Borrower or any guarantor
hereunder in any county in which Borrower or such guarantor has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower or any guarantor hereunder; or the entry of a judgment against Borrower or any guarantor hereunder; in each case for an amount in excess of $750,000.00 and that is not dismissed or stayed within thirty (30) days.
(f) Borrower or any guarantor hereunder shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower or any guarantor hereunder shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any guarantor hereunder that is not dismissed within sixty (60) days of its institution, or Borrower or any such guarantor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any such guarantor shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower or any such guarantor by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors.
(g) The occurrence of any adverse change in the financial condition of Borrower that Bank, in its reasonable discretion, deems material.
(h) The dissolution or liquidation of Borrower or, without the consent of Bank, any Guarantor or Borrower or any such guarantor, or any of their directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower or such guarantor.
(i) Borrower shall fail to comply with the financial covenants in
Section 4.9.
(j) Borrower shall fail to maintain the Collateral Value equal to or
greater than the face amount of the Standby Letter of Credit in accordance with
Section 1.5 and such failure shall continue for a period of five (5) Business
Days from its occurrence.
(k) Borrower shall fail to maintain its primary operating accounts with Bank in accordance with Section 4.13.
(l) Borrower or any Guarantor shall fail to comply with Section 4.11 hereof.
SECTION 6.2 REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under
any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity.
ARTICLE VII.
MISCELLANEOUS
SECTION 7.1 NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing.
SECTION 7.2 NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address:
BORROWER: UNIVERSAL TECHNICAL INSTITUTE, INC.
20410 North 19th Avenue, Suite 200
Phoenix, Arizona 85027
Attention: Chief Financial Officer
Fax #: 623/445-9403
Attention: Vice President - Corporate Legal Counsel
Fax #: 623/445-9389
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
Commercial Banking
MAC S4101-251, 100 West Washington
Phoenix, Arizona 85003
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or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the date of receipt as evidenced by U.S. mail return receipt; and (c) if sent by telecopy, upon receipt (with confirmation to be sent by U.S. mail, first class).
SECTION 7.3 COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and, except for the initial negotiation and preparation of this Agreement and the other Loan Documents, all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the
initial negotiation and preparation of this Agreement and the other Loan
Documents in excess of $10,000.00, Bank's continued administration hereof and
thereof, and the preparation of any amendments and waivers hereto and thereto,
(b) the enforcement of Bank's rights and/or the collection of any amounts which
become due to Bank under any of the Loan Documents, and (c) the prosecution or
defense of any action in any way related to any of the Loan Documents, including
without limitation, any action for declaratory relief, whether incurred at the
trial or appellate level, in an arbitration proceeding or otherwise, and
including any of the foregoing incurred in connection with any bankruptcy
proceeding (including without limitation, any adversary proceeding, contested
matter or motion brought by Bank or any other person) relating to any Borrower
or any other person or entity.
SECTION 7.4 SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided, however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any credit subject hereto, Borrower or its business, any guarantor hereunder or the business of such guarantor, or any collateral required hereunder.
SECTION 7.5 ENTIRE AGREEMENT; AMENDMENT; DEFINITIONS.
(a) This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto.
(b) All defined terms shall have the meaning given them in Exhibit "A" attached hereto.
SECTION 7.6 REDUCTION; TERMINATION.
(a) Borrower may permanently reduce the Line of Credit Commitment in whole or in part in integral multiples of $500,000.00 upon at least five (5) business days written notice to Bank which notice shall specify the amount of any such reduction; provided, however, that the amount of the Letter of Credit Commitment may not be reduced below the aggregate amount of advances and Letters of Credit outstanding thereunder.
(b) This Agreement shall terminate upon full payment by Borrower of all obligations owed to Bank hereunder.
SECTION 7.7 NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party.
SECTION 7.8 TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents.
SECTION 7.9 SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement.
SECTION 7.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement.
SECTION 7.11 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona.
SECTION 7.12 ARBITRATION.
(a) Arbitration. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise arising out of or relating to in any way (i) the loan and related Loan Documents which are the subject of this Agreement and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (ii) requests for additional credit.
(b) Governing Rules. Any arbitration proceeding will (i) proceed in
a location in Arizona selected by the American Arbitration Association ("AAA");
(ii) be governed by the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
documents between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the
AAA's commercial dispute resolution procedures, unless the claim or counterclaim
is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and
costs in which case the arbitration shall be conducted in accordance with the
AAA's optional procedures for large, complex commercial disputes (the commercial
dispute resolution procedures or the optional procedures for large, complex
commercial disputes to be referred to, as applicable, as the "Rules"). If there
is any inconsistency between the terms hereof and the Rules, the terms and
procedures set forth herein shall control. Any party who fails or refuses to
submit to arbitration following a demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
dispute. Nothing contained herein shall be deemed to be a waiver by any party
that is a bank of the protections afforded to it under 12 U.S.C. Section.91 or
any similar applicable state law.
(c) No Waiver of Provisional Remedies, Self-Help and Foreclosure. The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the
pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph.
(d) Arbitrator Qualifications and Powers. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided, however, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of Arizona or a neutral retired judge of the state or federal judiciary of Arizona, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of Arizona and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Arizona Rules of Civil Procedure or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief.
(e) Discovery. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than twenty (20) days before the hearing date and within one hundred eighty (180) days of the filing of the dispute with the AAA. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for obtaining information is available.
(f) Class Proceedings and Consolidations. The resolution of any dispute arising pursuant to the terms of this Agreement shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any class proceeding.
(g) Payment Of Arbitration Costs And Fees. The arbitrator shall award all costs and expenses of the arbitration proceeding.
(h) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within one hundred eighty (180) days of the filing of the dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation. If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above.
BORROWER:
UNIVERSAL TECHNICAL INSTITUTE, INC., a
Delaware corporation, dba UNIVERSAL
TECHNICAL INSTITUTE OF DELAWARE
By: _____________________________________________
Name: Jennifer L. Haslip
Title: Chief Financial Officer
BANK:
WELLS FARGO BANK, NATIONAL
ASSOCIATION
By: _____________________________________________
Name: Keri Tignini
Title: Vice President
EXHIBIT "A"
DEFINITIONS
"Advance Rate" means those Advance Rates that are generally in effect as to marketable securities within the Bank from time to time pursuant to its Commercial Banking Credit Policies, copies of which current Advance Rates may be obtained upon request from the Bank.
"Agreement" means this Credit Agreement.
"Bank" means WELLS FARGO BANK, NATIONAL ASSOCIATION.
"Borrower" means UNIVERSAL TECHNICAL INSTITUTE, INC., a Delaware corporation.
"Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions are generally authorized or obligated by law or executive order to close in Phoenix, Arizona.
"Closing Date" means the date this Agreement is executed and delivered by Borrower to Bank.
"Collateral Account": See Section 1.5.
"Collateral Account Agreement" means that Investment Account Agreement dated September 24, 2004 between Borrower and Wells Fargo Brokerage Services, LLC.
"Collateral Value: See Section 1.5.
"EITF 97-10 Liabilities" means those liabilities subject to the Financial Accounting Standards Board (FASB) Emerging Issues Task Force 97-10 rule.
"Excess Collateral" means the amount by which the Collateral Value of the Collateral Account exceeds the aggregate face amount of the Standby Letter of Credit.
"GAAP" means accounting principles generally accepted in the United States.
"GE" means HELLER FINANCIAL, INC., as agent and lender.
"Guaranties," each a "Guaranty," means those guaranties delivered to Bank by the Guarantors.
"Guarantors," each a Guarantor, means all Subsidiaries of Borrower and their Subsidiaries.
"Letter of Credit": See Section 1.1(c).
"Line of Credit Commitment" means THIRTY MILLION AND NO/100 DOLLARS ($30,000,000.00).
"Line of Credit Maturity Date" means October 26, 2007.
"Line of Credit Note": See Section 1.1(a).
"Loan Documents": See Section 2.2.
"Loans," each a "Loan," means the Line of Credit and the Standby Letter of Credit.
"Permitted Liens" means the following types of liens:
(1) any liens in favor of Bank;
(2) liens existing as of and disclosed to Bank in writing prior to, the Closing Date;
(3) cash held by GE for collateral on the existing GE letter of credit issued for the benefit of the Department of Education;
(4) liens for taxes, assessments or governmental charges or claims either (1) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Borrower or its Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP;
(5) statutory liens of landlords and liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof;
(6) liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);
(7) judgment liens not giving rise to an Event of Default so long as such lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired;
(8) liens securing purchase money indebtedness incurred or in the ordinary course of business, provided, however, that such purchase money
indebtedness shall not exceed $10,000,000 in the aggregate at any time outstanding;
(9) banker's liens, rights of setoff and similar liens with respect to cash and cash equivalents on deposit in one or more bank accounts in the ordinary course of business; and
(10) extensions and renewals of any of the foregoing so long as the aggregate amount of extended or renewed liens are not increased and are on terms and conditions no more restrictive than the terms and conditions of the liens extended or renewed.
"Prime Rate": See Section 1.3(b).
"Sallie Mae" means Student Loan Marketing Association.
"SEC" means the Securities and Exchange Commission.
"Standby Letter of Credit": See Section 1.2(a).
"Standby Letter of Credit Agreement: See Section 1.2(a).
"Subsidiary" of an entity means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Entity or by one or more
of its Subsidiaries or by such Entity and one or more of its Subsidiaries, or
(ii) any partnership, limited liability company, association, joint venture or
similar business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
"Tangible Net Worth": See Section 4.9(b).
"Title IV Programs" means the programs administered by the U.S. Department of Education under Title IV of the Higher Education Act of 1965, as amended.
EXHIBIT "B"
NOTE
REVOLVING LINE OF CREDIT NOTE
$30,000,000.00 Phoenix, Arizona ____________, 2004
FOR VALUE RECEIVED, the undersigned UNIVERSAL TECHNICAL INSTITUTE, INC., a Delaware corporation ("Borrower"), promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at MAC S4101-251, 100 West Washington, Phoenix, Arizona 85003, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of THIRTY MILLION AND NO/100 DOLLARS ($30,000,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein.
1. DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in Arizona are authorized or required by law to close.
(b) "Fixed Rate Term" means a period commencing on a Business Day and continuing for one (1), two (2), three (3) or six (6) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided, however, that no Fixed Rate Term may be selected for a principal amount less than Five Hundred Thousand Dollars ($500,000.00) and provided further that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day.
(c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula:
(i) "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time
approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term.
(d) "Loan Documents" means this Note and each other contract, instrument or document required hereby or now or hereafter executed in connection with or delivered to Bank pursuant to the terms of this Note by any person or entity.
(e) "Prime Rate" means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate.
(f) "Third Party Obligor" means any person or entity, other than Borrower, obligated to Bank under any of the Loan Documents, including without limitation, any guarantor hereof, any trustor of any Borrower which is a trust, or any general partner or joint venturer in any Borrower which is a partnership or a joint venture.
2. INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) either
(i) at a fluctuating rate per annum one-half percent (0.5%) below the Prime Rate
in effect from time to time, or (ii) at a fixed rate per annum determined by
Bank to be five-eighths percent (0.625%) above LIBOR in effect on the first day
of the applicable Fixed Rate Term. When interest is determined in relation to
the Prime Rate, each change in the rate of interest hereunder shall become
effective on the date each Prime Rate change is announced within Bank. With
respect to each LIBOR selection hereunder, Bank is hereby authorized to note the
date, principal amount, interest rate and Fixed Rate Term applicable thereto and
any payments made thereon on Bank's books and records (either manually or by
electronic entry) and/or on any schedule attached to this Note, which notations
shall be prima facie evidence of the accuracy of the information noted.
(b) Selection of Interest Rate Options. At any time any portion of this Note bears interest determined in relation to LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term applicable hereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At
any time any portion of this Note bears interest determined in relation to the
Prime Rate, Borrower may convert all or a portion thereof so that it bears
interest determined in relation to LIBOR for a Fixed Rate Term designated by
Borrower. At such time as Borrower requests an advance hereunder or wishes to
select a LIBOR option for all or a portion of the outstanding principal balance
hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice
specifying: (i) the interest rate option selected by Borrower; (ii) the
principal amount subject thereto; and (iii) for each LIBOR selection, the length
of the applicable Fixed Rate Term. Any such notice may be given by telephone so
long as, with respect to each LIBOR selection, (A) Bank receives written
confirmation from Borrower not later than three (3) Business Days after such
telephone notice is given, and (B) such notice is given to Bank prior to 10:00
a.m., California time, on the first day of the Fixed Rate Term. For each LIBOR
option requested hereunder, Bank will quote the applicable fixed rate to
Borrower at approximately 10:00 a.m., California time, on the first day of the
Fixed Rate Term. If Borrower does not immediately accept the rate quoted by
Bank, any subsequent acceptance by Borrower shall be subject to a
redetermination by Bank of the applicable fixed rate; provided however, that if
Borrower fails to accept any such rate by 11:00 a.m., California time, on the
Business Day such quotation is given, then the quoted rate shall expire and Bank
shall have no obligation to permit a LIBOR option to be selected on such day. If
no specific designation of interest is made at the time any advance is requested
hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have
made a Prime Rate interest selection for such advance or the principal amount to
which such Fixed Rate Term applied. At no time shall more than five (5) advances
bear interest determined in relation to LIBOR.
(c) Additional LIBOR Provisions.
(i) If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining LIBOR, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, then (A) no new LIBOR option may be selected by Borrower, and (B) any portion of the outstanding principal balance hereof which bears interest determined in relation to LIBOR, subsequent to the end of the Fixed Rate Term applicable thereto, shall bear interest determined in relation to the Prime Rate.
(ii) If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for Bank (A) to make LIBOR options available hereunder, or (B) to maintain interest rates based on LIBOR, then in the former event, any obligation of Bank to make available such unlawful LIBOR options shall immediately be cancelled, and in the latter event, any such unlawful LIBOR-based interest rates then outstanding shall be converted, at Bank's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Prime Rate; provided however, that if any such Change in Law shall permit any LIBOR-based interest rates to remain in effect until the expiration of the Fixed Rate Term applicable thereto, then such permitted LIBOR-based interest rates shall continue in effect until the expiration of such Fixed Rate Term. Upon the occurrence of
any of the foregoing events, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any LIBOR options made available to Borrower hereunder, and any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.
(iii) If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall:
(A) subject Bank to any tax, duty or other charge with respect to any LIBOR options, or change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or
(B) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any office of Bank; or
(C) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any LIBOR options hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such LIBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any LIBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.
(d) Payment of Interest. Interest accrued on this Note shall be payable on the 1st day of each calendar quarter, commencing January 1, 2005.
(e) Default Interest. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable to this Note.
3. BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to
all of the limitations, terms and conditions of this Note and each other Loan Document; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount set forth above or such lesser amount as shall at any time be available hereunder. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on the Line of Credit Maturity Date (as defined in the Credit Agreement).
(b) Advances. Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of anyone acting alone who is authorized to request advances, written notice of which authorization has been provided by Borrower to the holder, and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above.
(c) Application of Payments. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first.
4. PREPAYMENT:
(a) Prime Rate. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00); provided, however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month:
(i) Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto.
(ii) Subtract from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of
prepayment for new loans made for such term and in a principal amount equal to the amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above.
Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum four percent (4%) above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). Each change in the rate of interest on any such past due prepayment fee shall become effective on the date each Prime Rate change is announced within Bank.
5. EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of October 26, 2004, as amended from time to time (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note.
6. MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several.
(c) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of Arizona.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above.
UNIVERSAL TECHNICAL INSTITUTE, INC., a
Delaware corporation
By: _______________________________
Name: _____________________________
Title: ____________________________
EXHIBIT "C"
SUBSIDIARIES
1. UTI Holdings, Inc. (AZ)
2. Universal Technical Institute of Arizona, Inc. (DE) [AZ, NC]
3. U.T.I. of Illinois, Inc. (IL) [NC]
4. Universal Technical Institute of California, Inc. (CA) [NC]
5. Universal Technical Institute of North Carolina, Inc. (DE) d/b/a: NASCAR Technical Institute [IL, MS, NC, LA]
6. Universal Technical Institute of Texas, Inc. (TX) [FL, IL, WV]
7. Universal Technical Institute of Pennsylvania, Inc. (DE) [AZ, PA]
8. Universal Technical Institute of Massachusetts, Inc. (DE) [AZ, PA]
9. The Clinton Harley Corporation (DE) d/b/a: Clinton Technical Institute; Motorcycle/ Marine Mechanics Institute [AZ, FL, IL, MS, NJ, WA]
10. Clinton Education Group, Inc. (DE) Inactive Entity [AZ]
11. Custom Training Group, Inc. (CA)
EXHIBIT "D"
COMPLIANCE CERTIFICATE FOR
PERIOD ENDING
_____________, 20___
("REPORTING PERIOD")
Wells Fargo Bank, National Association
MAC S4101-251
100 West Washington
Phoenix, Arizona 85004
Date: ____________ (1)
Dear Ladies and Gentlemen:
This Compliance Certificate refers to the Credit Agreement dated as of October 26, 2004 (as it may hereafter be amended, modified, extended or restated from time to time, the "Credit Agreement"), between Universal Technical Institute, Inc., a Delaware corporation ("Borrower"), and Wells Fargo Bank, National Association ("Bank"). Capitalized terms used and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement.
Pursuant to Section 4.3(c) of the Credit Agreement, the undersigned, the chief financial officer of Borrower, hereby certifies that:
Enclosed are the required financial statements for the [fiscal quarter]
[fiscal year] ending for the Borrower as required under Section 4.3 of the
Credit Agreement, which fairly and accurately present in all material respects
the financial condition and results of the operation of the Borrower.
To the best of the undersigned's knowledge, no "Event of Default" and/or other event that with the passing of time or the giving of notice or both would become an Event of Default has occurred [or if so, specifying the nature and extent thereof and any corrective actions taken or to be taken].
As of the last day of the Reporting Period, the computations below were true and correct:
(1) To be submitted within forty-five (45) days after the end of each fiscal quarter (120 days after the end of each fiscal year).
I. Section 4.9(a) - NET INCOME AFTER TAXES
Net Income After Taxes $__________
Net Income After Taxes Minimum Requirement $ 3,500,000
II. Section 4.9(b) - TOTAL LIABILITIES TO TANGIBLE NET WORTH
Liabilities:
Current Liabilities $__________
Plus: Noncurrent Liabilities $__________
Less: EITF 97-10 Liabilities up to $30,000,000 ($__________)
Less: Subordinated Debt ($__________)
Equals: Total Liabilities $__________A
Tangible Net Worth:
Total Assets $__________
Less: Total Liabilities ($__________)
Less: Intangible Assets ($__________)
Equals: Tangible Net Worth $__________B
DNW Ratio (A divided by B) Equals :1.00
DNW Ratio Maximum Requirement
December 31, 2004
to June 30, 2005 3.50:1.00
September 30, 2005
to June 30, 2006 2.00:1.00
September 30, 2006
and thereafter 1.50:1.00
|
III. Section 4.9(c) - CURRENT RATIO
Numerator: Current Assets (excluding cash $_________A
in the Collateral Account and
cash controlled by GE)
divided by
Denominator: Current Liabilities (including $_________B
Line of Credit balance
outstanding surety bonds and
outstanding Letters of Credit under
The Line of Credit Commitment)
Current Ratio equals _________A/B
Current Ratio Minimum Requirement
December 31, 2004
to June 30, 2005 0.40:1.00
September 30, 2005
to June 30, 2006 0.50:1.00
September 30, 2006
and thereafter 0.60:1.00
IV. Section 4.9(d) - TANGIBLE NET WORTH
Amount $__________
Minimum Requirement $__________
|
UNIVERSAL TECHNICAL INSTITUTE, INC., a
Delaware corporation
By: _____________________________________
Name: ___________________________________
Title: __________________________________
Exhibit 21.1
Subsidiaries of the Registrant
| State of | ||||
|
Name of Subsidiary
|
Incorporation
|
DBA
|
||
|
UTI Holdings, Inc.
(1)
|
Arizona | |||
|
Universal Technical Institute of Arizona, Inc.
(2)
|
Delaware | |||
|
Universal Technical Institute of California, Inc.
(2)
|
California | |||
|
U.T.I. of Illinois, Inc.
(2)
|
Illinois | |||
|
Universal Technical Institute of Massachusetts, Inc.
(2)
|
Delaware | |||
|
Universal Technical Institute of North Carolina, Inc.
(2)
|
Delaware | NASCAR Technical Institute | ||
|
Universal Technical Institute of Northern California,
Inc.
(2)
|
California | |||
|
Universal Technical Institute of Pennsylvania, Inc.
(2)
|
Delaware | |||
|
Universal Technical Institute of Texas, Inc.
(2)
|
Texas | |||
|
Custom Training Group, Inc.
(2)
|
California | |||
|
Clinton Education Group, Inc.
(2)
|
Delaware | |||
|
The Clinton Harley Corporation
(2)
|
Delaware | Clinton Technical Institute; | ||
|
|
Motorcycle/Marine | |||
|
|
Mechanics Institute |
| (1) | UTI Holdings, Inc. is a wholly-owned subsidiary of the Registrant. | |
| (2) | Wholly-owned subsidiaries of UTI Holdings, Inc. |
Exhibit 23.1
CONSENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the
incorporation by reference in the Registration Statements on
Form S-8
(No. 333-111898, 333-111899, 333-111900) of Universal Technical
Institute, Inc. and its subsidiaries of our report dated
November 22,
2004 relating to the financial statements and financial statement
schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers
Phoenix, Arizona
December 23, 2004
Exhibit 31.1
CERTIFICATION
I, Kimberly J. McWaters, certify that:
1.
I have reviewed this annual report on Form 10-K of Universal Technical
Institute, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a)
Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b)
Evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
c)
Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent
functions):
a)
All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial
information; and
b)
Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: December 23, 2004
/s/ Kimberly J. McWaters
Kimberly J. McWaters
Chief Executive Officer, President
Exhibit 31.2
CERTIFICATION
I, Jennifer L. Haslip, certify that:
1.
I have reviewed this annual report on Form 10-K of Universal Technical
Institute, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a)
Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b)
Evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
c)
Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent
functions):
a)
All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial
information; and
b)
Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: December 23, 2004
/s/ Jennifer L. Haslip
Jennifer L. Haslip
Senior Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
Exhibit 32.1
CERTIFICATION PURSUANT TO
In connection with the annual report of Universal Technical Institute,
Inc. (the “Company”) on Form 10-K for the year ending September 30, 2004, as
filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Kimberly J. McWaters, Chief Executive Officer and President of
the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
A signed original of this written statement required by Section 906 has been
provided to Universal Technical Institute, Inc. and will be retained by
Universal Technical Institute, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
This certification accompanies this Annual Report on Form 10-K pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Such certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933, as amended, or the Exchange
Act, except to the extent that the Company specifically incorporates it by
reference.
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(1)
The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company for the periods presented.
Dated: December 23, 2004
/s/ Kimberly J. McWaters
Kimberly J. McWaters
Chief Executive Officer, President
Universal Technical Institute, Inc.
Exhibit 32.2
CERTIFICATION PURSUANT TO
In connection with the annual report of Universal Technical Institute,
Inc. (the “Company”) on Form 10-K for the year ending September 30, 2004, as
filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Jennifer L. Haslip, Senior Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary of the Company, certify, to the best
of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
A signed original of this written statement required by Section 906 has been
provided to Universal Technical Institute, Inc. and will be retained by
Universal Technical Institute, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
This certification accompanies this Annual Report on Form 10-K pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Such certification will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933, as amended, or the Exchange
Act, except to the extent that the Company specifically incorporates it by
reference.
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(1)
The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company for the periods presented.
Dated: December 23, 2004
/s/ Jennifer L. Haslip
Jennifer L. Haslip
Senior Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
Universal Technical Institute, Inc.