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The following is an excerpt from a S-1 SEC Filing, filed by UNIVERSAL TECHNICAL INSTITUTE INC on 10/3/2003.
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UNIVERSAL TECHNICAL INSTITUTE INC - S-1 - 20031003 - BUSINESS

BUSINESS

General

      We are a leading provider of post-secondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians. We offer undergraduate degree, diploma and certificate programs at seven campuses across the United States, and manufacturer-sponsored advanced programs at 22 dedicated training centers. For the nine-month period ended June 30, 2003, our net revenues were $141.6 million, a 34.3% increase over the nine-month period ended June 30, 2002, and our average undergraduate enrollments were 10,228 full-time students, a 25.3% increase over the nine-month period ended June 30, 2002.

      We work closely with leading original equipment manufacturers (OEMs) in the automotive, diesel, motorcycle and marine industries to understand their needs for qualified service professionals. By staying current on the equipment and technology employed by OEMs, we are able to continuously refine and expand our programs and curricula. We believe that our industry-oriented educational philosophy and national presence have enabled us to develop valuable strategic relationships that provide us with a significant competitive strength and support our market leadership. We are a primary provider of manufacturer-branded technician training programs for Audi of America; American Honda Motor Co., Inc.; American Suzuki Motor Corp.; BMW of North America, LLC; Ford Motor Co.; Harley-Davidson Motor Co.; International Truck and Engine Corp.; Jaguar Cars, Inc.; Kawasaki Motors Corp., U.S.A.; Mercedes-Benz USA, LLC; Mercury Marine; Porsche Cars of North America, Inc.; Volkswagen of America, Inc.; Volvo Car Corp.; 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). Our undergraduate programs are designed to be completed in 12 to 18 months and culminate in an associate’s degree, diploma or certificate, depending on the program and campus. Tuition ranges from approximately $17,000 to $31,000 per program, primarily depending on the nature and length of the program. All of our undergraduate programs are accredited and eligible for federal Title IV financial aid. Upon completion of one of our automotive or diesel undergraduate programs, qualifying students have the opportunity to enroll in one of the manufacturer-sponsored advanced training programs that we offer. These training programs are manufacturer-specific and are offered in a facility in which the OEM supplies the cars, equipment, specialty tools and curriculum. Tuition for these advanced training programs is paid by each participating OEM in return for a commitment by the student to work for a dealer of that OEM upon graduation. We also provide continuing education and retraining to experienced technicians at our customers’ sites or in our training facilities.

Our History

      We were founded in Phoenix, Arizona in 1965 to educate students in automotive services. Since our inception, we have expanded our programs with additional curricula and have opened new campuses, growing internally and through acquisitions. To address the needs of corporate clients, we started providing continuing education and training for technicians in 1980. In 1983, we opened our Houston, Texas campus, and in 1988 we opened our Glendale Heights, Illinois campus outside of Chicago. In 1998, we opened a campus in Rancho Cucamonga, California.

      In January 1998, we acquired all of the assets of the parent company of MMI, which expanded our program offerings to include motorcycle and marine technician training. From its inception in 1973, MMI grew from a small operator of regional training centers to an educational institution with campus locations in Phoenix, Arizona and Orlando, Florida and relationships with leading OEMs in the motorcycle and marine industries. Concurrent with this acquisition, in order to provide liquidity for certain stockholders and capital for the acquisition of MMI, and to fund growth, we recapitalized our company with the assistance of The Jordan Company, LLC. As part of the recapitalization, we sold preferred and common

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equity to a group of investors assembled by The Jordan Company, consisting of private equity investors, individual investors employed by or serving as consultants to The Jordan Company and certain members of our management team. In April 2002, we sold convertible preferred equity to a group of investors, including Charlesbank Capital Partners, LLC and Worldwide Training Group, LLC, to reduce our outstanding debt and provide capital for growth.

      In July 1999, we entered into a licensing arrangement with the National Association for Stock Car Auto Racing (NASCAR) to build NTI. NTI is the nation’s first NASCAR-licensed technical training school to combine general automotive and NASCAR technology. The school is an extension of NASCAR’s Officially Licensed Automotive Aftermarket Program. Opened in July 2002, NTI is located in Mooresville, North Carolina.

Industry

      Based on estimates by the U.S. Department of Education, National Center for Education Statistics, expenditures for post-secondary education exceeded $290 billion in the 2002-2003 academic year. While public and private four-year colleges currently represent a majority of this spending, a fast-growing segment of the post-secondary education market is the field of technical, career-oriented training. According to the Bureau of Labor Statistics, occupations requiring a post-secondary vocational credential or an academic degree, which accounted for 29% of all jobs in 2000, will account for 42% of total job growth from 2000 to 2010. To address the need for career-focused technical curricula, post-secondary institutions are increasingly offering programs in automotive technology, health sciences and information technology. According to data collected by the U.S. Department of Labor, there will be approximately 55,000 new job openings each year from 2000 to 2010 in the fields we serve.

      In recent years, there has been an increasing shortage of qualified service technicians in the automotive, diesel, collision repair, motorcycle and marine industries. This shortage primarily is being driven by the rapid technological advancement in these industries and an aging workforce. For example, it is not unusual today for an automobile to have more than 50 microprocessors to meet the need for sophisticated engine controls, comply with fuel emissions standards, perform advanced diagnostic analysis, enhance safety features (such as anti-lock brakes or automatic airbags) and provide certain comfort and convenience features (such as global positioning systems or sophisticated climate controls). Aspiring technicians must have sophisticated technical skills and be able to adapt to continually changing technologies, making it increasingly challenging for them to be self-trained. Furthermore, technicians working for particular dealers of such manufacturers need additional training to familiarize themselves with technologies that are proprietary to those manufacturers. In addition to creating employment requirements for new technicians, these technological changes have increased the need for continuing training for working technicians.

      As a result of these trends, we believe that the market for qualified service technicians is large, growing and increasingly underserved. In 2000, the U.S. Department of Labor estimated that there were approximately 840,000 working automotive technicians in the United States, and that this number was expected to increase by 18% from 2000 to 2010. These estimates also indicate that the other industries we serve have similar growth trends. Furthermore, the National Auto Dealers Association cites a current shortage of approximately 60,000 automotive technicians.

      The rapidly changing technologies in the fields that we serve dictate that manufacturers and dealers continually invest in their training programs. The recurring need and resultant expense of training technicians has led many manufacturers to outsource training that was formerly conducted internally. Traditionally, manufacturers and dealers spend a significant amount of time recruiting and training entry-level technicians. Automotive manufacturers typically look to their dealerships to recruit and screen applicants; however, local dealerships may lack recruiting resources and expertise, making it difficult for them to attract qualified candidates. By outsourcing their recruiting and training, manufacturers and dealers can better focus on their core activities. In addition, by hiring technicians directly from our graduating classes, manufacturers and dealers are able to benefit from our extensive national recruiting

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effort and employ a qualified technician at a lower overall cost than they could through their own recruitment and training efforts. Given our national presence and manufacturer support, we believe that we are in a position to provide these training services on a cost-effective basis.

Competitive Strengths

      We believe that we are well positioned to capitalize on these market opportunities as a result of the following competitive strengths:

  •  Industry-Oriented Business Model. We work extensively with leading automotive, diesel, collision repair, motorcycle and marine equipment manufacturers, dealers and suppliers to determine the present and future needs of the end-markets our graduates enter and to tailor our educational programs to best serve those constituents. As a result, we believe that our graduates have the opportunity to work for the most desirable employers in their chosen fields due to the quality of their education and their commitment to careers as qualified service technicians. In turn, we believe that the higher quality employment opportunities available to our graduates drive increased enrollments at our campuses and training centers.
 
  •  Unique Manufacturer-Based Programs. We work closely with OEMs to develop brand-specific education programs. Participating manufacturers typically assist us in developing course content and curricula, and provide us with equipment, specialty tools and parts at no charge. In addition, the manufacturer pays the full tuition of each student enrolled in our advanced training programs. Our collaboration with OEMs enables us to provide highly specialized education to our students, resulting in improved employment opportunities and the potential for higher wages for graduates. We are a primary provider of such programs for Audi of America; American Honda Motor Co., Inc.; American Suzuki Motor Corp.; BMW of North America, LLC; Ford Motor Co.; Harley-Davidson Motor Co.; International Truck and Engine Corp.; Jaguar Cars, Inc.; Kawasaki Motors Corp., U.S.A.; Mercedes-Benz USA, LLC; Mercury Marine; Porsche Cars of North America, Inc.; Volkswagen of America, Inc.; Volvo Car Corp.; and Yamaha Motor Corp., USA.
 
  •  Strategic Relationships. In addition to our curriculum-based relationships with OEMs, we develop and maintain a variety of complementary relationships with OEMs, parts and tools suppliers, enthusiast organizations and other industry participants. Currently, these relationships include BEL-RAY Company, Inc., Dana Corporation, Dodge Motorsports, DuPont Automotive Finishes, Hot Rod Magazine, NASCAR and Snap-on Industrial, among others. 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.
 
  •  National Presence. Since our founding in 1965, we have grown our business and expanded our campus platform to establish a national presence. Through the UTI, MMI and NTI brands, our undergraduate campuses and advanced training centers currently provide us with local representation covering several geographic regions across the United States. Supporting our campuses, we maintain a national recruiting network of over 190 education representatives who are able to identify, advise and enroll students from all 50 states. Consequently, unlike competitors with single-or regional-campus models, we are able to effectively reach a national pool of potential students and to provide qualified professionals to our various end-markets on a broad geographic basis.
 
  •  Superior Recruiting Strategy. We employ an integrated marketing and recruitment strategy that we believe enables us to effectively target and recruit both traditional post-secondary students and working adults. Our field-based education representatives provide a local presence to prospective students at high schools across the country. Additionally, our campus-based education representatives respond to media-driven inquiries from adults across the United States who are interested in returning to school. We support our education representatives’ recruiting efforts with a national

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  multimedia marketing strategy that includes television, enthusiast magazines, direct mail and the Internet.

Growth Strategy

      We have a long history of providing high quality educational programs to our students, helping many of them to secure attractive positions in their chosen fields of specialty. Our goal is to maintain and strengthen our role as a leading provider of technical education services. We intend to pursue the following growth strategies to attain this goal:

  •  Open New Campuses. We continue to identify new markets that we believe will complement our established campus network and support further growth. We believe that there are a number of local markets, in regions where we do not currently have a campus, with both pools of interested prospective students and career opportunities for graduates. By establishing campuses in these locations, we believe that we will be able to supply skilled technicians to local employers, as well as provide educational opportunities for students otherwise unwilling to relocate to acquire a post-secondary education. Additional locations will also provide us with an opportunity to expand our relationships with OEMs by providing a graduate population with greater geographic reach.
 
  •  Increase Recruitment and Marketing. We plan to hire additional education representatives to enhance our recruitment coverage in territories where we are currently active in recruiting students and to expand into new regions and cities. We estimate that in our 2003 fiscal year, our field-based education representatives made approximately 9,000 high school visits and approximately 360,000 student contacts. In addition, during the same period, we estimate that our campus-based education representatives addressed approximately 150,000 inquiries from prospective students. We believe that additional education representatives, combined with increased marketing spending, will increase our national presence and enable us to better target the prospective student pool from which we recruit.
 
  •  Expand Program Offerings. As the industries we serve become more technologically advanced, the requisite training for qualified technicians continues to increase. We continually work with our industry customers to expand and adapt our course offerings to meet their needs for skilled technicians. We also intend to increase the number of specialized or manufacturer-specific electives we offer in our undergraduate programs, such as our Hot Rod U high performance series and our Ford-certified elective.
 
  •  Seek Additional Strategic Relationships. We actively seek to develop new strategic relationships with leading OEMs, dealership networks and other industry participants. Securing such relationships will enable us to further drive undergraduate enrollment growth, diversify funding sources and expand the scope and increase the number of the programs we offer. We believe that these relationships are also valuable to our industry partners since our programs provide them with a steady supply of highly trained service technicians and are a cost-effective alternative to in-house training. Therefore, we believe that these relationships will also provide us additional incremental revenue opportunities from retraining OEMs’ existing employees.
 
  •  Consider Strategic Acquisitions. We may selectively consider acquisition opportunities that, among other factors, would complement our program offerings, benefit from our expertise and scale in marketing and administration and could be integrated into our existing operations.

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). Our undergraduate programs are designed to be completed in 12 to 18 months and culminate in an associate’s degree, diploma or certificate, depending on the program and campus. Tuition

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ranges from approximately $17,000 to $31,000 per program, primarily depending on the nature and length of the program. All of our undergraduate programs are accredited and eligible for federal Title IV financial aid. Upon completion of one of our automotive or diesel undergraduate programs, qualifying students have the opportunity to enroll in one of our advanced, manufacturer-specific training programs. These programs are offered in facilities in which OEMs supply the vehicles, equipment, specialty tools and curricula. Tuition for the advanced training programs is paid by each participating OEM in return for a commitment by the student to work for a dealer of that OEM upon graduation. We also provide continuing education and retraining to experienced technicians.

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

                     
Date
School Location Opened Principal Programs




  UTI     Phoenix, Arizona     1965     Automotive; Diesel & Industrial; Automotive/ Diesel; Automotive/ Diesel & Industrial
  UTI     Houston, Texas     1983     Automotive; Diesel & Industrial; Automotive/ Diesel; Automotive/ Diesel & Industrial; Collision Repair and Refinishing
  UTI     Glendale Heights, Illinois     1988     Automotive; Diesel & Industrial; Automotive/ Diesel; Automotive/ Diesel & Industrial
  UTI     Rancho Cucamonga, California     1998     Automotive
  MMI     Phoenix, Arizona     1973     Motorcycle
  MMI     Orlando, Florida     1986     Motorcycle, Marine
  NTI     Mooresville, North Carolina     2002     Automotive with NASCAR

      Universal Technical Institute (UTI)

      UTI is one of the few schools in the United States to offer automotive, diesel & industrial, and collision repair and refinishing programs that are master certified by the National Automotive Technicians Education Foundation (NATEF), a division of the Institute for Automotive Service Excellence (ASE). All UTI programs are accredited and culminate in an associate’s degree or diploma, depending on the program and campus. Students also have the option to enhance their core program through the Ford Accelerated Credential Training (FACT) Elective, a Ford-specific program that allows them to become Ford-certified technicians.

  •  Automotive Technology. Established in 1965, the Automotive Technology program is designed to teach students how to diagnose, service and repair automobiles. The program ranges from 48 to 76 weeks in duration, and tuition ranges from $19,200 to $27,900. Graduates of this program are qualified to work as entry-level service technicians in automotive repair facilities or automotive dealer service departments.
 
  •  Diesel & Industrial Technology. Established in 1968, the Diesel & Industrial Technology program is designed to teach students how to diagnose, service and repair diesel systems and industrial equipment. The program is 45 weeks in duration and tuition ranges from $18,200 to $18,800. Graduates of this program are qualified to work as entry-level service technicians in medium and heavy truck facilities, truck dealerships, or in service and repair facilities for marine diesel engines and equipment utilized in various industrial applications, including materials handling, construction, transport refrigeration or farming.
 
  •  Automotive/Diesel Technology. Established in 1970, the Automotive/ Diesel Technology program is designed to teach students how to diagnose, service and repair automobiles and diesel systems. The program ranges from 66 to 81 weeks in duration and tuition ranges from approximately

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  $23,500 to $29,800. Graduates of this program typically can work as entry-level service technicians in automotive repair facilities, automotive dealer service departments, diesel engine repair facilities, medium and heavy truck facilities or truck dealerships.
 
  •  Automotive/ Diesel & Industrial Technology. Established in 1970, the Automotive/ Diesel & Industrial Technology program is designed to teach students how to diagnose, service and repair automobiles, diesel systems and industrial equipment. The program ranges from 72 to 84 weeks in duration and tuition ranges from $24,400 to $31,000. Graduates of this program are qualified to work as entry-level service technicians in automotive repair facilities, automotive dealer service departments, diesel engine repair facilities, medium and heavy truck facilities, truck dealerships, or in service and repair facilities for marine diesel engines and equipment utilized in various industrial applications, including material handling, construction, transport refrigeration or farming.
 
  •  Collision Repair and Refinishing Technology (CRRT). Established in 1999, the CRRT program teaches students how to repair non-structural and structural automobile damage as well as how to prepare cost estimates on all phases of repair and refinishing. The program ranges from 51 to 57 weeks in duration and tuition ranges from $20,400 to $21,900. Graduates of this program are qualified to work as entry-level service technicians at OEM dealerships and independent repair facilities.
 
Motorcycle Mechanics Institute and Marine Mechanics Institute (collectively, MMI)

  •  Motorcycle. Established in 1973, this MMI program is designed to teach students how to diagnose, service and repair motorcycles and all-terrain vehicles. The program ranges from 57 to 81 weeks in duration and tuition ranges from $17,000 to $23,100. Graduates of this program are qualified to work as entry-level service technicians in motorcycle dealerships and independent repair facilities. MMI is supported, pursuant to oral understandings, by all five major motorcycle manufacturers: American Honda Motor Co., Inc.; American Suzuki Motor Corp.; Harley-Davidson Motor Co.; Kawasaki Motors Corp., U.S.A.; and Yamaha Motor Corp., USA. We estimate that MMI commands over 80% market share in the entry-level motorcycle technician training industry.
 
  •  Marine. Established in 1986, this MMI program is designed to teach students how to diagnose, service and repair boats and personal watercraft. The program is 60 weeks in duration and tuition is approximately $19,900. Graduates of this program are qualified to work as entry-level service technicians for marine dealerships and independent repair shops, as well as for marinas, boat yards and yacht clubs.
 
NASCAR Technical Institute (NTI)

      Established in 2002, NTI offers the same type of automotive training as UTI does, but with additional NASCAR-specific courses. In addition to the training received in our Automotive Technology program, students are able to learn first-hand on NASCAR engines and equipment and to learn specific skills required for entry-level positions in NASCAR-related career opportunities. The program ranges from 57 to 73 weeks in duration and tuition ranges from $25,100 to $31,200. Similar to graduates of the Automotive Technology program, NTI graduates are qualified to work as entry-level service technicians in automotive repair facilities or automotive dealer service departments. A small percentage of these graduates may have the opportunity to work on NASCAR technician teams.

      Manufacturer-Sponsored Programs

  •  Advanced Training Programs. Pursuant to oral or written understandings, we offer manufacturer-specific advanced training programs for the following companies: Audi of America; BMW of North America, LLC; Ford Motor Co.; International Truck and Engine Corp.; Jaguar Cars, Inc.; Mercedes-Benz USA, LLC; Porsche Cars of North America, Inc.; Volkswagen of America, Inc.; and Volvo Car Corp. These programs are intended to offer in-depth instruction on specific manufacturers’ products, qualifying a graduate for employment with a dealer seeking highly

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  specialized, entry-level technicians with brand-specific skills. The programs range from eight to 27 weeks in duration, and tuition, which generally ranges from $5,000 to $8,200, is paid by the manufacturer. The manufacturer also supplies equipment for the courses.
 
  •  Retraining. Technicians in all of the industries we serve are in regular need of retraining or certification on new technologies. Increasingly, manufacturers such as American Honda Motor Co., Inc.; BMW of North America, LLC; Harley-Davidson Motor Co.; and Mercedes-Benz USA, LLC are outsourcing a portion of this training to education providers such as our company.

Strategic Relationships

      We have an extensive network of strategic relationships that provide a wide range of strategic and financial benefits, including product/ financial support, licensing and manufacturer training.

  •  Product/ Financial Support. Product/financial support is an integral component of our business strategy and is employed across our schools. In these relationships, sponsors provide their products, including equipment and supplies, at little or no cost to us in return for our use of those products in the classroom, or provide financial sponsorship to either us or our students. Product/financial support is an attractive marketing channel for sponsors because our classrooms provide them with early access to the future end-users of their products. As students become familiar with a manufacturer’s products during training, they may be more likely to continue to use the same products upon graduation. Our extensive use of product support relationships allows us to minimize the equipment and supply costs in each of our classrooms and significantly reduces the capital outlay necessary for operating and equipping our campuses.

An example of a product/financial support relationship is:

•  Snap-on Tools. At various stages in our undergraduate programs, students receive a Snap-on Tools entry-level tool set having an approximate retail value of $1,000. We purchase these tool sets from Snap-on Tools at a discount from their list price. In the context of this relationship, we have granted Snap-on Tools exclusive access to our campuses and display advertising and we have agreed to use Snap-on tools to train our students. We receive credits from Snap-on Tools for tool kits and any additional purchases made by our students. We can then redeem those credits to purchase Snap-on Tools equipment and tools for our campuses at the full retail list price.

  •  Licensing. Licensing encompasses our affiliation with key industry brands. We pay a licensing fee and, in return, receive the right to use a particular industry participant’s name or logo in our promotional materials and on our campuses. We believe that our current and potential students generally identify favorably with the recognized brand names licensed to us, enhancing our reputation and the effectiveness of our marketing efforts.

An example of a licensing arrangement is:

•  NASCAR. In July 1999, we entered into a licensing arrangement with NASCAR and became its exclusive education provider for automotive technicians. In July 2002, the NASCAR Technical Institute opened in Mooresville, North Carolina. More than 1,000 students currently attend this campus. This relationship provides us with access to the extensive network of NASCAR sponsors, presenting us with the opportunity to enhance our product support relationships. The popular NASCAR brand name combined with the opportunity to learn on high-performance cars is a powerful recruiting and retention tool for a broad group of potential students.

  •  Manufacturer Training. Manufacturer training relationships provide strategic benefits to us that impact each of our education programs. These relationships induce entry-level training tailored to the needs of a specific manufacturer, as well as continuing education and retraining of experienced technicians. In our entry-level programs, students receive training and certification on a given

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  manufacturer’s products. In return, the manufacturer supplies equipment, specialty tools and parts, and assistance in developing curricula. Students who receive this training are often certified to work on that manufacturer’s products when they complete the program. That certification typically leads to both improved employment opportunities and the potential for higher wages. Manufacturer training relationships lower the capital investment necessary to equip our classrooms and provide us with a significant marketing advantage. In addition, through these relationships, manufacturers are able to increase the pool of skilled resources available to service and repair their products.

  We actively seek to extend our relationship with a given manufacturer by providing the manufacturer’s retraining. Like the advanced training, these programs are built on a strategic training relationship under which the manufacturer not only provides the equipment and curriculum but also pays for the students’ tuition. These retraining courses often take place within our existing facilities, allowing the manufacturer to avoid the costs associated with establishing its own dedicated facility.
 
  Examples of Manufacturer Training relationships include:

  •  Ford Motor Company. We offer the Ford Accelerated Credential Training (FACT) Elective to all of the students in our Automotive and Automotive/Diesel programs. The FACT Elective is a 15-week course in Ford-specific training, during which students are able to earn Ford certifications. Ford Motor Company provides the curriculum, vehicles, specialty equipment and other training aids required in this elective.
 
  •  Mercedes-Benz USA, LLC. We offer the Mercedes-Benz ELITE training program. This is a 16-week advanced training program that enables students to earn Mercedes-Benz training credits in service maintenance, diagnosis and repair of most Mercedes-Benz vehicle systems. Highly ranked graduates of UTI’s Automotive and Automotive/ Diesel programs may apply for acceptance into the Mercedes-Benz ELITE training program. Tuition for the program is paid by the manufacturer. All curricula, vehicles, specialty tools and training aids are provided by Mercedes-Benz. Recently, we added a Mercedes-Benz ELITE training program for graduates of the CRRT program. In addition, we provide training for Mercedes-Benz factory technicians on a regular basis at our Houston, Texas facility.
 
  •  American Honda Motor Co., Inc. American Honda Motor Co., Inc. supports our campus training program called HonTech® by donating equipment and providing curriculum. In addition, we are a primary provider of continuing training for experienced American Honda technicians. We oversee administration of the training program, including scheduling classes and technician enrollment. Our instructors provide the training at American Honda-authorized training centers across the United States.

Student Recruitment Model

      We strive to increase our school enrollment and profitability through a dedicated marketing program designed to maximize market penetration. Our strategy is to recruit a geographically dispersed and demographically diverse student body, including both recent high school graduates and adults. Due to the diverse backgrounds and locations of students who attend our schools, we utilize a variety of marketing techniques to recruit applicants to our programs, including:

  •  Field-Based Representatives. Our field-based education representatives recruit prospective students from high schools across the country. Over the last three fiscal years, approximately 60% of our student population has been recruited directly out of high school. Currently, we have 128 field-based education representatives, an increase from 58 field-based representatives as of the end of our 1998 fiscal year, with assigned territories covering the United States and U.S. territories. Our field-based education representatives recruit students by making career presentations at high schools and direct presentations at the homes of prospective students. We estimate that in our 2003 fiscal year,

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  our education representatives made approximately 9,000 high school visits and approximately 360,000 student contacts.

        Our reputation in local, regional and national business communities, endorsements from high school guidance counselors and the recommendations of satisfied graduates are some of our most effective recruiting tools. Accordingly, we strive to build relationships with the people who influence the career decisions of prospective students, such as vocational instructors and high school guidance counselors. Every year, we conduct seminars for high school career counselors and instructors at our training facilities and campuses as a means of further educating these individuals on the merits of our programs. We estimate that as much as 10% of our enrollment comes from referrals from our staff, current students and alumni.

  •  Campus-Based Representatives. In addition to our field-based education representatives, we use campus-based representatives to recruit students. These representatives respond to targeted marketing leads and inbound inquiries to directly recruit new students — typically adults returning to school — from anywhere across the United States. We estimate that our 66 campus-based education representatives, an increase from 35 campus-based education representatives at the end of our 1998 fiscal year, addressed approximately 150,000 media-driven inquiries in our 2003 fiscal year. Since working adults tend to start our programs throughout the year instead of in the fall as is most typical of traditional school calendars, these students help balance our enrollment throughout the year.
 
  •  Marketing and Advertising. We make use of multiple direct and indirect marketing and advertising channels aimed at prompting enthusiasts and underemployed or unemployed prospective students to contact us. We select various advertising methods on a national, regional and local basis to drive enrollments at our campuses. We utilize television advertising on national cable networks such as Speed Channel, Fox Sports Net, Spike TV (formerly known as TNN) and Outdoor Life Network, as well as on local stations. We advertise in both national and regional automotive, motorcycle and marine enthusiast publications, including Harley-Davidson’s enthusiast publication which has a circulation of over 495,000. We also employ direct mailings and maintain a proprietary database consisting of over 980,000 names that enable us to target both high school students and working adults throughout the year.

Student Admissions and Retention

      We currently employ 194 field- and campus-based education representatives who work directly with prospective students to facilitate the enrollment process. At each campus, student admissions are overseen by an admissions department that reviews each application. We screen prospective student applications to increase the likelihood that all admitted students are capable of completing the requisite coursework and ready to obtain employment following graduation. Different programs have varying admissions standards. For example, applicants for the diploma and associate of occupational studies programs must be at least 16 years of age and have a high school diploma or certification of high school equivalency (G.E.D.). Applicants for the certificate programs must have a high school diploma or G.E.D. or be beyond the age of compulsory school attendance and have the ability to benefit from the training offered, as determined by personal interviews and performance on the Wonderlic Scholastic Level Exam.

      To maximize student persistence, we have staff and other resources to assist and advise students regarding academic, financial, personal and employment matters. Currently, our student completion rate is typically above 70%, which we believe compares favorably with other providers of comparable educational/ training programs.

Enrollment

      We enroll students continuously throughout the year. For the nine months ended June 30, 2003, we had an average enrollment of 10,228 full-time undergraduate students, representing an increase of approximately 25.3% as compared to the nine months ended June 30, 2002 and making us the largest

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provider of post-secondary education in our fields of study. Currently, our student body is geographically diverse, with approximately 80% of our students at most campuses having relocated to attend our programs. For the twelve months ended September 30, 2001 and 2002, we had average enrollments of 6,710 and 8,277 full-time students, respectively.

Graduate Placement

      We believe that securing employment for our graduates is critical to our ability to attract high quality prospective students. In addition, high placement rates are directly correlated to low student loan default rates, an important requirement for continuing participation in Title IV federal funding programs. Accordingly, we dedicate significant resources to maintaining an efficient graduate placement program. Our consolidated graduate placement rates were 90%, 89% and 90% for our fiscal years 2000, 2001 and 2002, respectively.

      Our schools utilize their externship programs to develop job opportunities and referrals. During the course of each program, students receive instruction on job search and interviewing skills and have available reference materials and assistance with the composition of resumes.

      Currently, over 3,200 employers participate in the Tuition Reimbursement Incentive Program (TRIP), whereby employers of our graduates make some or all of the graduates’ monthly student loan payments for as long as they employ the graduate or until the loan is paid in full, whichever is earlier. We believe that TRIP provides us with a more compelling value proposition to prospective students and further enhances our relationship with our OEM partners.

Faculty and Employees

      Faculty members are hired nationally in accordance with established criteria, applicable accreditation standards and applicable state regulations. Members of our faculty are primarily industry professionals and are hired based on their prior work and educational experience. We require a specific level of industry experience in order to enhance the quality of the programs that we offer and to address current and industry-specific issues in the course content. We provide intensive instructional training and continuing education to our faculty members to maintain the quality of instruction in all fields of study. Generally, our existing instructors have between four and seven years teaching experience and our average undergraduate student-to-teacher ratio is approximately 24-to-1.

      The staff of each school includes a school director, a director of graduate placement, an education director, a director of student services, a financial-aid director, an accounting manager or division controller and a director of admissions. The staff is composed of industry professionals with experience in the fields that we serve. As of September 30, 2003, we had approximately 1,400 full-time employees, including approximately 600 student support employees and approximately 600 full-time faculty members.

      None of our employees is represented by labor unions or is subject to collective bargaining agreements. Accordingly, we have never experienced a work stoppage, and we believe that we have a good relationship with our employees. However, as we open or acquire campuses in new geographic areas, we may encounter employees who desire or maintain union representation.

Seasonality

      Our business is subject to seasonal variations, principally due to changes in total student population. Student population varies as a result of new student enrollments, graduation and student attrition. Historically, our campuses have had lower student populations in the third fiscal quarter than in the remainder of the year because fewer students are enrolled during the summer months. Our expenses, however, do not significantly vary with changes in student population and net revenues and, as a result, such expenses do not fluctuate significantly on a quarterly basis. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. Such patterns may change,

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however, as a result of acquisitions, new school openings, new program introductions and increased enrollments of adult students.

Competition

      The career-oriented school industry is highly fragmented, with no one provider or public institution controlling a significant market share. Generally, there is limited direct competition between career-oriented schools and traditional four-year colleges or universities. Our main competitors are traditional public and private two-year junior and community colleges, other proprietary career-oriented schools and technical schools, including Lincoln Technical Institute and Wyoming Technical Institute, which is owned by Corinthian Colleges, Inc. We compete at a local and regional level based primarily on the content, visibility and accessibility of academic programs, the quality of instruction and the time necessary to enter the workforce. We believe that we are superior to our competitors in size, strategic relationships, brand, reputation and recruiting capability.

Campuses and Other Properties

      The following chart provides information relating to our seven leased campuses and other leased properties:

                 
Approximate
Square
School/Program Location Footage



Campus:
  UTI   Phoenix, Arizona (1)     166,000  
    UTI   Houston, Texas     178,000  
    UTI   Glendale Heights, Illinois     125,000  
    UTI   Rancho Cucamonga, California     83,000  
    MMI   Phoenix, Arizona     109,000  
    MMI   Orlando, Florida     108,000  
    NTI   Mooresville, North Carolina     146,000  
Corporate Offices:
  Headquarters   Phoenix, Arizona (current through October 2003)     31,300  
        Phoenix, Arizona (after October, 2003)     47,100  
Advanced Training
Centers:
  Audi Academy   Phoenix, Arizona     10,000  
    Audi Academy   Glendale Heights, Illinois     6,500  
    Audi Academy   Allentown, Pennsylvania     6,200  
    BMW STEP   Phoenix, Arizona     9,700  
    BMW STEP   Ontario, California     2,500  
    BMW STEP   Houston, Texas     7,500  
    BMW STEP   Upper Saddle River, New Jersey     7,500  
    BMW STEP   Orlando, Florida     13,300  
    Ford Technical Institute   Dearborn, Michigan     9,600  
    Jaguar PACE   Orlando, Florida     13,300  


                 
(1) We have entered into a lease for a new 273,000 square foot facility in Avondale, Arizona. It is currently contemplated that this new facility will replace the current Phoenix, Arizona facility in the summer of 2004. This replacement is not expected to increase our student capacity.

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Approximate
Square
School/Program Location Footage



    International Tech Education Program   Carol Stream, Illinois     7,100  
    Mercedes-Benz ELITE   Rancho Cucamonga, California     8,700  
    Mercedes-Benz ELITE   Orlando, Florida     10,100  
    Mercedes-Benz ELITE   Houston, Texas     27,600  
    Mercedes-Benz ELITE   Glendale Heights, Illinois     11,900  
    Mercedes-Benz ELITE   Allentown, Pennsylvania     10,600  
    Porsche TAP   Atlanta, Georgia     5,000  
    Volkswagen V.S.T.T.   Glendale Heights, Illinois     6,900  
    Volkswagen V.S.T.T.   Allentown, Pennsylvania     6,900  
    Volkswagen V.S.T.T.   Rancho Cucamonga, California     8,700  
    Volvo SAFE   Glendale Heights, Illinois     11,000  
    Volvo SAFE   Phoenix, Arizona     10,000  

Environmental Matters

      We use hazardous materials at our training facilities and campuses, and generate small quantities of waste such as used oil, antifreeze, paint and car batteries. As a result, our facilities and operations are subject to a variety of environmental laws and regulations governing, among other things, the use, storage and disposal of solid and hazardous substances and waste, and the clean-up of contamination at our facilities or off-site locations to which we send or have sent waste for disposal. We are also required to obtain permits for our air emissions, and to meet operational and maintenance requirements, including periodic testing, for an underground storage tank located at one of our properties. In the event we do not maintain compliance with any of these laws and regulations, or are responsible for a spill or release of hazardous materials, we could incur significant costs for clean-up, damages, and fines or penalties.

Legal Proceedings

      In the ordinary conduct of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, results of operations, cash flows or financial condition.

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REGULATORY ENVIRONMENT

      Our schools and students participate in a variety of government-sponsored financial aid programs to assist students in paying the cost of their education. The largest source of such support is the federal programs of student financial assistance under Title IV of the Higher Education Act of 1965, as amended, commonly referred to as Title IV Programs, which are administered by the U.S. Department of Education or ED. In our 2002 fiscal year, we derived approximately 65% of our net revenues from Title IV Programs.

      To participate in Title IV Programs, a school must be authorized to offer its programs of instruction by relevant state education agencies, be accredited by an accrediting commission recognized by ED, and be certified as an eligible institution by ED. For this reason, our schools are subject to extensive regulatory requirements imposed by all of these entities.

State Authorization

      Each of our schools must be authorized by the applicable state education agency of the state in which the school is located in order to operate and to grant degrees, diplomas or certificates to its students. Our schools are subject to extensive, ongoing regulation by each of these states. State authorization is also required for an institution to become and remain eligible to participate in Title IV Programs. In addition, our schools are required to be authorized by the applicable state education agencies of certain other states in which our schools recruit students. Currently, each of our schools is authorized by the applicable state education agency or agencies.

      The level of regulatory oversight varies substantially from state to state, and is very extensive in some states. State laws typically establish standards for instruction, qualifications of faculty, location and nature of facilities and equipment, administrative procedures, marketing, recruiting, financial operations and other operational matters. State laws and regulations may limit our ability to offer educational programs and to award degrees, diplomas or certificates. Some states prescribe standards of financial responsibility that are different from, and in certain cases more stringent than, those prescribed by ED, and some states require schools to post a surety bond. Currently, we have posted surety bonds on behalf of our schools and education representatives with multiple states in a total amount of approximately $8.0 million. These bonds are backed by letters of credit. We believe that each of our schools is in substantial compliance with state education agency requirements. If any one of our schools lost its authorization from the education agency of the state in which the school is located, that school would be unable to offer its programs and we could be forced to close that school. If one of our schools lost its state authorization from a state other than the state in which the school is located, the school would not be able to recruit students in that state.

      In August 2003, due to reduced state appropriations, the State of Illinois eliminated the positions of all employees in the office of the Illinois State Board of Education, or ISBE, that authorizes and oversees private business and technical schools, and that office has ceased to function. That office oversees over 200 schools, including our UTI school in Glendale Heights, Illinois. ISBE recently reauthorized UTI/ Illinois to operate through June 2004. Despite the elimination of the employee positions in ISBE, the State of Illinois did not repeal or suspend the requirements imposed by the Illinois Private Business and Vocational Schools Act. It is not clear how the elimination of the employee positions in ISBE will affect the ongoing operations of UTI/ Illinois, including the implementation of any changes in operations for which the school is required to obtain the approval of ISBE, such as a change of control, the opening of a new campus, the introduction of new programs or the hiring or placement of new education representatives. Due to state budget constraints in other states in which we operate, such as Texas and California, it is possible that those states may reduce the number of employees in, or curtail the operations of, the state education agencies that authorize our schools. A delay or refusal by any state education agency in approving any changes in our operations that require state approval could prevent us from making such changes or could delay our ability to make such changes.

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Accreditation

      Accreditation is a non-governmental process through which a school submits to ongoing qualitative review by an organization of peer institutions. Accrediting commissions primarily examine the academic quality of the school’s instructional programs, and a grant of accreditation is generally viewed as confirmation that the school’s programs meet generally accepted academic standards. Accrediting commissions also review the administrative and financial operations of the schools they accredit to ensure that each school has the resources necessary to perform its educational mission.

      Accreditation by an accrediting commission recognized by ED is required for an institution to be certified to participate in Title IV Programs. In order to be recognized by ED, accrediting commissions must adopt specific standards for their review of educational institutions. All of our schools are accredited by the Accrediting Commission of Career Schools and Colleges of Technology, or ACCSCT, an accrediting commission recognized by ED. We believe that each of our schools is in substantial compliance with ACCSCT accreditation standards. If any one of our schools lost its accreditation, students attending that school would no longer be eligible to receive Title IV Program funding, and we could be forced to close that school.

Nature of Federal and State Support for Post-Secondary Education

      The federal government provides a substantial part of its support for post-secondary education through Title IV Programs, in the form of grants and loans to students who can use those funds at any institution that has been certified as eligible by ED. Most aid under Title IV Programs is awarded on the basis of financial need, generally defined as the difference between the cost of attending the institution and the amount a student can reasonably contribute to that cost. All recipients of Title IV Program funds must maintain a satisfactory grade point average and progress in a timely manner toward completion of their program of study. In addition, each school must ensure that Title IV Program funds are properly accounted for and disbursed in the correct amounts to eligible students.

      Students at our schools receive grants and loans to fund their education under the following Title IV Programs: (1) the Federal Family Education Loan, or FFEL, program, (2) the Federal Pell Grant, or Pell, program, (3) the Federal Supplemental Educational Opportunity Grant, or FSEOG, program, and (4) the Federal Perkins Loan, or Perkins, program.

      FFEL. Under the FFEL program, banks and other lending institutions make loans to students or their parents. If a student or parent defaults on a loan, payment is guaranteed by a federally recognized guaranty agency, which is then reimbursed by ED. Students with financial need qualify for interest subsidies while in school and during grace periods. In our 2002 fiscal year, we derived more than 50% of our net revenues from the FFEL program.

      Pell. Under the Pell program, ED makes grants to students who demonstrate financial need. In our 2002 fiscal year, we derived less than 10% of our net revenues from the Pell program.

      FSEOG. FSEOG grants are designed to supplement Pell grants for students with the greatest financial needs. An institution is required to make a 25% matching contribution for all funds received from ED under this program. In our 2002 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, 75% of which is capitalized by ED and the remainder by the institution. Each institution is responsible for collecting payments on Perkins loans from its former students and lending those funds to currently enrolled students. Defaults by students on their Perkins loans reduce the amount of funds available in the applicable school’s revolving account to make loans to additional students, but the school does not have any obligation to guarantee the loans or repay the defaulted amounts. In our 2002 fiscal year, we derived less than 1% of our net revenues from the Perkins program.

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      Some of our students receive financial aid from federal sources other than Title IV Programs, such as the programs administered by the U.S. Department of Veterans Affairs and under the Workforce Investment Act. In addition, many states also provide financial aid to our students in the form of grants, loans or scholarships. The eligibility requirements for state financial aid and these other federal aid programs vary among the funding agencies and by program. Several states that provide financial aid to our students, including California, are facing significant budgetary constraints. We believe that the overall level of state financial aid for our students is likely to decrease in the near term, but we cannot predict how significant any such reductions will be or how long they will last.

Regulation of Federal Student Financial Aid Programs

      To participate in Title IV Programs, an institution must be authorized to offer its programs by the relevant state education agencies, be accredited by an accrediting commission recognized by ED and be certified as eligible by ED. ED will certify an institution to participate in Title IV Programs only after the institution has demonstrated compliance with the Higher Education Act and ED’s extensive regulations regarding institutional eligibility. An institution must also demonstrate its compliance to ED on an ongoing basis. These standards are applied primarily on an institutional basis, with an institution defined by ED as a main campus and its additional locations, if any. Under this definition, for ED purposes, we have the following three institutions:

  •  Universal Technical Institute of Arizona

                Main campus: Universal Technical Institute, Phoenix, Arizona

  Additional locations: Universal Technical Institute, Glendale Heights, Illinois

                                     Universal Technical Institute, Rancho Cucamonga, California

                                     NASCAR Technical Institute, Mooresville, North Carolina

  •  Clinton Technical Institute

                Main campus: Motorcycle Mechanics Institute, Phoenix, Arizona

                Additional location: Motorcycle and Marine Mechanics Institute, Orlando, Florida

  •  Universal Technical Institute of Texas

                Main campus: Universal Technical Institute, Houston, Texas

                Additional locations: None

All of our schools are currently certified by ED to participate in Title IV Programs.

      The substantial amount of federal funds disbursed through Title IV Programs, the large numbers of students and institutions participating in those programs and instances of fraud and abuse by some schools and students in the past have caused Congress to require ED to increase its level of regulatory oversight. Accrediting commissions and state education agencies also have responsibilities for overseeing compliance of institutions with Title IV Program requirements. As a result, each of our institutions is subject to detailed oversight and review, and must comply with a complex framework of laws and regulations. Because ED periodically revises its regulations and changes its interpretation of existing laws and regulations, we cannot predict with certainty how the Title IV Program requirements will be applied in all circumstances.

      Significant factors relating to Title IV Programs that could adversely affect us include the following:

      Congressional Action. Political and budgetary concerns significantly affect Title IV Programs. Congress must reauthorize the Higher Education Act approximately every six years. The last reauthorization took place in 1998. Consequently, Congress recently began the process of reviewing and reauthorizing the Higher Education Act again, a process that is expected to be concluded in late 2004. We

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believe that this reauthorization will likely result in numerous changes to the Higher Education Act. At this time, we cannot determine what changes Congress will make.

      In addition, Congress reviews and determines federal appropriations for Title IV Programs on an annual basis. Congress can also make changes in the laws affecting Title IV Programs in the annual appropriations bills and in other laws it enacts between the Higher Education Act reauthorizations. Since a significant percentage of our net revenues is derived from Title IV Programs, any action by Congress that significantly reduces Title IV Program funding or the ability of our schools or students to participate in Title IV Programs could reduce our student enrollment and net revenues. Congressional action may also increase our administrative costs and require us to modify our practices in order for our schools to comply fully with Title IV Program requirements.

      The “90/10 Rule.” A proprietary institution, such as each of our institutions, loses its eligibility to participate in Title IV Programs if, on a cash accounting basis, it derives more than 90% of its revenue for any fiscal year from Title IV Programs. Any institution that violates this rule becomes ineligible to participate in Title IV Programs as of the first day of the fiscal year following the fiscal year in which it exceeds 90%, and is unable to apply to regain its eligibility until the next fiscal year. If one of our institutions violated the 90/10 Rule and became ineligible to participate in Title IV Programs but continued to disburse Title IV Program funds, ED would require the institution to repay all Title IV Program funds received by the institution after the effective date of the loss of eligibility.

      We have calculated that, for each of our 2000, 2001 and 2002 fiscal years, none of our institutions derived more than 81.9% of its revenue from Title IV Programs for any fiscal year. For our 2002 fiscal year, our institutions’ 90/10 Rule percentages ranged from 74.0% to 80.5%. 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. If an institution appeared likely to approach the maximum percentage threshold, we would consider making changes in student financing to comply with the 90/10 Rule.

      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 (which correspond to our fiscal years) 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 1999, 2000 and 2001, 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.

                         
FFEL Cohort Default
Rate

School 1999 2000 2001




UTI/Arizona
    6.8 %     6.7 %     4.4 %
Clinton Technical Institute (dba MMI)
    7.5 %     8.7 %     5.9 %
UTI/Texas
    12.3 %     15.6 %     8.1 %

      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. All of our institutions have Perkins cohort

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default rates greater than 8.6%, but not greater than 15%, for students who were scheduled to begin repayment in the 2000-2001 federal award year, the most recent federal award year for which ED has published such rates. In recertifying all of our institutions for continued participation in Title IV Programs in July 2003, ED did not place any of our institutions on provisional certification for their FFEL or Perkins cohort default rates. We have recently submitted to ED our institutions’ Perkins cohort default rates, all of which we believe are less than 20%, for students scheduled to begin repayment in the 2001-2002 federal award year as calculated by a third party administrator that we use in our Perkins loan program, but those rates have not yet been accepted or published by 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 for the remainder of the federal award year in which ED determines that the institution has lost its eligibility and for the two subsequent federal award years. None of our institutions has had a Perkins cohort default rate of 50% or greater for any of the last three federal award years. ED also will not provide any additional federal funds to an institution for Perkins loans in any federal award year in which the institution’s Perkins cohort default rate is 25% or greater. None of our institutions has had its federal Perkins funding eliminated for the last two federal award years for this reason.

      Financial Responsibility Standards. All institutions participating in Title IV Programs must satisfy specific standards of financial responsibility. ED evaluates institutions for compliance with these standards each year, based on the institution’s annual audited financial statements, as well as following a change of control of the institution.

      The most significant financial responsibility measurement is the institution’s composite score, which is calculated by ED based on three ratios:

  •  the equity ratio, which measures the institution’s capital resources, ability to borrow and financial viability;
 
  •  the primary reserve ratio, which measures the institution’s ability to support current operations from expendable resources; and
 
  •  the net income ratio, which measures the institution’s ability to operate at a profit.

      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 ED’s financial responsibility standards, depending on its composite score and other factors, that institution may establish its financial responsibility on an alternative basis by, among other things:

  •  posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during the institution’s most recently completed fiscal year;
 
  •  posting a letter of credit in an amount equal to at least 10% of such prior year’s Title IV Program funds, accepting provisional certification, complying with additional ED monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than ED’s standard advance funding arrangement; or
 
  •  complying with additional ED monitoring requirements and agreeing to receive Title IV Program funds under an arrangement other than ED’s standard advance funding arrangement.

      Beginning with our 1999 fiscal year, ED has 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., as the parent company, the financial statements of each institution and the financial statements of any related party.

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      Based on its review of the financial statements of Universal Technical Institute, Inc., as the parent company, for our fiscal years 1999, 2000 and 2001, ED found that we did not have a composite score of 1.5 or higher. Consequently, since November 2000, we have been required to post a letter of credit on behalf of our institutions in favor of ED and to accept provisional certification and additional ED reporting and monitoring procedures. We currently have posted a letter of credit in the amount of $7.6 million, representing approximately 10% of the total Title IV Program funds received by our institutions in our 2001 fiscal year, as calculated by ED. In addition, all of our institutions are provisionally certified and are required to credit their students’ accounts before requesting and receiving Title IV Program funds on behalf of their students, and two of our institutions are required to file additional reports with ED regarding their receipt of Title IV Program funds. Based on our financial statements for our 2002 fiscal year, which we submitted to ED in March 2003, our composite score at the parent company level remained below 1.5. Consequently, when the existing letter of credit expires in November 2003, we expect ED to require us to renew that letter of credit at a higher amount, representing 10% of Title IV Program funds received by our institutions in our 2002 fiscal year. We anticipate that we will have to increase the amount of that letter of credit by approximately $1.8 million with respect to our 2002 fiscal year.

      Return of Title IV Funds. A school participating in Title IV Programs must calculate the amount of unearned Title IV Program funds that have been disbursed to students who withdraw from their educational programs before completing them, and must return those unearned funds to ED or the applicable lending institution in a timely manner, which is generally within 30 days from the date the institution determines that the student has withdrawn.

      If an institution is cited in an audit or program review for returning Title IV Program funds late for 5% or more of the students in the audit or program review sample, the institution must post a letter of credit in favor of ED in an amount equal to 25% of the total amount of Title IV Program funds that should have been returned for students who withdrew in the institution’s previous fiscal year. Our 2002 fiscal year Title IV compliance audits cited UTI/Texas and MMI for exceeding the 5% late payment threshold. While ordinarily we would be required to post letters of credit for this reason, ED informed us that we were not required to post these additional letters of credit because we had already posted a larger letter of credit as a result of our financial responsibility composite score being less than 1.5.

      School Acquisitions. When a company acquires a school that is eligible to participate in Title IV Programs, that school undergoes a change of ownership resulting in a change of control as defined by ED. Upon such a change of control, a school’s eligibility to participate in Title IV Programs is generally suspended until it has applied for recertification by ED as an eligible school under its new ownership, which requires that the school also re-establish its state authorization and accreditation. ED may temporarily and provisionally certify an institution seeking approval of a change of control under certain circumstances while ED reviews the institution’s application. The time required for ED to act on such an application may vary substantially. ED’s recertification of an institution following a change of control will be on a provisional basis. Our expansion plans are based, in part, on our ability to acquire additional schools and have them certified by ED to participate in Title IV Programs. Our expansion plans take into account the approval requirements of ED and the relevant state education agencies and accrediting commissions.

      Change of Control. In addition to school acquisitions, other types of transactions can also cause a change of control. ED, most state education agencies and our accrediting commission all have standards pertaining to the change of control of schools, but these standards are not uniform. ED’s regulations describe some transactions that constitute a change of control, including the transfer of a controlling interest in the voting stock of an institution or the institution’s parent corporation. For a company that is privately held, but not closely held, which is the status of our company prior to the offering, ED’s regulations provide that a change of ownership resulting in a change of control occurs if any person either acquires or ceases to hold at least 25% of the company’s total outstanding voting stock and that person gains or loses actual control of the corporation. With respect to a publicly-traded corporation, which will be the status of our company after the offering, 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

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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 standards are subject to interpretation by ED. A significant purchase or disposition of our common stock could be determined by ED to be a change of control under this standard. Most of the states and our accrediting commission include the sale of a controlling interest of common stock in the definition of a change of control. A change of control under the definition of one of these agencies would require the affected school to reaffirm its state authorization or accreditation. The requirements to obtain such reaffirmation from the states and our accrediting commission vary widely.

      We have received confirmation from our accrediting commission that this offering will not be a change of control under its standards. We have submitted a description of the offering to ED, and have asked ED to confirm our understanding that the offering will not be a change of control under its standards, but we have not yet received ED’s reply. We believe that the offering will be a change of control under the standards of the state education agencies in Texas and Illinois, but will not be a change of control under the standards of any other education agencies of states in which our schools are located. As a result, our schools in Texas and Illinois will be required to be reauthorized by their respective state education agencies. We believe that the offering will not affect the ability of those schools to participate in Title IV Programs unless any of those state education agencies fail to reauthorize any of those schools in a timely manner. The failure of any of those schools to re-obtain state authorization would cause that school to lose its eligibility to participate in Title IV Programs. In August 2003, due to reduced state appropriations, the State of Illinois eliminated the positions of all employees in the office of the Illinois state education agency that oversees private business and technical schools, and that office has ceased to function. It is not clear how this action will affect the change of control approval process in Illinois. Due to state budget problems in other states, such as Texas, it is possible that such other states may reduce the number of employees in the state education agencies that authorize our schools or curtail those agencies’ operations, which could affect the change of control approval process in those states. We believe the offering will not affect the ability of our schools in Arizona, California, Florida and North Carolina to continue their participation in Title IV Programs.

      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, once we become a publicly-traded company, 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. In addition, the adverse regulatory effect of a change of control also could discourage bids for your shares of common stock and could have an adverse effect on the market price of your shares. If a future transaction results in a change of control of our company or our schools, we believe that we will be able to obtain all necessary approvals from ED, our accrediting commission and the applicable state education agencies. However, we cannot assure you that all such approvals can be obtained at all or in a timely manner that will not delay or reduce the availability of Title IV Program funds for our students and schools.

      Opening Additional Schools and Adding Educational Programs. For-profit educational institutions must be authorized by their state education agencies and fully operational for two years before applying to ED to participate in Title IV Programs. However, an institution that is certified to participate in Title IV Programs may establish an additional location and apply to participate in Title IV Programs at that location without reference to the two-year requirement, if such additional location satisfies all other applicable ED eligibility requirements. Our expansion plans are based, in part, on our ability to open new schools as additional locations of our existing institutions and take into account ED’s approval requirements.

      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

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ED approval if that new program leads to an associate level or higher degree and the institution already offers programs at that level, or if that program prepares students for gainful employment in the same or a related occupation as an educational program that has previously been designated as an eligible program at that institution and meets minimum length requirements. If an institution erroneously determines that an educational program is eligible for purposes of Title IV Programs, the institution would likely be liable for repayment of Title IV Program funds provided to students in that educational program. Our expansion plans are based, in part, on our ability to add new educational programs at our existing schools. We do not believe that current ED regulations will create significant obstacles to our plans to add new programs.

      Some of the state education agencies and our accrediting commission also have requirements that may affect our schools’ ability to open a new campus, establish an additional location of an existing institution or begin offering a new educational program. We do not believe that these standards will create significant obstacles to our expansion plans.

      Administrative Capability. ED assesses the administrative capability of each institution that participates in Title IV Programs under a series of separate standards. Failure to satisfy any of the standards may lead ED to find the institution ineligible to participate in Title IV Programs or to place the institution on provisional certification as a condition of its participation. One standard that applies to programs with the stated objective of preparing students for employment requires the institution to show a reasonable relationship between the length of the program and the entry-level job requirements of the relevant field of employment. We believe we have made the required showing for each of our applicable programs.

      Other standards provide that an institution may be found to lack administrative capability and be placed on provisional certification if its student loan default rate under the FFEL program is 25% or greater for any of the three most recent federal fiscal years, or if its Perkins cohort default rate exceeds 15% for any federal award year. In recertifying all of our institutions for continued participation in Title IV Programs in July 2003, ED did not find that any of our institutions lacked administrative capability and did not place any of our institutions on provisional certification for their student loan default rates.

      Restrictions on Payment of Commissions, Bonuses and Other Incentive Payments. An institution participating in Title IV Programs may not provide any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of Title IV Program funds. In November 2002, ED published new regulations, which took effect July 2003, to attempt to clarify this so-called “incentive compensation” law. The new regulations identify twelve compensation arrangements that ED has determined are not in violation of the incentive compensation law, including the payment and adjustment of salaries, bonuses and commissions in certain circumstances. ED’s new regulations do not establish clear criteria for compliance in all circumstances, and ED has announced that it will no longer review and approve individual schools’ compensation plans. Nonetheless, we believe that our current compensation plans are in compliance with the Higher Education Act and ED’s new regulations, although we cannot assure you that ED will not find deficiencies in our compensation plans.

      Eligibility and Certification Procedures. Each institution must apply to ED for continued certification to participate in Title IV Programs at least every six years, or when it undergoes a change of control, and an institution may come under ED review when it expands its activities in certain ways, such as opening an additional location or raising the highest academic credential it offers. ED may place an institution on provisional certification status if it finds that the institution does not fully satisfy all of the eligibility and certification standards. ED may withdraw an institution’s provisional certification without advance notice if ED determines that the institution is not fulfilling all material requirements. In addition, ED may more closely review an institution that is provisionally certified if it applies for approval to open a new location, add an educational program, acquire another school or make any other significant change. Provisional certification does not otherwise limit an institution’s access to Title IV Program funds.

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      All of our institutions were recertified by ED in July 2003 for continued participation in Title IV Programs through June 2006. All of the recertifications were on a provisional basis, based on our composite score at the parent company level under ED’s financial responsibility formula.

      Compliance with Regulatory Standards and Effect of Regulatory Violations. Our schools are subject to audits and program compliance reviews by various external agencies, including ED, ED’s Office of Inspector General, state education agencies, student loan guaranty agencies, the U.S. Department of Veterans Affairs and our accrediting commission. Each of our institutions’ administration of Title IV Program funds must also be audited annually by an independent accounting firm, and the resulting audit report submitted to ED for review. If ED or another regulatory agency determined that one of our institutions improperly disbursed Title IV Program funds or violated a provision of the Higher Education Act or ED’s regulations, that institution could be required to repay such funds and could be assessed an administrative fine. ED could also transfer the institution to the reimbursement system of receiving Title IV Program funds, under which an institution must disburse its own funds to students and document the students’ eligibility for Title IV Program funds before receiving such funds from ED. Violations of Title IV Program requirements could also subject us or our schools to other civil and criminal penalties.

      Significant violations of Title IV Program requirements by us or any of our institutions could be the basis for a proceeding by ED to limit, suspend or terminate the participation of the affected institution in Title IV Programs. Generally, such a termination extends for 18 months before the institution may apply for reinstatement of its participation. There is no ED proceeding pending to fine any of our institutions or to limit, suspend or terminate any of our institutions’ participation in Title IV Programs, and we have no reason to believe that any such proceeding is contemplated.

      We and our schools are also subject to complaints and lawsuits relating to regulatory compliance brought not only by our regulatory agencies, but also by 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 2002 fiscal year, one lending institution, Sallie Mae, provided more than 95% of the FFEL loans that our students received. In addition, in our 2002 fiscal year, one student loan guaranty agency, EdFund, guaranteed more than 95% of the FFEL loans made to our students. Sallie Mae and EdFund are among the largest student loan lending institutions and guaranty agencies, respectively, in the United States in terms of loan volume. We do not believe that either one intends to withdraw from the student loan field or reduce the volume of loans it makes or guarantees in the near future. If loans by our primary lender or guarantees by our primary guaranty agency were significantly reduced or no longer available, we believe that we would be able to identify other lenders and guarantors to make and guarantee those loans for our students because the student loan industry is highly competitive and we are frequently approached by other lenders and guarantors seeking our business. If we were not able to timely identify other lenders and guarantors to make and guarantee those loans for our students, that could delay our students’ receipt of their loans, extend our tuition collection cycle and reduce our student population and net revenues.

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