PROPOSAL 4

APPROVAL OF CONVERSION AND VOTING OF SERIES A PREFERRED STOCK

We are seeking stockholder approval, in accordance with Section 312.03 of the NYSE Listed Company Manual (“NYSE Rule 312”), of (a) the issuance of shares of our common stock, par value $0.0001 per share, upon conversion of our currently outstanding shares of Series A Preferred Stock, to any holder of our Series A Preferred Stock, and any of such holder’s affiliates, that is a director, officer or substantial security holder of our company for purposes of NYSE Rule 312, (b) the issuance of shares of our common stock, that would cause any holder of our Series A Preferred Stock, and any of such holder’s affiliates, in the aggregate, to beneficially own 20% or more of our outstanding shares of common stock upon the conversion of our currently outstanding and any future outstanding shares of Series A Preferred Stock, as computed immediately after giving effect to such conversion, and (c) the ability of any holder of our Series A Preferred Stock and any of such holder’s affiliates to vote, in the aggregate, 20% or more of the aggregate voting power of all of our currently outstanding and any future outstanding shares of common stock and Series A Preferred Stock (on an as-converted basis), as computed on the applicable record date for determining stockholders who may vote on any proposal (the “Series A Conversion and Voting Proposal”).

In connection with our Preferred Stock Financing (as defined below) on June 24, 2016, a Conversion Cap and an Investor Voting Cap (each as defined below) were negotiated to ensure that the transaction complied with certain regulatory requirements. We further agreed to use best efforts to obtain applicable stockholder and regulatory approvals to remove the Conversion Cap and Investor Voting Cap upon request of the holders of a majority of the then outstanding shares of Series A Preferred Stock. As of the record date, all shares of our Series A Preferred Stock outstanding were held by Coliseum.

On January 7, 2020, Coliseum provided us written notice pursuant to the Certificate of Designations (as defined below) requesting that we use best efforts to obtain Stockholder Approval (as defined below) in accordance with NYSE Rule 312, but that we not pursue any efforts at this time to obtain the Education Regulatory Approval (as defined below). As described below under “General—Removing the Conversion Cap and Investor Voting Cap,” the Certificate of Designations provides that the Conversion Cap and Investor Voting Cap will remain in place until we receive both Stockholder Approval and Education Regulatory Approval or we make a good faith determination that one or both of those approvals are not required.

If we do receive stockholder approval of the Series A Conversion and Voting Proposal, the Conversion Cap and the Investor Voting Cap will remain in place until we receive Education Regulatory Approval or we make a good faith determination that Education Regulatory Approval is not required. In addition, if we do receive stockholder approval of the Series A Conversion and Voting Proposal, Coliseum has waived any right to receive dividends at the increased dividend rate set forth in the Certificate of Designations, solely by reason of our not obtaining or not seeking to obtain the Education Regulatory Approval at this time (unless and until such dividend rate increase becomes applicable pursuant to the terms of Section 3(h) of the Certificate of Designation following the delivery by the holders of a majority of the then outstanding shares of Series A Preferred Stock to us of written notice requesting that we use best efforts to obtain the Education Regulatory Approval).

If we do not receive stockholder approval of the Series A Conversion and Voting Proposal, the Conversion Cap and Voting Cap will remain in place and we will be required to pay dividends to the holders of Series A Preferred Stock at the increased dividend rate provided for in the Certificate of Designations until the Stockholder Approval is obtained. See “Summary of Rights and Preferences of the Series A Preferred Stock—Dividends” and “Consequences if the Proposal is Not Approved” for further information.

The Preferred Stock Financing occurred on June 24, 2016, and we are not seeking stockholder approval of the Preferred Stock Financing described below.

 

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General

On June 24, 2016, following arm’s length negotiations with Coliseum, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Coliseum, pursuant to which Coliseum purchased 700,000 shares of our Series A Preferred Stock for a total purchase price of $70,000,000 (the “Preferred Stock Financing”). The Purchase Agreement contained customary representations, warranties, covenants and indemnity provisions, including covenants relating to, among other things, information rights, financial reporting, tax matters, listing compliance under the NYSE, stockholder and regulatory approvals and use of proceeds. The proceeds of the Preferred Stock Financing were used for general corporate purposes. Prior to the consummation of the Preferred Stock Financing, Coliseum and its affiliates held 3,601,724 shares of our common stock and did not have representation on our Board of Directors. On June 29, 2016, our Board of Directors, upon the designation by Coliseum pursuant to the Certificate of Designations, elected Christopher S. Shackelton, a Managing Partner at CCM, to serve on our Board of Directors. See “Summary of Rights and Preferences of the Series A Preferred Stock—Board Representation” and “Interests of Directors in the Matters Being Voted Upon” for further information.

In connection with the Preferred Stock Financing, we filed a Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock (the “Certificate of Designations”) with the Secretary of State of the State of Delaware. The Certificate of Designations authorized a total of 700,000 shares of Series A Preferred Stock, all of which were purchased by Coliseum, and set forth the negotiated rights, powers, preferences and privileges of the Series A Preferred Stock, including the terms of the Conversion Cap and the Investor Voting Cap, the dividends payable to the holders of the Series A Preferred Stock, and the circumstances under which the holders of the Series A Preferred Stock could be entitled to receive dividends at an increased rate.

Removing the Conversion Cap and Investor Voting Cap.

The Certificate of Designations provides that prior to the receipt of Regulatory Approval (as defined below) or a good faith determination by us that Regulatory Approval is not required, the Series A Preferred Stock may only be converted into common stock to the extent that the number of shares of common stock issued pursuant to such conversion, in the aggregate, is less than or equal to 4.99% of the number of shares of our common stock that were outstanding at the close of business on June 24, 2016 (the “Conversion Cap”). The Series A Preferred Stock is entitled to vote with the holders of common stock (and any other class or series similarly entitled to vote with the holders of common stock) and not as a separate class, at any annual or special meeting of stockholders; provided, however, that, prior to the receipt of Regulatory Approval, or a good faith determination by us that Regulatory Approval is not required, the voting power of the Series A Preferred Stock and any common stock issued upon conversion of the Series A Preferred Stock may not exceed 4.99% of the aggregate voting power of all of our voting stock that was outstanding on June 24, 2016 (the “Investor Voting Cap”). The Certificate of Designations defines “Regulatory Approval” as (i) the approvals by the holders of common stock that are required under the listing standards of the NYSE, including NYSE Rule 312, and (ii) the approval of any person, entity, or organization that engages in granting or withholding educational approvals for, administers financial assistance to or for students of, or otherwise regulates private postsecondary schools, including without limitation the United States Department of Education, any state education department or agency, any guaranty agency, and any institutional accreditation agency, in each case, as applicable, to remove the Investor Voting Cap and the Conversion Cap and allow the issuance of the Series A Preferred Stock and the common stock issuable thereunder without limitations on voting or the number of shares to be issued (the approval required under clause (i) of the definition of “Regulatory Approval” is referred to as the “Stockholder Approval,” the approval required under clause (ii) of the definition of “Regulatory Approval” is referred to as the “Education Regulatory Approval” and, together, the Stockholder Approval and the Education Regulatory Approval are referred to as the “Regulatory Approval”).

As of June 24, 2016, we had 24,553,644 shares of Common Stock outstanding. Accordingly, until we obtain Regulatory Approval, or we make good faith determination that Regulatory Approval is not required, the number

 

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of shares of common stock into which shares of Series A Preferred Stock may be converted, and the number of shares of common stock that may be voted by the holders of Series A Preferred Stock on an as converted basis, is limited to 1,225,226 shares of common stock pursuant to the Conversion Cap and the Investor Voting Cap, each as set forth in the Certificate of Designations.

Stockholder Approval

Our common stock is listed on the NYSE. Accordingly, we are subject to the rules set forth in the NYSE Listed Company Manual. NYSE Rule 312 requires stockholder approval prior to certain issuances of securities, including the following:

 

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the issuance of common stock, or securities convertible into or exercisable for common stock, in any transaction or series of related transactions to a director, officer or substantial security holder of our company if the number of shares of common stock to be issued, or the number of shares of common stock into which the securities may be convertible or exercisable, exceeds either five percent of the number of shares of common stock or five percent of the voting power outstanding before the issuance;

 

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the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if:

 

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the common stock has, or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock; or

 

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the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock; and

 

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an issuance that will result in a change of control of the issuer.

As of the record date, we had 700,000 shares of Series A Preferred Stock outstanding, which represented 21,021,021 shares of common stock, or approximately 44.9% of our outstanding common stock, on an as-converted basis. On December 17, 2019, Coliseum and its affiliates sold their existing 3,601,724 shares of our common stock in a firm commitment underwritten offering. Accordingly, as of the record date, if all of the shares of Series A Preferred Stock were converted into common stock, Coliseum and its affiliates would have owned approximately 45.0% of the outstanding shares of common stock and our existing stockholders would have owned approximately 55.0% of the outstanding shares of common stock.

In order to comply with NYSE Rule 312, as well as certain education-based regulatory requirements related to a change of control of our company, the Series A Preferred Stock was issued subject to the Conversion Cap and the Investor Voting Cap. We are now seeking stockholder approval, in accordance with NYSE Rule 312, to approve the Series A Conversion and Voting Proposal.

In the event that we do not receive Stockholder Approval, as proposed by this Series A Conversion and Voting Proposal, the Series A Preferred Stock will remain subject to the Conversion Cap and the Investor Voting Cap and we will be required to pay dividends to the holders of Series A Preferred Stock at the increased dividend rate provided for in the Certificate of Designations. See “Summary of Rights and Preferences of the Series A Preferred Stock—Dividends” and “Consequences if the Proposal is Not Approved” for further information.

Education Regulatory Approval

Pursuant to the Certificate of Designations, we must obtain Education Regulatory Approval (or make a good faith determination that it is not required) to remove the Investor Voting Cap and the Conversion Cap.

 

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Coliseum has not requested that we seek, and we are not currently seeking, Education Regulatory Approval; however, if we receive stockholder approval of the Series A Conversion and Voting Proposal, Coliseum has waived any right to receive dividends at the increased dividend rate set forth in the Certificate of Designations, solely by reason of our not obtaining or not seeking to obtain the Education Regulatory Approval at this time. Pursuant to the Certificate of Designations, a majority of the outstanding shares of Series A Preferred Stock may request at any time that we use best efforts to obtain Education Regulatory Approval. We may make a good faith determination at any time, without notice to our stockholders, that the Education Regulatory Approval is not required in order for one or more holders of Series A Preferred Stock to convert their shares of Series A Preferred Stock into common stock or to vote their shares on an as-converted basis.

In the event that we receive Stockholder Approval, as proposed by this Series A Conversion and Voting Proposal, and later receive the Education Regulatory Approval (or we make a good faith determination that the Education Regulatory Approval is not required), the Conversion Cap and the Investor Voting Cap would be removed, allowing all of the outstanding shares of Series A Preferred Stock to be converted into common stock and, prior to any such conversion, to be voted (on an as-converted basis) together with the holders of common stock (and any other class or series similarly entitled to vote with the holders of common stock) and not as a separate class, at any annual or special meeting of stockholders. See “Summary of Rights and Preferences of the Series A Preferred Stock—Voting” and “Impact on Stockholders if the Proposal is Approved” for further information.

THIS SUMMARY OF THE TERMS OF THE PREFERRED STOCK FINANCING AND RELATED DOCUMENTS IS INTENDED TO PROVIDE YOU WITH BASIC INFORMATION CONCERNING THE PREFERRED STOCK FINANCING, THE PURCHASE AGREEMENT, THE REGISTRATION RIGHTS AGREEMENT AND THE CERTIFICATE OF DESIGNATIONS. HOWEVER, IT IS NOT INTENDED AS A SUBSTITUTE FOR REVIEWING THE PURCHASE AGREEMENT, CERTIFICATE OF DESIGNATIONS AND THE REGISTRATION RIGHTS AGREEMENT. THESE DOCUMENTS AND THE PREFERRED STOCK FINANCING ARE FURTHER DESCRIBED IN THE COMPANY’S PERIODIC FILINGS WITH THE SEC, INCLUDING THE COMPANY’S CURRENT REPORT ON FORM 8-K FILED ON JUNE 24, 2016 AND THE DOCUMENTS FILED THEREWITH AS EXHIBITS, WHICH ARE INCORPORATED BY REFERENCE INTO THIS PROXY STATEMENT.

Summary of Rights and Preferences of the Series A Preferred Stock

The description below provides a summary of certain material terms of the Series A Preferred Stock set forth in the Certificate of Designations.

Rank. The Series A Preferred Stock will, with respect to dividend rights and rights upon liquidation, winding up or dissolution, rank senior to our common stock and each other junior class or series of shares that we may issue in the future. The Series A Preferred Stock will also rank junior to any future indebtedness.

Dividends. We may pay a noncumulative cash dividend on each share of Series A Preferred Stock at a rate of 7.5% per year on the liquidation preference then in effect (“Cash Dividend”). Such dividend shall be paid before any dividends would be declared or paid to common stockholders or other junior stockholders. If we do not declare and pay a Cash Dividend, the liquidation preference on the Series A Preferred Stock shall be increased to an amount equal to the liquidation preference in effect at the start of the applicable dividend period, plus an amount equal to such then applicable liquidation preference multiplied by the total of the Cash Dividend rate then in effect plus 2.0% per year (an “Accrued Dividend”). If and to the extent declared, Cash Dividends are payable semi-annually in arrears on September 30 and March 31 of each year, and will begin to accrue on the first day of the applicable dividend period. We paid Cash Dividends of $2.6 million at September 30, 2017, $2.6 million at March 31, 2018, $2.6 million at September 30, 2018, $2.6 million at March 31, 2019 and $2.6 million at September 30, 2019.

 

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If applicable, an Accrued Dividend begins to accrue and be cumulative on the first day of each applicable dividend period, remains accumulated with respect to the Series A Preferred Stock until paid and compounds at the applicable annual rate on the payment date of each applicable subsequent dividend period. Accrued Dividends accrue whether or not there are profits, surplus or other funds legally available for the payment of dividends.

The Series A Preferred Stock includes participation rights such that, in the event that we pay a dividend or make a distribution on our outstanding common stock, we will also pay to each holder of the Series A Preferred Stock a dividend on an as converted to common stock basis.

In the event that we fail to pay any Cash Dividend declared by our Board of Directors on the date set for payment for any applicable dividend period, no dividends shall be declared or paid or set apart for payment, or other distribution declared or made, upon any of our common stock or junior stock, nor shall any of our common stock or junior stock be redeemed, purchased or otherwise acquired for any consideration by our company, directly or indirectly, until all such Cash Dividends have been paid in full without the approval of holders of Series A Preferred Stock, subject to certain exceptions set forth in the Certificate of Designations.

If we are required or elect to obtain Regulatory Approval and such approval is not obtained within the time periods set forth in the Certificate of Designations, the dividend rates with respect to the Cash Dividend and Accrued Dividend will be increased by 5.0% per year, not to exceed a maximum of 14.5% per year. In the event that we ultimately obtain Regulatory Approval after expiration of the time periods set forth in the Certificate of Designations, the increased dividend rates with respect to the Cash Dividend and Accrued Dividend would be reversed.

In connection with the delivery of its written notice requesting that we use our best efforts to obtain the Stockholder Approval, Coliseum agreed that if the Stockholder Approval is obtained within the applicable time period, then the dividend rate increase will not apply, and Coliseum waived any right to receive any such increased dividends calculated at the increased dividend rate, solely by reason of our not obtaining or not seeking to obtain the Education Regulatory Approval, unless and until such dividend rate increase becomes applicable pursuant to the terms of Section 3(h) of the Certificate of Designations following the delivery by the holders of a majority of the then outstanding shares of Series A Preferred Stock to us of written notice requesting that we use best efforts to obtain the Education Regulatory Approval.

Liquidation Preference. In the event of voluntary or involuntary liquidation, dissolution or winding up of our company, holders of the Series A Preferred Stock are entitled to receive, before any distribution or payment to the holders of any common or junior stock, an amount per share of Series A Preferred Stock equal to the liquidation preference then in effect, which would include any Accrued Dividends. Alternatively, the holder may choose to receive the amount that would be payable per share of common stock issued upon conversion of the Series A Preferred Stock immediately prior to such liquidation event. The initial liquidation preference under the Certificate of Designations was $100 per share, the original issue price of the Series A Preferred Stock.

Mergers (regardless of whether we remain the surviving entity), a sale of substantially all of our assets or any other recapitalization, reclassification or other transaction in which substantially all of our common stock is exchanged or converted into cash or other property are considered Deemed Liquidation Events. The Certificate of Designations provides that, in the case of a Deemed Liquidation Event, each holder of the Series A Preferred Stock shall be entitled to receive the liquidation amount they would receive under a normal liquidation event; however, the liquidation amount must be in the same form of consideration as is payable to the holders of our common stock.

Voting. Holders of shares of Series A Preferred Stock will be entitled to vote with the holders of shares of our common stock on an as-converted basis. The holders of Series A Preferred Stock may vote only to an extent not to exceed 4.99% of the aggregate voting power of all of our voting stock outstanding on the issue date of

 

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June 24, 2016, until such time that we receive necessary Regulatory Approval to remove the Investor Voting Cap. Additionally, a majority of the voting power of the Series A Preferred Stock must approve certain significant actions, including, among others, the amendment to any provision of our Restated Certificate of Incorporation or Amended and Restated Bylaws in a manner adverse to the rights, preferences, privileges or voting powers of the Series A Preferred Stock; the increase of the number of members of our Board of Directors above twelve members; the issuance of certain equity securities; the repurchase, redemption or acquisition of our common stock; the incurrence of debt other than in a form required by a regulatory agency; the consummation of certain acquisitions, mergers or other such transactions; and the sale or license of material assets.

As of June 24, 2016, we had 24,553,644 shares of common stock outstanding. Accordingly, until we obtain both Stockholder Approval and Education Regulatory Approval, or we obtain Stockholder Approval and make a good faith determination that the Education Regulatory Approval is not required, the voting power of the Series A Preferred Stock and any common stock issued upon conversion of the Series A Preferred Stock is limited to 1,225,226 shares of Common Stock pursuant to the Investor Voting Cap.

Conversion Rate and Conversion Price. The conversion rate for each share of the Series A Preferred Stock into our common stock will be calculated by dividing the liquidation preference then in effect by the conversion price then in effect. The conversion price as currently in effect for the Series A Preferred Stock is $3.33 per share. The conversion price is subject to adjustment upon the occurrence of certain common stock events, as defined in the Certificate of Designations, including stock splits, reverse stock splits or the issuance of common stock dividends.

Optional Conversion by Holders of the Series A Preferred Stock. Shares of the Series A Preferred Stock are convertible into common stock at the conversion rate at any time at the option of the holder. Prior to receiving Stockholder Approval and Education Regulatory Approval, the Series A Preferred Stock may be converted only to the extent that the number of shares of our common stock issued upon conversion does not, in the aggregate, exceed 4.99% of the total shares of common stock outstanding on the issue date of June 24, 2016.

As of June 24, 2016, we had 24,553,644 shares of common stock outstanding. Accordingly, until we obtain both Stockholder Approval and Education Regulatory Approval, or we obtain Stockholder Approval and make a good faith determination that the Education Regulatory Approval is not required, the number of shares of common stock into which shares of Series A Preferred Stock may be converted is limited to 1,225,226 shares of Common Stock pursuant to the Conversion Cap.

Optional Conversion by our Company. If at any time after June 24, 2019, the volume weighted average price of our common stock equals or exceeds 2.5 times the conversion price of the Series A Preferred Stock for a period of 20 consecutive trading days (the “Conversion Trigger”), we may, at our option and subject to obtaining any required Regulatory Approval, require that any or all of the then outstanding shares of Series A Preferred Stock be automatically converted into our common stock at the conversion rate. We may not elect to effectuate a conversion during certain time periods, including the closed trading window periods in which any director or executive officer of our company is prohibited by us to directly or indirectly purchase, sell or otherwise acquire or transfer any of our equity securities. If we are unable to obtain the necessary Regulatory Approval to remove the Conversion Cap within 120 days of giving our notice of intent to convert, we would have the option to redeem all shares of the Series A Preferred Stock at a premium, and during the time periods, each as set forth in the Certificate of Designations.

Optional Special Dividend and Conversion on Certain Change of Control. Upon a change of control, at the written election by the holders of a majority of the then outstanding shares of Series A Preferred Stock, we shall declare and pay a special cash dividend in the amount equal to either 1.5 or 2.0 times the Cash Dividend rate, depending on the type of change in control, multiplied by the liquidation preference per share then in effect.

Redemption at the Option of Our Company. We have the ability to redeem the Series A Preferred Stock at any time after June 24, 2019, provided that the Conversion Trigger has not been met on the date of our

 

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redemption notice. After receiving our redemption notice, the holders of the Series A Preferred Stock will be able to convert their shares into common stock if neither the Investor Voting Cap nor the Conversion Cap is in effect. If the holders of the Series A Preferred Stock do not provide notice of conversion within 10 days of receipt of our redemption notice, the redemption will proceed at a price per share equal to the product of the then current conversion rate and 2.5 times the conversion price. If either the Investor Voting Cap or the Conversion Cap is in effect at the date of our redemption notice, the holders of a majority of the then outstanding shares of the Series A Preferred Stock may request that we obtain the necessary Regulatory Approval for its removal. If the necessary Regulatory Approval is not obtained within 120 days of such request, we have the ability to effectuate the redemption at a price per share equal to the product of the then current conversion rate and the greater of 2.5 times the conversion price and the 20-day volume weighted average price of our common stock measured at the close of business on the business day immediately preceding the date of redemption.

After June 24, 2026, we will have the ability to redeem the Series A Preferred Stock in whole or in part at any time. After receiving our redemption notice, the holders of the Series A Preferred Stock will then be able to convert their shares into common stock if neither the Investor Voting Cap nor the Conversion Cap is in effect. If the holders of the Series A Preferred Stock do not provide notice of conversion within 10 days of receipt of our redemption notice, the redemption will proceed at a price per share equal to the liquidation preference then in effect. If either the Investor Voting Cap or the Conversion Cap is in effect at the date of our redemption notice, the holders of a majority of the then outstanding shares of the Series A Preferred Stock may request that we obtain the necessary Regulatory Approval for its removal. If the Regulatory Approval is not obtained within 120 days of such request, we have the ability to effectuate the redemption at a price per share equal to the greater of the liquidation preference then in effect per share and the product of the then current conversion rate and the closing price of our common stock on the date immediately preceding the date of such redemption. If at any time prior to our redemption, the necessary Regulatory Approval is obtained, the holders of the Series A Preferred Stock have the option to convert such shares into our common stock.

Anti-dilution. The conversion price of the Series A Preferred Stock is subject to certain customary anti-dilution protections should we effect certain common stock events, such as stock splits, stock dividends or subdivisions, reclassifications or combinations of our common stock. In such events, the conversion price will be adjusted in a proportionate manner to the change in outstanding shares of common stock immediately preceding and immediately after the event.

Reservation of Shares Issuable upon Conversion. We are required, at all times, to reserve and keep available out of our authorized and unissued shares of common stock the number of shares that would be issuable upon conversion of all Series A Preferred Stock, assuming that the Conversion Cap does not apply. If this reserve is not sufficient at any point to allow for full conversion, we shall be required to take action to increase our pool of authorized but unissued shares.

Board Representation. Pursuant to the Certificate of Designations, for so long as Coliseum, its affiliates or any of its or its affiliates’ transferees approved by us beneficially own at least a majority of the then outstanding shares of Series A Preferred Stock, the holders of shares of Series A Preferred Stock, by the vote or written consent of the holders of a majority of the then outstanding shares of Series A Preferred Stock, shall have the right to designate one member to our Board of Directors who, subject to applicable law and regulations (including NYSE listing standards), may be appointed to a minimum of two committees of our Board of Directors. On June 29, 2016, our Board of Directors, upon the designation by the holders of Series A Preferred Stock, and upon deeming such appointment to be in the best interests of the Company, elected Christopher S. Shackelton, a Managing Partner at CCM, to our Board of Directors.

Pursuant to CCM’s company policy, Mr. Shackelton may not personally benefit from compensation he receives for serving as a director of any company in which funds or accounts managed by CCM hold an equity interest. Mr. Shackelton has agreed that such compensation shall inure to the benefit of CCP. Further, we have agreed with Mr. Shackelton to provide such compensation in cash to avoid the complexity and expense of

 

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unregistered equity issuances as well as to avoid potential accumulations of common stock by CCM and its affiliates.

Registration Rights Agreement

In connection with the Preferred Stock Financing, we also entered into a Registration Rights Agreement (“Registration Rights Agreement”), which provides Coliseum certain demand and piggyback registration rights covering the shares of common stock issuable upon conversion of the Series A Preferred Stock. The Registration Rights Agreement also provides that we will bear all costs and expenses associated with registering the shares of common stock issuable upon conversion of the Series A Preferred Stock, with the exception of underwriting discounts and commissions and brokerage fees. On October 18, 2019, following a request by Coliseum pursuant to the Registration Rights Agreement, we filed a Registration Statement on Form S-3 (no. 333-234253) to register, among other securities, the 21,021,021 shares of common stock that may be issuable to Coliseum, if the Conversion Cap and the Investor Voting Cap are removed, upon the conversion of the 700,000 shares of Series A Preferred Stock purchased in the Preferred Stock Financing. We bore the out-of-pocket costs, expenses and fees incurred in connection with the registration, other than any related underwriting discounts or selling commissions and brokerage fees. The registration statement was declared effective by the SEC on October 30, 2019.

Further Information

The terms of the Preferred Stock Financing and the documents related thereto, including the Purchase Agreement, the Certificate of Designations and the Registration Rights Agreement, are complex and only briefly summarized above. For further information on the Preferred Stock Financing, the Series A Preferred Stock and the documents related thereto, including the Purchase Agreement, the Certificate of Designations and the Registration Rights Agreement, please refer to the descriptions and exhibits contained in our Current Report on Form 8-K filed with the SEC on June 24, 2016.

Impact on Stockholders if the Proposal is Approved

As of the record date, Coliseum and its affiliates beneficially owned, in the aggregate, 700,000 shares of our Series A Preferred Stock, representing 100% of our outstanding Series A Preferred Stock. The number of shares of common stock into which shares of Series A Preferred Stock may be converted, and the number of shares of common stock that may be voted by the holders of Series A Preferred Stock on an as converted basis, is limited to 1,225,226 shares of common stock pursuant to the Conversion Cap and the Investor Voting Cap, which represents approximately 4.5% of our outstanding common stock as of the record date.

If the Series A Conversion and Voting Proposal is approved by our stockholders at the Annual Meeting, the Certificate of Designations provides that the Conversion Cap and Investor Voting Cap will remain in place until we obtain Education Regulatory Approval or otherwise make a good faith determination that Education Regulatory Approval is not required. See “General—Removing the Conversion Cap and Investor Voting Cap” for further information. Accordingly, if the Series A Conversion and Voting Proposal is approved by our stockholders at the Annual Meeting and we later receive Education Regulatory Approval or later make a good faith determination that Education Regulatory Approval is not required, the Conversion Cap and Investor Voting Cap would be removed. We may make a good faith determination at any time, without notice to our stockholders, that the Education Regulatory Approval is not required in order for one or more holders of the Series A Preferred Stock to convert their shares of Series A Preferred Stock into common stock or to vote their shares on an as-converted basis. If we make that determination following receipt of Stockholder Approval, the Conversion Cap and Investor Voting Cap would be removed with respect to the applicable shares of Series A Preferred Stock.

Immediately following removal of the Conversion Cap and Investor Voting Cap with respect to all shares of Series A Preferred Stock, the voting power of the holders of the Series A Preferred Stock would increase to

 

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approximately 44.9% of our common stock and Coliseum (or such other holder) would have the ability under the Certificate of Designations to vote on an as-converted basis, together with the holders of common stock (and any other class or series similarly entitled to vote with the holders of common stock), at any annual or special meeting of stockholders. See “Summary of Rights and Preferences of the Series A Preferred Stock—Voting.” As long as Coliseum (or another holder) owns or controls a significant percentage of our outstanding voting power, it will have the ability to significantly influence all corporate actions requiring stockholder approval, including the election and removal of directors and the size of our Board of Directors, any amendment to our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets. Coliseum’s (or such other holder’s) influence over our management could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of our securities to decline or prevent security holders from realizing a premium over the market price for such securities. Coliseum’s (or such other holder’s) interests may not align with the interests of our other stockholders.

Following removal of the Conversion Cap and Investor Voting Cap, the holders of the Series A Preferred Stock would have the ability under the Certificate of Designations to convert up to an aggregate of 700,000 shares of Series A Preferred Stock and to vote such shares on an as-converted basis. Assuming the conversion rate remains the same as in effect on the record date, Coliseum would receive approximately 30.03 shares of common stock for each share of Series A Preferred Stock converted, resulting in our issuance of up to 21,021,021 shares of common stock. However, the aggregate number of shares of common stock that may be acquired may increase in accordance with the terms of the Certificate of Designations. For example, the liquidation preference of the Series A Preferred Stock, which as of the record date is equal to $100.00 per share, may be increased from time to time by Accrued Dividends. Any increase to the liquidation preference would also increase the conversion rate and result in our issuance of a greater number of shares of common stock upon conversion of the Series A Preferred Stock. The conversion of Series A Preferred Stock is also subject to adjustment from time to time upon the occurrence of certain events, including a stock split, a reverse stock split or a dividend of common stock to our stockholders. See “Summary of Rights and Preferences of the Series A Preferred Stock—Liquidation Preference” and “Summary of Rights and Preferences of the Series A Preferred Stock—Conversion Rate and Conversion Price” for further information.

Any additional equity or convertible debt financings in the future could result in further dilution to our stockholders. In addition, any subsequent sale of common stock by Coliseum (or other holders of Series A Preferred Stock) into the public market following conversion, or the perception that such sales could occur, could also materially and adversely affect the market price of our common stock and impair our ability to raise funds in additional stock financings.

Consequences if the Proposal is Not Approved

If the Series A Conversion and Voting Proposal is not approved by our stockholders at the Annual Meeting, the Conversion Cap and the Investor Voting Cap will remain in place, and the dividend rate with respect to the Cash Dividend and Accrued Dividends will automatically increase, from a rate of 7.5% and 9.5%, respectively, to a rate of 12.5% and 14.5%, respectively. These increases would result in significant ongoing costs to us. We would pay an additional $3.5 million in cash per year to Coliseum, assuming that Coliseum continues to hold all of the outstanding Series A Preferred Stock and the liquidation preference of the Series A Preferred Stock remains at its current value of $100 per share. Coliseum would receive additional cash payments if the liquidation preference of the Series A Preferred Stock increases. See “Summary of Rights and Preferences of the Series A Preferred Stock—Dividends” for further information.

In addition, until the Series A Conversion and Voting Proposal is approved by our stockholders and we have either (i) received any required Education Regulatory Approval, or (ii) made a good faith determination that Education Regulatory Approval is not required, we are prohibited from electing to force a conversion of the Series A Preferred Stock at a time when it might be advantageous for us to do so pursuant to the Certificate of

 

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Designations. See “Summary of Rights and Preferences of the Series A Preferred Stock—Optional Conversion by our Company” for further information.

Use of Proceeds

In the event that the Conversion Cap and Investor Voting Cap are removed and Coliseum elects to convert its shares of Series A Preferred Stock, we will not receive any proceeds from the issuance of common stock upon the conversion of Series A Preferred Stock.

Interests of Directors in the Matters Being Voted Upon

As discussed under “Summary of Rights and Preferences of the Series A Preferred Stock—Board Representation” above, the holders of a majority of the then outstanding shares of Series A Preferred Stock designated Christopher S. Shackelton to serve on our Board of Directors. Mr. Shackelton is a Managing Partner of CCM, and CCM is the non-member manager of Coliseum, which, as of the record date, held all outstanding shares of Series A Preferred Stock. If the Series A Conversion and Voting Proposal is approved by our stockholders at the Annual Meeting and we later receive Education Regulatory Approval or later make a good faith determination that Education Regulatory Approval is not required, the Conversion Cap and Investor Voting Cap would be removed and Coliseum (or such other holder of Series A Preferred Stock) would have the ability under the Certificate of Designations to convert up to an aggregate of 700,000 shares of Series A Preferred Stock into 21,021,021 shares of common stock and immediately vote such shares on an as-converted basis. As of the record date, if all of the shares of Series A Preferred Stock were converted into common stock, Coliseum and its affiliates would have owned approximately 45.0% of the outstanding shares of our common stock. See “Impact on Stockholders if the Proposal is Approved” for further information. As Managing Partner and a co-founder of CCM, Mr. Shackelton has an indirect interest in the outcome of the vote on the Series A Conversion and Voting Proposal. Mr. Shackelton recused himself from our Board of Directors’ discussion regarding, and vote to approve and recommend, the Series A Conversion and Voting Proposal described in this Proxy Statement.

Section 203 of the Delaware General Corporation Law

Coliseum is not subject to the restrictions set forth in 8 Del. C. § 203 because the Board of Directors approved the Preferred Stock Financing prior to its closing on June 24, 2016.

Vote Required

Approval of the Series A Conversion and Voting Proposal will require the affirmative vote of a majority of the votes cast by the holders of our common stock who are present in person or by proxy and entitled to vote on the matter, provided that a quorum exists.

For this proposal, abstentions will be counted towards the vote total and will have the same effect as a vote “AGAINST” the proposal, but broker non-votes (which are not “entitled to vote” on the matter) will not be counted and will have no effect.

Please note that the shares of Series A Preferred Stock, and any shares of common stock issuable upon conversion of the Series A Preferred Stock, will not be considered for purposes of the vote to approve this proposal.

THE BOARD OF DIRECTORS (WITH MR. SHACKELTON NOT PARTICIPATING IN SUCH VOTE) RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF CONVERSION AND VOTING OF SERIES A PREFERRED STOCK.

 

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EQUITY COMPENSATION PLAN INFORMATION

We maintain the Management 2002 Stock Option Program (the “2002 Plan”) and the 2003 Plan pursuant to which we may grant equity awards to eligible persons.

Management 2002 Stock Option Program. The 2002 Plan was adopted by our Board of Directors and became effective in April 2002. A maximum of 783,000 shares of common stock may be issued under the 2002 Plan, which is administered by our Compensation Committee.

The 2002 Plan provides for the grant of incentive and nonqualified stock options to our employees and employees of related companies, including officers and management directors, and non-statutory options to other persons providing material services to us or related companies. A non-management director is not eligible to receive an award.

As of September 30, 2019, we had issued 690,152 shares of common stock upon the exercise of options granted under the 2002 Plan. We will not make any further grants under the 2002 Plan.

2003 Incentive Compensation Plan. The 2003 Plan was adopted by our Board of Directors and approved by holders of the majority voting power of our voting stock and became effective in December 2003. The 2003 Plan was amended by holders of the majority voting power of our voting stock at the 2012 Annual Meeting of Stockholders to, among other things, increase the number of shares issuable under the 2003 Plan to 5,280,972 shares of our common stock, subject to proportional adjustment to reflect stock splits, stock dividends and other similar events. The 2003 Plan was amended again by holders of the majority voting power of our voting stock at the 2017 Annual Meeting of Stockholders to increase the number of shares issuable under the 2003 Plan to 6,280,972 shares of our common stock, subject to proportional adjustment to reflect stock splits, stock dividends and other similar events, and to provide for additional performance criteria under the 2003 Plan. The 2003 Plan provides for the issuance of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, stock units, performance shares, performance units, performance-based awards and cash bonuses.

Awards under the 2003 Plan may be granted to employees, directors, consultants and advisors to the Company or any of our subsidiaries. However, only employees (including officers and directors who are also employees) of the Company or any of our subsidiaries may receive incentive stock options under the 2003 Plan. The 2003 Plan is administered by our Compensation Committee.

As of September 30, 2019, we had issued 412,293 shares of common stock upon the exercise of options granted under the 2003 Plan, at a weighted average exercise price of $19.15 per share. As of September 30, 2019, there were 210,000 shares of common stock issuable pursuant to currently exercisable options granted under the 2003 Plan, at a weighted average exercise price of $3.14 per share.

As of September 30, 2019, we had granted 2,971,705 shares of restricted stock awards under the 2003 Plan, of which 1,255,253 shares have been forfeited and no shares are still subject to restrictions.

As of September 30, 2019, we had awarded 2,340,441 restricted stock units under the 2003 Plan, of which 1,231,096 shares have been forfeited and 235,566 shares remain unvested. During the year ended September 30, 2019, 227,910 restricted stock units vested, of which 90,599 shares were withheld to settle individual participant tax obligations.

As of September 30, 2019, we had awarded 313,611 performance stock units under the 2003 Plan, of which 95,296 shares have been forfeited and 133,139 shares remain unvested. During the year ended September 30, 2019, 108,345 restricted stock units vested, of which 44,195 shares were withheld to settle individual participant tax obligations.

 

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The following table summarizes our equity compensation plan information as of September 30, 2019. Information is included for both equity compensation plans approved by the stockholders and equity plans not approved by the stockholders.

 

Plan Category		Common Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)				Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b)				Common Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Shares Reflected in Column (a) (c)
Equity compensation plans approved by UTI stockholders			210,000			$	3.14				1,854,184
Equity compensation plans not approved by UTI stockholders			—				—				—
Totals			210,000			$	3.14				1,854,184

 

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COMPENSATION DISCUSSION AND ANALYSIS

In this Compensation Discussion and Analysis, we describe the material components of our executive compensation program for our former principal executive officer who was serving as principal executive officer as of the end of fiscal 2019, our principal financial officer, our former principal financial officer who served as principal financial officer during fiscal 2019 but was not serving as principal financial officer as of the end of fiscal 2019, and the three other most highly compensated individuals who were serving as executive officers of the Company as of the end of fiscal 2019.

 

•

Kimberly J. McWaters, our former President and Chief Executive Officer (“CEO”)

 

•

Jerome A. Grant, our current Chief Executive Officer and former Executive Vice President and Chief Operating Officer

 

•

Troy R. Anderson, our Executive Vice President and Chief Financial Officer

 

•

Scott Yessner, our former interim Chief Financial Officer

 

•

Sherrell E. Smith, our Executive Vice President of Campus Operations and Services

 

•

Piper P. Jameson, our former Executive Vice President and Chief Marketing Officer

These individuals are referred to herein as the “Named Executive Officers” or “NEOs.”

Specifically, this Compensation Discussion and Analysis provides an overview of our executive compensation philosophy, the overall objectives of our executive compensation program and each compensation component that we provide. In addition, we explain how and why the Compensation Committee of our Board of Directors arrived at the specific compensation decisions for our executive officers for fiscal 2019.

The compensation of the NEOs for fiscal 2019 is set forth in “Executive Compensation—Fiscal 2019 Summary Compensation Table” and other tables contained in this Proxy Statement.

Executive Summary

Fiscal 2019 Business Highlights

Higher student population levels as we began 2019 resulted in a 2.5% increase in our average full-time enrollment to 10,674 students for the year ended September 30, 2019. We started 11,652 students during the year ended September 30, 2019, which represents an increase of 8.8% as compared to an increase of 1.2% for the year ended September 30, 2018. The increase in starts was primarily the result of the transformation plan initiatives and continued execution on the metro campus strategy.

During 2018, we announced and began implementation of a multi-year transformation plan. This plan included opportunities for growth with select investments in marketing, admissions and student services. During 2019, we realized measurable benefits from the transformation plan, and we continued to refine and execute on these opportunities. In addition to the transformation plan, we continue to focus on existing key strategies, including the following:

 

•

Expanding into new geographic markets either organically or through strategic acquisitions; we opened a new campus in Bloomfield, New Jersey in August 2018;

 

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Offering new programs, such as expanding our welding program to our Dallas Ft. Worth, Texas campus, and offering associate level degree programs at additional campus locations;

 

•

Maintaining and expanding relationships with OEM partners and other employers to provide career opportunities and tuition reimbursement for our graduates;

 

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•

Identifying and executing on a variety of affordability initiatives for our students, including employer financial support and institutional scholarships and grants; and

 

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Shifting perceptions and building advocacy with key policy makers and influencers.

Several factors continue to challenge our ability to start new students, including the following:

 

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Unemployment; during periods when the unemployment rate declines or remains stable as it has in recent years, prospective students have more employment options;

 

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Adverse media coverage, legislative hearings, regulatory actions and investigations by attorneys general and various agencies related to allegations of wrongdoing on the part of other companies within the education and training services industry, which have cast the industry in a negative light;

 

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Competition for prospective students continues to increase from within our sector and from market employers, as well as with traditional postsecondary educational institutions; and

 

•

The state of the general macro-economic environment and its impact on price sensitivity and the ability and willingness of students and their families to incur debt.

Our revenues for the year ended September 30, 2019 were $331.5 million, an increase of $14.5 million, or 4.6%, from the prior year. We had an operating loss of $7.8 million compared to an operating loss of $35.3 million for the same period in the prior year. The increase in revenue was due to higher student count and tuition rate increases. Additionally, there was an additional earning day, which resulted in an increase of approximately $1.3 million in revenue. The improvement in operating results were also impacted by an overall decrease across various expense categories with the primary drivers being decreased advertising and contract and professional services expense. We incurred a net loss of $7.9 million compared to a net loss of $32.7 million in the prior year. The net loss for the year ended September 30, 2018, included an income tax benefit of $3.0 million due primarily to the release of certain valuation allowance, as impacted by the provisions of the Tax Cuts and Jobs Act. In addition, our results of operations were positively impacted by the opening of our new campus in Bloomfield, New Jersey in August 2018. For the twelve months ended September 30, 2019, this campus had revenues of $10.9 million and direct costs of $8.7 million.

Key Management Changes in Fiscal 2019 and Thereafter

Troy R. Anderson was appointed Executive Vice President and Chief Financial Officer effective as of September 23, 2019.

In connection with Mr. Anderson’s appointment, Scott Yessner stepped down from his role as Interim Chief Financial Officer effective as of September 23, 2019. Mr. Yessner had served as interim Chief Financial Officer since May 14, 2018. Mr. Yessner provided his services through an agreement between the Company and Ranstad Professionals US, LLC, d/b/a Tatum, a professional services firm (“Tatum”). Mr. Yessner continued to support the Company through the 2019 fiscal year-end financial reporting cycle.

Following the end of the fiscal year, Kimberly J. McWaters retired from her role as our President and Chief Executive Officer, effective as of October 31, 2019. Ms. McWaters continues to serve as a director on our Board of Directors.

In connection with Ms. McWaters’ retirement, Jerome A. Grant, our former Executive Vice President and Chief Operating Officer, was appointed Chief Executive Officer effective as of November 1, 2019.

Following the end of the fiscal year, Piper P. Jameson left the Company, effective as of January 6, 2020.

 

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What We Pay and Why

Historically, the primary elements of NEO “target total direct compensation” consisted of base salary, annual incentive awards and long-term incentive compensation. To support the Company’s focus on returning to profitability, base salary was the only form of NEO “target total direct compensation” during fiscal 2019.

While the NEOs did not receive new grants of long-term incentive compensation awards or annual incentive awards during fiscal 2019, previously granted long-term incentive awards remained an important component of our executive compensation program and served to tie the interests of our executives to the interests of our stockholders.

CEO Compensation

We believe that the success of our business and resulting value creation for our stockholders is largely dependent on a stable management team led by an individual with the vision to provide long-term strategic leadership. Accordingly, the compensation package of our CEO is generally designed to support this belief while, at the same time, fulfilling our overall compensation objectives, including rewarding sustainable growth as reflected by our financial performance and favorable student outcomes, effective cost management and consistent operational excellence. For fiscal 2019, to support the Company’s focus on returning to profitability, the compensation package for our CEO consisted only of base salary.

2019 Executive Compensation Policies and Practices

We endeavor to maintain sound governance standards consistent with our executive compensation policies and practices. The Compensation Committee evaluates our executive compensation program on an ongoing basis to ensure that it is consistent with our short-term and long-term goals given the dynamic nature of our business and the market in which we compete for executive talent. The following policies and practices were in effect during fiscal 2019:

 

•

Annual Executive Compensation Review. The Compensation Committee conducts an annual review and approval of our compensation strategy, including a review of our compensation peer group used for comparative purposes and a review of our compensation-related risk profile to ensure that our compensation-related risks are not reasonably likely to have a material adverse effect on the Company.

 

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Independent Compensation Consultant. The Compensation Committee has engaged Compensia, Inc., a national compensation consulting firm, to assist it in fulfilling its responsibilities and duties.

 

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Pay for Performance. Historically, a significant portion of each NEO’s annual compensation was subject to achievement of objective performance metrics. Our executive compensation program was designed so that a significant portion of compensation was “at-risk” based on Company performance, as well as equity-based to align the interests of our executive officers and stockholders. For fiscal 2019, to support the Company’s focus on returning to profitability, no long-term incentive compensation or annual incentive awards were awarded to our NEOs. However, we expect such awards to be reinstated in subsequent years.

 

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Stock Ownership Guidelines. To further align the interests of our executive officers with the interests of our stockholders, our Board of Directors has implemented stock ownership guidelines for our executive officers. Each executive officer is expected to hold shares of our common stock with an aggregate value greater than or equal to a multiple of his or her base salary as set forth below. Compliance is measured annually in September. Executive officers may not sell or transfer any of their shares of common stock until their ownership requirement is met, other than to meet tax obligations. Once an executive officer’s ownership requirement is met, he or she may sell or transfer shares of common stock in excess of the ownership requirement.

 

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President & CEO—four times base salary;

 

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•

Chief Financial Officer—three times base salary; and

 

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Executive and Senior Vice Presidents—two times base salary.

 

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Cap on Annual Incentive Award Compensation. Historically, the aggregate maximum annual incentive award that could be earned by each of our NEOs was capped at 150% of his or her target award opportunity. For fiscal 2019, no annual incentive awards were made in support of the Company’s focus on the return to profitability.

 

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Hedging. Our Insider Trading Policy provides that no employee, officer or director may acquire, sell or trade in any interest or position relating to the future price of Company securities, such as a put option, a call option or a short sale (including a short sale “against the box”), or engage in hedging transactions (including “cashless collars”).

 

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Income Tax Gross-Ups. We do not provide for any 280G tax gross-up payments in any employment or change in control agreements.

 

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“Double Trigger” Change in Control Provisions. Under the change in control provisions of our severance programs and long-term incentive awards, our executive officers are only eligible to receive severance payments and benefits if they experience a qualifying termination of employment following a change in control, subject to award agreement terms.

Executive Compensation Philosophy and Objectives

Our executive compensation program is driven by our business environment, objectives and outcomes. Consequently, we evaluate the performance of our executive officers, including the NEOs, based on their management of the Company in the context of current business and economic conditions and our performance relative to our peers. Because the NEOs have broad policy-making authority, the Compensation Committee holds them responsible for our financial performance and for upholding our values in a competitive marketplace.

In this highly competitive market for top executive talent, we generally believe that it is important, if not consistent with the Company’s other objectives, to provide our executive officers with incentives that are aligned with the interests of our stockholders, internally and externally equitable, promote a culture of innovation and results-oriented service for our students and customers, and discourage undue risk-taking. We also believe an effective executive compensation program rewards the achievement of short-term, long-term and strategic objectives that are closely aligned with the soundness of the Company and the interests of our stockholders and encourages appropriate decision-making regarding the long-term value of the Company.

Therefore, we generally believe that a meaningful portion of each executive officer’s target total direct compensation opportunity should be “at risk” and payable only if his or her performance benefits the interests of our stockholders. As such, while the NEOs did not receive “at-risk” pay components in fiscal 2019, in support of the Company’s focus on a return to profitability, the Compensation Committee plans to reinstate the “at risk” pay components for our NEOs in the future.

Say on Pay Votes

We hold stockholder advisory Say on Pay votes on the compensation of our named executive officers every three years, the most recent of which occurred at our annual meeting in 2017. The 2017 Say on Pay proposal received majority support, achieving 78% approval. The Compensation Committee considers the results of our Say on Pay votes, together with the other factors discussed in this Compensation Discussion & Analysis, as it considers appropriate when it reviews and modifies the pay program and compensation packages provided to our NEOs.

 

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Oversight of the Executive Compensation Program

Role of Compensation Committee

The Compensation Committee is responsible for overseeing the design and operation of our executive compensation program. In fulfilling this responsibility, the Compensation Committee formulates recommendations for the target total direct compensation, and each individual element of compensation, for our executive officers, including the NEOs, for consideration by and approval of our Board of Directors.

In developing these recommendations, the Compensation Committee evaluates the financial and operational performance of the Company and conducts a performance review of our CEO, taking into consideration our short-term and long-term goals and objectives. The Compensation Committee also considers the annual performance review of our other executive officers, as conducted by our CEO, as a significant factor in developing the compensation recommendations for these individuals.

With the assistance of a compensation consultant, the Compensation Committee also conducts an annual assessment of the competitiveness of our executive compensation program, including a review of the compensation mix to ensure appropriate pay leverage is maintained in the overall compensation package and in equity-based incentives that emphasize the creation of long-term stockholder value.

In the summer of 2018, the Compensation Committee conducted its annual review of compensation for fiscal 2019, examining the base salary, annual cash incentive award opportunity and long-term incentive compensation opportunity of each executive officer, including each NEO. Given the Company’s objective to focus on a return to profitability during fiscal 2019, no long-term incentive or annual incentive awards were made.

Role of Executive Officers

Our CEO makes recommendations to the Compensation Committee as to the base salaries, target annual cash incentive award opportunities and long-term incentive compensation opportunities of our executive officers, including the NEOs (other than himself or herself). These recommendations are based on an analysis of relevant market data (derived from a review of peer company and survey data), as well as his or her evaluation of each executive officer’s performance.

Role of Compensation Consultants

The Compensation Committee has engaged Compensia, Inc., a national compensation consulting firm, to assist it in fulfilling its responsibilities and duties. Specifically, Compensia’s engagement encompasses advisory services, including a periodic review of our executive compensation philosophy; executive compensation levels and “pay-for-performance” linkage; executive cash and broad-based equity incentive program design; executive officer employment and other agreements; and other ad hoc support.

Compensia serves at the direction of, and reports directly to, the Compensation Committee. A representative of Compensia attends all Compensation Committee meetings. Compensia does not perform any other services for the Company unless directed to do so by the Compensation Committee. Other than the work described above, there are no other material relationships between Compensia and the Company or its executive officers or members of our Board of Directors.

The Compensation Committee has analyzed whether or not the work of Compensia as a compensation consultant has raised any conflicts of interest, taking into consideration the factors as set forth in the listing standards of the New York Stock Exchange. Based upon its analysis, the Compensation Committee has determined that the work of Compensia and any individual compensation consultant employed by Compensia and involved in providing us services on behalf of the Compensation Committee has not created any conflicts of interest.

 

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Competitive Positioning

To evaluate the competitiveness of our executive compensation program, the Compensation Committee generally compares each compensation element, as well as the total direct compensation of our executive officers, including the NEOs, against the compensation practices of a group of peer companies. In selecting the peer group companies, the Compensation Committee considers the following criteria: (i) focus on the education services industry, education-related industry, or a counter-cyclical industry, headquartered in the United States and traded on a major U.S. stock exchange; and (ii) revenue, market capitalization, assets and headcount within a reasonable range of the Company. In 2019, Bridgepoint Education rebranded to assume the name Zovio. In 2018, Cambium Learning Group, Inc. merged with Cambium Holding Corp. (formerly known as Campus Holding Corp.), resulting in its removal from our peer group during fiscal 2019.

The fiscal 2019 compensation peer group consisted of the following companies:

 

American Public Education, Inc.		National American University Holdings, Inc.
Career Education Corporation		Rosetta Stone, Inc.
Franklin Covey Co.		Strategic Education, Inc.
GP Strategies Corporation		U.S. Auto Parts Network, Inc.
Grand Canyon Education, Inc.		Zovio Inc.
Lincoln Educational Services Corporation

In addition to compensation peer group data, we also compile and analyze job-specific compensation survey data prepared from general industry organizations for companies with similar revenue levels. For fiscal 2019, the compensation surveys used were Mercer’s Benchmark Database, Mercer’s Human Resources Proprietary Education Network (HRPEN) For-Profit Post-Secondary Education Study, and PayFactors Survey Database. The data drawn from these surveys is combined with the data derived from the companies in the compensation peer group to create a set of composite comparison data (the “Competitive Market Data”). In the case of executive officers where compensation data is publicly available from SEC filings, the data derived from the companies in the compensation peer group is weighted equally with the compensation survey data in developing the Competitive Market Data for their positions.

The Compensation Committee and the independent members of our Board of Directors use the Competitive Market Data as a guide when making decisions about target total direct compensation, as well as individual elements of compensation, for our executive officers, including the NEOs. Generally, using the data from the 50th and 75th percentiles of target total direct compensation as reference points, the Compensation Committee formulates recommendations for the amount of each individual element of compensation for each executive officer. Generally, the Compensation Committee gives greater weight to compensation data above the midpoint of the competitive market because we believe that the Company’s continued status as the industry’s choice for technical training requires a level of leadership talent that commands a premium in the current environment. Additionally, the attraction and retention of talent in the for-profit education sector has been negatively impacted in recent years by regulatory and economic pressures creating a need to pay above the median for top talent. Since the Competitive Market Data is a starting point for the Compensation Committee’s deliberations, which are influenced by several additional factors as described below, the target total direct compensation opportunities for our executive officers, as well as the amounts of each individual compensation element, may vary from the 50th and 75th percentiles of such data.

We compare the positioning of our employee benefits annually using national healthcare surveys. Retirement benefits are evaluated annually against general industry standards, using data from our plan administrators (Vanguard and Newport Group). Typically, we target the median of this data to maintain competitive levels with respect to each of our employee benefits programs.

 

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Compensation Mix

Historically, our executive compensation program was designed around the concept of total direct compensation—that is, the combination of base salary, annual incentive awards and long-term incentive compensation. In setting the appropriate level of target total direct compensation, the Compensation Committee and the independent members of our Board of Directors sought to establish each compensation element at a level that was competitive and that would attract and motivate top talent, while keeping the overall compensation levels aligned with stockholder interests and job responsibilities. As discussed above, fiscal 2019 compensation consisted only of base salary, and no new long-term incentive compensation or annual incentive awards were granted in support of the Company’s focus on returning to profitability.

Compensation Elements

Base Salary

Each year, the Compensation Committee reviews the base salaries of our executive officers, including the NEOs, using the deliberative process described above. In making base salary adjustment recommendations, the Compensation Committee considers our current business environment, the Competitive Market Data and each executive officer’s past performance, anticipated future contributions, role, responsibilities, skills and experience. Other than with respect to Mr. Grant who was recently appointed Chief Executive Officer, the last base salary adjustment for our NEOs was a base salary 2% cost-of-living adjustment in December 2015.

The base salaries of the NEOs during fiscal 2018 and 2019 and the salaries approved for fiscal 2020 are as follows:

 

Named Executive Officer		Fiscal 2018 Base Salary				Fiscal 2019 Base Salary				Fiscal 2020 Base Salary
Kimberly J. McWaters		$	737,644			$	737,644					(1)
Jerome A. Grant		$	400,000			$	400,000			$	500,000	(2)
Troy R. Anderson (3)			N/A			$	365,000			$	365,000
Scott Yessner		$	270,000	(4)		$	810,450	(5)				(6)
Sherrell E. Smith		$	408,000			$	408,000			$	408,000
Piper P. Jameson (7)		$	355,000			$	355,000			$	355,000

 

(1)	Ms. McWaters retired effective October 31, 2019.

(2)	Mr. Grant was appointed Chief Executive Officer effective November 1, 2019.

(3)	Mr. Anderson joined the Company on September 23, 2019.

(4)

From April 9, 2018 through May 13, 2018, we paid Tatum a weekly fee of $7,500 for Mr. Yessner’s consulting services, which totaled $37,500 for fiscal 2018. From May 14, 2018 through September 30, 2018, we paid Tatum a weekly fee of $13,500, totaling $270,000, to retain Mr. Yessner’s services as interim Chief Financial Officer.

(5)	From October 1, 2018 through February 2, 2019, we paid Tatum a weekly fee of $16,050, and from February 3, 2019 through September 30, 2019, we paid Tatum a weekly fee of $15,250, totaling $810,450, to retain Mr. Yessner’s services as interim Chief Financial Officer.

(6)	From October 1, 2019 through November 30, 2019, we paid Tatum a weekly fee of $15,250 to retain Mr. Yessner for continued support through the 2019 fiscal year-end financial reporting cycle.

(7)	Ms. Jameson left the Company on January 6, 2020.

The fiscal 2019 base salaries of the Named Executive Officers are included in “Executive Compensation—Fiscal 2019 Summary Compensation Table” below.

Annual Cash Incentive Awards

Historically, our executive officers, including the NEOs, were eligible to earn annual cash incentive awards based on the achievement of specific performance goals for the fiscal year. To support the Company’s focus on

 

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returning to profitability, our executive officers, including the NEOs, did not receive annual cash incentive awards in fiscal 2019.

Long-Term Incentive Compensation

2019 Long Term Incentive Compensation

Historically, our executive officers, including the NEOs, have received long-term incentive compensation. To support the Company’s focus on returning to profitability, our executive officers, including the NEOs, did not receive long-term incentive compensation in fiscal 2019.

Vesting of Previous Performance-Based Grants

In September 2017, the Compensation Committee approved a new performance-based long-term incentive plan, comprised of time-based RSUs, performance units and performance cash. The performance units and performance cash awards are considered “at risk” performance-based compensation that encourages and rewards long-term performance using a total shareholder return growth measure.

The performance unit and performance cash awards for the September 2017 grant were tied to a two-year performance period wherein performance was measured by compound annual total shareholder return (“TSR”) calculated based on the 30-day trading average closing stock price at the beginning and the end of the performance period. The performance reflected stock price appreciation and any dividends paid on common stock (excludes preferred stock dividends).

The pay/performance scale for the September 2017 grant was as follows:

 

TSR Pay/Performance Scale		Two Year Compound Annual TSR		Payout as % of Target		30 Trading Day Average
Below Threshold		<5%		0%		<$3.87
Threshold		5%		25%		$3.87
Target		10%		100%		$4.25
Max		20%		150%		$5.06
30-Day Trading Average at Grant = $3.51

The 30-day trading average as of September 13, 2019, which was the last day of the performance period, was $4.69 which equated to a 127.2% payout of the targeted awards. For more information about the awarded amounts paid to the NEOs during fiscal 2019, see “Executive Compensation—Fiscal 2019 Summary Compensation Table” and “Executive Compensation—Fiscal 2019 Option Exercises and Stock Vested Table” below.

Retirement Benefits

We maintain a defined contribution plan, intended to qualify under Section 401(k) of the Internal Revenue Code, which is generally available to all employees, including the NEOs (other than Mr. Yessner), to assist them in saving for retirement. Under this plan, a participant may contribute a maximum of 75% of his or her pre-tax base salary (up to the statutorily prescribed annual limit). Our Board of Directors may approve discretionary matching and/or profit-sharing contributions into the plan for eligible employees. During fiscal 2019, we matched 25 cents on each dollar saved up to the first 6% of eligible compensation contributed to the plan after the first year of employment. A five-year vesting schedule applies to all of our matching contributions. A participant is considered fully vested in our matching contributions after he or she has completed five years of service with the Company.

Our executive officers, including the NEOs (other than Mr. Yessner), are also eligible to participate in our Nonqualified Deferred Compensation Plan. We offer this plan to allow participants to set aside a portion of their

 

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income for retirement on a pre-tax basis, in addition to the amounts allowed under the Section 401(k) plan. We view these retirement benefits as a key component of our executive compensation program because they are intended to encourage long-term service by our executive officers.

Severance and Change in Control Benefits

Each of the NEOs (other than Mr. Yessner) is eligible to receive certain payments and benefits in connection with his or her termination of employment under various circumstances, including following a change in control of the Company, under his or her employment agreement or other applicable agreements, such as the Company’s Severance Plan, and under the terms that apply to our outstanding restricted stock and restricted stock unit awards. Mr. Anderson’s hire date precluded his eligibility for change in control severance in fiscal 2019. We believe that these payments and benefits were necessary to attract and retain our NEOs and that the change in control payments and benefits are in the best interests of the Company and our stockholders because they help assure us that we will have the continued dedication and objectivity of our executive officers, notwithstanding the possibility or occurrence of a change in control of the Company. Specifically, these arrangements are intended to mitigate a potential disincentive for the NEOs when they are evaluating a potential acquisition of the Company, particularly when their services may not be required by the acquiring entity. In such a situation, we believe that these arrangements are necessary to encourage retention of the NEOs through the consummation of the transaction and to ensure a smooth management transition. For further details, see “Executive Compensation—Potential Payments upon Termination or Change in Control.”

Perquisites and Other Personal Benefits

We provide limited perquisites, including Company-paid premiums for life and disability insurance, a supplemental executive disability benefit, accidental death and dismemberment coverage, executive physicals, additional term-life insurance and the Executive Medical Plan (ArmadaCare), to certain of our executive officers, including the Named Executive Officers (other than Mr. Yessner). The ArmadaCare Executive Medical Plan has been discontinued for fiscal 2020. Given the rigorous demands placed on the Named Executive Officers, we have a vested interest in their proactive focus on their health and security. Based on its review of the Competitive Market Data, the Compensation Committee believes that perquisite levels provided to our executive officers are less than those provided by comparable companies.

Tax and Accounting Considerations

Deduction Limit

Pursuant to amendments to Section 162(m) of the Internal Revenue Code (New Tax Law), for taxable years beginning after December 31, 2017, a previous performance-based compensation exemption from the $1 million deduction limitation was repealed and no longer available to be used by public companies in order to minimize the loss of tax deductions of certain compensation payable to the Chief Executive Officer and the three next highest paid individuals (each, a “specified executive”) for tax deductibility purposes. It should be noted that the New Tax Law also provides that the Chief Financial Officer will now be eligible to be included as a specified executive for Section 162(m) purposes.

“Golden Parachute” Compensation

Sections 280G and 4999 of the Internal Revenue Code provide that our executive officers and directors who hold significant equity interests and certain other service providers may be subject to an excise tax if they receive payments or benefits that exceed certain prescribed limits in connection with a change in control of the Company, and that we, or a successor, may forfeit an income tax deduction on the amounts subject to this additional tax. We did not provide any executive officer, including any Named Executive Officer, with a “gross-up” or other reimbursement payment for any tax liability that he or she might owe as a result of the

 

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application of Sections 280G or 4999 of the Internal Revenue Code during fiscal 2019, and we have not agreed and are not otherwise obligated to provide any Named Executive Officer with such a “gross-up” or other reimbursement in connection with the payments or benefits in connection with a change in control of the Company.

Amounts payable to the Named Executive Officers as a result of a termination of employment in connection with a change in control of the Company may be reduced pursuant to provisions of the applicable agreements if they would be subject to taxes as a result of Sections 280G or 4999 of the Internal Revenue Code.

Accounting for Stock-Based Compensation

We follow Financial Accounting Standard Board Accounting Standards Codification Topic 718 (“ASC Topic 718”) for our stock-based compensation awards. ASC Topic 718 requires companies to measure the compensation expense for all share-based payment awards made to employees and directors, including stock options, based on the grant date fair value of these awards. This calculation is performed for accounting purposes and reported in the compensation tables below, even though our executive officers may never realize any value from their awards. ASC Topic 718 also requires companies to recognize the compensation cost of their stock-based compensation awards in their income statements over the period that an executive officer is required to render service in exchange for the option or other award.

Historically, when granting equity awards to the Named Executive Officers, the Compensation Committee generally considered the potential expense of those awards under generally accepted accounting principles and their impact on our earnings per share. The Compensation Committee concluded that the award levels were in the best interests of our stockholders given competitive compensation practices among the companies in our compensation peer group, the awards’ potential compensation expense, our performance and the impact of the awards on employee motivation and retention.

Other Compensation Policies

Compensation Recovery Policy

Currently, we have not implemented a policy regarding retroactive adjustments to any cash or equity-based incentive compensation paid to our executive officers and other employees where the payments were predicated upon the achievement of financial results that were subsequently the subject of a financial restatement. We intend to adopt a general compensation recovery (“claw-back”) policy covering our annual and long-term incentive compensation plans and arrangements once the SEC adopts final rules implementing the requirement of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Equity Award Policy

Pursuant to our equity award grant policy, we grant equity awards upon the recommendation of the Compensation Committee and with the approval from the independent members of our Board of Directors. Awards to newly-hired or promoted executive officers who are eligible to receive stock awards are proposed for approval at our Board of Directors’ next regularly-scheduled meeting following the executive officer’s hire or promotion. If granted, our annual equity awards have historically been granted in September, but in fiscal 2018 they were granted in December. Equity award levels are based on the grant date fair value of the shares of our common stock, reduced by the present value of the expected future dividends (which restricted stock awards and restricted stock unit awards do not receive) and vary among participants based on their positions within the Company.

Stock Ownership Policy

To further align the interests of our executive officers with the interests of our stockholders, our Board of Directors has implemented stock ownership guidelines applicable to our executive officers. Each executive

 

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officer is expected to hold shares of our common stock with an aggregate value greater than or equal to a multiple of his or her base salary as set forth below:

 

•

President and CEO—four times base salary;

 

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Chief Financial Officer—three times base salary; and

 

•

Executive and Senior Vice Presidents—two times base salary.

Under these guidelines, shares of our common stock held directly or indirectly, as well as shares of our common stock subject to outstanding restricted stock awards and restricted stock unit awards, count toward satisfaction of the stock ownership requirements. Performance units count toward satisfaction of the stock ownership requirements only after they are fully vested. Compliance with these guidelines is measured annually in September. Executive officers may not sell or transfer any of their shares of common stock until their ownership requirement is met, other than to meet tax obligations. Once an executive officer’s ownership requirement is met, he or she may sell or transfer shares of common stock in excess of the ownership requirement.

Hedging Policy

Our Insider Trading Policy provides that no employee, officer or director may acquire, sell or trade in any interest or position relating to the future price of Company securities, such as a put option, a call option or a short sale (including a short sale “against the box”), or engage in hedging transactions (including “cashless collars”).

Compensation-Related Risk

The Compensation Committee of our Board of Directors believes that our compensation policies and practices as generally applicable to the Company’s employees do not encourage excessive and unnecessary risk-taking and that the level of risk that the policies and practices do encourage is not reasonably likely to have a material adverse effect on the Company.

Compensation Committee Interlocks

Ms. Srere and Messrs. Blaszkiewicz and Lennox served as members of the Compensation Committee of our Board of Directors during fiscal 2019. None of these directors were an executive officer or otherwise an employee of the Company before or during such service. Ms. McWaters serves on the compensation committee of the Board of Directors of Mobile Mini, Inc.

 

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