U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

Commission File Number 1-31923

 

UNIVERSAL TECHNICAL INSTITUTE, INC.

(Exact name of registrant as specified in its charter)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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 þ     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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and larger accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o     No þ

 

As of November 20, 2007, 28,267,450 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 Company’s most recently completed second fiscal quarter (March 31, 2007) was approximately $525,502,608 (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 registrant’s definitive proxy statement for the 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

 

 

UNIVERSAL TECHNICAL INSTITUTE, INC.

 

INDEX TO FORM 10-K

FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 2007

 

 

PART I

 

 

Overview

 

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 10 campuses across the United States. We also offer manufacturer specific advanced training (MSAT) programs that are sponsored by the manufacturer or dealer, at 18 dedicated training centers. For the twelve months ended September 30, 2007, our average undergraduate enrollment was 15,856 full-time students. We have provided technical education for over 40 years.

 

We believe the market for qualified service technicians is large and growing. In the most recent data provided, the U.S. Department of Labor estimated that in 2004 there were approximately 803,000 working automotive technicians in the United States, and this number was expected to increase by 16% from 2004 to 2014. Other 2004 estimates provided by the U.S. Department of Labor indicate that from 2004 to 2014 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%, 10%, 14% and 15%, respectively. This 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 training to keep up with technological advancements and maintain its technical competency. As a result of these factors, there will be an average of approximately 52,400 new job openings annually for new entrants from 2004 to 2014 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, dealer networks, transportation companies and governmental entities with large fleets are outsourcing their training functions, seeking preferred education providers which can offer high quality curricula and have a national presence to meet the employment and advanced training 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. Through our relationships with OEMs, we are able to continuously refine and expand our programs and curricula. We believe our industry-oriented educational philosophy and national presence have enabled us to develop valuable industry relationships which provide us with 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 offer technician training programs using OEM provided vehicles, equipment, specialty tools and curricula. These OEMs include: Audi of America; American Honda Motor Co., Inc.; BMW of North America, LLC; Ford Motor Co.; Harley-Davidson Motor Co.; International Truck and Engine Corp.; Kawasaki Motors Corp., U.S.A.; Mercedes-Benz USA, LLC; Mercury Marine; Nissan North America, Inc.; Porsche Cars of North America, Inc.; Toyota Motor Sales, U.S.A., Inc.; Volkswagen of America, Inc.; Volvo Cars of North America, Inc. and Volvo Penta of the Americas, Inc. In addition, we provide technician training programs pursuant to verbal agreements with the following OEMs: American Honda Motor Co., Inc.; American Suzuki Motor Corp; Mercury Marine 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 associate of occupational studies (AOS) degree, diploma or certificate, depending on the program and campus. Tuition ranges from approximately $17,300 to $40,500 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 specific advanced training programs that we offer. These manufacturer programs are offered in a facility 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 training 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 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 2008 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 28, 2008, our proxy statement for the 2008 Annual Meeting of Stockholders will be filed with the SEC and available on our website at 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 our 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, Attention: Investor Relations.

 

Business Strategy

 

Our goal is to maintain and strengthen our role as a leading provider of post-secondary technical education services. We intend to pursue the following strategies to attain this goal:

 

 

The alternative loan options provided to our students require us to share the related risk with the lenders by paying the lenders discounts on the loan amounts provided to our students or entering into loan recourse arrangements. Under the discount agreements with the lenders, we are required to pay discounts ranging from 5% to 70% of the student loan amount, based on specific criteria in each agreement and the risk associated with the student borrower. These payments result in reductions to our tuition revenue on a pro-rata basis over the length of the student programs. Under these agreements, the full loan balance is applied to the individual student’s tuition requirements.

 

In addition to alternative loan options, we offer tuition discount programs for honorably discharged military veterans and dislocated workers and a need-based scholarship program to assist students in covering the cost of their education. Additionally, UTI participates in a number of internally-funded skills competitions in which high school students who exhibit exceptional technical skills are awarded scholarships to attend technical training. The amount of the discount or scholarship varies depending upon the program, region and campus. In most cases, the scholarship awards are reflected as tuition reductions, applied pro-rata over the course of the program.

 

 

We also offer training for other sectors of the industry such as motor freight companies, tier one suppliers and firms that employ skilled technicians and benefit from employees possessing the skills that we teach. The training is performed at the customers’ sites, UTI sites or at third party locations using curricula developed by UTI or supplied by the customer or the OEM. These training relationships provide new sources of revenue, establish new employment opportunities for our graduates and enhance UTI’s position as a provider of training for the industry.

 

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.

 

 

 

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 associate of occupational studies degree, diploma or certificate, depending on the program and campus. Tuition ranges from approximately $17,300 to $40,500 per program, depending on the nature and length of the program. Our campuses are accredited and our undergraduate programs are eligible for federal Title IV student financial aid funding. Upon completion of one of our automotive or diesel undergraduate programs, qualifying students have the opportunity to apply for enrollment in one of our manufacturer specific advanced training programs. These programs are offered in facilities in which OEMs supply the vehicles, equipment, specialty tools and curricula. In most cases, 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 training to experienced technicians.

 

Our undergraduate schools and programs are summarized in the following table:

 

Universal Technical Institute (UTI)

 

UTI offers automotive, diesel and 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). We are continuing the NATEF certification application process for our diesel program at our Exton, Pennsylvania campus and all programs at our Norwood, Massachusetts and Sacramento, California campuses. In order to apply for NATEF certification, a school must meet the ASE curriculum requirements and have also graduated its first class. Students have the option to enhance their training through the Ford Accelerated Credential Training (FACT) elective at all UTI campuses. We also offer the Toyota Professional Automotive Technician (TPAT) elective at our Glendale Heights, Illinois campus; the Toyota Professional Collision Training (TPCT) elective at our Houston, Texas campus; the BMW FastTrack elective at our Rancho Cucamonga, California and Avondale, Arizona campuses; the Nissan Automotive Technician Training (NATT) program at our Houston, Texas; Mooresville, North Carolina; Sacramento, California and Orlando, Florida campuses; the International Truck Elective Program (ITEP) at our Glendale Heights, Illinois campus; and the Cummins Engine (Cummins) elective at our Avondale, Arizona campus.

 

 

Motorcycle Mechanics Institute and Marine Mechanics Institute (collectively, MMI)

 

 

NASCAR Technical Institute (NTI)

 

Established in 2002, NTI offers the same type of automotive training as UTI, but with additional NASCAR-specific courses. In addition to the training received in our Automotive Technology program, students have the opportunity to learn first-hand with NASCAR engines and equipment and to learn specific skills required for entry-level positions in automotive and racing-related career opportunities. The program ranges from 48 to 78 weeks in duration and tuition ranges from $24,900 to $36,500. 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. For those students who have trained in our NASCAR technology program, from the opening of NTI through fiscal 2006, approximately 18% have found employment opportunities to work in racing-related industries.

 

Manufacturer Specific Advanced Training Programs

 

Our advanced 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. Students who are highly ranked graduates of an automotive program may apply to be selected for these programs. The programs range from 8 to 27 weeks in duration and tuition is paid by the manufacturer or dealer, subject to employment commitments made by the student. The manufacturer also supplies vehicles, equipment, specialty tools and curricula for the courses. Pursuant to written agreements, we offer manufacturer specific advanced training programs for the following OEMs: Audi of America; BMW of North America, LLC; International Truck and Engine Corp.; Mercedes-Benz USA, LLC; Porsche Cars of North America, Inc.; Volkswagen of America, Inc.; and Volvo Cars of North America, Inc.

 

 

 

Dealer/Industry Training

 

Technicians in all of the industries we serve are in regular need of training or certification on new technologies. Manufacturers are outsourcing a portion of this training to education providers such as UTI. We currently provide dealer technician training to manufacturers such as: American Honda Motor Co., Inc.; BMW of North America, LLC; Harley-Davidson Motor Co.; International Truck and Engine Corp.; Kawasaki Motors Corp. U.S.A.; Mercedes-Benz USA, LLC; Mercury Marine; Schlumberger Technology Corporation; smart USA Distributor, LLC; Volkswagen of America, Inc. and Volvo Penta of the Americas, Inc.

 

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.

 

 

An example of a product/financial support relationship is:

 

 

 

An example of a licensing arrangement is:

 

 

 

We actively seek to extend our relationship with a given manufacturer by providing the manufacturer’s training to entry level as well as experienced technicians. Similar to 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 training courses often take place within our existing facilities, allowing the manufacturer to avoid the costs associated with establishing its own dedicated facility.

 

Examples of manufacturer training relationships include:

 

 

 

Student Recruitment Model

 

We strive to increase our campus enrollment and profitability through a dual-pronged sales approach and a marketing approach designed to maximize market penetration. Our strategy is to recruit a geographically dispersed and demographically diverse student body. 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:

 

 

Our reputation in local, regional and national business communities, endorsements from high school guidance counselors and the recommendations of satisfied graduates and employers 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. 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.

Our military representatives develop relationships with military personnel and provide information about our training programs. We deliver career presentations to soldiers who are approaching their date of separation or have recently separated from the military as a means of further educating these individuals on the merits of our technical training programs.

 

 

Student Admissions and Retention

 

We currently employ approximately 250 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. Different programs have varying admissions standards. For example, applicants for programs offered at our Avondale location, which offers an associate of occupational studies (AOS) degree, must be at least 16 years of age and provide proof of either: high school graduation, or its equivalent, certification of high school equivalency (G.E.D.); successful completion of a degree program at the post-secondary level; or successful completion of home schooling. Students who present a diploma or certificate evidencing completion of home schooling or an online high school program are required to take and pass an entrance exam. Applicants at all other locations must meet the same requirements, 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 Basic Skills Exam. Students who are beyond the age of compulsory attendance and have completed a high school program, but have not passed a state required high school completion exam where required, may also apply to attend through the ability to benefit option, and must meet the same criteria outlined above. Students enrolling at UTI campuses in California are required by state law to complete and achieve a passing score on an entrance exam prior to being accepted into a program.

 

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 approximately 70%, which we believe compares favorably with the student completion rates of other providers of comparable educational/training programs.

 

Enrollment

 

We enroll students throughout the year. For the twelve months ended September 30, 2007, we had an average enrollment of 15,856 full-time undergraduate students, representing a decrease of approximately 3% as compared to the twelve months ended September 30, 2006. We are a 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, 2005, 2006 and 2007 we had average undergraduate enrollments of 15,390, 16,291 and 15,856, respectively.

 

Graduate Placement

 

Securing employment opportunities for our graduates is critical to our ability to attract high quality prospective students. Accordingly, we dedicate significant resources to maintaining an effective graduate placement program. Our placement rate for fiscal years 2006 and 2005 was 91%. The placement calculation is based on all graduates,

including those that completed manufacturer specific advanced training programs, from October 1, 2005 to September 30, 2006 and October 1, 2004 to September 30, 2005, respectively. For fiscal 2006, UTI had 11,892 total graduates, of which 11,496 were available for employment. Of those graduates available for employment, 10,470 were employed at the time of reporting, for a total of 91%. For fiscal 2005, UTI had 10,568 total graduates, of which 10,300 were available for employment. Of those graduates available for employment, 9,367 were employed at the time of reporting, for a total of 91%. In an effort to maintain our high placement rates, we offer an on-going program of employment search assistance to our students. Our schools develop job opportunities and referrals, instruct active students on employment search and interviewing skills, provide access to reference materials and assistance with the composition of resumes. We also seek out employers who may participate in our Tuition Reimbursement Incentive Program (TRIP), whereby employers assist our graduates with their tuition obligation by paying back a portion or all of their student loans. We believe that our employment services program provides our students with a more compelling value proposition and enhances the employment opportunities for our graduates.

 

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 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. Our existing instructors have an average of four years of teaching experience and our average undergraduate student-to-teacher ratio is approximately 22-to-1.

 

Each school’s support team typically includes a campus president, an education director, an admissions director, a financial aid director, a student services director, employment services director, accounting manager and facilities director. As of September 30, 2007, we had approximately 2,105 full-time employees, including approximately 515 student support employees and approximately 890 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, if we open new campuses, we may encounter employees who desire or maintain union representation.

 

Competition

 

Our main competitors are other proprietary career-oriented and technical schools, including Lincoln Technical Institute, a wholly-owned subsidiary of Lincoln Educational Services Corporation, WyoTech, which is owned by Corinthian Colleges, Inc. and traditional two-year junior and community colleges. 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 our industry relationships, size, brand recognition, reputation and nationwide recruiting system provide UTI a competitive advantage.

 

Environmental Matters

 

We use hazardous materials at our training facilities and campuses, and generate small quantities of regulated waste, including 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 if we 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 (ED). In our 2007 fiscal year, we derived approximately 68% 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 these reasons, 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 education agency of the state in which the school is located 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 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 of approximately $14.7 million. 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 authorization from a state other than the state in which the school is located, that 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, 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, or delay our ability to make, such changes.

 

As of July 1, 2007, the California Bureau for Private Postsecondary and Vocational Education (BPPVE), the state authorizing agency for our two campuses located in California, ceased operations following the expiration of the agency’s governing state statute. As permitted by state law, UTI has signed a voluntary agreement with the California Department of Consumer Affairs whereby our California campuses will continue to operate in accordance with the provisions of the expired BPPVE statute until February 2008. Under that voluntary agreement, the licenses and approvals of our California campuses that were valid as of June 30, 2007 will remain in effect until February 2008. Various legislative proposals are being considered by the California legislature, however it is unclear what the regulatory structure and requirements will be in the State of California after that time. ED has provided guidance that the expiration of the BPPVE statute will not affect a school’s ability to participate in Title IV programs. However, our ability to make any substantive changes at our California campuses, including offering new programs, is uncertain, given the unknown nature of the continuing regulatory framework in the state.

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. With the exception of our NASCAR Technical Institute (NTI); our Exton, Pennsylvania campus; our Norwood, Massachusetts campus; and our Sacramento, California campus, all of our campuses are on the same accreditation cycle, having achieved a five-year grant of accreditation in February 2004. NTI received a five-year grant of accreditation in December 2003. Our Exton, Pennsylvania campus received a five-year grant of accreditation in October 2006. Our Norwood, Massachusetts campus received its initial two-year grant of accreditation in July 2005 and is awaiting finalization of its renewal of accreditation. Our Sacramento, California campus received its initial two-year grant of accreditation effective December 2005 and is in the renewal process. 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. Currently, none of our campuses are on reporting status.

 

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 make timely progress 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 2007 fiscal year, we derived more than 55% of our net revenues from the FFEL program.

 

Pell.  Under the Pell program, ED makes grants to students who demonstrate financial need. In our 2007 fiscal year, we derived approximately 7% 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 2007 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 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. For the federal award year that extends from July 1, 2007 through June 30, 2008, ED will not disburse any new federal funds to any schools for Perkins loans due to federal appropriations limitations; however, schools may continue to make new Perkins loans to students out of their existing revolving accounts. In our 2007 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 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 may 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 of 1965, as amended, and ED’s extensive regulations regarding institutional eligibility. An institution must also demonstrate its compliance to ED on an ongoing basis. All of our schools are certified to participate in Title IV Programs.

 

ED’s Title IV Program 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 have the following three institutions:

 

 

 

 

                            Universal Technical Institute, Rancho Cucamonga, California

 

                            NASCAR Technical Institute, Mooresville, North Carolina

 

                            Universal Technical Institute, Norwood, Massachusetts

 

 

 

 

                            Universal Technical Institute, Orlando Florida

 

 

                   Marine Mechanics Institute, Orlando, Florida

 

                   Automotive, Orlando, Florida

 

 

 

 

In July 2006, ED began its recertification process for our campuses. Upon completion of its review, ED did not impose provisional certification requirements on any of our campuses. ED certified our Houston, Texas campus and its additional locations to participate in Title IV Programs through March 2012. ED certified our Avondale and Phoenix, Arizona campuses and their additional locations to participate in Title IV Programs through September 2010.

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 exercise significant regulatory oversight over schools participating in Title IV Programs. Accrediting commissions and state education agencies also have responsibility 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 has historically reauthorized the Higher Education Act (HEA) approximately every six years, and last reauthorized it in 1998. From 2004 to 2007, Congress temporarily extended and re-extended most of the then existing provisions of the HEA, pending completion of the formal reauthorization process. In 2007, some provisions of the HEA were revised by other Congressional legislation. Congress continues to consider additional changes to legislation that may affect the Title IV Programs. There has been extensive scrutiny of the relationships between student loan lenders and Title IV-eligible institutions. We expect that legislation and new ED regulations will be enacted within the next six months. UTI is closely monitoring these developments and has sought to proactively address its lending relationships and processes to support compliance with the anticipated new laws and regulations.

 

We believe that Congress will either complete its reauthorization of the HEA or further extend additional provisions of the HEA in 2008. Many changes to the HEA are likely to result from the reauthorization and any extension of the remaining provisions of the HEA; however, we cannot predict the changes that Congress will make. In addition, Congress reviews and determines federal appropriations for Title IV Programs on an annual basis. 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 reduces 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 with Title IV Program requirements.

 

In September 2007, the College Access and Affordability Act was signed into law. This new law increases Pell Grants, gradually reduces the interest rate on federal Stafford loans by half over five years, and provides broader access to the grant and loan programs. The funds used to support these changes, however, are coming exclusively from the reduction of federal subsidies for the private loan lenders involved in the Federal Family Education Loan Programs and the related costs may be passed to students through increased fees and reduced borrower benefits.

 

The “90/10 Rule.”  A proprietary institution loses its eligibility to participate in Title IV Programs if it derives more than 90% of its revenue, as defined by ED regulations, 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 the percentage of revenue derived from Title IV Programs for each of our institutions for our 2005, 2006 and 2007 fiscal years, and determined that none of our institutions derived more than 90% of its revenue from Title IV Programs for any fiscal year. For our 2007 fiscal year, our institutions’ 90/10 Rule percentages ranged from 67% to 70%. 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 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 30 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 2003, 2004 and 2005, 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. None of our institutions are on provisional status with ED.

 

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 and must liquidate its loan portfolio. 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. All of our institutions have Perkins cohort default rates less than 20% for students who were scheduled to begin repayment in the federal award year ended June 30, 2005, the most recent federal award year for which ED has published such rates. None of our institutions has had its federal Perkins funding eliminated for the past three federal award years for this reason. For the federal award year ending June 30, 2008, as with the two preceding federal award years, ED will not disburse any new federal funds to any schools for Perkins loans due to federal appropriations limitations. In our 2007 fiscal year, we derived less than 1% of our net revenues from the Perkins program.

 

Financial Responsibility Standards.  All institutions participating in Title IV Programs must satisfy specific ED 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 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 it’s financial responsibility standards, depending on the resulting composite score and other factors, that institution may establish its financial responsibility on an alternative basis by:

 

 

 

ED has historically evaluated 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. UTI’s composite score has exceeded the required minimum composite score of 1.5 for each of our fiscal years since 2004.

 

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. The institution must return those unearned funds to ED or the applicable lending institution in a timely manner, which is generally within 45 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, 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 fiscal year 2006 and 2007 Title IV compliance audits did not cite any of our institutions for exceeding the 5% late payment threshold.

 

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 may 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, 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 have its state authorization and accreditation reaffirmed by that agency. 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 ensure 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 be 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 regard 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. Currently, all of our campuses are eligible to offer Title IV Program funding.

 

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 meets minimum length requirements and 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. 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 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 continued 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.

 

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. ED regulations do not establish clear criteria for complying with this law 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 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. Further, 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 ED 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 existing institutions were granted Title IV recertification in 2006. Our Avondale and Phoenix campuses and their additional locations are fully certified with Program Participation Agreements (PPAs) expiring on September 30, 2010. Our Houston campus and its additional location are fully certified with a PPA expiring March 31, 2012.

 

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 reimbursement of such funds from ED. 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. Violations of Title IV Program requirements could also subject us or our schools to other civil and criminal penalties.

 

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 2007 fiscal year, one lending institution, Sallie Mae, provided more than 95% of the FFEL loans that our students received. In addition, in our 2007 fiscal year, one student loan guaranty agency, United Student Aid Funds (USAF), guaranteed more than 95% of the FFEL loans that our students received. Sallie Mae and USAF are among the largest student loan lending institutions and guaranty agencies in the United States in terms of loan volume.

 

Using a limited number of student loan lenders has been our practice for several years. The practice of using a limited number of lenders has come under scrutiny on a nationwide basis in 2007 as a result of investigations and reviews by various states’ Attorneys General, the U.S. Congress and ED. We have consistently focused our lending practices on securing the best terms for our students, while also creating efficient processes and quality customer service. Based on the feedback from ED and other reviewing agencies, we have increased our lending relationships. In August 2007, we distributed a request for information to various lenders and compiled a select list of lenders comprised of five FFEL lenders and four alternative loan providers to assist students in selecting a lender. At the students direction, we will process any qualified lender that a student selects. In addition, we are currently refining our student loan application process and have updated our related website.

 

ITEM 1A.  RISK FACTORS

 

Cautionary Statement Under the Private Securities Litigation Reform Act of 1995:

 

This 2007 Form 10-K and the documents incorporated by reference herein contain 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 verbal 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 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. Many events beyond our control may determine whether results we anticipate will be achieved. 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 or revise 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 2007 fiscal year, we derived approximately 68% of our net revenues from federal student financial aid programs, referred to in this report as Title IV Programs, administered by 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, results of operations and liquidity 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 loss of any such institution’s eligibility 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 believe that we have described the most significant regulatory risks that apply to our schools in the following paragraphs.

 

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 is currently considering reauthorization of the Higher Education Act, but reauthorization is not complete. Any action by Congress that significantly reduces funding for Title IV Programs, such as the new legislation which reduces subsidies available to FFEL lenders resulting in certain lenders no longer providing funding opportunities to our students, 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 profitability.

 

A high percentage of the Title IV student loans our students receive were made by one lender and guaranteed by one guaranty agency which exposes us to financial and regulatory risk.

 

In our 2007 fiscal year, one lender, Sallie Mae, provided more than 95% of all FFEL loans that our students received and one student loan guaranty agency, USAF, guaranteed more than 95% of the FFEL loans made to our students. Sallie Mae and USAF are among the largest student loan lending institutions and guaranty agencies in the United States in terms of loan volume. If loans made by Sallie Mae or guaranteed by USAF were significantly reduced or no longer available and we were not able to timely identify other lenders and guarantors to make and 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.

 

During 2007, the widespread practice of schools using a limited number of student loan lenders has come under scrutiny as the result of investigations and reviews by various states’ Attorneys General, the U.S. Congress and ED. These investigations and reviews have resulted in proposed legislative changes at the federal and state levels, proposed new ED regulations, and industry-developed “codes of conduct” adopted by many lenders and institutions which limit lenders’ relationships with schools, provide greater oversight of the types of services provided by lenders and prohibit FFEL lenders from providing other types of funding in exchange for FFEL loan volume. If we are not able to successfully respond to these changes in a timely manner, we could face sanctions by ED, including loss of Title IV eligibility for one or more of our schools.

 

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.

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.

 

Under the 90/10 Rule, a for-profit institution loses its eligibility to participate in Title IV Programs if it derives more than 90% of its revenue, as defined by ED, from those programs in any fiscal year. In our 2007 fiscal year, under the regulatory formula prescribed by ED, none of our institutions derived more than 70% of its revenues from Title IV Programs. If any of our institutions loses eligibility to participate in Title IV Programs, such a loss would adversely affect our students’ access to various government-sponsored student financial aid programs, which could reduce our student population. We regularly monitor compliance with this requirement in order to minimize the risk that any of our institutions would derive more than the applicable thresholds of its revenue from the Title IV Programs for any fiscal year. If an institution appears likely to approach the threshold, we will evaluate the appropriateness of making changes in student funding and financing to ensure compliance with the 90/10 Rule.

 

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 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, such a 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 or impact our cash flow.

 

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. We are not currently required to post a letter of credit. We may be required to post letters of credit in the future, which 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 or impact our cash flow.

 

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 programs.

 

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 45 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 be required 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.

 

We are subject to sanctions if we pay impermissible commissions, bonuses or other incentive payments to persons 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.

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.

 

In recent years 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, the U.S. Securities and Exchange Commission, state governmental agencies and ED. These actions 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.

 

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, it is possible that some 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. In July 2007, the California Bureau for Private Postsecondary and Vocational Education (BPPVE), the state agency authorizing our schools in California, ceased operations. We have signed a voluntary agreement with the California Department of Consumer affairs whereby our California campuses will continue to operate in accordance with the expired BPPVE statute until February 2008. However, our ability to make any substantive changes at our California campuses, including offering new programs, is uncertain, given the unknown nature of the continuing regulatory framework in California.

 

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. Many of those states, including California and Pennsylvania, provide financial aid to our students. These 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.

 

If regulators do not approve our acquisition of a school that participates in Title IV Program 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 Program 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 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.

 

Risks Related to Our Business

 

If we fail to effectively fill our existing capacity, we may incur higher than anticipated costs and expenses which likely will result in a deterioration of our profitability and operating margins.

 

We experienced a period of significant growth, opened new campuses and expanded seating capacity from 1998 through 2006. During fiscal 2007, our number of average students decreased which, when combined with the additional capacity created since 1998, has led to underutilized seating capacity throughout 2006 and 2007. Our continuing efforts to fill existing seating capacity may strain our management, operations, employees or other resources. We may not be able to maintain our current seating capacity utilization rates, effectively manage our operation or achieve planned capacity utilization on a timely or profitable basis. If we are unable to fill our underutilized seating capacity, we may experience operating inefficiencies that likely will increase our costs more than we had planned resulting in a deterioration of our profitability and operating margins.

 

We rely heavily on the reliability, security and performance of an internally developed student management and reporting system, and any difficulties in maintaining this system may result in service interruptions, decreased customer service, or increased expenditures.

 

The software that underlies our student management and reporting has been developed primarily by our own employees. The reliability and continuous availability of this internal system is critical to our business. Any interruptions that hinder our ability to timely deliver our services, or that materially impact the efficiency or cost with which we provide these services, or our ability to attract and retain computer programmers with knowledge of the appropriate computer programming language, would adversely affect our reputation and profitability and our ability to conduct business and prepare financial reports. In addition, many of the software systems we currently use will need to be enhanced over time or replaced with equivalent commercial products, either of which could entail considerable effort and expense.

 

Our computer systems as well as those of our service providers are vulnerable to interruption, malfunction or damage due to events beyond our control, including malicious human acts, natural disasters, and network and communications failures. Moreover, despite network security measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautions we have taken, unanticipated problems may nevertheless cause failures in our information technology systems. Sustained or repeated system failures that interrupt our ability to process information in a timely manner could have a material adverse effect on our operations.

An increase in interest rates and a tightening of credit markets could adversely affect our ability to attract and retain students.

 

In recent years, increases in interest rates and a tightening of credit markets have resulted in a less favorable borrowing environment for our students. Much of the financing our students receive is tied to floating interest rates. Therefore, increased interest rates have resulted in a corresponding increase in the cost to our existing and prospective students of financing their studies which has resulted in and could result in further reductions 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. In addition, a tightening of credit markets could adversely impact the ability of borrowers with little or poor credit history, such as many of our students, to borrow the necessary funds at an acceptable interest rate.

 

Lower rates of unemployment and higher fuel prices and living expenses could continue to affect our ability to attract and retain students.

 

Although demand for our graduates remains high, our ability to increase student enrollments is sensitive to changes in economic conditions and other factors such as lower unemployment, higher fuel prices and living expenses. A strong labor market across the country coupled with affordability concerns associated with increased gas and housing prices have made it more challenging and expensive for us to attract and retain students. During fiscal 2007, our number of average students has declined causing us to invest heavily in sales and marketing efforts and seek out additional funding sources for our students. If these efforts are unsuccessful, our ability to attract and retain students could be adversely affected which could result in a further decline in student enrollments.

 

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 support 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 training the employees of our industry customers. Our success 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.; Mercury Marine and Yamaha Motor Corp., USA, are not memorialized in writing and are based on verbal 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.

 

Competition could decrease our market share and create tuition pricing concerns.

 

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, due in part to government subsidies and other financial sources not available to for-profit schools. Some other for-profit education providers have greater financial and other resources which may, among other things, allow them to secure industry relationships with some or all of the OEMs with which we have relationships 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 other for-profit education providers 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 geographic area.

 

We may limit tuition increases 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 decrease. 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 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.

 

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 must 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. If we are unable to adequately respond to changes in market requirements due to 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, campus presidents, 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 and train new education representatives, as well as retain and continue to develop our existing 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; regulatory restrictions on the method of compensating education representatives; 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.

 

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 seeking advanced training.

 

The awareness of our programs among high school graduates and working adults seeking advanced training 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:

 

 

 

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 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.

 

If we fail to maintain effective internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting which would harm our business and the trading price of our stock.

 

Internal control over financial reporting is a process designed by or under the supervision of our principal executive and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control structure is also designed to provide reasonable assurance that fraud would be detected or prevented before our financial statements could be materially affected.

 

Because of inherent limitations, our internal controls over financial reporting may not prevent or detect all misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risks that our controls may become inadequate as a result of changes in conditions or the degree of compliance with our policies and procedures may deteriorate.

 

If our internal control over financial reporting was not effective, we could incur a negative impact to our reputation and our financial statements could require adjustment which could in turn lead to a decline in our stock price.

 

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, our ability to control costs, and our ability to integrate new personnel. 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 $20.6 million at September 30, 2007, representing approximately 8.8% of our total assets at that date.

 

Goodwill is recorded at its 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.

 

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 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 Title IV Program funding, 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. Our failure 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.

 

 

Not applicable.

 

 

Campuses and Other Properties

 

The following sets forth certain information relating to our campuses and other properties:

 

We completed a sale and leaseback transaction of our Sacramento, California campus on July 18, 2007. Under the terms of the transaction, we sold our facilities and assigned our ground lease for $40.8 million, received net proceeds of $40.1 million and realized a modest pretax loss on the transaction during our fourth quarter. Concurrent with the sale and assignment, we leased back the buildings and land for an initial term of 15 years and have the option to renew for up to an additional 20 years.

 

We completed a sale and leaseback transaction of our Norwood, Massachusetts campus on October 10, 2007. Under the terms of the transaction, we sold our building and land for $33.0 million, received net proceeds of $32.6 million and realized a modest pretax gain on the transaction which will be amortized over the life of the new lease. Concurrent with the sale, we leased back the building and land for an initial term of 15 years and have the option to renew for up to an additional 20 years.

 

 

 

 

All leased properties listed above are leased with remaining terms that range from less than one year to approximately 17 years. Many of the leases are renewable for additional terms at our option.

 

 

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. Based on internal review, we accrue reserves using our best estimate of the probable and reasonably estimable contingent liabilities. 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, individually or in the aggregate, will have a material adverse effect on our business, results of operations, cash flows or financial condition.

In October 2007, we received letters from the Department of Education for two of our schools, and in May 2007, we received letters from the Offices of the Attorneys General of the State of Arizona and the State of Illinois. The letters requested information related to our relationships with student loan lenders. We have submitted timely responses to these requests and, as of the date of this report, have not received subsequent communication from the Department of Education or the states’ Attorneys General. In November 2007, we received a request for similar information from the Florida Attorney General’s office. We are in the process of providing a timely response to this request.

 

As we previously reported, 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. On February 23, 2005, the former employees filed suit in Maricopa County, Arizona Superior Court. We filed a motion for summary judgment and by minute entry dated December 22, 2005, the Arizona Superior Court granted our motion on all claims. The plaintiffs filed a motion requesting that the court amend and vacate its minute entry. The Court denied plaintiffs’ motion on March 30, 2006. On May 1, 2006, the Court entered final judgment in our favor and against plaintiffs on all claims. On May 22, 2006, plaintiffs filed their notice of appeal with the Arizona Court of Appeals. On May 22, 2007, the Arizona Court of Appeals reversed the lower court’s decision and remanded the trial court’s judgment on the basis that factual questions exist. On July 9, 2007, the Court of Appeals denied our Motion for Reconsideration. On July 24, 2007, we filed a petition for review with the Arizona Supreme Court seeking reversal of the Arizona Court of Appeals decision. On November 26, 2007, we were notified that the Arizona Supreme Court denied review of our pending petition. This matter will return to the Arizona Superior Court. We intend to continue to defend this matter.

 

 

None.

 

EXECUTIVE OFFICERS OF UNIVERSAL TECHNICAL INSTITUTE, INC.

 

The executive officers of UTI are set forth in this table. All executive officers serve at the direction of the Board of Directors. Mr. White and Ms. McWaters also serve as directors of UTI.

 

 

John C. White has served as UTI’s Chairman of the Board since October 1, 2005. Mr. White served as UTI’s Chief Strategic Planning Officer and Vice Chairman from October 1, 2003 to September 30, 2005. 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 operated 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.

 

Kimberly J. McWaters has served as UTI’s Chief Executive Officer since October 1, 2003 and as a director on UTI’s Board since February 16, 2005. 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 Penske 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.

 

Sherrell E. Smith has served as UTI’s Senior Vice President of Operations and Education since July 2006. From 1986 to 2006, Mr. Smith held several positions with UTI including Director of Student Services, Campus President and Senior Campus President of the UTI Arizona campus; Senior Campus President of the UTI Rancho Cucamonga campus and Regional Vice President of Operations. Mr. Smith received a BS in Management from Arizona State University.

 

Joseph R. Cutler has served as UTI’s Senior Vice President of Field Admissions since February 2007. From 1983 to 2007, Mr. Cutler held several positions with UTI including Admissions Representative, Admissions Field Manager, Director of Admissions, Regional Admissions Director and District Vice President of Admissions. Mr. Cutler received a BS in Criminal Administration of Justice from the University of Louisiana.

 

Robert K. Adler has served as UTI’s Vice President of Campus Admissions since September 2007. From May 2006 to June 2007, Mr. Adler served as the Campus President of the UTI Massachusetts campus and from July to August 2007 he served as the Campus President of the UTI Arizona campus. From 2002 to 2004, Mr. Adler served as the Director of Admissions/Operations and from 2004 to April 2006, Mr. Adler served as the Vice President of Massachusetts campuses for the University of Phoenix. Mr. Adler received a BS in Business Administration and an MBA from the University of Phoenix.

 

Roger L. Speer has served as UTI’s Senior Vice President of Custom Training Group and Support Services since July 2006. From 1988 to 2006, Mr. Speer held several positions with UTI including Director of Graduate Employment at the UTI Arizona Campus, Corporate Director of Graduate Employment, Campus President of the UTI Glendale Heights Campus, Vice President of Operations and Senior Vice President of Operations/Education. Mr. Speer received a BS in Human Resource Management from Arizona State University.

 

Chad A. Freed has served as UTI’s Senior Vice President and General Counsel since February 2005. From March 2004 to February 2005, Mr. Freed served as UTI’s Vice President and Corporate Counsel. From 1998 to February 2004, Mr. Freed practiced corporate and securities law with the international law firm of Bryan Cave LLP. Mr. Freed received a BS in French and International Business from Pennsylvania State University and a JD from Tulane University.

 

Larry H. Wolff has served as UTI’s Senior Vice President and Chief Information Officer since June 2005. From June 2003 to June 2005, Mr. Wolff served as a management consultant advising major businesses and startup companies. From 1998 to 2003, Mr. Wolff served as Senior Vice President and Chief Information Officer of Reed Business Information, a division of Reed Elsevier PLC, a provider of information solutions to the legal, science, business-to-business and education markets. Mr. Wolff received a BS in Computer Science from Seton Hall University.

 

Richard P. Crain has served as UTI’s Senior Vice President of Marketing since January 2007. From 2003 to 2006, Mr. Crain served as a marketing consultant for his own consulting firm. From 1988 to 2003, Mr. Crain served in senior marketing leadership positions at Verizon Communications and GTE Service Corporation. Mr. Crain received a BS in Business Administration with a concentration in marketing from the University of Texas.

 

PART II

 

 

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 November 20, 2007, was $21.51 per share. As of November 20, 2007 there were 44 holders of record of our common stock.

 

We do not currently pay any dividends on our common stock. 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.

 

Sales of Unregistered Securities; Repurchase of Securities

 

We did not make any sales of unregistered securities during the three months ended September 30, 2007.

 

The following table summarizes the purchase of equity securities for the twelve months ended September 30, 2007:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

Stock Performance Graph

 

This graph compares total cumulative stockholder return on our common stock during the period from December 17, 2003 (the date on which our common stock first traded on The New York Stock Exchange) through September 30, 2007 with the cumulative return on the NYSE Stock Market Index (U.S. Companies) and a Peer Issuer Group Index. The peer issuer group consists of the companies identified below, which were selected on the basis of the similar nature of their business. The graph assumes that $100 was invested on December 17, 2003, and any dividends were reinvested on the date on which they were paid.

 

 

 

Notes:

 

 

 

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, 2003, 2004, 2005, 2006 and 2007 have been derived from our audited consolidated financial statements.

 

 

 

 

 

 

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 “Risk Factors” and elsewhere in this Report on Form 10-K.

 

General Overview

 

We provide 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 10 campuses across the United States. We also offer manufacturer specific advanced training programs that are sponsored by the manufacturer or dealer, at 18 dedicated training centers. We have provided technical education for over 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, discounts 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 tuition revenues with additional revenues from sales of textbooks and program supplies, student housing and other revenues, all of which are recognized as sales occur or services are performed. In aggregate, these additional revenues represented less than 4% of our total net revenues in each fiscal year for the three-year period ended September 30, 2007. Tuition revenue and fees generally vary based on the average number of students enrolled and average tuition charged 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. Our average student enrollments are influenced by 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 and alternative 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 influence our average student enrollment. 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 and length of our programs and the program level, such as undergraduate or advanced training. Tuition rates have increased by approximately 3% to 5% per annum in each fiscal year in the three-year period ended September 30, 2007. Tuition increases are generally consistent across our schools and programs; however, changes in operating costs may impact price increases at individual locations. We did not increase tuition prices this fall and are currently evaluating whether increases will be made during the winter. We believe that in future years we can continue to increase tuition as student demand for our programs remains strong, tuition at other post-secondary institutions continues to rise and student funding options continue to be available, although future 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 2007 fiscal year, approximately 68% of our net revenues, as defined by the Department of Education, 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. In addition we share the risk associated with less qualified borrowers with several lenders. Under the agreements, we subsidize 5% to 70% of the student loan amount, based upon the specific criteria in each agreement and the risk associated with the student borrower. The full loan balance is applied to the individual student’s tuition requirements.

 

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, tools, training aids, royalties 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; 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 or when services are provided.

 

2007 Overview

 

Operations

 

Our net revenues for the year ended September 30, 2007 were $353.4 million, an increase of 1.8% from the prior year, and our net income for the year was $15.6 million, a decrease of 43.2%. The decrease in our net income was due to lower capacity utilization in conjunction with higher compensation and related costs, sales and marketing costs, depreciation, contract services and occupancy costs.

 

We increased available seating capacity by 3,085 seats, or 14.0%, and 370 seats, or 1.5%, for the years ended September 30, 2006 and 2007, respectively. During 2006, we opened the first building of our permanent location in Sacramento, California in June 2006 with available seating capacity of 1,800 students, which included 400 seats in our temporary facility. Additionally, we expanded our available seating capacity at our Orlando, Florida location by 785 seats through the expansion of our automotive program and at our Exton, Pennsylvania campus by 500 seats to accommodate the diesel program. During 2007, we completed construction of our permanent location in Sacramento and exited our temporary space in April 2007 for a net increase of 300 seats. Additionally, we expanded our available seating capacity at our MMI Phoenix campus by 300 seats to accommodate the longer program length of our elective programs and at our Orlando location by 190 seats through the reconfiguration of space. These increases in our available seating capacity were offset by a decrease in our available seating capacity at our Avondale campus by 360 seats to accommodate dealer training for our motorcycle customers.

 

Average undergraduate full-time student enrollment decreased 2.7% to 15,856 for the year ended September 30, 2007, as compared to 16,291 for the year ended September 30, 2006. Student starts declined by 3.6% for the year ended September 30, 2007, as compared to 3.1% for the year ended September 30, 2006. Recruitment efforts and student starts lagged the prior year due to a variety of factors. A portion of the decline in students is attributed to internal execution challenges with lead generation, sales processes and student funding availability. Key leaders in marketing, sales and future student services were replaced during the year. These personnel changes allowed greater focus to be placed on improving customer service levels, simplifying the application process and expanding funding alternatives. Additionally, external factors impacted our ability to attract prospective students. The primary external factors related to rising tuition and interest rates, increased gas and housing prices, low unemployment and relocation costs making it more difficult to fill existing capacity. Historically, we have been able to overcome such external forces by modifying educational programs, utilizing different pricing strategies and investing in sales and marketing. In response to both the external environment and internal operational issues, we have implemented a plan that focuses on stabilizing and improving key operating efforts. We are uncertain when we will realize the benefits of these efforts.

 

Our campus representatives, who rely on advertising to identify prospective students, have been affected by a strong labor market coupled with affordability concerns. Independent students have access to less financial aid and must find alternative sources to fund their education. These funding sources often have significantly higher interest rates, depending on the student’s credit history. Our lead flow remained flat despite increased spending on advertising during the year ended September 30, 2007, as compared to the prior year. In addition, in June 2007, we changed our lead distribution policy and increased the number of leads provided to our campus representatives. As a result, we are modifying our marketing strategy, focusing our message to reach a broader target audience, using a variety of advertising media including, television, enthusiast magazines, direct mail, the internet, radio and print materials at local, regional and national levels. We are also evaluating our lead and conversion trends to re-deploy our advertising spending in areas that have proven successful while eliminating spending in areas that have not been as productive.

As a result of the change in the lead distribution policy, we reorganized and eliminated 24 of our less productive field sales territories. The changes were made in our 2007 third and fourth quarters when the majority of high schools were not in session. This allowed sales representative training to occur during a non peak period. Additionally, during the year we modified our sales processes to focus the efforts of our field sales representatives on improving the quality of the student applications and ultimately our student starts.

 

Due to lower capacity utilization rates at some of our campuses, combined with slower growth, we effected a reduction in force of approximately 225 employees nationwide in September 2007, which increased operating expenses by approximately $4.5 million during the fourth quarter of the year ended September 30, 2007. These costs related primarily to severance and outplacement services for those who were affected. This reduction is expected to provide a cost savings of approximately $10.7 million to $11.4 million in 2008, which we plan to reinvest in our sales and marketing efforts focused on increasing capacity utilization, improving our service levels, subsidizing lending programs and outsourcing portions of our financial aid process.

 

The regulatory environment related to Title IV funding and lender practices continues to evolve. As a result of the changing environment and the affordability concerns of our students, we have identified additional lenders, funding sources and programs to provide more options for our students. We no longer have access to the $5.0 million opportunity fund which was an alternative loan option for our students who did not qualify for traditional loans. As a result, we are increasing the discount we pay to subsidize these loans and increasing our scholarship programs. The subsidies will be recognized as a reduction to tuition revenue ratably over the students program. In some cases revenue will not be recognized until cash is received due to variability in collection.

 

Significant Transactions

 

We completed a sale and leaseback transaction of our Sacramento, California campus on July 18, 2007. Under the terms of the transaction, we sold our facilities and assigned our rights and obligations under the ground lease for $40.8 million, received net proceeds of $40.1 million and realized a modest pretax loss on the transaction during our fourth quarter. Concurrent with the sale and assignment, we leased back the facilities and land for an initial term of 15 years at an annual rent of $3.8 million, subject to escalation under certain circumstances. We have the option to renew the agreement for up to 20 years.

 

We also completed a sale and leaseback transaction of our Norwood, Massachusetts campus on October 10, 2007. Under the terms of the transaction, we sold our facilities and land for $33.0 million, received net proceeds of $32.6 million and realized a modest pretax gain on the transaction during our first quarter of fiscal 2008. Concurrent with the sale, we leased back the facilities and land for an initial term of 15 years at an annual rent of $2.6 million, subject to escalation every 2 years. We have the option to renew the agreement for up to 20 years.

 

We intend to use the cash proceeds from these transactions for the repurchase of our common stock, subsidizing funding alternatives for our students and potential strategic acquisitions.

 

Staff Accounting Bulletin No. 108

 

As described in Note 4 of the notes to our Consolidated Financial Statements contained in this Report, we adopted Staff Accounting Bulletin No. 108 (SAB 108), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” effective October 1, 2006. During the three months ended December 31, 2006, we evaluated the calculation of the accrual for our field sales representative bonus plan and subsequently determined there was an error in the calculation. More specifically, we determined that not all tuition revenue for graduates with multiple enrollment sequences was being included in the related bonus calculations, resulting in an understatement of compensation expense during the period from June 2002 through September 30, 2006. We determined that, as of September 30, 2006, the cumulative effect of this error totaled $2.1 million on a pretax basis and $1.3 million after tax. We have also determined that this amount accumulated over time and that the financial statements of all prior annual and interim periods were not materially misstated as a result of this error. Not all of our field sales representatives were affected by this error. We made retroactive payments to the affected sales representatives during our 2007 third quarter.

The following is a summary of the adjustments made to our consolidated balance sheet as of October 1, 2006 to reflect our adoption of SAB 108:

 

 

The cumulative effect of this error on our consolidated retained earnings totaled $0.5 million, $0.9 million and $1.3 million as of September 30, 2004, 2005 and 2006, respectively.

 

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.

 

 

Capacity utilization is the ratio of our average undergraduate full-time student enrollment to total seats available. The following table sets forth our average capacity utilization during each of the periods indicated and the total seats available at the end of each of the periods indicated:

 

 

New Campus Results

 

In addition to using results under accounting principles generally accepted in the United States, management evaluates operating income with and without the impact from new campus revenues and expenses. The following table sets forth data for our new campuses in each of the periods indicated. We begin to incur a majority of new

campus costs in the nine month period prior to the new campus opening. Our new campuses typically become profitable within the first 12 months of operations and are no longer considered to be a new campus after one fiscal year of operation. We believe that including this additional information pertaining to new campus net revenues, operating income and expenses provides increased transparency and improves the ability to evaluate our operating results.

 

 

 

 

Year Ended September 30, 2007 Compared to Year Ended September 30, 2006

 

Net revenues.  Our net revenues for the year ended September 30, 2007 were $353.4 million, representing an increase of $6.3 million, or 1.8%, as compared to net revenues of $347.1 million for the year ended September 30, 2006.

 

We began teaching classes at our Norwood, Massachusetts and Sacramento, California campuses in June 2005 and October 2005, respectively, and we expanded the automotive program at our Orlando, Florida campus in September 2006. Average undergraduate full-time student enrollments at these campuses increased by 1,177 students, or 35.1%, for the year ended September 30, 2007. Our net revenues at our Norwood, Sacramento and Orlando campuses increased $27.3 million for the year ended September 30, 2007. The increase in net revenues is a result of the increase in average undergraduate full-time student enrollment at these campuses, as well as tuition increases of

between 3% and 5%, depending on the program, an increase in the number of students taking two courses at a time and our change in policy reducing the number of free course retakes from two to one. The change in the number of students taking two courses at a time and the change in our retake policy resulted in additional revenue of approximately $0.7 million and $0.2 million, respectively. The increase due to these factors is offset by an increase in need-based tuition scholarships and higher military and veteran discounts of approximately $0.7 million.

 

Net revenues at all campuses, other than our Norwood, Sacramento and Orlando campuses, decreased $21.0 million primarily due to a decrease in average undergraduate full-time student enrollment of 1,612 students, or 12.5%. Net revenue also decreased due to an increase in need-based tuition scholarships, higher military and veteran discounts as well as other reductions to income that aggregated $2.9 million for the year ended September 30, 2007. These decreases were partially offset by tuition increases of between 3% and 5%, depending on the program, and an increase of approximately $2.1 million due to our change in policy reducing the number of free course retakes from two to one.

 

Educational services and facilities expenses.  Our educational services and facilities expenses for the year ended September 30, 2007 were $186.2 million, representing an increase of $13.0 million, or 7.5%, as compared to educational services and facilities expenses of $173.2 million for the year ended September 30, 2006.

 

The following table sets forth the significant components of our educational services and facilities expenses:

 

 

We began teaching at our Norwood, Massachusetts and Sacramento, California campuses in June 2005 and October 2005, respectively, and we expanded the automotive program at our Orlando, Florida campus in September 2006. The expansion of these campuses resulted in an increase in compensation and related costs of $6.3 million, depreciation expense of $1.9 million and occupancy costs of $2.0 million. During our 2007 third quarter, we exited two facilities and recorded an out of period cost of approximately $1.0 million in depreciation expense related to assets which were not fully depreciated. During our 2007 fourth quarter, we recorded $0.2 million in compensation and related costs for our expansion campuses associated with our reduction in force.

 

The $6.3 million increase in compensation and related costs attributable to our campus expansions was offset by a decrease in expense of $2.2 million at all campuses, other than our Norwood, Sacramento and Orlando campuses. The $2.2 million decrease is due to a $3.9 million decrease attributable to lower instructor salaries related to the decline in our average undergraduate full-time student enrollment and a decrease in bonus plan expenses as a result of not meeting all of our bonus criteria for the year ended September 30, 2007. The $3.9 million decrease is partially offset by an increase of approximately $1.7 million related to compensation related costs in connection with our reduction in force during the fourth quarter of fiscal 2007.

 

The $2.0 million increase in contract services expense is primarily due to our providing disability accommodations for hearing-impaired students, outplacement services for employees impacted by our reduction in force during the fourth quarter of fiscal 2007 and financial aid compliance efforts. In our 2008 fiscal year, we plan to outsource a portion of our student financial aid processes in order to enhance the student experience and streamline our financial aid practices. As a result, we anticipate contract services will increase in future periods. These costs were previously included in compensation and related costs. This change allows for a more variable cost structure which creates flexibility as our student population fluctuates.

Selling, general and administrative expenses.  Our selling, general and administrative expenses for the year ended September 30, 2007 were $143.4 million, an increase of $10.3 million, or 7.7%, as compared to selling, general and administrative expenses of $133.1 million for the year ended September 30, 2006.

 

The following table sets forth the significant components of our selling, general and administrative expenses:

 

 

Compensation and related costs increased due to increases in salaries and bonus expense, stock-based compensation expense, employee benefits expense and costs associated with our reduction in force. Salaries and bonus expense increased $2.7 million primarily due to annual merit increases and market adjustments, partially offset by a decrease in bonus plan expenses as a result of not meeting all of our bonus criteria for the year ended September 30, 2007. Stock-based compensation expense increased $1.6 million primarily due to the timing and mix between stock option and restricted stock in our annual stock-based compensation grants. Benefits expense increased $1.4 million primarily due to an increase in expenses under our self-insured medical plan. Compensation and related costs also increased by $1.0 million to $1.6 million for the year ended September 30, 2007 related to our reductions in force in both the fiscal 2006 and 2007 fourth quarter.

 

Advertising expense increased by $4.5 million for the year ended September 30, 2007, however, the increased spending did not result in contract growth at the anticipated level. As discussed in the 2007 overview, we are modifying our marketing strategy, evaluating our lead and conversion trends and developing lead qualification criteria. Over the long term we expect to target specific market segments, improve the quality of our leads and potentially lower spending in this category.

 

The increase in contract services expense is primarily due to sales and marketing consulting services and outplacement services for employees affected by our reduction in force during the fourth quarter of fiscal 2007.

 

Five of our campuses are no longer subject to the 30 day delay in receiving the first disbursement of funds under our Title IV programs. This fact, combined with our focused efforts on financial aid processes and collection activities, led to lower out of school student balances and lower bad debt expense for the year ended September 30, 2007.

 

During fiscal 2007, as part of our internal financial aid compliance efforts, we identified approximately $0.5 million of federal aid which we were not entitled to retain. The aid was returned to the federal government by September 30, 2007 at the end of our internal analysis. The $0.5 million was recorded to bad debt expense as we did not satisfy all verification requirements or related regulation timeframes to retain the funds for the period July 1, 2006 to June 30, 2007.

 

Interest income.  Our interest income for the year ended September 30, 2007 was $2.6 million, representing a decrease of $0.4 million, or 11.8%, compared to interest income of $3.0 million for the year ended September 30, 2006. The decrease in interest income is primarily attributable to the decrease in cash available for investment as a result of our investment in our campus expansion and our repurchase of shares of our common stock during the last half of the year ended September 30, 2006. This was partially offset by the increase in cash available for investment as a result of the sale of our campus located in Sacramento, California during the fourth quarter of fiscal 2007.

Income taxes.  Our provision for income taxes for the year ended September 30, 2007 was $10.8 million, or 41.0% of pre-tax income compared with $16.3 million or 37.3% for the year ended September 30, 2006. Our effective income tax rate in each year differed from the federal statutory tax rate of 35% primarily as a result of state income taxes, net of the related federal income tax benefits. Our effective tax rate in 2007 of 41.0% exceeded the 37.3% rate experienced in 2006 primarily due to a $0.9 million increase in our deferred tax asset valuation allowance for state of Massachusetts investment tax credits which are no longer available to us as a result of the previously mentioned sale of our campus facilities in Norwood, Massachusetts.

 

Net income.  As a result of the foregoing, we reported net income for the year ended September 30, 2007 of $15.6 million, as compared to net income of $27.4 million for the year ended September 30, 2006.

 

Year Ended September 30, 2006 Compared to Year Ended September 30, 2005

 

Net revenues.  Our net revenues for the year ended September 30, 2006 were $347.1 million, representing an increase of $36.3 million, or 11.7%, as compared to net revenues of $310.8 million for the year ended September 30, 2005.

 

We began teaching classes at our Exton, Pennsylvania, Norwood, Massachusetts and Sacramento, California campuses in July 2004, June 2005 and October 2005, respectively, and we began teaching the automotive program at our Orlando, Florida campus in July 2004. Average undergraduate full-time student enrollments at these campuses increased 1,526 or 48.9% for the year ended September 30, 2006. Our net revenues at our Exton, Norwood, Sacramento, and Orlando campuses increased $36.6 million for the year ended September 30, 2006. The increase in net revenues is a result of the increase in average undergraduate full-time student enrollment at these campuses, as well as tuition increases of between 3% and 5%, depending on the program, an increase in the number of students taking two courses at a time and our change in policy reducing the number of free course retakes from two to one. The increase in the number of students taking two courses at a time and the change in our retake policy resulted in additional revenue of approximately $2.2 million and $0.2 million, respectively. The increase is offset by one less revenue earning day during the year ended September 30, 2006 as compared to the year ended September 30, 2005 resulting in a decrease in net revenue of approximately $0.4 million.

 

Net revenues at all campuses, other than our Exton, Norwood, Sacramento and Orlando campuses, decreased $0.4 million due to lower average undergraduate full-time student enrollment at such campuses, of 625 students, or 5.1%, for the year ended September 30, 2006. Additionally, there was one less revenue earning day in the year ended September 30, 2006, as compared to the year ended September 30, 2005, resulting in a decrease in net revenue of approximately $1.0 million. These decreases were partially offset by tuition increases of between 3% and 5%, depending on the program, our change in policy reducing the number of free course retakes from two to one and an increase in the number of students taking two courses at a time. The change in our retake policy and the increase in the number of students taking two courses at a time resulted in additional revenue of approximately $1.5 million and $1.3 million, respectively.

 

Educational services and facilities expenses.  Our educational services and facilities expenses for the year ended September 30, 2006 were $173.2 million, representing an increase of $28.2 million, or 19.5%, as compared to educational services and facilities expenses of $145.0 million for the year ended September 30, 2005.

 

The following table sets forth the significant components of our educational services and facilities expenses:

 

We began teaching classes at our Exton, Pennsylvania, Norwood, Massachusetts and Sacramento, California campuses in July 2004, June 2005 and October 2005, respectively, and we began teaching the automotive program at our Orlando, Florida campus in July 2004. The expansion of these campuses resulted in an increase in compensation and related costs of $11.2 million, occupancy costs of $3.0 million and depreciation expense of $2.7 million. In addition to these increases, compensation and related costs for all campuses, other than our Exton, Norwood, Sacramento and Orlando campuses, increased $4.7 million. The increase is due to higher instructor and support services salaries related primarily to an increase in employee headcount to support our students, approximately $0.5 million in stock compensation expense as a result of our adoption of SFAS No. 123(R) and approximately $0.3 million related to the employees affected by the reduction in force during our fourth quarter of fiscal 2006. We did not recognize any stock compensation expense related to stock options as a component of educational services and facilities in fiscal 2005.

 

The increase in contract services expense is primarily due to our providing disability accommodations for hearing-impaired students and outplacement services for employees impacted by the reduction in force during our fourth quarter of fiscal 2006.

 

Selling, general and administrative expenses.  Our selling, general and administrative expenses for the year ended September 30, 2006 were $133.1 million, an increase of $23.1 million, or 21.0%, as compared to selling, general and administrative expenses of $110.0 million for the year ended September 30, 2005.

 

The following table sets forth the significant components of our selling, general and administrative expenses:

 

 

The increase in compensation and related costs was primarily due to increases in salaries and bonus expense, stock-based compensation expense and employee benefits expense. Salaries and bonus expense increased $5.9 million for the year ended September 30, 2006, primarily due to increased personnel associated with sales and marketing activities and other organizational support. Additionally, salaries and bonus expense increased approximately $0.6 million related to the employees affected by the reduction in force during our fourth quarter of fiscal 2006. Stock-based compensation expense increased $4.2 million for the year ended September 30, 2006 as a result of our adoption of SFAS No. 123(R). We did not recognize any stock compensation expense related to stock options as a component of selling, general and administrative expenses in fiscal 2005. Benefits expense increased $1.1 million for the year ended September 30, 2006, primarily due to increased personnel head count.

 

We shifted our media mix and increased our spending in television to maximize lead generation through proven national media channels and to create greater awareness in regional and local markets surrounding our campuses. This increased our advertising costs for the year ended September 30, 2006 by $6.6 million.

 

The increase in contract services expense is primarily due to costs associated with our expansion strategy, costs associated with the search for a new Board member and outplacement services for employees affected by the reduction in force during our fourth quarter of fiscal 2006.

 

The decrease in professional services expense is primarily attributable to reduced legal costs and lower costs associated with Sarbanes-Oxley compliance efforts.

Interest income.  Our interest income for the year ended September 30, 2006 was $3.0 million, representing an increase of $1.4 million, or 91.4%, compared to interest income of $1.6 million for the year ended September 30, 2005. The increase in interest income is primarily attributable to an increase in available investment funds as well as higher interest rate returns.

 

Income taxes.  Our provision for income taxes for the year ended September 30, 2006 was $16.3 million, or 37.3% of pretax income, compared to $21.4 million, or 37.4% of pretax income, for the year ended September 30, 2005. The effective rate for the year ended September 30, 2006 is lower than the statutory rate primarily due to the release of tax reserves related to tax years closed to audit and state tax credits received related to our investment in our Norwood, Massachusetts campus. The effective tax rate for the year ended September 30, 2005 is lower than the statutory rate due to state tax credits received related to our investment in our Norwood, Massachusetts campus.

 

Net income.  As a result of the foregoing, we reported net income for the year ended September 30, 2006 of $27.4 million, as compared to net income of $35.8 million for the year ended September 30, 2005.

 

Liquidity and Capital Resources

 

We finance our operating activities and our internal growth through cash generated from operations. Our net cash from operations was $57.4 million, $45.4 million and $39.6 million for the years ended September 30, 2005, 2006 and 2007, respectively.

 

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 consisting of 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. During 2006, ED clarified its rule and is now allowing institutions with default rates below 10% for three consecutive years to request the first disbursement when students begin attending class. As a result, beginning in June 2006, our campuses in Avondale, Arizona; Glendale Heights, Illinois; Rancho Cucamonga, California; Mooresville, North Carolina and Norwood, Massachusetts are no longer subject to a 30 day delay in receiving the first disbursement. Certain types of grants and other funding are not subject to a 30-day delay. These factors, together with the timing of when our students begin their programs, affect our operating cash flow.

 

Operating Activities

 

In 2007, our cash flows provided by operating activities were $39.6 million resulting from net income of $15.6 million, adjustments of $28.3 million for non-cash and other items, partially offset by $4.2 million related to the change in our operating assets and liabilities.

 

In 2007, the primary adjustments to our net income for non-cash and other items were amortization and depreciation of $18.8 million, substantially all of which was depreciation, stock-based compensation expense of $6.4 million and bad debt expense of $3.4 million. In 2008, amortization and depreciation is expected to be higher due to additional capital expenditures placed in service during fiscal 2007, stock-based compensation is expected to be higher due to stock-based compensation grants in February 2007 and anticipated grants in 2008 and bad debt expense as a percentage of revenue is expected to be consistent with 2007.

 

In 2006, our cash flows provided by operating activities were $45.4 million resulting from net income of $27.4 million, adjustments of $21.7 million for non-cash and other items, partially offset by $3.7 million related to the change in our operating assets and liabilities.

 

In 2006, the primary adjustments to our net income for non-cash and other items were amortization and depreciation of $14.2 million, substantially all of which was depreciation, and bad debt expense of $4.7 million. The additional adjustments related to our adoption of SFAS 123(R) resulted in stock-based compensation expense of $4.9 million which was partially offset by the related tax effect recognized in deferred income taxes of approximately $2.4 million.

In 2005, our cash flows from operating activities were $57.4 million resulting from net income of $35.8 million, adjustments of $13.9 million for non-cash and other items, and $7.6 million related to the change in our operating assets and liabilities.

 

In 2005, the primary adjustments to net income for non-cash and other items were amortization and depreciation of $9.8 million, substantially all of which was depreciation, and bad debt expense of $4.2 million. Additional adjustments included deferred income taxes, excess tax benefit from stock-based compensation, stock compensation expense and loss on the sale of assets.

 

Changes in operating assets and liabilities

 

In 2007, changes in our operating assets and liabilities resulted in cash outflows of $4.2 million and was primarily attributable to changes in receivables, deferred revenue and accounts payable and accrued expenses.

 

The change in receivables and deferred revenue resulted in a combined use of cash of $1.7 million. The change was attributable to an increase in need-based tuition scholarships and higher military and veteran discounts, a decrease in student receivables related to the timing of Title IV disbursements and a lower number of student starts during the year ended September 30, 2007 when compared to the year ended September 30, 2006.

 

Accounts payable and accrued expenses decreased $2.2 million and was primarily attributable to the timing of our accounts payable cycle and the nature of our employee benefit plans. The timing of our accounts payable cycle resulted in a decrease in accounts payable and accrued expenses of approximately $1.4 million, primarily attributable to a decrease of $2.7 million in accrued capital expenditures related to the completion of the expansion projects at our Sacramento and Orlando campuses. This decrease was partially offset by an increase in advertising accruals of $0.9 million. The nature of our employee benefit and bonus plans and the timing of payments under those plans resulted in a decrease in accounts payable and accrued expenses of approximately $0.7 million. The $0.7 million decrease is primarily due to a decrease of $4.1 million related to our bonus plans and $1.1 million in severance payments related to our reduction in force in September 2006, partially offset by an increase of $3.9 million in the severance accrual related to our reduction in force in September 2007 and $0.6 million primarily related to our self-insured employee benefit plans.

 

In 2006, the change in our operating assets and liabilities of $3.7 million was primarily due to changes in receivables and deferred revenue, income taxes, other assets, and accounts payable and accrued expenses. A combination of a lower number of student starts during the year ended September 30, 2006 when compared to the year ended September 30, 2005, operating efficiencies and our ability to request the first disbursement of Title IV funding without a 30 day delay at five campuses resulted in a decrease in receivables of $1.8 million and an increase in deferred revenue of $6.6 million resulting in a combined positive cash flow of $8.4 million.

 

We were in an income tax receivable position, at September 30, 2006 as compared to an income tax payable position at September 30, 2005, due to the timing of income tax payments, which reduced cash by $3.7 million. Additionally, we classified $0.8 million of the tax benefit from stock-based compensation as a decrease in income taxes in cash flows from operating activities with the offsetting increase in cash flows from financing activities. Other assets increased by $2.1 million primarily due to a prepayment of software licenses. The cash used in accounts payable and accrued expenses of $6.3 million was primarily due to the timing of payments related to construction liabilities.

 

In 2005, cash flows of $7.6 million were provided by operations relating to the change in our operating assets and liabilities primarily due to changes in accounts receivable and deferred revenues, accounts payable and accrued expenses and other current liabilities partially offset by cash outflows attributable to prepaid expenses. The growth of our student population and the timing of tuition funding resulted in an increase in accounts receivable of $5.3 million and an increase in deferred revenues of $8.3 million resulting in a combined positive cash flow of $3.0 million. Cash provided by increases in accounts payable and accrued expenses and other current liabilities was primarily due to increases in accounts payable, accrued compensation and benefits, royalties, real estate taxes and professional fees primarily associated with Sarbanes-Oxley compliance, income tax payable and the recognition of our guarantee liability associated with certain tuition funding received. These increases were attributable primarily to our increased level of operations necessary to support average student growth. The increase in cash used for prepaid expenses was primarily attributable to the payment of advertising and facility rent.

Our working capital increased by $33.3 million to $7.3 million at September 30, 2007, as compared to a working capital deficit of $26.0 million at September 30, 2006. The increase in 2007 was primarily attributable to $40.1 million in cash proceeds from the sale of our facilities at our Sacramento, California campus. At September 30, 2006, we had repurchased approximately 1.4 million shares of our common stock at an average purchase price of $20.95 per share. Our current ratio was 1.08 at September 30, 2007 as compared to 0.73 at September 30, 2006. There were no amounts outstanding on our line of credit during 2007.

 

Our working capital decreased $39.8 million to a working capital deficit of $26.0 million at September 30, 2006 compared to $13.8 million at September 30, 2005. The decrease in 2006 was primarily attributable to the decrease in cash of $30.0 million which was used to repurchase shares of our common stock in accordance with our stock repurchase program. At September 30, 2006 we had repurchased approximately 1.4 million shares of our common stock at an average purchase price of $20.95 per share. Our current ratio was 0.73 at September 30, 2006 as compared to 1.15 at September 30, 2005. There were no outstanding borrowings on our line of credit during 2006.

 

Receivables, net were $14.5 million and $16.7 million at September 30, 2007 and 2006, respectively. Our days sales outstanding (DSO) in accounts receivable was approximately 16 days at September 30, 2007 and 20 days at September 30, 2006, an improvement of 4 days. The improvement was primarily attributable to the lower number of student starts during 2007 as compared to 2006 and operating efficiencies gained during 2007.

 

Receivables, net were $16.7 million and $21.2 million at September 30, 2006 and 2005, respectively. Our days sales outstanding (DSO) in accounts receivable was approximately 20 days at September 30, 2006 and 24 days at September 30, 2005, an improvement of 4 days. The improvement was primarily attributable to the lower number of student starts during 2006 as compared to 2005, operating efficiencies and the ability to request the first disbursement of Title IV funding without a 30 day delay at five of our campuses.

 

Investing Activities

 

Our cash used in investing activities is primarily related to the purchase of property and equipment and capital improvements, partially offset by proceeds from the sale of property and equipment. Our capital expenditures primarily result from the addition of new campuses, the expansion of existing campuses and ongoing replacements of equipment related to student training. Net cash used in investing activities was $51.1 million, $29.9 million and $6.4 million in the years ended September 30, 2005, 2006 and 2007, respectively.

 

The decrease in cash used in investing activities during the year ended September 30, 2007 was primarily attributable to the proceeds received from the sale of the facilities at our Sacramento, California campus of $40.1 million, offset by cash outflows associated with capital expenditures related to expansion efforts of our existing campuses and investment in training aids, classroom technology and other equipment that support our programs.

 

In addition to our investment in new and replacement training equipment for our ongoing operations, the following is a summary of our significant investments in capital expenditure activities for the year ended September 30, 2007.

 

 

As a result of our investments in new campuses and the expansion of existing campuses, we added 370 seats to our capacity during 2007 ending the year with a total of 25,480 seats.

 

We anticipate capital expenditures will decrease during 2008 as we do not have any significant expansion projects for fiscal 2008. Additionally, we plan to decrease total seating capacity during fiscal 2008.

 

In addition to our investment in new and replacement training equipment for our ongoing operations, the following is a summary of our significant investments in capital expenditures for our fiscal year ended September 30, 2006.

 

 

As a result of our investments in new and expansion of existing campuses, we added 3,085 seats to our capacity during 2006 ending the year with a total of 25,110 seats.

 

Additionally, we were notified during the first quarter of 2006 that ED no longer required a letter of credit and accordingly, the restrictions on our $16.2 million of restricted investments were removed and the funds became available for general corporate use. Upon maturity of the investments, the proceeds were invested in cash equivalent funds.

 

In addition to our investment in new and replacement training equipment for our ongoing operations, the following is a summary of our significant investments in capital expenditures for our fiscal year ended September 30, 2005.

 

 

In addition, concurrent with the release of $10.4 million in restricted cash, we invested $16.2 million in securities to secure our letter of credit in the amount of $14.4 million issued in favor of ED.

 

Financing Activities

 

In 2007, our cash flows provided by financing activities were $0.9 million and were primarily attributable to proceeds from the issuance of our common shares under employee stock plans.

 

In 2006, our cash flows used in financing activities were $26.2 million and were primarily attributable to $30.0 million used for the repurchase of shares of our common stock, partially offset by $3.1 million provided by proceeds from the issuance of our common shares under employee stock plans and $0.8 million related to the tax benefit from stock-based compensation.

 

In 2005, our cash flows provided by financing activities were $3.2 million and were primarily related to $3.4 million provided by proceeds from the issuance of our common shares from the exercise of stock options

partially offset by the payments on capital leases, payment of deferred finance fees and the distribution of proceeds from the sale of land.

 

Debt Service

 

On October 26, 2007, we entered into a second modification agreement which extended our $30.0 million revolving line of credit agreement with a bank through October 26, 2009 and established new covenant requirements. There was no amount outstanding on the line of credit at September 30, 2007 or at the date of the modification agreement.

 

The revolving line of credit is guaranteed by UTI Holdings, Inc. and each of its wholly owned subsidiaries. Letters of credit issued bear fees of 0.625% per annum and reduce the amount available to borrow under the revolving line of credit. The credit agreement requires interest to be paid quarterly in arrears based upon the lender’s interest rate less 0.50% per annum or LIBOR plus 0.625% per annum, at our option. Additionally, the revolving line of credit requires an unused commitment fee payable quarterly in arrears equal to 0.125% per annum.

 

The October 26, 2007 modification agreement revised the financial ratios to the following: net income after taxes determined for any fiscal year of not less than $7.5 million for such year; net income after taxes for any two consecutive fiscal quarters of not less than $0.00 for such consecutive quarters; total liabilities divided by tangible net worth determined for any fiscal quarter of not greater than 3.00 to 1.00; current ratio determined for any fiscal quarter of not less than 0.50 to 1.00; and tangible net worth determined as of any fiscal quarter of not less than $35.0 million. In addition, the credit agreement requires that we maintain our accreditation and eligibility for receiving Title IV Program funds. At September 30, 2007, we were not in compliance with the previous covenant requiring quarterly minimum net income of $3.5 million as a result of $4.5 million of costs related to the reduction in force in the fourth quarter of fiscal 2007. We obtained a waiver from the bank on October 2, 2007. We were in compliance with all other restrictive covenants at September 30, 2007.

 

Dividends

 

We do not currently pay any dividends on our common stock. 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.

 

Future Liquidity Sources

 

Based on past performance and current expectations, we believe that our cash flow from operations and other sources of liquidity, including borrowings available under our revolving credit facility, will satisfy our working capital needs, capital expenditures, commitments, and other liquidity requirements associated with our existing operations through the next 12 months.

 

On October 10, 2007, we received net proceeds of $32.6 million in connection with the sale of our facilities and land at our Norwood, Massachusetts campus. For further details on the transaction, refer to Note 7 of our audited Consolidated Financial Statements within Part II, Item 8 of this Report.

 

On November 26, 2007, our Board of Directors authorized us to repurchase up to $50.0 million of our common stock in open market or privately negotiated transactions. The timing and actual number of shares purchased will depend on a variety of factors such as price, corporate and regulatory requirements, and other prevailing market conditions. We may terminate or limit the stock repurchase program at any time without prior notice.

 

We believe that the most strategic uses of our cash resources include the repurchase of our common stock subsidizing funding alternatives for our students, filling existing capacity, and expanding our program offerings. In addition, our long-term strategy includes the consideration of strategic acquisitions. 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 or issue debt, resulting in increased interest expense.

 

Contractual Obligations

 

The following table sets forth, as of September 30, 2007, the aggregate amounts of our significant contractual obligations and commitments with definitive payment terms that will require significant cash outlays in the future.

 

 

 

 

On October 10, 2007, we entered into a lease agreement for our Norwood, Massachusetts campus with an initial term of 15 years. The terms of the agreement require total annual rent payments of $2.6 million, $2.6 million, $2.7 million, $2.7 million, $2.8 million and $30.2 million in the years ending September 30, 2008, 2009, 2010, 2011, 2012 and thereafter, respectively. Such amounts are not reflected in the preceding table.

 

Related Party Transactions

 

Since 1991, some of our properties have been leased from entities controlled by John C. White, the 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 totaled 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, since April 1994, we have leased 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, totaled 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 have made in fiscal 2005, 2006 and 2007 under these leases: