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EX-31.2 - EXHIBIT 31.2 - UNIVERSAL TECHNICAL INSTITUTE INCexhibit31293015.htm
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EX-23.1 - EXHIBIT 23.1 - UNIVERSAL TECHNICAL INSTITUTE INCex231deloitteconsent93015.htm
EX-21.1 - EXHIBIT 21.1 - UNIVERSAL TECHNICAL INSTITUTE INCex211subsidiariesofregistr.htm
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EX-23.2 - EXHIBIT 23.2 - UNIVERSAL TECHNICAL INSTITUTE INCex232pwcconsent93015.htm

__________________________________________________________________________________________
__________________________________________________________________________________________
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 _____________________________________________
Form 10-K
(Mark One)

þ    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2015
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 _____________________________________________
Commission File Number 1-31923
 _____________________________________________

 UNIVERSAL TECHNICAL INSTITUTE, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
Delaware
 
 
 
86-0226984
(State or other jurisdiction of
incorporation or organization)
 
 
 
(IRS Employer Identification No.)
16220 North Scottsdale Road, Suite 100
Scottsdale, Arizona 85254
(Address of principal executive offices)
(623) 445-9500
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
 
Name of each exchange on which registered:
Common Stock, $0.0001 par value
 
New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨    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 ¨    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  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   þ    No ¨  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ¨    Accelerated filer  þ     Non-accelerated filer  ¨    Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
At November 23, 2015, 24,233,296 shares of common stock were outstanding. The aggregate market value of the shares of common stock held by non-affiliates of the registrant on the last business day of the registrant's most recently completed second fiscal quarter (March 31, 2015) was approximately $204,800,000 (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 registrant has excluded the market value of all common stock beneficially owned by all executive officers and directors of the registrant.


Documents Incorporated by Reference

Portions of the registrant's definitive proxy statement for the 2016 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.





 
 
Page
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 1A.
ITEM 1B.
ITEM 2.
 
ITEM 3.
 
ITEM 4.
 
 
 
 
 
 
ITEM 5.
 
ITEM 6.
 
ITEM 7.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 7A.
ITEM 8.
 
ITEM 9.
 
ITEM 9A.
ITEM 9B.


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Special Note Regarding Forward-Looking Statements

This Annual Report on 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, as amended (Exchange Act) and Section 27A of the Securities Act of 1933, as amended (Securities Act), 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 agency interpretations of such 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, strategies 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. However, not all forward-looking statements contain these identifying words.
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. Among the factors that could cause actual results to differ materially are the factors discussed under Item 1A, "Risk Factors". You should bear this in mind as you consider forward-looking statements.
Except as required by law, 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 Securities and Exchange Commission (SEC).


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PART I
ITEM 1. BUSINESS
Overview
We are the leading provider of postsecondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians as measured by total average undergraduate full-time enrollment and graduates. We offer undergraduate degree or diploma programs at 12 campuses across the United States 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 (NASCAR Tech). We also offer manufacturer specific advanced training programs, including student-paid electives, at our campuses and manufacturer or dealer sponsored training at certain campuses and dedicated training centers. We have provided technical education for 50 years.
For the year ended September 30, 2015, our average undergraduate full-time student enrollment was approximately 13,200.
Business Model
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 specific advanced training (MSAT) programs, and we have relationships with over 30 OEMs, including the following, and their associated brands:
American Honda Motor Co., Inc.
 
Mercedes-Benz USA, LLC
BMW of North America, LLC
 
Mercury Marine, a division of Brunswick Corp.
BMW Motorrad of North America, LLC
 
Navistar International Corp.
Bombardier Produits Recreatifs (BRP), Inc.
 
Nissan North America, Inc.
Cummins Rocky Mountain, a subsidiary of Cummins, Inc.
 
Peterbilt Motors Company
Daimler Trucks N.A.
 
Porsche Cars of North America, Inc.
FCA US LLC (fka Chrysler Group LLC)
 
Suzuki Motor of America, Inc.
Ford Motor Co.
 
Toyota Motor Sales, U.S.A., Inc.
General Motors Co.
 
Volvo Cars of North America, LLC
Harley-Davidson Motor Co.
 
Volvo Penta of the Americas, Inc.
Kawasaki Motors Corp., U.S.A.
 
Yamaha Motor Corp., USA
KTM of North America, Inc.
 
 

Participating manufacturers typically assist us in the development of course content and curricula, while providing us with vehicles, equipment, specialty tools and parts at reduced prices or at no charge. In some instances they pay for students’ tuition. Our collaboration with OEMs enables us to provide highly specialized education to our students, resulting in enhanced employment opportunities and the potential for higher wages for our graduates.
Our industry partners and their dealers benefit from a supply of technicians who are certified or credentialed by the manufacturer as graduates of the MSAT programs. The MSAT programs offer a cost-effective alternative

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for sourcing and developing technicians for both OEMs and their dealers. These relationships also support the development of incremental revenue opportunities from training the OEMs’ existing employees.
In addition to the OEMs, our industry relationships also extend to after-market retailers, fleet service providers and enthusiast organizations. Other target groups for relationship-building, such as parts and tools suppliers and enthusiast organizations, provide us with a variety of strategic and financial benefits that include equipment sponsorship, new product support, licensing and branding opportunities and financial sponsorship for our campuses and students.
Business Strategy
Our goal is to continue to be the leading provider of post-secondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians and the leading supplier of entry-level skilled technicians for the industries we serve. We intend to pursue the following business strategies to attain this goal:
    Strengthen industry relationships    
Our relationships with leading OEMs are important to our business. We strive to understand the workforce needs of our existing OEM partners to provide the quantity and quality of technicians when and where they are needed. We have a dedicated account management team at our corporate level focused on managing those relationships and developing new ones. We deliver value to these OEMs by functioning as an efficient hiring source and low cost training option. These relationships give us direct input on the latest needs and requirements of employers, which not only guides our prospective student recruitment, but also strengthens our curricula and our students’ opportunities for employment and earnings potential after graduation. In addition, our OEM partners and their related dealers support our students through manufacturer-paid courses, scholarships and tuition reimbursement programs. In the future, we may be more selective about which OEMs we choose to partner with. This may lead to the cancellation of relationships that do not result in the best outcomes for our students after graduation.

Recruit, train and identify employment opportunities for more students
Our student recruitment efforts are focused on three primary markets for prospective students and are conducted through three admissions channels:
High School: Field-based representatives develop and maintain relationships with high school guidance counselors and vocational instructors as well as students and parents.
Adult: Campus-based representatives serve adult career-seeking or career changing students via inbound and outbound media.
Military: Our military representatives are strategically located throughout the country and focus on building relationships with and serving the needs of transitioning soldiers and military veterans. Additionally, we have a centralized team of military representatives who are dedicated to serving and assisting veterans throughout the U.S.
We collaborate with employers to help prospective students and their families understand the potential career opportunities that may be available after completing one of our programs. Employers are raising awareness of the benefits of a technician career path for prospective students in our marketing materials, at special events highlighting the high-tech nature of being a technician on-site at employer locations, and during open houses at our campuses.

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Our national multi-media marketing strategies are designed to drive new student growth by building brand awareness and differentiation and generating inquiries from qualified prospective students.

We continue to optimize our national and local marketing initiatives, tools and systems with the goals of cost-effectively achieving the optimal balance between generating a strong volume of inquiries from adult students and maximizing the percentage of inquiries from students with a high propensity to attend our programs.
Partnering with employers and focusing on our marketing strategies is part of an effort to increase positive perception of technical careers and our programs. We are working to build relationships on military bases, in high schools, with local and state businesses and education and policy leaders to educate them on the value we create for our students, local employers, the economy and the community.
We have implemented new processes, technology and tools to support our national network of admissions representatives in responding to new student inquiries and keeping them engaged as they apply for, enroll in and start school.
We regularly evaluate, update and expand our core and MSAT courses to align our training programs with current industry requirements. We regularly evaluate program offerings, schedules and locations that are most appealing to students and aligned with employer expectations. We provide relevant services to assist students with possible tuition financing options, educational and career counseling, opportunities while attending school for part-time work and housing assistance and, ultimately, graduate employment. Our national employment services team develops job opportunities and outreach, while our local employment services teams instruct active students on employment search and interviewing skills, facilitate employer visits to campuses, provide access to reference materials and assist with the composition of resumes.
Improve educational value proposition and affordability
Educational value
Our strategy is to provide students with an excellent return on their educational investment by offering training that is not typically available through other providers, is tailored to industry standards and requirements, improves students’ opportunities to find employment and maximizes their earnings potential in a secure, growing industry.
We are focused on adding new campus locations in key regions where there is strong student interest and employer demand for our graduates. Opening our Long Beach, California campus in August 2015 is an example of this ongoing strategy Through organic growth and strategic acquisition of campus locations, we believe we can leverage our national capabilities and marketing initiatives, make our education accessible and convenient for more students and decrease student relocation costs.
Our Automotive and Diesel Technology II curricula is designed around manufacturers’ needs and fulfills student demand for hands-on, instructor led training combined with flexible, web-based learning. We intend to continue integrating the new curricula and methodologies at new and existing campuses that offer Automotive and Diesel Technology programs. As we accelerate our campus expansion program, we will prioritize implementation of the Automotive and Diesel Technology II curricula at new campus locations.
We actively engage transportation industry partners in defining our core curriculum and improving and expanding manufacturer specific advanced training courses. These unique course offerings make our students more employable by giving them training that is consistent with industry needs and rapidly changing technology and the opportunity to earn certain industry-recognized certifications and credentials that are not readily available elsewhere. As a result, we are well positioned to better meet the industry’s demand for trained technicians.

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Affordability
Increased price sensitivity and aversion to debt continue to negatively impact prospective students’ willingness and ability to fund an education. We are focused on making our training more affordable and accessible through financing options, proprietary loans, scholarships based on need and merit as well as financing tools and guidance for students.
In response to growing demand for trained technicians, our industry partners and employers are increasingly willing to provide our students with scholarship money and to offer our graduates tuition reimbursement plans and competitive compensation and benefit packages, including signing bonuses, relocation grants and toolboxes. 
We are working with high schools across the nation to increase course articulation programs, which allow students who have completed courses accredited by the National Automotive Technical Education Foundation (NATEF), a division of the Institute for Automotive Service Excellence (ASE), to transfer these credits to our programs. These additional credits can reduce students’ tuition and the time needed to complete our programs.
Additionally, we regularly review and revise key business processes with the goals of eliminating costs and waste, driving efficiency and allowing us to continue to improve value and affordability for our students. Our goal is to align costs with student populations without compromising the quality of our education.
Industry Background
The market for qualified service technicians is large and growing. In the most recent data available, the United States Department of Labor (U.S. DOL) estimated that in 2012 there were approximately 701,100 employed automotive technicians in the United States, and this number was expected to increase by 8.6% from 2012 to 2022. Other 2012 estimates provided by the U.S. DOL indicate that 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 8.7%, 13.3%, 6.0% and 5.8%, respectively. The need for technicians is due to a variety of factors, including technological advancement in the industries into which our graduates enter, a continued increase in the number of automobiles, trucks, motorcycles and boats in service, the increasing lifespan of late-model automobiles and light trucks and an aging workforce that has begun to retire. As a result of these factors, the U.S. DOL estimates that an average of approximately 37,300 new job openings will exist annually for new entrants from 2012 to 2022 in the fields that we serve, according to data collected. 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 who can offer high quality curricula and have a national presence to meet the employment and advanced training needs of their national dealer networks.

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 (NASCAR Tech). The majority of our undergraduate programs are designed to be completed in 45 to 102 weeks and culminate in an associate of occupational studies degree or diploma, depending on the program and campus. Tuition ranges from approximately $21,600 to $58,500 per program, depending on the nature and length of the program. Our campuses are accredited and our undergraduate programs are eligible for federal student financial assistance funds under the Higher Education Act of 1965, as amended (HEA), commonly referred to as Title IV Programs, which are administered by the U.S. Department of Education (ED). Our programs are also eligible for financial aid from federal sources other than Title IV Programs, such as the programs administered by the U.S. Department of Veterans Affairs (VA) and under the Workforce Investment Act.


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Our undergraduate schools and programs are summarized in the following table:
 
 
Date
 
 
 
Training
 
Location
Brand
Commenced
Principal Programs
Arizona (Avondale)*
UTI
1965
Automotive; Diesel & Industrial
Arizona (Phoenix)
MMI
1973
Motorcycle
California (Long Beach)*
UTI
2015
Automotive; Diesel & Industrial; Collision Repair and Refinishing
California (Rancho Cucamonga)
UTI
1998
Automotive; Diesel & Industrial
California (Sacramento)*
UTI
2005
Automotive; Diesel & Industrial; Collision Repair and Refinishing
Florida (Orlando)*
UTI/MMI
1986
Automotive; Diesel & Industrial; Motorcycle; Marine
Illinois (Lisle)
UTI
1988
Automotive; Diesel & Industrial
Massachusetts (Norwood)
UTI
2005
Automotive; Diesel & Industrial
North Carolina (Mooresville)
NASCAR Tech
2002
Automotive; Automotive with NASCAR
Pennsylvania (Exton)
UTI
2004
Automotive; Diesel & Industrial
Texas (Dallas/Ft. Worth)*
UTI
2010
Automotive; Diesel & Industrial
Texas (Houston)
UTI
1983
Automotive; Diesel & Industrial; Collision Repair and Refinishing

* Indicates a campus location that offers our Automotive and Diesel Technology II curricula.

In October 2014, we entered into a build-to-suit facility lease agreement related to the design and construction of a new campus in Long Beach, California. We opened the Long Beach, California campus in August 2015.

Universal Technical Institute (UTI)
UTI offers automotive, diesel and industrial, and collision repair and refinishing programs that are accredited by the National Automotive Technical Education Foundation (NATEF), a division of the Institute for Automotive Service Excellence (ASE). In order to apply for NATEF accreditation, a school must meet the NATEF curriculum requirements and also must have graduated its first class. We offer the following programs under the UTI brand:
Automotive Technology. Established in 1965, the Automotive Technology program is designed to teach students how to diagnose, service and repair automobiles. In 2010, we began offering this program as Automotive Technology II in a blended learning format which combines daily instructor-led theory and hands-on lab training complimented by interactive web-based learning. Automotive Technology II is currently offered at our Avondale, Arizona; Dallas/Ft. Worth, Texas; Long Beach, California; Orlando, Florida and Sacramento, California campuses. The program ranges from 51 to 72 weeks in duration and tuition ranges from approximately $31,700 to $45,350. Graduates of this program are qualified to work as entry-level service technicians in automotive dealer service departments or automotive repair facilities.

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

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equipment. In 2010, we began offering this program as Diesel Technology II in the blended learning format described above; Diesel Technology II is currently offered at our Avondale, Arizona; Dallas/Ft. Worth, Texas; Long Beach, California; Orlando, Florida and Sacramento, California campuses. The program is 45 to 60 weeks in duration and tuition ranges from approximately $29,500 to $37,650. 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 equipment utilized in various industrial applications, including materials handling, construction, transport refrigeration or farming.

Automotive Technology and Diesel Technology II. Established in 1970, the Automotive/Diesel Technology program is designed to teach students how to diagnose, service and repair automobiles and diesel systems. In 2010, we began offering this program in the blended learning format described above. The program ranges from 75 to 102 weeks in duration and tuition ranges from approximately $42,950 to $58,500. Graduates of this program typically can work as entry-level service technicians in automotive repair facilities, automotive dealer service departments, diesel engine repair facilities, medium and heavy truck facilities or truck dealerships.

Automotive/Diesel & Industrial Technology. Established in 1970, the Automotive/Diesel & Industrial Technology program is designed to teach students how to diagnose, service and repair automobiles, diesel systems and industrial equipment. The program ranges from 75 to 100 weeks in duration and tuition ranges from approximately $40,350 to $51,750. 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 materials handling, construction, transport refrigeration or farming.

Collision Repair and Refinishing Technology (CRRT). Established in 1999, the CRRT program is designed to teach 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 45 to 54 weeks in duration and tuition ranges from approximately$27,950 to $36,400. Graduates of this program are qualified to work as entry-level technicians at OEM dealerships and independent repair facilities.

Motorcycle Mechanics Institute and Marine Mechanics Institute (collectively, MMI)
Motorcycle. Established in 1973, the MMI motorcycle program is designed to teach students how to diagnose, service and repair motorcycles and all-terrain vehicles. The program ranges from 48 to 102 weeks in duration and tuition ranges from approximately $21,600 to $45,650. Graduates of this program are qualified to work as entry-level service technicians in motorcycle dealerships and independent repair facilities. MMI is supported by seven major motorcycle manufacturers. We have agreements relating to specific motorcycle training and elective programs with American Honda Motor Co., Inc.; BMW Motorrad of North America, LLC; Harley-Davidson Motor Co.; Kawasaki Motors Corp., U.S.A.; KTM North America, Inc.; Suzuki Motor of America, Inc. and Yamaha Motor Corp., USA. We have agreements for dealer training with American Honda Motor Co., Inc. and Harley-Davidson Motor Co. These motorcycle manufacturers support us through their endorsement of our curricula content, assisting with our course development, providing equipment and product donations and instructor training. Certain of these agreements are verbal and may be terminated without cause by either party at any time.

Marine. Established in 1991, the MMI marine program is designed to teach students how to diagnose, service and repair boats. The program is 51 weeks in duration and tuition is approximately $27,300.

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Graduates of this program are qualified to work as entry-level service technicians for marine dealerships and independent repair shops, as well as for marinas, boat yards and yacht clubs. MMI is supported by several marine manufacturers and we have agreements relating to marine elective programs with American Honda Motor Co., Inc.; Mercury Marine, a division of Brunswick Corp.; Suzuki Motor of America, Inc.; Volvo Penta of the Americas, Inc. and Yamaha Motor Corp., USA. We have agreements for dealer training with American Honda Motor Co. Inc. and Mercury Marine, a division of Brunswick Corp. These marine manufacturers support us through their endorsement of our curricula content, assisting with course development, equipment and product donations, and instructor training. Certain of these agreements are verbal and may be terminated without cause by either party at any time.

NASCAR Technical Institute (NASCAR Tech)
Established in 2002, NASCAR Tech offers the same type of automotive training as other UTI locations, along with additional NASCAR-specific elective courses. In the NASCAR-specific elective courses, students have the opportunity to learn first-hand with NASCAR engines and equipment and to acquire specific skills required for entry-level positions in automotive and racing-related career opportunities. The programs range from 48 to 78 weeks in duration and tuition ranges from $32,950 to $46,950. Graduates of the Automotive Technology program and the Automotive Technology with NASCAR (the NASCAR program) at NASCAR Tech are qualified to work as entry-level service technicians in automotive repair facilities or automotive dealer service departments. Graduates from the NASCAR program have additional opportunities to work in racing-related industries. In 2014 and 2013, approximately 19% of the graduates from the NASCAR program have found employment opportunities in racing-related industries. Additionally, approximately 71% of the 2014 and 2013 graduates from all programs at NASCAR Tech are working in the automotive service sector. See "Business - Graduate Employment" included elsewhere in this Report on Form 10-K for further information on our employment rates.
Manufacturer Specific Advanced Training (MSAT) Programs
We offer advanced training programs in the form of student-paid MSAT courses which may be added to a student’s core Automotive, Diesel or Motorcycle undergraduate program, and in the form of manufacturer-paid post-graduate MSAT programs.

The student-paid MSATs are offered at our campus locations and students attending these programs are eligible for Title IV funding. Additionally, qualifying student graduates have the opportunity to apply for enrollment in one of our manufacturer-paid MSAT programs. The manufacturer-paid MSATs are paid for by the manufacturer and/or its dealers in return for a commitment by the student to work for a dealer of that manufacturer for a certain period of time upon completion of the program. For both types of programs, the manufacturer typically assists us in the development of course content and curricula, while providing us with vehicles, equipment, specialty tools and parts at reduced prices or at no charge. This specialized training enhances the student’s skills with a particular manufacturer’s technology resulting in enhanced employment opportunities and potential for higher wages for our graduates.

Student-Paid MSATs

Pursuant to written agreements, we offer the following student-paid MSAT programs for the following OEMs using vehicles, equipment, specialty tools and curricula provided by the OEMs:
American Honda Motor Company, Inc. We provide the Honda PACT Program at our Lisle, Illinois campus.
BMW of North America, LLC. We provide BMW’s FastTrack Program at the BMW training center in Ontario, California, and at our Avondale, Arizona and Orlando, Florida campuses.

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Cummins Rocky Mountain, a subsidiary of Cummins, Inc. We provide the Cummins Technician Qualification Program at our Avondale, Arizona; Exton, Pennsylvania and Houston, Texas campuses.
Daimler Trucks N.A. We provide the Daimler Trucks Finish First Program at our Avondale, Arizona and Lisle, Illinois campuses.
Ford Motor Co. We provide the Ford Accelerated Credential Training Program at all UTI campuses except our Dallas/Ft. Worth, Texas and Long Beach, California campuses.
General Motors Company. We provide the GM Technical Career Training Program at our Avondale, Arizona campus.
Mercedes-Benz USA, LLC. We provide the Mercedes-Benz ELITE START Program at our Houston, Texas; Norwood, Massachusetts and Rancho Cucamonga, California campuses.
Navistar International Corp. We provide the International Technician Education Program at our Lisle, Illinois campus.
Nissan North America, Inc. We provide the Nissan Automotive Technician Training Program at our Houston, Texas; Mooresville, North Carolina; Sacramento, California; Orlando, Florida and Norwood, Massachusetts campuses.
Toyota Motor Sales, U.S.A., Inc. We provide the Toyota Professional Automotive Technician Program at our Lisle, Illinois; Exton, Pennsylvania and Sacramento, California campuses.
Manufacturer-Paid MSATs
Our manufacturer-paid MSATs 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 or diesel program may apply to be selected for these programs. The programs range from 11 to 24 weeks in duration. Pursuant to written agreements, we offer the following manufacturer-paid MSAT programs using vehicles, equipment, specialty tools and curricula provided by the OEMs:
BMW of North America, LLC. We provide BMW’s Service Technician Education Program (STEP) and MINI Service Technical Education Program (MINI STEP). Both programs are provided at our Avondale, Arizona and Orlando, Florida campuses and at the BMW training centers in Ontario, California and Woodcliff Lake, New Jersey. This agreement expires on December 31, 2017 and may be terminated for cause by either party.
Mercedes-Benz USA, LLC. We provide the Mercedes-Benz ELITE ADVANCED Program at the MBUSA training centers in Jacksonville, Florida and Long Beach, California. This agreement expires on December 31, 2016 and may be terminated without cause by either party.
Navistar International Corp. We provide the International Truck Education Program at our Lisle, Illinois; Exton, Pennsylvania and Sacramento, California campuses. The written agreement we were operating under expired in October 2015 and we are currently operating under a verbal agreement while we await final signature on a new agreement.
Peterbilt Motors Company. We provide the Peterbilt Technician Institute program at our Dallas/Ft. Worth, Texas and Lisle, Illinois campuses. This agreement expires on December 31, 2016 and may be terminated without cause by either party.

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Porsche Cars of North America, Inc. We provide the Porsche Technician Apprenticeship Program at the Porsche training centers in Atlanta, Georgia and Easton, Pennsylvania. This agreement expires September 30, 2016 and may be renewed annually by mutual agreement.
Volvo Cars of North America, LLC. We provide Volvo’s Service Automotive Factory Education program training at our Avondale, Arizona campus. This agreement expires on December 31, 2015 and may be renewed annually by mutual agreement.
Dealer/Industry Training
Technicians in all of the industries we serve are in regular need of training or certification on new technologies. Manufacturers outsource a portion of this training to education providers such as UTI. We currently provide dealer technician training to manufacturers such as the following: American Honda Motor Co., Inc.; BMW of North America, LLC; Ford Motor Co.; General Motors Company; Harley-Davidson Motor Co.; Mercedes-Benz USA, LLC; and Mercury Marine, a division of Brunswick Corporation.
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.
Product/Financial Support. Product/financial support is an integral component of our business strategy and is present throughout our schools. In these relationships, sponsors provide their products, including equipment and supplies, at reduced or no cost to us, in return for our use of those products in the classroom. Additionally, they may provide financial sponsorship either to us or to our students. Product/financial support is an attractive marketing opportunity 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 product support relationships allow us to minimize the equipment and supply costs in each of our classrooms and significantly reduce the capital outlay necessary for operating and equipping our campuses.

An example of a product/financial support relationship is:
Snap-on Tools. We have a strategic agreement with Snap-on Tools, a premier tool provider to the industries we serve. Upon graduation from our undergraduate programs, students receive a Snap-on Tools entry-level tool set having an approximate retail value of $1,000, which can become valuable as a student establishes their career. We purchase these tool sets from Snap-on Tools at a discount from their list price pursuant to a written agreement which expires in April 2017. In the context of this relationship, we have granted Snap-on Tools exclusive access to our campuses to display tool related advertising, and we have agreed to use Snap-on Tools equipment to train our students. We receive credits from Snap-on Tools for student tool kits that we purchase and any additional purchases made by our students. We can then redeem those credits in multiple ways, which historically has been to purchase Snap-on Tools equipment and tools for our campuses at the full retail list price.

Licensing. Licensing agreements enable us to establish meaningful relationships with key industry brands. We pay a licensing fee and, in return, receive the right to use a particular industry participant’s name, logo or trademark 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.


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An example of a licensing arrangement is:
NASCAR. We have a licensing arrangement with NASCAR and we are its exclusive education provider for automotive technicians. The agreement expires on December 31, 2024 and may be terminated for cause by either party at any time prior to its expiration. This relationship provides us with access to the network of NASCAR sponsors, presenting us with the opportunity to enhance our product support relationships. In July 2002, NASCAR Technical Institute opened in Mooresville, North Carolina where students have the opportunity to take NASCAR-specific elective courses that were developed through a collaboration of NASCAR crew chiefs and motorsports industry leaders. The popular NASCAR brand name combined with the opportunity to learn on high-performance cars is a powerful recruiting and retention tool. It also provides students with the opportunity to learn first-hand with NASCAR engines and equipment and to acquire specific skills required for entry-level positions in automotive and racing-related career opportunities.

See Note 13 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion of licensing agreements.

Manufacturer Training. Manufacturer training relationships provide benefits to us that impact each of our education programs. These relationships support entry-level training tailored to the needs of a specific manufacturer, as well as continuing education and training of experienced technicians. In both the entry-level and continuing education programs, students receive training on a given manufacturer’s products. In return, the manufacturer supplies vehicles, equipment, specialty tools and parts at reduced prices or at no charge and assistance in developing curricula. Students who receive the entry-level training may earn manufacturer certification to work on that manufacturer’s products when they complete the program. The manufacturer certification typically leads to both improved employment opportunities and the potential for higher wages. The continuing education programs for experienced technicians are paid for by the manufacturer and often take place in our facilities, allowing the manufacturer to avoid the costs associated with establishing its own dedicated facility. 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 technicians available to service and repair their products.

Examples of manufacturer training relationships include:
Mercedes-Benz USA, LLC. This is an example of a student-paid MSAT program. We offer the Mercedes-Benz ELITE START elective program at our Houston, Texas, Norwood, Massachusetts and Rancho Cucamonga, California campuses. The Mercedes-Benz Program uses training and course materials as well as training vehicles and equipment provided by Mercedes-Benz.

American Honda Motor Co., Inc. This is an example of a dealer technician training program paid for by the manufacturer or dealer. We provide marine and motorcycle training for experienced American Honda technicians utilizing training materials and curricula provided by American Honda. Our instructors provide marine and motorcycle dealer training at American Honda-authorized training centers across the United States. We oversee the administration of the motorcycle training program, including technician enrollment. Additionally, American Honda supports our campus Hon Tech training program by donating equipment and providing curricula.


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Porsche Cars of North America, Inc. This is an example of a manufacturer-paid MSAT program. We have a written agreement with Porsche Cars of North America, Inc. whereby we provide the Porsche Technician Apprenticeship Program at the Porsche training centers in Atlanta, Georgia and Easton, Pennsylvania using vehicles, equipment, specialty tools and curricula provided by Porsche. The written agreement expires September 30, 2016 and may be renewed by mutual agreement.

Student Recruitment Model
Our student recruitment efforts begin with our commitment to positive outcomes, both for our students and our industry relationships. Our responsibility to present job-ready graduates to employers requires that we recruit, enroll and train prospective students who have the drive and potential to successfully pursue a career in their field of training. We use a national multi-touch media approach, including digital engagement and fulfillment platforms, to generate the quality and quantity of prospective students necessary for our three primary admissions channels to enroll and start students.
Marketing and Advertising. Our marketing strategies are designed to identify potential students who would benefit from our programs and pursue successful careers upon graduation. We leverage an integrated inquiry generation platform that focuses on nationally efficient television advertising coupled with digital advertising, where our website acts as the primary hub of our campaigns, to inform and educate potential students on the nature and cost of our educational programs and the employment opportunities that could be available to them. Currently, we advertise on television, internet search, social media, display, online video and other internet-based content, email and radio and in magazines, and we use events, sponsorships, social media, direct mail, email, texting and telephonic response to reach prospective students.

Our recruiting policy is intended to maximize the efficiency of our admissions representatives by focusing on the students most likely to succeed in our programs and as a technician. Our admissions representatives are provided with training and tools to assist any prospective student.

High Schools. Our field-based representatives recruit prospective students primarily from high schools across the country with assigned territories covering the United States and U.S. territories. Our field-based admissions representatives generate the majority of their inquiries by making career presentations at high schools. Typically, the field-based admissions representatives enroll high school students during an application interview conducted at the homes of prospective students.

Our reputation in local, regional and national business communities, endorsements from high school instructors and 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 technical training programs. Our representatives focus on expanding high school relationships and increasing access to high schools beyond the traditional vocational programs and into academic classes. Our programs align with Science, Technology, Engineering and Math (STEM) principles, and we actively work to increase this awareness in high school educators and prospective students.
Military Personnel. Our military representatives are strategically located throughout the country and focus on building relationships with military installations. Additionally, we have a centralized team of military representatives who are dedicated to serving and assisting veterans throughout the U.S. and we have one representative located in Europe. We develop relationships with military personnel and provide information about our training programs by delivering career presentations to

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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. We are expanding the courses offered under our unique instructional program teaching introductory motorcycle mechanics classes at Fort Bliss in El Paso, Texas. These classes are designed to introduce motorcycle theory to active military personnel and expose them to the opportunity to transfer to an MMI campus to complete their program after they are discharged from the military. This continues to be part of our ongoing initiative to serve the needs of transitioning veterans and military personnel.

Adult Students. Our campus-based representatives recruit adult career-seeker or career-changer students. These representatives respond to student inquiries generated from national, regional and local advertising and promotional activities. Since adults tend to start our programs throughout the year instead of in the fall as is most typical of traditional school calendars or for recent high school graduates, these students help balance our enrollment throughout the year.

Student Admissions and Retention
We currently employ field, military and campus-based admissions representatives who work directly with prospective students to facilitate the enrollment process. Enrollment applications are reviewed by a central enrollment office for accuracy and completion before students are enrolled into the program of study. Different programs have varying admissions standards. Applicants must provide proof of one of the following: high school graduation or its equivalent; certification of high school equivalency (G.E.D. or HiSET); successful completion of a degree program at the postsecondary level or successful completion of officially recognized home schooling. Certain states require official transcripts or G.E.D. test scores instead of the certificates. 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.
To maximize the likelihood of student retention and graduation, our admissions process is intended to identify students who have the desire and ability to succeed in their chosen program. We have student services professionals and other resources that provide various student services, including orientation, tutoring, student housing assistance, and academic, financial, personal and employment advisement. We have established processes to identify students who may be in need of assistance to succeed in and complete their chosen program.
Enrollment
We enroll students throughout the year and courses start every three to six weeks. For the year ended September 30, 2015, our average undergraduate full-time student enrollment was approximately 13,200, representing a decrease of approximately 8.3% as compared to 14,400 for the year ended September 30, 2014. Currently, our student body is geographically diverse, with approximately 50% of our students having relocated to attend our programs. Due to the seasonality of our business and normal fluctuations in student populations, we would expect volatility in our quarterly results. See "Seasonality" within Part II, Item 7 of this Report on Form 10-K for further discussion of seasonal fluctuations in revenues and operating results.

Graduate Employment
As described in “Business - Schools and Programs” included elsewhere in this Report on Form 10-K, our programs prepare graduates for careers in industries using the training we provide, primarily as automotive, diesel, collision repair, motorcycle and marine technicians. Identifying employment opportunities and preparing our graduates for these careers is critical to our ability to help our graduates benefit from their education.  Accordingly, we dedicate significant resources to maintaining an effective employment team.  Our campus-based staff facilitates several career development processes, including instruction and coaching for interview skills, interview etiquette and professionalism. Additionally, the employment team provides students with reference materials and assistance

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with the composition of resumes. Finally, we place emphasis on and devote significant time to assisting students with part-time and graduate job searches.

We also have a centralized department whose focus is to build and maintain relationships with potential and existing national employers and develop graduate job opportunities and, where possible, relocation assistance, sign-on bonuses, tool packages and tuition reimbursement plans with our OEMs and other industry employers. Together, the campuses and centralized department coordinate and host career fairs, industry awareness presentations, interview days and employer visits to our campus locations. We believe that our graduate employment services provide our students with a compelling value proposition and enhance the employment opportunities for our graduates.

Our employment rates for 2014 and 2013 graduates who were employed within one year of graduation were 88%. The employment calculation is based on all graduates, including those that completed manufacturer specific advanced training programs, from October 1, 2013 to September 30, 2014 and October 1, 2012 to September 30, 2013, respectively, excluding graduates not available for employment because of continuing education, military service, medical reasons, incarceration, death or international student status. We count a graduate as employed based on a verified understanding of the graduate’s job duties to assess and confirm that the graduate’s primary job responsibilities are in his or her field of study. We verify employment by sending written verification requests to both the graduate and the employer. The verifications must include employer name, job duties, job title, hire date and employer contact. Once we receive written verification from either source, the graduate is counted as employed. If we are unable to obtain written verification, we also count graduates as employed if we are able to obtain verbal verification from both the graduate and the employer. We periodically review a sample of employment verifications to ensure accuracy.

For 2014, we had approximately 9,900 total graduates, of which approximately 9,200 were available for employment. Of those graduates available for employment, approximately 8,100 were employed within one year of their graduation date, for a total of 88%. For 2013, we had approximately 10,600 total graduates, of which approximately 9,900 were available for employment. Of those graduates available for employment, approximately 8,700 were employed within one year of their graduation date, for a total of 88%.
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. A majority of our existing instructors have a minimum of five years experience in the industry and an average of seven years of experience teaching at UTI, ranging from less than 1 year to 31 years. Our average undergraduate student-to-teacher ratio is approximately 20-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, an employment services director, a campus controller and a facilities director. As of September 30, 2015, we had approximately 2,020 full-time employees, including approximately 610 student support employees and approximately 710 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 good relationships with our employees. However, we have encountered in the past, and may encounter in the future, employees who desire or maintain union representation at new or existing campuses.

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Competition
The for-profit, post-secondary education industry is highly competitive and highly fragmented, with no one provider controlling significant market share. We compete with other institutions that are eligible to receive Title IV funding, including not-for-profit public and private schools, community colleges and all for-profit institutions which offer automotive, diesel, collision repair, motorcycle and marine technician training as well as other skilled trades training programs. Our competition differs in each market depending on the curriculum that we offer and the availability of other choices including job prospects. Our main competitors for the programs we provide are other for-profit career-oriented and technical schools, including Lincoln Technical Institute, a wholly owned subsidiary of Lincoln Educational Services Corporation, WyoTech and traditional two-year junior and community colleges. WyoTech was previously owned by Corinthian Colleges, Inc., which filed for bankruptcy in May 2015. Certain WyoTech campus locations are still in operation and are now owned by Educational Credit Management Corporation. We also compete with our industry partners and other manufacturers and employers of our graduates; when employers do not have a sufficient supply of trained technicians, they may hire untrained technicians and train them via internships or other internal training. Competition is generally based on location, the type of programs offered, the quality of instruction and instructional facilities, graduate employment rates, reputation, recruiting and tuition rates. Public institutions are generally able to charge lower tuition than our schools, due in part to government subsidies and other financial sources not available to for-profit schools.

According to data available through the National Center for Education Statistics (NCES), for the twelve months ended June 30, 2014, we had 10,106 graduates; Lincoln Technical Institute had 4,336 graduates and WyoTech had 4,317 graduates in programs similar to ours. This data also shows that no individual community college had a number of graduates commensurate with ours in similar programs. Further, we partner with over 30 OEMs to provide manufacturer specific advanced training. We believe that we have the largest number of OEM branded training programs. These OEMs provide vehicles, equipment, specialty tools and curricula that lead to increased training and employment opportunities for our students, including the potential for brand specific certifications. For additional information regarding the benefits of the relationships with OEMs, see “Business - Business Model” and “Business - Business Strategy” included elsewhere in this report on Form 10-K. We believe that our industry relationships, brand recognition and national presence provide significant benefits to our students, our graduates and their employers while differentiating us from other technical training schools.

Environmental Matters
We use hazardous materials at our training facilities and campuses and generate small quantities of regulated waste, including, but not limited to, used oil, antifreeze, transmission fluid, paint, solvents 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. Certain of our campuses are required to obtain permits for our air emissions. 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.

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 Exchange Act are available on our website at www.uti.edu under the “Investors - Financial Information - SEC Filings” captions, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Reports of our executive officers, directors and any other persons required to file securities ownership reports under Section 16(a) of the Exchange Act are also available through our website. Information contained on our website is not a part of this Report and is not incorporated herein by reference.

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In Part III of this Report on Form 10-K, we “incorporate by reference” certain information from parts of other documents filed with the SEC, specifically our proxy statement for the 2016 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 about January 15, 2016, our proxy statement for the 2016 Annual Meeting of Stockholders will be filed with the SEC and available on our website at www.uti.edu under the “Investors - Financial Information - SEC Filings” captions.
Information relating to our corporate governance, 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.uti.edu under the “Investors - Corporate Governance” captions. We will provide copies of any of the foregoing information without charge upon written request to Universal Technical Institute, Inc., 16220 North Scottsdale Road, Suite 100, Scottsdale, Arizona 85254, Attention: Investor Relations.

See Note 17 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for for summary segment financial information.

Regulatory Environment

Our institutions participate in a variety of government-sponsored financial aid programs that assist students in paying their cost of education. The largest source of such support is the federal programs of student financial assistance under Title IV of the HEA. This support, commonly referred to as Title IV Programs, is administered by ED. In 2015, we derived approximately 73% of our revenues, on a cash basis as defined by ED, from Title IV Programs, as calculated under the 90/10 rule.
To participate in Title IV Programs, an institution 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. To participate in veterans' benefits programs, including the Post-9/11 GI Bill, the Montgomery GI Bill, the Reserve Education Assistance Program (REAP), and VA Vocational Rehabilitation, an institution must comply with certain requirements established by the VA. Additionally, certain states and their attorneys general require additional authorization to operate our institutions or for our students to receive state funding. Furthermore, ED has established a task force overseeing proprietary postsecondary companies which consists of ED, the Consumer Financial Protection Bureau (CFPB), the SEC, the Federal Trade Commission (FTC), the Internal Revenue Service (IRS) and the Departments of Veterans Affairs, Defense, Treasury, Labor and Justice. For these reasons, our institutions are subject to extensive regulatory requirements imposed by all of these entities.

State Authorization and Regulation
Each of our institutions must be authorized by the applicable state education agency where the institution is located to operate and offer a postsecondary education program to its students. Our institutions are subject to extensive, ongoing regulation by each of these states. Additionally, our institutions are required to be authorized by the applicable state education agencies of certain other states in which our institutions recruit students. Currently, each of our institutions 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, student outcomes reporting, financial operations and other operational matters. State laws and regulations may limit our ability to offer educational programs and to award degrees or diplomas. Some states prescribe standards of financial responsibility that are not consistent with those required by ED and some mandate that institutions post surety bonds. Currently, we have posted surety bonds on behalf of our institutions and admissions representatives with multiple states of approximately $19.0

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million. We believe that each of our institutions is in substantial compliance with state education agency requirements.
States often change their requirements in response to ED regulations or to implement requirements that may impact institutional and student success, and our institutions must respond quickly to remain in compliance. Also, from time to time, states may transition authority between state agencies and we must comply with the new state agency’s rules, procedures and other documentation requirements. If any one of our campuses were to lose its authorization from the education agency of the state in which the campus is located, that campus would be unable to offer its programs and we could be forced to close that campus. If one of our campuses were to lose its authorization from a state other than the state in which the campus is located, that campus would not be able to recruit students in that state.
On June 20, 2014, the Massachusetts Attorney General (MA AG) published disclosure and business practice regulations applicable to proprietary schools operating in or recruiting from Massachusetts or providing services to residents of that state.  Historically, state attorneys general have been involved in the enforcement of certain regulations, but not in the promulgation of new regulations. As published, the regulations were effective immediately. The disclosure obligations include, among other information, graduation, loan non-payment and placement data requirements that are uniquely defined by the MA AG and differ from data and calculation requirements historically applied to our schools by other regulating agencies and our accreditor. In addition to required disclosures, the regulations also require various business practice changes including, among other items, a 72-hour waiting period between disclosing required data to a prospective student and entering into an enrollment agreement with that student as well as significant limitations on contact between our admissions representatives and prospective students. We believe that we have made good faith efforts to comply with these disclosure requirements. These regulations have resulted in substantial changes to our recruiting operations in the New England region and to our Norwood, Massachusetts campus. We continue to experience increases in our cost of doing business and pressure on the number of inquiries compared to the number of student applications.
Accreditation
Accreditation is a non-governmental process through which an institution voluntarily submits to ongoing qualitative reviews by an organization of peer institutions. Accrediting commissions examine the academic quality of the institution’s instructional programs, and a grant of accreditation is generally viewed as confirmation that the institution’s programs meet generally accepted academic standards and practices. Accrediting commissions also review the administrative and financial operations of the institutions they accredit to ensure that each institution has the resources necessary to perform its educational mission, implement continuous improvement processes and support student success.

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Accreditation by an ED recognized commission 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 institutions are accredited by the Accrediting Commission of Career Schools and Colleges (ACCSC), a national accrediting commission recognized by ED. We believe that each of our institutions is in substantial compliance with ACCSC accreditation standards. If any one of our institutions lost its accreditation, students attending that institution would no longer be eligible to receive Title IV Program funding and we could be forced to close that institution. Our campuses' five-year grants of accreditation expire as follows:
Campus
 
 
 
 
 
Exton, Pennsylvania
 
October 2016
Dallas/Ft. Worth, Texas
 
March 2017
Long Beach, California*
 
March 2017
Norwood, Massachusetts
 
July 2017
Sacramento, California
 
December 2017
Mooresville, North Carolina; NASCAR Technical Institute (NASCAR Tech)
 
December 2018
Avondale, Arizona
 
February 2019
Orlando, Florida
 
February 2019
Houston, Texas
 
February 2019
Lisle, Illinois
 
February 2019
Rancho Cucamonga, California
 
February 2019
Phoenix, Arizona; Motorcycle Mechanics Institute (MMI)
 
May 2019

* Initial two-year grant of accreditation based on approval from California's Bureau for Private Postsecondary Education received on March 2, 2015. The campus will be eligible for a five-year grant of accreditation in March 2017.

In the past eighteen months, one of our twelve institutions had its accreditation term scheduled to expire and successfully completed the renewal of accreditation process and received a renewed five-year grant of accreditation.  Our Avondale, Arizona; Houston, Texas; Phoenix, Arizona and Rancho Cucamonga, California campuses received the “School of Excellence” designation by ACCSC.  The School of Excellence Award recognizes ACCSC-accredited institutions for their commitment to the expectations and rigors of ACCSC accreditation, as well as the efforts made by the institution in maintaining high-levels of achievement among their students. In order to be eligible for the School of Excellence Award, an ACCSC-accredited institution must meet the conditions of renewing accreditation without any finding of non-compliance, satisfy all requirements necessary to be in good standing with ACCSC and demonstrate that the majority of the schools’ student graduation and graduate employment rates for all programs offered meet or exceed the average rates of graduation and employment among all ACCSC-accredited institutions. 

Our 2015 annual report has been completed and submitted to ACCSC. Eleven of our approximately 218 approved programs did not meet either the graduation rate or the employment rate requirements. The majority of the programs that were below the benchmark requirements did not meet the requirements as a result of a small number of students in the program. ACCSC may require additional reporting regarding these programs or institutions, and the program or institution could be at risk of a show cause or other adverse action that could lead to sanctions, including but not limited to loss of accreditation of the program or institution. An institution placed on reporting status is required to report periodically to ACCSC on that institution’s performance in the area or areas specified by ACCSC. We are taking steps to improve the outcomes of these programs.

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In 2014, one program in the automotive division at our Orlando, Florida campus with approximately 601 students eligible to graduate during 2010 did not achieve the ACCSC's graduation benchmark and was placed on outcomes reporting with the intention of monitoring the program. We provided updated graduation data through January 2015 to ACCSC in February 2015. ACCSC accepted our response and voted to remove the program from outcomes reporting with a stipulation that we provide additional data, which was submitted in October 2015 as requested. We received notification from ACCSC in October 2015 that the stipulation was met and no further reporting is required.

As of September 30, 2015, one program in the automotive division at our Norwood, Massachusetts campus did not achieve the ACCSC's graduation or employment benchmarks and was placed on heightened monitoring status. The program had only three graduates during the 2011 reporting period and therefore we have decided to discontinue the program. The request to discontinue was sent to ACCSC in October 2015; once approved, heightened monitoring status will no longer be applicable for the program.

Nature of Federal and State Support for Postsecondary Education
The federal government provides a substantial part of its support for postsecondary 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 to participate 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 academic progress, as defined by ED, towards the completion of their program of study. In addition, each institution must ensure that Title IV Program funds are properly accounted for and disbursed in the correct amounts to eligible students, as well as provide a variety of disclosures and reports on recipient data and program expenditures.
During 2015, based on their individual eligibility under the following Title IV Programs, our students received grants and loans from the William D. Ford Federal Direct Loan (DL) program, the Federal Pell Grant (Pell) program, the Federal Supplemental Educational Opportunity Grant (FSEOG) program and the Federal Perkins Loan (Perkins) program.
Federal Title IV Programs
DL. Under the DL program, ED makes loans to students or their parents. Borrowers repay these loans to ED according to the terms and conditions of the program. Students with financial need continue to qualify for interest subsidies while in school up through 150% of the published length of the student's program. Non-need-based unsubsidized loans are also available to students or their parents. In 2015, we derived approximately 56% of our revenues, on a cash basis, from the DL program.
Pell. Under the Pell program, ED makes grants to students who demonstrate financial need based on the federal Free Application for Federal Student Aid (FAFSA). In 2015, we derived approximately 17% of our revenues, on a cash basis, from the Pell program.
FSEOG. FSEOG grants are designed to supplement Pell grants for students with the greatest financial need. Institutions must provide matching funding equal to 25% of all awards made under this program. In 2015, we derived less than 1% of our revenues, on a cash basis, 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 institution’s revolving account to make loans to

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additional students. Since the federal award year beginning July 1, 2004, ED has made no new Perkins allocations to schools due to federal appropriations limitations. In 2015, we derived less than 1% of our revenues, on a cash basis, from the Perkins program.
The Federal Perkins Loan Program was not extended beyond September 30, 2015. Therefore, institutions may not make Federal Perkins Loans to new borrowers on or after September 30, 2015. ED has provided guidance on the wind-down of the program.
Other Federal and State Programs
Some of our students receive financial aid from federal sources other than Title IV Programs, such as the programs administered by the VA and under the Workforce Investment Act. Additionally, some states provide financial aid to our students in the form of grants, loans or scholarships. The eligibility requirements for state financial aid vary by funding agency and program.
Historically, our largest source of state financial aid was the Cal Grant program funded by the State of California. Due to institutional eligibility changes as a result of the 2012 California Budget Act, which was enacted on June 27, 2012, institutions are required to maintain a three-year cohort default rate of less than 15.5% to remain eligible for the Cal Grant program, as well as maintain a graduation rate above 30%.  As a result of their respective cohort default rates, our Universal Technical Institute of Phoenix institution, which includes our Sacramento, California campus, and our Universal Technical Institute of Arizona institution, which includes our Rancho Cucamonga, California campus, became ineligible for the Cal Grant program beginning with the 2013-2014 and 2014-2015 award years, respectively. An ineligible institution cannot receive Cal Grant funds for any student who enrolls after the institution becomes ineligible. Additional information on our cohort default rates is included under "Federal Student Loan Defaults" below. The Cal Grant program represented less than 1% of our revenues, on a cash basis, for the year ended September 30, 2012, which was the last full year when we received Cal Grant funding.

Veterans' Benefits. Since October 1, 2011, the Post-9/11 GI Bill has been effective for both degree and non-degree granting institutions of higher learning, allowing eligible veterans to use their Post-9/11 GI Bill benefits at all of our institutions. Additionally, veterans use benefits such as the Montgomery GI Bill, the REAP and VA Vocational Rehabilitation at our campuses. We derived approximately 20% of our revenues, on a cash basis, from veterans' benefits programs in 2015. To participate in veterans' benefits programs, including the Post-9/11 GI Bill, the Montgomery GI Bill, the REAP, and VA Vocational Rehabilitation, an institution must comply with certain requirements established by the VA. These criteria require, among other things, that the institution:

report on the enrollment status of eligible students;

maintain student records and make such records available for inspection;

follow current VA rules; and

comply with applicable limits on the percentage of students receiving certain veterans benefits on a program or campus basis.

If we fail to comply with these requirements, we could lose our eligibility to participate in veterans' benefits programs.

The VA imposes limitations on the percentage of students per program receiving benefits under certain veterans’ benefits programs, unless the program qualifies for certain exemptions. If the VA determines that a program is out of compliance, the VA will continue to provide benefits to current students, but new students will not be eligible to use their veterans benefits for an affected program until we demonstrate compliance.


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The VA shares responsibility for VA benefit approval and oversight with designated State Approving Agencies (SAAs).  SAAs play a critical role in evaluating institutions and their programs to determine if they meet VA benefit eligibility requirements.  Processes and approval criteria as well as interpretation of applicable requirements can vary from state to state. Therefore, approval in one state does not necessarily result in approval in all states.  If we are unable to secure approvals in one or more states, or if the process for obtaining an approval takes significant time, we could be required to alter the delivery methodology or structure of the program or experience delays in or the loss of a portion of VA funding. Students receiving VA funding may not be able to receive the full benefit of our Automotive Technology and Diesel Technology II curricula methodology. During 2015, we received approval from the California SAA to use veterans’ benefits to fund courses under this curricula in California under an alternative method we had previously proposed. Additionally, we received approval from the Florida SAA to use veterans’ benefits to fund all course combinations under this curricula in Florida under the alternative methodology.

 Since July 2012, the Texas SAA has approved the use of Veterans benefits to fund tuition under our original Automotive Technology and Diesel Technology II delivery method at our Dallas/Ft. Worth, Texas campus. During 2015, we have been in contact with the Texas SAA regarding a potential transition to an alternative delivery method for Veterans at this campus. The Texas SAA has recently communicated that the program at this campus remains approved while we work to implement a unique delivery methodology. We are evaluating our options for implementing changes in response to guidance received from the Texas SAA. 

During 2012, President Obama signed an Executive Order directing the Departments of Defense, Veterans Affairs and Education to establish “Principles of Excellence” (Principles), based on certain guidelines set forth in the Executive Order, to apply to educational institutions receiving federal funding for service members, veterans and family members. As requested, we provided written confirmation of our intent to comply with the Principles to the VA in June 2012. We are required to comply with the Principles to continue recruitment activities on military installations. Additionally, there is a requirement to possess a memorandum of understanding (MOU) with the U.S. Department of Defense as well as with certain individual installations. Our access to bases for student recruitment has become more limited due to recent changes in the Transition Assistance Program (Transition Goals, Plans, Success) and increased enforcement of the MOU requirement. Each of our institutions has an MOU with the U.S. Department of Defense. We have MOUs with certain key individual installations and are pursuing MOUs at additional locations; however, some installations will not provide MOUs to institutions that do not teach at the installation. We continue to strengthen and develop relationships with our existing contacts and with new contacts in order to maintain and rebuild our access to military installations.

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 HEA and ED’s extensive regulations regarding institutional eligibility. An institution must also demonstrate its compliance to ED on an ongoing basis. All of our institutions are certified to participate in Title IV Programs.

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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. Each institution is assigned a unique Office of Post-Secondary Education Identification Number (OPEID). Under this definition for ED purposes we have the following three institutions:
Institution
 
 
Universal Technical Institute of Arizona
 
 
Main campus
 
 
Universal Technical Institute, Avondale, Arizona
 
 
Additional campuses
 
 
Universal Technical Institute, Lisle, Illinois
 
Universal Technical Institute, Long Beach, California
 
Universal Technical Institute, Rancho Cucamonga, California
 
NASCAR Technical Institute, Mooresville, North Carolina
 
Universal Technical Institute, Norwood, Massachusetts

Institution
 
 
Universal Technical Institute of Phoenix
 
 
Main campus
 
 
Universal Technical Institute DBA Motorcycle Mechanics Institute,
Motorcycle & Marine Mechanics Institute, Phoenix, Arizona
 
 
Additional campuses
 
 
Universal Technical Institute, Sacramento, California
 
Universal Technical Institute, Orlando, Florida
 
 
 
Divisions
 
Motorcycle Mechanics Institute, Orlando, Florida
 
Marine Mechanics Institute, Orlando, Florida
 
Automotive, Orlando, Florida


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Institution
 
 
Universal Technical Institute of Texas
 
 
Main campus
 
 
Universal Technical Institute, Houston, Texas
 
 
Additional campuses
 
 
Universal Technical Institute, Exton, Pennsylvania
 
Universal Technical Institute, Dallas/Ft. Worth, Texas

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 have prompted ED to exercise significant regulatory oversight over institutions participating in Title IV Programs. Accrediting commissions and state agencies also oversee compliance with both their respective standards and certain 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 HEA approximately every five to six years. The HEA was reauthorized, amended and signed into law most recently on August 14, 2008; a new reauthorization process has begun with hearings and draft legislation in the Senate Committee on Health, Education, Labor and Pensions and the House Committee on Education and the Workforce. Congress reviews and determines federal appropriations for Title IV Programs at least annually.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the CFPB, which became active during 2012. The CFPB is tasked with overseeing large banks and certain other types of nonbank financial companies, including alternative loan providers, for compliance with federal consumer financial protection laws. It is possible that our proprietary loan program will be subject to such review.
Title IV Cash Management. On October 30, 2015, ED published a set of new final regulations which have a general effective date of July 1, 2016. The regulations include, among other things, revised cash management requirements related to holding Title IV credit balances. The regulations specify that institutions subject to heightened cash monitoring or reimbursement payment methods will not be permitted to hold any Title IV credit balances regardless of student or parent authorization. Instead, these institutions will be required to first credit a student’s ledger account for the amount of Title IV funds the student or parent is eligible to receive, and pay such credits to the student or parent within 14 calendar days, prior to initiating a request from ED for funds that include those students and parents.
               
While we are not currently subject to the heightened cash monitoring or reimbursement payment methods, it is possible that we will be subject to one of the methods on or before the effective date of the regulations. As a result, we would then be compelled to comply with this new cash management regulation beginning July 1, 2016. For related discussion, see "Financial Responsibility Standards" below.

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Incentive Compensation. In 2010, ED issued revised regulations pertaining to incentive compensation, which became effective July 1, 2011. The new regulations eliminated the 12 safe harbors in the former regulations, and provide that an institution participating in Title IV Programs may not provide any commission, bonus or other incentive payment based in any part, directly or indirectly, on success in securing enrollments or the award of 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. When it issued the regulations, ED also stated that it does not intend to provide private guidance to individual schools on their specific compensation practices, but that it may issue additional broadly applicable guidance to all schools from time to time.

The revised incentive compensation regulations and the ED guidance that accompanied the revised regulations when they were issued in 2010 prohibit schools from:
making salary adjustments to covered employees based, in any part, directly or indirectly, on the employee’s success in securing enrollments or financial aid, or the number of students recruited, enrolled or awarded financial aid;

providing any payments or incentives to covered employees based on students’ graduation or completion of any part of their program, although, as discussed below, ED recently issued new revised guidance regarding graduation and completion-based compensation; and

paying any incentives to covered employees based on how many students receive jobs in their field of study after graduation.

The compensation restrictions apply to any employee who undertakes recruiting or admitting of students, or who makes decisions about and awards Title IV Program funds, as well as any higher level employee with responsibility for recruitment or admission of students, or making decisions about awarding Title IV Program funds. Furthermore, the regulations state that the same restrictions on a school’s payments to its own individual employees will also be applied to a school’s payments to an outside company, with a limited exception for payments to an outside company for providing student contact information for prospective students.
On November 27, 2015, ED published guidance in the Federal Register that it characterized as clarifying and providing additional information about the revised regulations. This new guidance allows for increased flexibility with regard to compensation for admissions representatives that is based upon students' graduation from, or completion of, educational programs. ED has reconsidered its previous interpretation and now indicated the regulations do not prohibit compensation for admissions representatives that is based upon students' graduation from, or completion of, educational programs. Enrollment-based compensation continues to be prohibited. In assessing the legality of a compensation structure, ED will evaluate whether compensation labeled as graduation-based or completion-based is in substance enrollment-based compensation. Consequently, ED’s recently published guidance eliminates certain restrictions on compensation, and we may adjust our compensation practices in accordance with the recently issued guidance.

Because the regulations differ significantly from the prior regulations, and because of the imprecise nature of many aspects of these regulations and ED's published guidance, it is not clear how ED will apply these regulations in all circumstances. Although we cannot guarantee that ED will not take a position that some aspect of our compensation practices is not in compliance with these regulations, we believe that our compensation plans are in substantial compliance with the regulations. ED's revisions to the regulations continue to adversely affect our ability to compensate our employees and our compensation practices for third parties.

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Gainful Employment. The HEA generally requires for-profit institutions to provide programs of training that prepare students for gainful employment in a recognized occupation in order for the students enrolled in those programs to qualify for Title IV Program assistance. ED has relied on this statutory provision to support its efforts for the last five years to promulgate a “gainful employment” rule. On June 13, 2011, ED published regulations imposing additional Title IV Program eligibility requirements on certain educational programs intended to lead to gainful employment. These regulations established metrics for determining whether a program would qualify as an eligible program, but the metrics and related reporting requirements were vacated by the U.S. District Court for the District of Columbia (District Court) on June 30, 2012, prior to their effective date. Under portions of the regulations not vacated, most proprietary postsecondary institutions, including our institutions, are still required to provide extensive disclosures for prospective students and the public. The disclosures include each covered program’s costs, length and on-time completion rate, as well as the recognized occupations for which each program is intended to prepare graduates and the graduate employment rate and median loan debt of individuals who complete each program. We have established a webpage located at www.uti.edu/disclosure for this purpose.
In 2014, ED promulgated a second gainful employment rule, which established new debt metrics and related reporting requirements to replace those vacated by the District Court. ED published the final successor gainful employment rule on October 31, 2014. Most parts of the new rule were effective on July 1, 2015, except that the new disclosure requirements do not take effect until January 1, 2017, until which time institutions must continue to comply with the disclosure requirements discussed previously. The final rule requires institutions to satisfy one of two debt-to-earnings (DE) ratios in order to maintain Title IV Program eligibility. The rule also requires institutions to make certain certifications respecting each of their gainful employment programs, to annually report certain information to ED, and to make disclosures to prospective students and the public. The following is a summary of the key elements of the final rule.

Applicability
The final rule applies to all programs intended by the HEA to lead to gainful employment in a recognized occupation, which includes all of our undergraduate programs. ED will use two DE calculations to compare the debt incurred by each program’s Title IV recipients to their annual earnings following graduation. Specifically, our programs will qualify under the gainful employment rules if we can establish that the program meets at least one of the following two annual DE metrics:
annual debt to earnings rate (aDTE) which requires that the estimated median annual loan payment of a particular cohort of graduates not exceed eight percent of the higher of the mean or median earnings of those graduates, based on earnings information obtained by ED from the Social Security Administration (SSA).

discretionary debt to income rate (dDTE) which requires that the estimated median annual loan payment of a particular cohort of graduates not exceed 20 percent of the estimated discretionary income of those graduates. Discretionary income for this purpose is the higher of the mean or median annual earnings of the cohort less 1.5 times the poverty guideline for a single person as determined by the U.S. Department of Health and Human Services.

Measurement Standards
The gainful employment rule provides a three tier rating system of pass, zone and fail:
Pass: Program meets at least one of the DE metrics.
Zone: Program passes neither DE metric, but is in the "zone" under at least one of the DE metrics, which is defined as having an aDTE between eight and 12 percent or a dDTE between 20 and 30 percent. The program's other metric may be failing.

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Fail: Program fails both DE metrics, meaning the program has an aDTE greater than 12 percent and a dDTE greater than 30 percent.
A program would become ineligible for Title IV if it fails both DE tests in two out of any three consecutive years. In addition, any program that measures in the zone or has a combination of zone/failing scores for four consecutive years would become ineligible for Title IV. The earliest a program could lose eligibility would be in calendar year 2017, which is the earliest ED could publish a second set of final DE rates. If a program loses eligibility or is voluntarily discontinued after receiving zone or failing DE rates, the institution may not reestablish eligibility for that program or a substantially similar program for a period of three years.
The rule includes a transition period, which varies in duration between five and seven years depending on the length of the particular program. During the transition period, an institution's programs may be evaluated using an alternative DE calculation that uses the debt incurred by a more recent cohort of graduates. The transition period is intended to allow an institution to improve its DE rates by taking steps to reduce the debt of its recent student cohorts; however, at least for the first year of the transition period, the calculation will still use debt incurred by students who graduated before the rule took effect.
    The rule provides an institution with the opportunity to challenge certain elements of the DE calculations. However, such challenges will be subject to a compressed timeline. Challenges to the earnings calculations will be extremely limited and likely involve considerable expense to the institution. The rule grants ED substantial discretion to establish procedures, requirements and standards for the challenges.
The final rule, which took effect on July 1, 2015, is less favorable to us than the regulations originally published in June 2011. Under the 2012 Informational Rates published by ED in 2014 based on the 2007-2009 cohort of graduates, two of our 12 programs for which Information Rates were provided would have been in the zone. However, we are not able to develop reliable projections of our programs' performance under the final rules because the data previously provided by ED is dated and we do not have access to the recent SSA earnings data which will be used in the calculations. If a particular program ceased to be eligible for Title IV Program funding, in most cases it would not be practical to continue offering that program under our current business model. In order to prevent this, we may have to explore mitigation strategies which might include preemptively reducing program tuition in an attempt to ensure compliance. Because we cannot calculate the exact impact of such action on a program's DE rates, we may overestimate the required tuition reduction, which would have a negative impact on our tuition revenues. Conversely, we may underestimate the required tuition reduction, and fail to improve the program's DE rates, which could result in the loss of Title IV eligibility as discussed above.
Certification
The rule requires an institution's most senior executive officer to certify, as a condition of continued Title IV Program eligibility, that each of the institution’s eligible gainful employment programs satisfies certain new ED certification requirements that focus primarily on the approval of the program by relevant regulatory or governing bodies such as institutional accreditors and, if applicable, programmatic accreditors and state licensing agencies.
Disclosure
The rule identifies up to 16 different items that institutions must disclose to prospective students and the public about each of their programs, while providing ED the right to expand the list as it deems necessary. Items that may be required include program cost, length, graduation rates, placement rates, accreditation, mean and median student indebtedness and program cohort default rate. Institutions may be required to aggregate disclosure data into multiple student cohorts such as graduates and non-graduates or students enrolled in the program as offered in different formats or lengths. These disclosure requirements take effect on January 1, 2017, until which time institutions must continue to comply with the existing disclosure requirements previously described.

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Reporting
The rule requires institutions to annually report to ED information required to calculate the DE rates, including information about the institution's gainful employment programs, the enrollment status of students in those programs and the debt incurred by those students.
Warnings
The rule requires institutions to provide disclosures to all prospective students prior to their signing an enrollment agreement, obtain verification of receipt from the student and maintain historical records of such verification. The rule further requires institutions to provide separate warnings with respect to any program that ED identifies as in jeopardy of losing Title IV eligibility when the next set of DE rates is published. The earliest a program could be required to issue such warnings would be in calendar year 2016, which is the earliest ED could publish the first set of final DE rates. These warnings must be provided to all active and prospective students and the institution must maintain records that document its efforts to distribute the warning. Warnings must include a number of elements including a statement that the program has not met ED’s gainful employment standards and Title IV eligibility may be terminated, options available to the student should Title IV eligibility be lost and guidance on the institution’s plans to continue the program, offer refunds, or transfer credit should Title IV eligibility be lost.
Parent Loan for Undergraduate Students (PLUS loans). In October 2014, ED published final regulations with the goal of improving student access to postsecondary education by increasing availability of PLUS loan funds. Specifically, the regulations modify the eligibility criteria by relaxing the definition of adverse credit history. The regulations also expand the period for which a credit approval is valid from 90 days to 180 days, and include a new provision requiring loan counseling for borrowers who have an adverse credit history, but who qualify for a PLUS loan due to extenuating circumstances. Although the formal effective date of these regulations was July 1, 2015, ED implemented the changes on March 29, 2015. While we expect that these regulations will result in more of our students’ parents qualifying for PLUS funding and accordingly reduce volume for our institutional loan program, we cannot quantify the impact at this time.

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 from Title IV Programs for two consecutive fiscal years as calculated under a cash basis formula mandated by ED. The HEA and ED regulations set forth specific requirements for the calculation of the Title IV Program revenue percentage, mandate expanded disclosure requirements in how an institution presents the calculation and impose negative consequences if an institution exceeds the 90% limit in a single fiscal year.

The HEA provides that an institution will lose its Title IV Program eligibility for a period of at least two institutional fiscal years if it exceeds the 90% threshold for two consecutive institutional fiscal years. The loss of such eligibility would begin on the first day following the conclusion of the second consecutive year in which the institution exceeded the 90% limit and, as such, any Title IV Program funds already received by the institution and its students during a period of ineligibility would have to be returned to ED or a lender, if applicable. Additionally, if an institution exceeds the 90% level for a single year, ED will place the institution on provisional certification for a period of at least two years and could impose other restrictions or conditions on the institution's Title IV eligibility.
The HEA sets specific standards for certain elements in the calculation of an institution’s percentage under the 90/10 Rule, including, among other things, the treatment of institutional loans and revenue received from students who are enrolled in educational programs that are not eligible for Title IV Program funding.

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As of September 30, 2015, our institutions’ annual Title IV percentages as calculated under the 90/10 rule ranged from approximately 71% to 75%. We regularly monitor compliance with this requirement to minimize the risk that any of our institutions would derive more than the allowable maximum percentage of its revenue from Title IV Programs for any fiscal year.

Federal Student Loan Defaults. To remain eligible to participate in Title IV Programs, institutions must maintain federal student loan cohort default rates below specified levels. The cohort default rate includes borrowers under the Federal Family Education Loan (FFEL) program, which was discontinued June 30, 2010, as well as the DL program. ED calculates an institution’s cohort default rate on an annual basis. Under the current calculation, the FFEL/DL cohort default rate is derived from student FFEL/DL borrowers who first enter loan repayment during a federal fiscal year (FFY) ending September 30 and subsequently default on those loans within the two following years; parent borrowers are excluded from the calculation. This represents a three-year measuring period. An institution whose cohort default rate is 30% or more for three consecutive FFYs or greater than 40% for any given FFY loses eligibility to participate in some or all Title IV Programs. This sanction is effective for the remainder of the FFY in which the institution lost its eligibility and for the two subsequent FFYs. None of our institutions had a three-year FFEL/DL cohort default rate of 30% or greater for 2012, 2011 or 2010, the three most recent FFYs with published rates.
The following tables set forth the FFEL/DL cohort default rates for our institutions:
 
Three-Year Cohort Default Rates for
Institution
Cohort Years Ended September 30, (1)
 
2012
 
2011
 
2010
 
 
 
 
 
 
Universal Technical Institute of Arizona
17.1%
 
18.8%
 
18.9%
Universal Technical Institute of Phoenix
18.9%
 
19.5%
 
20.2%
Universal Technical Institute of Texas
18.3%
 
21.6%
 
21.6%
 
 
 
 
 
 
All proprietary postsecondary institutions
15.8%
 
19.1%
 
21.8%
 
 
 
 
 
 
(1)       Based on information published by ED.

An institution whose three-year cohort default rate under the FFEL/DL program exceeds 15% for any one of the three preceding years is subject to a 30-day delay in receiving the first disbursement on federal student loans for first-time borrowers. As of September 30, 2015, all of our institutions were subject to delayed disbursements. An institution whose cohort default rate under the FFEL/DL program is 30% or greater, but less than or equal to 40%, for two of the three most recent federal fiscal years may be placed on provisional certification status by ED for up to three years. None of our institutions are on provisional status with ED.
Perkins Loan Defaults. An institution with a Perkins program cohort default rate that is greater than 15.0% for any federal award year, which is the twelve month period from July 1 through June 30, may be placed on provisional certification. The Perkins cohort default rates for Universal Technical Institute of Arizona was 8.3% for students who were scheduled to begin repayment in the federal award year ended June 30, 2014, the most recent federal award year reported by our institutions. The Perkins cohort default rate for Universal Technical Institute of Texas for the same period was 16.7% with 5 of 30 Perkins borrowers defaulting in this cohort period. The Perkins cohort default rate for Universal Technical Institute of Phoenix was 20.8%, based on a composite of the three prior award year’s data, as there were fewer than 30 borrowers applicable to the 2013-14 cohort. Although the most recent Perkins cohort default rates are greater than 15% for Universal Technical Institute of Texas and for Universal Technical Institute of Phoenix, we have not been advised of any provisional certification status. If we are placed

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on provisional certification status for any reason, ED will require us to obtain prior approval for changes to our programs and locations and may more closely view any application we file for recertification, new locations, new or revised educational programs, acquisitions of other schools, increases in degree level or other significant changes. Further, for an institution that is provisionally certified, ED may revoke the institution’s certification without advance notice or advance opportunity to challenge the action.

An institution with a Perkins cohort default rate of 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 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 past three federal award years. For the federal award year ended June 30, 2016, as with the 11 preceding federal award years, ED will not disburse any new federal funds to any institutions for Perkins loans due to federal appropriations limitations. In our 2015 fiscal year, we derived less than 1% of our 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 institution’s financial responsibility is measured by its 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. In addition to having an acceptable composite score, an institution must, among other things, meet all of its financial obligations including required refunds to students and any Title IV Program liabilities and debts, be current in its debt payments, and not receive an adverse, qualified, or disclaimed opinion by its accountants in its audited financial statements. If ED determines that an institution does not satisfy its financial responsibility standards, depending on the resulting composite score and other factors, that institution may establish its financial responsibility on an alternative basis.
If an institution's composite score is below 1.5, but is at least 1.0, the institution is in a category classified by ED as the zone. Under ED regulations, institutions in the zone solely because their composite score is less than 1.5 are still considered to be financially responsible, but require additional oversight by ED in the form of cash monitoring and other participation requirements. Institutions in the zone typically are permitted by ED to continue to participate in the title IV programs under one of two alternatives:  1) the “Zone Alternative” under which an institution is required to make disbursements to students under the Heightened Cash Monitoring 1 (HCM1) payment method and to notify ED within 10 days after the occurrence of certain oversight and financial events or 2) submit a letter of credit to ED equal to at least 50 percent of the Title IV funds received by the institutions during the most recent fiscal year.  ED permits an institution to participate under the “Zone Alternative” for a period of up to three consecutive fiscal years.  Under the HCM1 payment method, the institution is required to make Title IV

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disbursements to eligible students and parents before it requests or receives funds for the amount of those disbursements from ED.  As long as the student accounts are credited before the funding requests are initiated, an institution is permitted to draw down funds through ED’s electronic system for grants management and payments for the amount of disbursements made to eligible students.  Unlike the Heightened Cash Monitoring 2 (HCM2) or reimbursement payment methods, the HCM1 payment method typically does not require schools to submit documentation to ED and wait for ED approval before drawing down Title IV funds. Under new regulations published on October 30, 2015 with an effective date of July 1, 2016, a school on the HCM1, HCM2, or reimbursement payment methods must pay any credit balances due to a student or parent before drawing down funds from ED for the amount of disbursements made to the student or parent.
If an institution's composite score is below 1.0, the institution is considered by ED to lack financial responsibility. 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 its most recently completed fiscal year, or
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.
If an institution is unable to establish financial responsibility on an alternative basis, the institution will be required to comply with additional ED monitoring requirements and receive Title IV Program funds under the HCM2 or reimbursement payment methods.
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. For the 2015 fiscal year, we have calculated our composite score to be 1.4 and therefore anticipate that we will be subject to the “Zone Alternative” option described above. However, the composite score calculation and resulting requirements imposed on our institutions are subject to determination by ED once it receives and reviews our audited financial statements. If ED imposes its typical requirement to disburse Title IV funds under the HCM1 payment method, we believe that our current procedures for processing Title IV payments are similar to those currently required under the HCM1 payment method.  We do not believe this will have an impact on our ability to make disbursements of Title IV funds to our students or to receive funds for the amount of those disbursements from ED.
Return of Title IV Funds. An institution 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 appropriate 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 Title IV Program funds that should have been returned in the previous fiscal year. Our 2015 Title IV compliance audits did not cite any of our institutions for exceeding the 5% late payment threshold.
Institution Acquisitions. When a company acquires an institution that is eligible to participate in Title IV Programs, that institution undergoes a change of ownership resulting in a change of control as defined by ED.

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Upon such a change of control, an institution’s eligibility to participate in Title IV Programs is generally suspended until it has applied for recertification by ED as an eligible institution under its new ownership, which requires that the institution 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 is typically on a provisional basis. Our expansion plans are based, in part, on our ability to acquire additional institutions and have them certified by ED to participate in Title IV Programs following affirmation of state licensure and accreditation. Although we believe we will be able to obtain all necessary approvals from ED, ACCSC and the applicable state agencies for our expansion plans, we cannot ensure that such approvals will 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.
Change of Control. In addition to institution acquisitions, other types of transactions can also cause a change of control. ED and most state education agencies and ACCSC have standards pertaining to the change of control of institutions, 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: (i) if there is an event that would obligate the corporation to file a Current Report on Form 8-K with the SEC disclosing a change of control or (ii) if the corporation has a “Controlling Stockholder”, as defined in ED regulations, that owns or controls through agreement 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 these agencies would require any affected institution 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 our institutions are involved. Some corporate re-organizations and some changes in the board of directors are examples of such transactions. Additionally, 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 institutions, we believe that we will be able to obtain all necessary approvals from ED, ACCSC 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.
Opening Additional Institutions and Adding Educational Programs. For-profit educational institutions must be authorized by their state education agencies, accredited by an accrediting commission recognized by ED 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 campuses as additional locations of our existing institutions and take into account ED’s approval requirements. Currently, all of our institutions 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. Our expansion plans are based, in part, on our ability to add new educational programs at our existing institutions. Generally, an institution that is eligible to participate in Title IV Programs, and is not provisionally certified, may add a new educational program without ED approval if the new program is licensed by the applicable state agency, accredited by an agency

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recognized by ED and meets certain other requirements. For programs required to lead to gainful employment in a recognized occupation, which includes all of our programs, the institution must also certify that the new program:
is approved by a recognized accrediting agency or is otherwise included in the institution's accreditation by its recognized accrediting agency;
is programmatically accredited if such accreditation is required by a federal government entity or by a governmental entity in the state in which the institution is located or in which the institution is otherwise required to obtain state approval; and
in the state in which the institution is located, or in which the institution is otherwise required to obtain state approval, satisfies the applicable education prerequisites for professional licensure or certification requirements in that state so that a student who completes the program and seeks employment in that state qualifies to take any licensure or certification examination that is needed for the student to practice or find employment in an occupation that the program prepares students to enter.

Some of the state education agencies and ACCSC also have requirements that may affect our institutions’ ability to open a new location, establish an additional location of an existing institution or begin offering a new or revised 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, require the institution to repay Title IV Program funds, change the method of payment of Title IV Program funds or place the institution on provisional certification as a condition of its continued participation or take other actions against the institution.
Eligibility and Certification Procedures. The HEA specifies the manner in which ED reviews institutions for eligibility and certification to participate in Title IV Programs. Every educational institution seeking Title IV Program funding for its students must be certified to participate and is required to periodically renew this certification. Each institution must apply to ED for continued certification to participate in Title IV Programs before its current term of certification expires, or if it undergoes a change of control. Terms of certification are typically six years, but can be three years or shorter. Furthermore, an institution may come under ED review if it expands its activities in certain ways such as opening an additional location or raising the highest academic credential it offers. The Program Participation Agreement (PPA) document serves as ED’s formal authorization of an institution and its associated additional locations to participate in Title IV Programs for a specified period of time. Universal Technical Institute of Arizona and Universal Technical Institute of Phoenix were recertified in October 2010 and entered into new PPAs with ED which will expire on June 30, 2016. Universal Technical Institute of Texas was recertified in February 2012 and entered into a new PPA with ED which will expire March 31, 2018.
Compliance with Regulatory Standards and Effect of Regulatory Violations. Our institutions 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 VA and ACCSC, as well as other federal and state agencies. Each of our institutions’ administration of Title IV Program funds must also be audited annually by independent accountants 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 HEA 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 from the advance method of receiving Title IV Program funds to a cash monitoring or reimbursement system, which could negatively impact cash flow at an institution. Significant violations of Title IV Program requirements by us or any of our institutions could be the basis for a proceeding by ED to fine the affected institution or to limit, suspend or terminate the participation of the affected

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institution in Title IV Programs. Generally, such a termination extends for 18 months before the institution may apply for reinstatement of its participation.
In April 2015, ED completed an ordinary course program review of our administration of the Title IV programs in which we participate for our Avondale, Arizona campus and additional locations of that campus. The site visit covered the 2013-2014 and 2014-2015 award years. We have not received the initial report and have had no further communications from ED regarding this matter.
As previously disclosed, during a review of our methodology for assessing compliance with the 90/10 Rule, we determined that it would be appropriate to revise the manner in which we treat certain stipends, primarily those awarded to recipients of veterans benefits. The revision, which did not impact our current or historical compliance with the 90/10 rule, related to the application of technical regulatory guidance in a circumstance where a student has multiple sources of tuition funding including Title IV funds and a portion of those funds is used as a stipend. In August 2015, we provided this information to ED and requested guidance from ED on any additional procedures they might require. We received a letter from ED in September 2015 requesting additional documentation in connection with revisions to our methodology for performing prior year 90/10 calculations. We provided the requested documentation in September 2015 and have not received a further response from ED.
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 written notice that any such proceeding is currently contemplated. Violations of Title IV Program requirements could also subject us or our institutions to other civil and criminal penalties.
1ITEM 1A. RISK FACTORS
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, could cause our actual results to differ materially from expected and historical results. We note these factors for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. 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. You should consider carefully the risks and uncertainties described below in addition to other information contained in this Report on Form 10-K, including our consolidated financial statements and related notes.
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 2015, we derived approximately 73% of our revenues, on a cash basis, from Title IV Programs, administered by ED. To participate in Title IV Programs, an institution must receive and maintain authorization by the appropriate state agencies, be accredited by an accrediting commission recognized by ED and be certified as an eligible institution by ED. As a result, our institutions are subject to extensive regulation by the state agencies, ACCSC and ED. These regulatory requirements cover the vast majority of our operations, including our 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, expand or open additional institutions or campuses, add new, or expand our existing 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 agencies, ACCSC and ED periodically revise their requirements and modify their interpretations of existing requirements.

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If our institutions failed to comply with any of these regulatory requirements, our regulatory agencies could impose monetary penalties; bring litigation against us; place limitations on our schools’ operations, such as restricting our ability to recruit or enroll students within certain states; terminate our schools’ ability to grant degrees and diplomas; revoke our schools’ accreditation; or terminate our schools’ eligibility to receive Title IV Program funds, each of which could adversely affect our cash flows, results of operations and financial condition, and impose significant operating restrictions upon us. 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.
Failure to maintain eligibility to participate in Title IV Programs could materially and adversely affect our business.    
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. 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 have prompted ED to exercise significant regulatory oversight over institutions participating in Title IV Programs. Accrediting commissions and state agencies also oversee compliance with both their respective standards and 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 frequently changing laws and regulations and subjective regulatory interpretation of these obligations by various regulating entities. Because ED periodically revises its regulations and changes its interpretation of existing laws and regulations, we cannot predict with certainty how Title IV Program requirements will be applied in all circumstances. Additionally, given the complex nature of the regulations, the fact that they are subject to multiple interpretations, a stated department policy of providing limited or no interpretive guidance and the large volume of Title IV transactions in which we are involved, it is reasonable to conclude that, from time to time, in the conduct of our business, we may inadvertently violate such regulations. In such an event, remedial action may be necessary, regulatory proceedings could occur and regulatory penalties could be assessed.
Significant factors relating to Title IV Program eligibility that could adversely affect us include the following:
State Authorization
A campus that grants degrees or diplomas must be authorized to offer postsecondary education programs in that state 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 campuses from the education agency of the state in which the campus is located would end that campus’ eligibility to participate in Title IV Programs and could cause us to close the campus, which could have a material adverse effect on our cash flows, results of operations and financial condition.
Accreditation
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 campuses would end that campus’ participation in Title IV Programs and could cause us to close the campus, which could have a material adverse effect on our cash flows, results of operations and financial condition. A change in accreditation to a more restrictive or monitored status could restrict our ability to add new programs, open new campuses or increase recruitment activity.

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The “90/10 Rule”
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 from those programs for two consecutive institutional fiscal years, under a cash-basis calculation mandated by ED. The period of ineligibility covers at least the next two succeeding fiscal years, and any Title IV Program funds already received by the institution and its students during the period of ineligibility would have to be returned to ED, if DL loans were included in the calculation. If an institution exceeds the 90% level for a single year, ED will place the institution on provisional certification for a period of at least two years and could impose other restrictions or conditions on the institution's Title IV eligibility. If we are placed on provisional certification status for any reason, ED will require us to obtain prior approval for changes to our programs and locations and may more closely review any application we file for recertification, new locations, new educational programs, revisions to existing educational programs, acquisitions of other schools, increases in degree level or other significant changes. Furthermore, for an institution that is provisionally certified, ED may revoke the institution’s certification without advance notice or advance opportunity to challenge the action. In our 2015 fiscal year, under the regulatory formula prescribed by ED, each of our institutions derived approximately 71% - 75% of its revenues from Title IV Programs.
We received a letter from ED in September 2015 requesting additional documentation in connection with revisions to our methodology for performing prior year 90/10 calculations. We provided the requested documentation in September 2015 and have not received a further response from ED. While the revisions did not cause any of our institutions to exceed the 90% revenue threshold, it is possible that ED may take other actions against our institutions or require us to provide additional information. See “Business - Regulatory Environment - Regulation of Federal Student Financial Aid Programs - the '90/10Rule'” included elsewhere in this Report on Form 10-K for additional information.
Multiple legislative proposals have been introduced in Congress that would increase the requirements of the 90/10 Rule, such as reducing the 90% maximum under the rule to 85% and/or including military and veterans' funding in the 90% portion of the calculation. If any of our institutions loses eligibility to participate in Title IV Programs, such a loss would adversely affect our students’ access to Title IV Program funds they need to pay their educational expenses, which could reduce our student population and would have a material adverse effect on our cash flows, results of operations and financial condition.

Federal Student Loan Defaults
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 have federal 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 Title IV Program funds, which could reduce our student population and would have a material adverse effect on our cash flows, results of operations and financial condition. See “Business - Regulatory Environment - Regulation of Federal Student Financial Aid Programs - Federal Student Loan Defaults” included elsewhere in this Report on Form 10-K for additional information.

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Financial Responsibility Standards
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. The operating conditions that may be placed on a school that does not meet the standards of financial responsibility include being transferred from the advance payment method of receiving Title IV Program funds to either the reimbursement or the heightened cash monitoring system, which could result in a significant delay in the institution’s receipt of those funds or increased administrative costs related to those funds. We are not currently required to post a letter of credit on behalf of any of our schools and are not subject to additional operating conditions. We may be required to post letters of credit in the future, which could increase our costs of regulatory compliance or change the timing of receipt of Title IV Program funds. Our inability to obtain a required letter of credit or the imposition of other limitations on our participation in Title IV Programs could limit our students’ access to Title IV Program funds, which could reduce our student population and could have a material adverse effect on our cash flows, results of operations and financial condition.
Return of Title IV Funds
A school participating in Title IV Programs must correctly calculate and return funds received for students who withdraw before completing their educational programs whose aid exceeds the amount earned under Title IV Program guidelines. Returns must be completed 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 or timely returned, we may be required to post a letter of credit in favor of ED, pay interest on the late repayment of funds, or be otherwise sanctioned by ED, which could increase our cost of regulatory compliance and adversely affect our results of operations. Additionally, the failure to timely return Title IV Program funds also could result in the termination of eligibility to receive such funds going forward or the imposition of other sanctions. Any of these results could have a material adverse effect on our cash flows, results of operations and financial condition. Given the complex nature of the regulations applicable to Title IV refunds and the fact they are subject to multiple interpretations, and the large volume of such transactions in which we are involved, it is reasonable to conclude that, from time to time, in the conduct of our business, we may inadvertently violate such regulations. In such an event, remedial actions may be necessary, regulatory proceedings could occur and regulatory penalties could be assessed.
Administrative Capability
ED regulations specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in Title IV Programs. These criteria require, among other things, that the institutions:
comply with all Title IV Program regulations;
have capable and sufficient personnel to administer Title IV Programs;
have acceptable methods of defining and measuring the satisfactory academic progress of its students;
administer Title IV Programs with adequate checks and balances in its system of internal controls over financial reporting;
divide the function of authorizing and disbursing or delivering Title IV Program funds so that no office has the responsibility for both functions;
establish and maintain records required under Title IV Program regulations;

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develop and apply an adequate system to identify and resolve discrepancies in information from sources regarding a student’s application for financial aid under Title IV Programs;
not have a student loan cohort default rate above specified levels;
refer to the Office of the Inspector General any credible information indicating that any applicant, student, employee or agent of the institution has been engaged in any fraud or other illegal conduct involving Title IV Programs;
not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting or engaging in activity that is the cause of debarment or suspension;
provide adequate financial aid counseling to its students;
show no significant problems that affect the administrative ability of the institution;
develop and follow procedures to evaluate the validity of a student's high school completion;
timely submit all reports and financial statements required by the regulations; and
not otherwise appear to lack administrative capability.
If an institution fails to satisfy any of these criteria, ED may:
require the repayment of Title IV Program funds;
impose a less favorable payment system for the institution’s receipt of Title IV Program funds;
place the institution on provisional certification status; or
commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV Programs.
If we fail to maintain administrative capability as defined by ED, we could lose our eligibility to participate in Title IV Programs or have that eligibility adversely conditioned, which could have a material adverse effect on our cash flows, results of operations and financial condition.
The loss of funds from Veterans' Benefits programs could materially and adversely affect our business.

To participate in veterans' benefits programs, including the Post-9/11 GI Bill, the Montgomery GI Bill, the REAP, and VA Vocational Rehabilitation, an institution must comply with certain requirements established by the VA. If we fail to comply with these requirements, we could lose our eligibility to participate in veterans' benefits programs, which could reduce our student population. For additional information regarding this activity, see “Business - Regulatory Environment - Other Federal and State Programs - Veterans' Benefits” included elsewhere in this Report on Form 10-K.
    
Other considerations which could impact the funding we receive from veterans' benefits programs include the following:

Access to military installations. Recently, our access to military installations for student recruitment has become highly restricted due to the changes described in “Business - Regulatory Environment - Other Federal and State Programs” included elsewhere in this Report on Form 10-K. Restrictions on access

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necessary to continue to develop awareness of our programs with this population could reduce our enrollments.

90/10 rule changes. Multiple legislative proposals have been introduced in Congress that would increase the requirements of the 90/10 Rule, such as reducing the 90% maximum under the rule to 85% and/or including military and veteran funding in the 90% portion of the calculation. Implementation of these proposals could have a negative impact on our 90/10 ratio, which could have a negative impact on our eligibility to participate in 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 Title IV Program funds they need to pay their educational expenses, which could reduce our student population and would have a material adverse effect on our cash flows, results of operations and financial condition.

Funding for veterans' benefits programs. Funding for veterans' benefits programs is dependent upon Congressional appropriations. If appropriations are not maintained at the current level, or if an extended government shutdown were to occur, the VA might not be able to continue funding veterans' benefits.

State Approving Agencies. The VA shares responsibility for VA benefit approval and oversight with designated SAAs.  SAAs play a critical role evaluating institutions and their programs to determine if they meet VA benefit eligibility requirements.  Processes and approval criterion as well as interpretation of applicable requirements can vary from state to state.  Therefore, approval in one state does not necessarily result in approval in all states.  If we are unable to secure approvals in one or more states, if the process for obtaining an approval takes significant time or if our approval is revoked, we could be required to alter the delivery methodology or structure of the program or experience delays in or the loss of a portion of VA funding, or could be required to return a portion of the funding received. Students receiving VA funding may not be able to receive the full benefit of our Automotive Technology and Diesel Technology II curricula methodology, which could reduce our enrollments and have a material adverse effect on our cash flows, results of operations and financial condition.
    
Any loss of funds from veterans' benefits programs could reduce our student population and have a material adverse effect on our cash flows, results of operations and financial condition.

A substantial decrease in student financing options, or a significant increase in financing costs for our students, could have a negative effect on our student population and consequently, on our cash flows, results of operations and financial condition.

The student loan market has undergone significant changes in the past few years, including increased regulations from the HEA reauthorization in 2008, elimination of the FFEL program in 2010, implementation of more stringent PLUS loan credit requirements and contraction in credit markets that has reduced availability of federal and private student loans for certain institutions and/or students. Many banks and lending institutions have discontinued their private student loan programs. Those that have stayed in the market have increased financing costs, both rates and fees, to offset the risks associated with offering unsecured debt. Additionally, the broader economic environment has put pressure on students’ ability to repay their loans, resulting in higher default rates. These factors may result in lending institutions continuing to exit the student loan market and for other providers to determine not to enter the market, which could decrease the availability of alternative loans to postsecondary students, including students with low credit scores who would not otherwise be eligible for credit-based alternative loans that seek to enroll. Prospective students may find that increased financing costs make borrowing to fund their education unattractive and motivate them to abandon or delay enrollment in postsecondary education programs such as ours. Tight credit markets may also move private lenders to impose on us and on our prospective and continuing students new or increased fees in order to provide alternative loans. If any of these scenarios were to occur, in whole or in part, our students’ ability to finance their education could be adversely affected and could result in a decrease in our student population and result in decreased profitability.


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Congress may change the law or reduce funding for or place restrictions on the use of funds received through Title IV Programs, which could reduce our student population, revenues and/or profit margin.

Congress periodically revises the HEA and other laws, and enacts new laws, governing Title IV Programs and annually determines the funding level for each Title IV Program, and may make changes in the laws at any time. Congress most recently reauthorized the HEA in 2008, is actively working on another HEA reauthorization and is expected to revise and reauthorize the HEA soon. Any action by Congress that significantly reduces funding for Title IV Programs or the ability of our schools or students to receive funding through these programs or places restrictions on the use of funds received by an institution through these programs could reduce our student population and revenues. Such action may occur during HEA reauthorization, or such action could also occur as part of separate technical amendments to the HEA or during Congress' annual budget and appropriations cycle.

Congressional action may also require us to modify our practices in ways that could increase administrative costs, reduce the ability of students to finance their education at our schools, and materially decrease student enrollment and result in decreased profitability.

Continued Congressional examination of the for-profit education sector could result in legislation or further ED rulemaking restricting Title IV Program participation by for-profit schools in a manner that materially and adversely affects our business.

Congress continues to be focused on for-profit education institutions, specifically regarding participation in Title IV Programs and U.S. Department of Defense oversight of tuition assistance for military service members attending for-profit colleges. For a description of additional information regarding this activity, see “Business - Regulatory Environment - Regulation of Federal Student Financial Aid Programs - Congressional Action” included elsewhere in this Report on Form 10-K.

This Congressional activity could result in the enactment of more stringent legislation by Congress, further rulemakings affecting participation in Title IV Programs and other governmental actions, increasing regulation of the for-profit sector. Action by Congress may also increase our administrative costs and require us to modify our practices in order for our institutions to comply with Title IV Program requirements. In addition, concerns generated by this Congressional activity may adversely affect enrollment in for-profit educational institutions such as ours. Any laws that are adopted that limit our or our students’ participation in Title IV Programs or in programs to provide funds for active duty service members and veterans or the amount of student financial aid for which our students are eligible, or any decreases in enrollment related to the Congressional activity concerning this sector, could have a material adverse effect on our cash flows, results of operations and financial condition.
Compliance with the Title IV Program Integrity regulations, gainful employment regulations and ongoing negotiated rulemaking could materially and adversely affect our business.
Since the publication of the program integrity regulations in 2010, ED has issued interpretive guidance on the regulations in the form of multiple Dear Colleague Letters and electronic announcements to institutions. The letters and announcements provide sub-regulatory guidance on certain aspects of the regulations, which assists institutions with understanding the regulations in these areas. The laws and regulations governing certain of the requirements do not establish clear criteria for compliance, and ED has indicated that they do not intend to provide additional guidance on certain topics. In particular, the elimination of the 12 safe harbors regarding the incentive compensation prohibition has significantly impacted our business. On November 27, 2015, ED published guidance eliminating certain restrictions on compensation, and we may adjust our compensation practices in accordance with the recently issued guidance. For a description of additional information regarding these regulatory changes, see “Business - Regulatory Environment - Regulation of Federal Student Financial Aid Programs - Incentive Compensation” included elsewhere in this Report on Form 10-K.


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ED published the final gainful employment rule on October 31, 2014, which took effect on July 1, 2015. The final rule maintains the debt to earning (DE) metrics and disclosure requirements published in ED’s March 2014 proposed rule, but eliminates the proposed program cohort default rate metric. In addition to the DE metrics, the final rules include requirements for program certifications, reporting and disclosure of program information and warnings. For a summary of the final rules, see “Business - Regulatory Environment - Regulation of Federal Student Financial Aid Programs - Gainful Employment” included elsewhere in this Report on Form 10-K.
Compliance with final rules could have a material adverse effect on the manner in which we conduct our business and our results of operations. We are not able to develop reliable estimates as to the potential outcome or impact of the final gainful employment rule because the data previously provided by ED is dated and we do not have access to recent earnings data which will be used in the calculations. If a particular program ceased to be eligible for Title IV Program funding, in most cases it would not be practical to continue offering that program under our current business model, which could reduce our enrollment and have a material adverse effect on our cash flows, results of operations and financial condition. In order to prevent this, we may have to explore mitigation strategies which might include preemptively reducing program tuition in an attempt to ensure compliance. Because we cannot calculate the exact impact of such action on the program's DE rates, we may overestimate the required tuition reduction, which would have a negative impact on our tuition revenues. Conversely, we may underestimate the required tuition reduction, and fail to improve the program's DE rates, which could result in the loss of Title IV eligibility. Additionally, a decrease in or loss of any non-loan financial aid available to our students, such as financial aid provided by states, as discussed below, could cause the students to incur more loan debt, which would negatively impact our DE rates. Finally, the disclosures and warnings required by the final rule could also negatively impact our enrollment and have a material adverse effect on our cash flows, results of operations and financial condition.
On October 30, 2015, ED published a set of new final regulations which have a general effective date of July 1, 2016. The regulations include, among other things, revised cash management requirements related to holding Title IV credit balances. The regulations specify that institutions subject to heightened cash monitoring or reimbursement payment methods will not be permitted to hold any Title IV credit balances regardless of student or parent authorization. Instead, these institutions will be required to first credit a student’s ledger account for the amount of Title IV funds the student or parent is eligible to receive, and pay such credits to the student or parent within 14 calendar days, prior to initiating a request from ED for funds that include those students and parents. See “Business - Regulatory Environment - Regulation of Federal Student Financial Aid Programs - Cash Management” included elsewhere in this Report on Form 10-K. While we are not currently subject to the heightened cash monitoring or reimbursement payment methods, it is possible that we will be subject to one of the methods on or before the effective date of the regulations. As a result, we would then be compelled to comply with this new cash management regulation beginning July 1, 2016.
We have devoted significant effort to understanding the effects of these regulations on our business and to developing compliant solutions that are also congruent with our business, culture and mission to serve our students and industry relationships. However, these solutions related to implementation and compliance with these final rules, including but not limited to cash management, compensation and gainful employment, may have a material adverse effect on the manner in which we conduct our business, our student populations and the nature of our programs. Interpretation of the regulations is subject to change if ED provides further guidance and clarification. The solutions may require further analysis based on the uncertainty noted above and any additional interpretive guidance that is provided. Existing or future understandings could be different from ED’s interpretations and thus lead to repayments, restrictions, fines or litigation.


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Our business could be harmed if we experience a disruption in our ability to process student loans under the Federal Direct Loan Program.
 
 Because all Title IV Program student loans other than the Perkins loans are now processed under the DL program, any processing disruptions by ED may impact our students’ ability to obtain student loans on a timely basis. If we experience a disruption in our ability to process student loans through the DL program, either because of administrative challenges on our part or the inability of ED to process the increased volume of loans through the DL program on a timely basis, our cash flows, results of operations and financial condition could be adversely and materially affected.

Limited opportunities for private alternative student loans for our students could increase the need for institutional funding, which could have a material adverse effect on our business, results of operations and financial condition.
The current state of the national economy and generalized lending crisis has led to a contracted lending environment, resulting in limited lender choices for students who need a private alternative loan to meet gaps between Title IV Program funding and cost of education. Furthermore, lender underwriting criteria has been much more stringent, resulting in fewer prospective borrowers being approved for their loans. As lenders seek to reduce their risk on portfolios of new alternative loans, we have seen many lenders move to shift their target markets exclusively to four-year baccalaureate degree schools. We currently have a list of seven private unaffiliated alternative loan providers to assist new borrowers in selecting a lender, with two of these lenders providing the vast majority of our private alternative student loans. If these lenders decided to decline to lend to students attending our schools, and we were not able to find alternative lenders, the demand for our proprietary loan program could increase, requiring us to devote greater than planned resources which could have a material adverse effect on our cash flows, results of operations and financial condition.
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 noncompliance by government agencies, regulatory agencies and third parties alleging noncompliance with applicable standards. These compliance reviews and claims could also result from our notification to an agency or third party based upon our own internal compliance review. We are also subject to various lawsuits, investigations and claims, covering a wide range of matters, including, but not limited to alleged violations of federal and state laws, false claims made to the federal government and routine employment matters. 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 monetary damages or be subject to fines, limitations, loss of regulatory approvals or Title IV Program funding, injunctions or other penalties. We could also incur substantial legal costs in excess of our insurance coverage. 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. Additionally, given the significant public scrutiny being placed on the sector, numerous state attorneys general have initiated investigations either of the operation of the for-profit schools in their state or of particular institutions operating in that state.
In September 2012, we received a Civil Investigative Demand (CID) from the Attorney General of the Commonwealth of Massachusetts related to a pending investigation in connection with allegations that we caused false claims to be submitted to the Commonwealth relating to student loans, guarantees and grants provided to students at our Norwood, Massachusetts campus. The CID required us to produce documents and provide written testimony regarding a broad range of our business activities from September 2006 to the present. We responded timely to the request. The Attorney General made a follow-up request for documents, and we complied with this

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request in February 2013.  In response to a status update request from us, the Attorney General has requested and we have provided additional documents and information related to graduate employment at our Norwood, Massachusetts campus and our policies and practices for determining graduate employment. At this time, we cannot predict the eventual scope, duration, outcome or associated costs or operational impact of this inquiry, and accordingly we have not recorded any liability in the accompanying consolidated financial statements.

On July 17, 2015, we received a subpoena from the U.S. Attorney’s Office for the Western District of North Carolina (U.S. Attorney's Office) issued pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The subpoena covers a broad range of matters relating to our Mooresville, North Carolina campus operations over the past several years. It also seeks documents and information relating to our compliance with the “90/10 rule,” and other programs and practices. We are cooperating with the U.S. Attorney’s Office. At this time, we cannot predict the eventual scope, duration, outcome or associated costs or operational impact of this inquiry, and accordingly we have not recorded any liability in the accompanying consolidated financial statements.

In November 2015, one of our software vendors notified us of potential additional license and maintenance fees for the use of its software. The terms of the business arrangement are in dispute. However, it is reasonably possible we could incur a loss up to $1.4 million related to this matter. We are in ongoing discussion with the vendor. At this time, we cannot predict the eventual outcome, associated costs or operational impact of this matter, and accordingly we have not recorded any liability in the accompanying consolidated financial statements.

We cannot predict the ultimate outcome of unsettled matters and we may incur significant defense costs and other expenses in connection with them in excess of our insurance coverage related to these matters. We may be required to pay substantial damages, settlement costs or fines or penalties. Such costs and expenses could have a material adverse effect on our business, cash flows, results of operations and financial condition. An adverse outcome in any of these matters could also materially and adversely affect our licenses, accreditation and eligibility to participate in Title IV programs.

Our business and stock price could be adversely affected as a result of regulatory investigations of, or actions commenced against, us or other companies in our industry.
The operations of companies in the education and training services industry, including UTI, are 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 SEC, state governmental agencies, ED and other federal agencies. These allegations have attracted adverse media coverage and have been the subject of legislative hearings and regulatory actions at both the federal and state levels, focusing not only on the individual schools but in some cases on the for-profit postsecondary education sector as a whole. These investigations of or regulatory actions against 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 student enrollment and heighten the risk of class action lawsuits against us, which could have a material adverse effect on our cash flows, results of operations and financial condition.
Changes in the state regulatory environment, including budget constraints, may affect our ability to obtain necessary authorizations or approvals from those states to conduct or change our operations.
Due to state budget constraints and changes in the regulatory environment 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 or the revision of existing programs, a change of control or the hiring or placement of new admissions representatives, could prevent us from making such changes or delay our ability to make such changes, or could require substantial additional costs to accommodate such delay.

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The regulations may lengthen the time to obtain necessary state approvals and may increase the nature and type of state regulation such that it would require us to modify our operations in order to comply with the requirements. This could impose substantial additional costs on our institutions, which could have a material adverse effect on our cash flows, results of operations and financial condition.
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 and negatively affect our 90/10 Rule calculation and other compliance metrics.
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 provide financial aid to our students. These and other states may decide to reduce or redirect 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 available to our students decreases and our students are not able to secure alternative sources of funding, our student population could be reduced, which could have a material adverse effect on our profitability. The decrease or loss of this funding could also negatively impact our DE rates under the gainful employment rule, as well as our cohort default rates. Additionally, loss of state funding would negatively impact our 90/10 Rule calculation and the cost of our compliance with the 90/10 Rule, as this funding is counted in the non-Title IV Program funds portion of the ratio, and such loss would drive up the percentage of revenue attributable to Title IV Programs.
If regulators do not approve our acquisition of a school that participates in Title IV Program funding or the opening of an additional location, the acquired school and/or the additional location would not be permitted to participate in Title IV Programs, which could impair our ability to operate the acquired school and/or the additional location as planned or to realize the anticipated benefits from the acquisition of that school and/or opening of the additional location.
If we acquire a school that participates in Title IV Program funding and/or open an additional location, we must obtain approval from ED and applicable state education agencies and accrediting commissions in order for the school and/or additional location to be able to operate and participate in Title IV Programs. While we would attempt to ensure we will be able to receive such approval prior to acquiring a school and/or opening an additional location, approval may be withheld. An acquisition can result in the temporary suspension of the acquired school’s participation in Title IV Programs and opening an additional location can result in a delay of the campus’ participation in Title IV Programs unless we submit a timely and materially complete application for approval of the acquisition or the opening of the new location. Upon an acquisition, ED will only grant a temporary certification while it reviews the application. If we were unable to timely re-establish or establish the state authorization, accreditation or ED certification of the acquired school or obtain approval for the new location, our ability to operate the acquired school and/or open the additional location as planned or to realize the anticipated benefits from the acquisition of that school and/or the opening of the additional location 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. These agencies do not have uniform criteria for what constitutes a change of control. 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 would impair our ability to participate in Title IV Programs, which would have a material adverse effect on our cash flows, results of operations and financial condition. 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

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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 experience a deterioration of our profitability and operating margins.
We have underutilized seating capacity at several of our campuses. Our ongoing 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.
Our proprietary loan program could have a negative effect on our results of operations.

Our proprietary loan program enables students who have utilized all available government-sponsored or other financial aid and have not been successful in obtaining private loans from other financial institutions, for independent students, or PLUS loans, for dependent students, to borrow a portion of their tuition if they meet certain criteria.

Under the proprietary loan program, the bank originates loans for our students who meet our specific credit criteria with the related proceeds to be used exclusively to fund a portion of their tuition. We then purchase all such loans from the bank at least monthly and assume all the related credit and collection risk. See Note 2 of the notes to our consolidated financial statements within Part IV of this Report on Form 10-K for further discussion of activity under our proprietary loan program.

Factors that may impact our ability to collect these loans include the following: current economic conditions; compliance with laws applicable to the origination, servicing and collection of loans; the quality of our loan servicers’ performance; a decline in graduate employment opportunities and the priority that the borrowers under this loan program attach to repaying these loans as compared to other obligations, particularly students who did not complete or were dissatisfied with their programs of study. Because we record revenues upon the receipt of cash payments, if we are unable to collect on these loans, our revenues and profitability may continue to be adversely impacted.

Federal, state and local laws and general legal and equitable principles relating to the protection of consumers can apply to the origination, servicing and collection of the loans under our proprietary loan program. Any violation of various federal, state or local laws, including, in some instances, violations of these laws by parties not under our control, may result in losses on the loans or may limit our ability to collect all or part of the principal or interest on the loans. This may be the case even if we are not directly responsible for the violations by such parties.

Our proprietary loan program may also be subject to oversight by the CFPB, which could result in additional reporting requirements or increased scrutiny. Other proprietary postsecondary institutions have been subject to recent information requests from the CFPB with regard to their private student loan programs. The possibility of litigation, and the associated cost, are risks associated with this student loan program. At least two proprietary education institutions have been subject to recent lawsuits under the Consumer Financial Protection Act of 2010; the institutions are accused of having unfair private student loan programs and of allegedly engaging in certain abusive practices, including interfering with students' ability to understand their debt obligations and failing to provide certain material information.

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Changes in laws or public policy could negatively impact the viability of this student loan program and cause us to delay or suspend the program. Additionally, depending on the terms of the loans, state consumer credit regulators may assert that our activities in connection with the student loan program require us to obtain one or more licenses, registrations or other forms of regulatory approvals, any of which may not be able to be obtained in a timely manner, if at all. All of these factors could result in the proprietary loan program having a material adverse effect on our cash flows, results of operations and financial condition.

We rely on third parties to originate, process and service loans under our proprietary loan program. If these companies fail or discontinue providing such services, our business could be harmed.
A state chartered bank with a small market capitalization originates loans under our proprietary loan program. If the bank no longer provides service under the contract, we do not currently have an alternative bank to fulfill the demand. There are a limited number of banks that are willing to participate in a program such as our proprietary loan program. The time it could take us to replace the bank could result in an interruption in the loan origination process, which could result in a decrease in our student populations. Furthermore, a single company processes loan applications and services the loans under our proprietary loan program. There is a 90-day termination clause in the contract under which they provide these services. If this company were to terminate the contract, we could experience an interruption in loan application processing or loan servicing, which could result in a decrease in our student populations.
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 extensive industry relationships that we believe afford us significant competitive strength and support our market leadership. These 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 with OEMs, 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 Honda Motor Co. Inc.; Mercury Marine, a division of Brunswick Corp.; Volvo Penta of the Americas, Inc. 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 had they been in writing. Additionally, certain of our written agreements may be terminated without cause by the OEM. Finally, 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, require additional capital expenditures or increase expenses and have a material adverse effect on our cash flows, results of operations and financial condition.

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

The postsecondary education market is highly competitive. The elimination of ability-to-benefit options for establishing general student eligibility for Title IV Program funds beginning July 1, 2012 has increased competition for higher quality students. Some traditional public and private colleges and universities and community colleges, 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. Additionally, recent executive branch

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proposals have included two years of free tuition at community colleges for certain students, who must attend school at least half time, maintain a grade point average of 2.5 or higher and make steady progress toward a degree or transferring to a four-year institution.  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, 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. Additionally, 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; however, if we cannot effectively respond to competitor changes, it could reduce our enrollments and our student populations. 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 market share, revenues and operating margin.

Our success depends in part on our ability to update and expand the content of existing programs and develop and integrate 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. Additionally, the method used to deliver curriculum has been evolving to include on-line delivery. The expansion of our existing programs and the development of new programs, including our Automotive Technology and Diesel Technology II curricula, and changes in the method in which we deliver them, 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 graduate employment rates could suffer.
Our Automotive Technology and Diesel Technology II curricula are a blend of daily instructor-led theory and hands-on lab training complimented by interactive web-based learning, which is reflective of current industry training methods and standards. The blended learning model combines several methodologies for communicating training information and incorporates on-site classes, real-time web-based learning sessions and independent learning and is the standard used by our OEMs to provide continuous technical education. If we are unable to address and respond to requirements such as training instructors to teach the curricula, develop an IT infrastructure that would effectively support this program, obtain the appropriate equipment to teach this program to our students, or obtain the appropriate regulatory approvals to teach and fund this program, we may not be able to successfully roll out the curricula to new or existing campuses in a timely and cost-effective manner. If we are not able to effectively and efficiently integrate the curricula or experience delays in development, this could have a material adverse effect on our cash flows, results of operations and financial condition.
Macroeconomic conditions, particularly unemployment, could adversely affect our business.
The U.S. economy and the economies of other key industrialized countries are experiencing difficult and uncertain economic characteristics. While the economy has shown signs of recovery, the impact has not been equal, and certain sectors and socioeconomic groups continue to be negatively impacted. We believe that our enrollment is affected by changes in economic conditions, although the nature and magnitude of this effect are uncertain and may change over time. While these conditions may have contributed to a portion of the past growth in our average full-time undergraduate student population as individuals sought to advance their education and improve their employment opportunities, during periods when the unemployment rate declines or remains stable

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as it has in recent years, prospective students have more employment options and recruiting new students has traditionally been more challenging. Affordability concerns associated with increased living expenses and the availability of full- and part-time jobs for students attending classes have made it more challenging for us to attract and retain students. The state of the general macroeconomic environment has had a negative impact on price sensitivity and on the ability and willingness of students and their families to incur debt. Furthermore, these circumstances may continue to reduce the willingness of employers to sponsor educational opportunities for their employees, and affect the ability of our students to find employment in the auto, diesel, collision repair, motorcycle or marine industries, any of which could materially and adversely affect our business, cash flows, results of operations and financial condition.
Adverse market conditions for consumer and federally guaranteed student loans 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. These events could adversely affect the ability or willingness of our former students to repay student loans, which could increase our student loan cohort default rate and require increased time, attention and resources to manage these defaults.
We rely heavily on the reliability 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 and related integrations are 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. Additionally, 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.
System disruptions and security threats to our computer networks, including breach of the personal information we collect, could have a material adverse effect on our business and our reputation.
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 committed by foreign or domestic persons, natural disasters, and network and communications failures. We have established a written data breach incident response policy which we test informally and formally at least annually. Additionally, we periodically perform vulnerability self-assessments and engage service providers to perform independent vulnerability assessments and penetration tests. However, despite network security measures, our servers and the servers at our service providers are potentially vulnerable to physical or electronic unauthorized access, computer hackers, computer viruses, malicious code, organized cyber attacks and other security problems and system disruptions. Increasing socioeconomic and political instability in some countries has heightened these risks. Despite the precautions we and our service providers have taken, our systems may still be vulnerable to these threats. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations.

Additionally, the personal information that we collect subjects us to additional risks and costs that could harm our business and our reputation. We collect, retain and use personal information regarding our students and their families and our employees, including personally identifiable information, tax return information, financial data, bank account information and other data. Although we employ various network and business security measures to limit access to and use of such personal information, we cannot guarantee that a third party will not circumvent such security measures, resulting in the breach, loss or theft of the personal information of our students and their families and our employees. Possession and use of personal information in our operations also subjects us to

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legislative and regulatory burdens that could restrict our use of personal information and require notification of data breaches. A violation of any laws or regulations relating to the collection, retention or use of personal information could also result in the imposition of fines or lawsuits against us.
Sustained or repeated system failures or security breaches that interrupt our ability to process information in a timely manner or that result in a breach of proprietary or personal information could have a material adverse effect on our operations and our reputation. Although we maintain insurance in respect of these types of events, available insurance proceeds may not be adequate to compensate us for damages sustained due to these events.

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. The for-profit education sector is under significant regulatory and government scrutiny, which may make it more difficult to attract and retain talent. Additionally, key personnel may leave us and subsequently compete against us. Because 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 admissions representatives, the effectiveness of our student recruiting efforts would be adversely affected.
In order to support revenue growth and student enrollment, we need to hire and train new admissions representatives, as well as retain and continue to develop our existing admissions representatives, who are our employees dedicated to student recruitment. Our ability to develop a strong admissions representative team may be affected by a number of factors, including the following: our ability to integrate and motivate our admissions representatives; our ability to effectively train our admissions representatives; the length of time it takes new admissions representatives to become productive; the competition we face from other companies in hiring, compensating and retaining admissions representatives and our ability to effectively manage a multi-location educational organization. We have made modifications to our employee compensation structure in order to comply with the incentive compensation rule. These modifications affected the compensation structure for our admissions representatives, including the elimination of their variable compensation. As a result of these changes and the macroeconomic conditions impacting our business, we have experienced and may continue to experience a decrease in our enrollment rates. On November 27, 2015, ED published guidance eliminating certain restrictions on compensation, and we may adjust our compensation practices in accordance with the recently issued guidance. For a description of additional information regarding these regulatory changes, see “Business - Regulatory Environment - Regulation of Federal Student Financial Aid Programs - Incentive Compensation” included elsewhere in this Report on Form 10-K. Our existing compensation structure and any future changes to admissions representative compensation may result in a continued decrease in our enrollment rates. If we are unable to hire, develop or retain quality admissions representatives, the effectiveness of our student recruiting efforts would be adversely affected.
 

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Our financial performance depends in part on our ability to continue to develop awareness and acceptance of our programs among high school graduates, military personnel and adults seeking advanced training.
The awareness of our programs among high school graduates, military personnel 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, which could have a material adverse effect on our cash flows, results of operations and financial condition. The following are some of the factors that could prevent us from successfully marketing our programs:
student dissatisfaction with our programs and services;
diminished access to high school student populations, including school district limitations on access to students by for-profit institutions;
reduced access to military bases and installations;
our failure to maintain or expand our brand or other factors related to our marketing or advertising practices;
our inability to maintain relationships with automotive, diesel, collision repair, motorcycle and marine manufacturers and suppliers;
availability of funding sources acceptable to our students; and
recruitment of veterans or other potential students without formal education by our industry partners and other manufacturers.

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 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 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. Additionally, our 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 control 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.

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Because of inherent limitations, our internal controls over financial reporting may not prevent or detect all misstatements. Additionally, 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, our historical financial statements could require restatement which could negatively impact our reputation and lead to a decline in our stock price.
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. Additionally, 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 have historically experienced.
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. Additionally, 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. In addition, our acquisition of a school is a change of ownership of that school, which may result in the temporary suspension of that school’s participation in federal student financial aid programs until it obtains ED’s approval. These results could have a negative effect on our cash flows, results of operations and 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.
Goodwill represents the excess of the cost of an acquired business over the estimated fair values of the assets acquired and liabilities assumed. Goodwill is reviewed at least annually for impairment, which might result from the deterioration in the operating performance of the acquired business, adverse market conditions, adverse changes in the applicable laws or regulations and a variety of other circumstances. Any resulting impairment charge is recognized as an expense in the period in which impairment is identified.


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Our goodwill resulted from the acquisition of our motorcycle and marine education business in 1998. We allocated such goodwill to two of our reporting units that provide the related educational programs. We assess our goodwill for impairment during the fourth quarter of each fiscal year. During the year ended September 30, 2015, we recorded an impairment of $12.4 million for one of the reporting units. Goodwill as of September 30, 2015 was $8.2 million. Actual experience may differ from the amounts included in our assessment, which could result in impairment of our goodwill in the future.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

ITEM 2. PROPERTIES
Campuses and Other Properties
The following sets forth certain information relating to our campuses and corporate headquarters:
 
 
Location
 
Brand
 
 Approximate Square Footage
 
Leased or Owned
Campuses:
 
Arizona (Avondale)
 
UTI
 
268,700
 
 Leased
 
 
Arizona (Phoenix)
 
MMI
 
129,400
 
 Leased
 
 
California (Long Beach)
 
UTI
 
142,000
 
Leased
 
 
California (Rancho Cucamonga)
 
UTI
 
187,300
 
 Leased
 
 
California (Sacramento)
 
UTI
 
239,100
 
 Leased
 
 
Florida (Orlando)
 
UTI/MMI
 
263,100
 
 Leased
 
 
Illinois (Lisle)
 
UTI
 
180,000
 
 Leased
 
 
Massachusetts (Norwood)
 
UTI
 
245,000
 
 Leased
 
 
North Carolina (Mooresville)
 
NASCAR Tech
 
146,000
 
 Leased
 
 
Pennsylvania (Exton)
 
UTI
 
188,800
 
 Leased
 
 
Texas (Dallas/Ft. Worth)
 
UTI
 
95,000
 
 Owned
 
 
Texas (Houston)
 
UTI
 
221,300
 
Owned/leased*
Corporate Headquarters:
 
Arizona (Scottsdale)
 
Headquarters
 
77,100
 
 Leased

*We own 172,200 square feet and lease the remaining 49,100 square feet.

All leased properties listed above are leased with remaining terms that range from approximately three to 16 years. Many of the leases are renewable for additional terms at our option.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary conduct of our business, we are periodically subject to lawsuits, demands in arbitrations, investigations, regulatory proceedings or other claims, including, but not limited to, claims involving current and former students, routine employment matters, business disputes and regulatory demands.  When we are aware of a claim or potential claim, we assess the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we would accrue a liability for the loss. When a loss is not both probable and estimable, we do not accrue a liability. Where a loss is not probable but is reasonably possible, including if a loss in excess of an accrued liability is reasonably possible, we determine whether it is possible to

51


provide an estimate of the amount of the loss or range of possible losses for the claim. Because we cannot predict with certainty the ultimate resolution of the legal proceedings (including lawsuits, investigations, regulatory proceedings or claims) asserted against us, it is not currently possible to provide such an estimate. The ultimate outcome of pending legal proceedings to which we are a party may have a material adverse effect on our business, cash flows, results of operations or financial condition.

In September 2012, we received a Civil Investigative Demand (CID) from the Attorney General of the Commonwealth of Massachusetts related to a pending investigation in connection with allegations that we caused false claims to be submitted to the Commonwealth relating to student loans, guarantees and grants provided to students at our Norwood, Massachusetts campus. The CID required us to produce documents and provide written testimony regarding a broad range of our business activities from September 2006 to the present. We responded timely to the request. The Attorney General made a follow-up request for documents, and we complied with this request in February 2013.  In response to a status update request from us, the Attorney General has requested and we have provided additional documents and information related to graduate employment at our Norwood, Massachusetts campus and our policies and practices for determining graduate employment. At this time, we cannot predict the eventual scope, duration, outcome or associated costs or operational impact of this inquiry, and accordingly we have not recorded any liability in the accompanying consolidated financial statements.

On July 17, 2015, we received a subpoena from the U.S. Attorney’s Office for the Western District of North Carolina (U.S. Attorney's Office) issued pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The subpoena covers a broad range of matters relating to our Mooresville, North Carolina campus operations over the past several years. It also seeks documents and information relating to our compliance with the “90/10 rule,” and other programs and practices. We are cooperating with the U.S. Attorney’s Office. At this time, we cannot predict the eventual scope, duration, outcome or associated costs or operational impact of this inquiry, and accordingly we have not recorded any liability in the accompanying consolidated financial statements.
In November 2015, one of our software vendors notified us of potential additional license and maintenance fees for the use of its software. The terms of the business arrangement are in dispute. However, it is reasonably possible we could incur a loss up to $1.4 million related to this matter. We are in ongoing discussion with the vendor. At this time, we cannot predict the eventual outcome, associated costs or operational impact of this matter, and accordingly we have not recorded any liability in the accompanying consolidated financial statements.

ITEM 4. MINE SAFETY DISCLOSURES
None.

52


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. Ms. McWaters also serves as a director of UTI.
Name
Age
Position
Kimberly J. McWaters
51
Chairman of the Board and Chief Executive Officer
Eugene S. Putnam, Jr.
55
President and Chief Financial Officer
Chad A. Freed
42
General Counsel, Executive Vice President of Corporate Development
Sherrell E. Smith
52
Executive Vice President of Admissions and Operations
Charles J. Barresi
54
Senior Vice President, Customer Solutions
Jeffry B. May
45
Senior Vice President, Marketing
Bryce H. Peterson
37
Senior Vice President, Information Technology
Rhonda R. Turner
42
Senior Vice President, Industry and People Solutions
Kimberly J. McWaters has served as our Chief Executive Officer since October 2003, as the Chairman of our Board of Directors since December 2013 and as a director on our Board since February 2005. Ms. McWaters served as UTI’s President from 2000 to March 2011 and previously served on our 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 Automotive Group, Inc. and Mobile Mini, Inc. Ms. McWaters received a BS in Business Administration from the University of Phoenix.
Eugene S. Putnam, Jr. has served as our President and Chief Financial Officer since March 2011.  Mr. Putnam served as our Executive Vice President and Chief Financial Officer from July 2008 to March 2011 and he served as our interim Chief Financial Officer from January 2008 to July 2008. From June 2005 to May 2007, Mr. Putnam served as Executive Vice President and Chief Financial Officer of Aegis Mortgage Corporation which declared bankruptcy in August 2007.  From July 2003 to June 2005, Mr. Putnam served as President of Coastal Securities L.P. and from March 2001 to March 2003, Mr. Putnam served as Executive Vice President and Chief Financial Officer of Sterling Bancshares, Inc.  Mr. Putnam also spent 14 years as Director of Investor Relations and in various corporate finance positions with SunTrust Banks, Inc.  Mr. Putnam also serves as a director of Community Bankers Trust Corporation. Mr. Putnam received his MBA from the University of North Carolina at Chapel Hill and holds a BS in Economics from the University of California, Los Angeles.
Chad A. Freed has served as our General Counsel, Executive Vice President of Corporate Development since June 2015 and is also our Corporate Secretary. Mr. Freed served as Senior Vice President of Business Development from March 2009 to June 2015, as Senior Vice President, General Counsel from February 2005 to March 2009 and as inside legal counsel since March 2004. Prior to joining UTI, Mr. Freed was a Senior Associate in the Corporate Finance and Securities department at Bryan Cave LLP. Mr. Freed received his Juris Doctor from Tulane University and holds a BS in International Business and French from Pennsylvania State University.
Sherrell E. Smith has served as our Executive Vice President of Admissions and Operations since June 2015. Mr. Smith served as Senior Vice President, Operations from August 2012 to June 2015. During his previous tenure with UTI from 1986 to 2009, Mr. Smith held several positions with UTI including Campus President, Regional Vice President of Operations, Senior Vice President of Operations and Education and Executive Vice President of Operations. Prior to his return to UTI, Mr. Smith advised a private equity firm on acquisition opportunities in the education field and served as the Chief Executive Officer of the American Institute of Technology. Mr. Smith received a BS in Management from Arizona State University.

53


Charles J. Barresi has served as our Senior Vice President, Customer Solutions since June 2015. Mr. Barresi served as our Regional Vice President of Operations, East from April 2012 to June 2015 and as President of our Norwood, Massachusetts campus from August 2010 to April 2012. Prior to joining UTI, Mr. Barresi served as Vice President of Sales for SIE Computing Solutions and served in a variety of positions at GSI Group, Inc. and AMP Inc. Mr. Barresi received a BA in Business Administration from William Patterson University and a Certificate in The General Managers Program from the Harvard Business School, Executive Education program.
Jeffry B. May has served as our Senior Vice President, Marketing since September 2014. Mr. May served as Vice President, Integrated Marketing & Analytics from September 2013 to September 2014, as Vice President, Marketing Operations & Analytics from October 2012 to September 2013, and as Vice President, Student Experience & Operational Excellence from March 2009 to October 2012. Prior to joining UTI, Mr. May served as First Vice President Capital Markets from 2005 to 2009 and as Vice President and Senior Finance Manager from 2002 to 2004 at Washington Mutual. Mr. May holds a BS in Economics from the University of Arizona.
Bryce H. Peterson has served as our Senior Vice President, Information Technology since June 2012. Mr. Peterson served as Vice President of Information Technology from March 2011 to June 2012, as Vice President of Internal Audit Services from March 2010 to March 2011 and as Information Technology Audit Manager from October 2008 to February 2010. Prior to joining UTI, Mr. Peterson served in a variety of positions at KPMG, LLP; Brigham Young University; and Fenton Enterprises. Mr. Peterson received his MS in Information Systems Management and holds a BS in Business Management from Brigham Young University.
Rhonda R. Turner has served as our Senior Vice President of Industry and People Solutions since October 2014. In addition to leading our People Services (Human Resources) function, Ms. Turner provides leadership for our Advanced Training Recruitment and Industry Employment functions. Prior to this role, Ms. Turner served as Senior Vice President of People Services from June 2010 through October 2014, as Vice President of People Services from August 2009 to May 2010, as Vice President of People Services Partnerships & Training from January 2008 to July 2009 and as Director, People Services Partnerships, from January 2006 to December 2007. Prior to joining UTI, Ms. Turner served in human resources leadership positions at ConocoPhillips, Circle K and Main Street Restaurant Group, Inc., a TGI Friday’s franchisee. Ms. Turner received her BS in Human Resources Management from Arizona State University.

54



PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol “UTI”.
 
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.

 
 
 
Price Range of
 
 
 
 Common Stock
 
 
 
High
 
Low
Fiscal Year Ended September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Quarter
 
$
11.97

 
$
9.19

 
Second Quarter
 
$
10.30

 
$
8.15

 
Third Quarter
 
$
10.45

 
$
7.94

 
Fourth Quarter
 
$
8.75

 
$
3.50


 
 
 
Price Range of
 
 
 
 Common Stock
 
 
 
High
 
Low
Fiscal Year Ended September 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Quarter
 
$
15.16

 
$
11.07

 
Second Quarter
 
$
14.36

 
$
11.34

 
Third Quarter
 
$
13.7

 
$
10.52

 
Fourth Quarter
 
$
12.88

 
$
9.25


The closing price of our common stock as reported by the NYSE on November 23, 2015 was $5.30 per share. As of November 23, 2015, there were 31 holders of record of our common stock.

Dividends

On December 19, 2014; March 31, 2015 and June 30, 2015, we paid cash dividends of $0.10 per share to common stockholders of record as of December 8, 2014; March 20, 2015 and June 19, 2015, respectively. The aggregate payment was approximately $7.3 million. On September 16, 2015, we declared a cash dividend of $0.02 per share to common stockholders of record as of September 28, 2015, which was paid on October 5, 2015. On December 20, 2013; March 31, 2014; June 30, 2014 and September 30, 2014, we paid cash dividends of $0.10 per share to common stockholders of record as of December 10, 2013; March 17, 2014; June 20, 2014 and September 19, 2014, respectively. The aggregate payment was approximately $9.9 million.

We continuously evaluate our cash position in light of growth opportunities, operating results and general

55


market conditions. Periodically, we may continue to return shareholder earnings through cash dividends or stock repurchases, or a combination thereof.

Repurchase of Securities

On December 20, 2011, our Board of Directors authorized the repurchase of up to $25.0 million of our common stock in the open market or through privately negotiated transactions.

The following table summarizes our share repurchases of common stock and our share repurchases to settle individual tax liabilities, which are not included in the repurchase plan totals as they were approved in conjunction with restricted share awards, during each period in the fourth quarter of 2015. Shares from share repurchases in lieu of taxes are returned to the pool of shares issuable under our 2003 Incentive Compensation Plan.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
(a) Total Number of Shares Purchased
 
(b) Average Price Paid per Share
 
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans Or Programs
(In thousands)
Share Repurchases
 
 
 
 
 
 
 
 
July 1-31, 2015
 

 
$

 

 
$
10,243

August 1-31, 2015
 
104,318

 
$
4.75

 
104,318

 
$
9,747

September 1-30, 2015
 

 
$

 

 
$
9,747

Total
 
104,318

 
$
4.75

 
104,318

 
$
9,747

Tax Withholdings
 
 
 
 
 
 
 
 
July 1-31, 2015
 

 
$

 

 
$

August 1-31, 2015
 

 
$

 

 
$

September 1-30, 2015
 
118,850

 
$
4.04

 

 
$

Total
 
118,850

 
$
4.04

 

 
$


Stock Performance Graph

The following Stock Performance Graph and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor should such information be incorporated by reference into any future filings under the Securities Act or the Securities Exchange Act except to the extent that we specifically incorporate it by reference in such filing.

56



This graph compares total cumulative stockholder return on our common stock during the period from September 30, 2010 through September 30, 2015 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 September 30, 2010, and any dividends were reinvested on the date on which they were paid.
Symbol
CRSP Total Returns Index for:
09/2010

09/2011

09/2012

09/2013

09/2014

09/2015

u
Universal Technical Institute, Inc.
100.0

69.5

71.7

65.8

52.4

20.4

n
NYSE Stock Market (US Companies)
100.0

99.3

128.2

155.8

181.1

174.2

p
Self-Determined Peer Group
100.0

71.4

50.1

50.1

56.7

37.7

Companies in the Self-Determined Peer Group
      Apollo Group, Inc.
 
Career Education Corporation
      DeVry Education Group Inc.
 
Grand Canyon Education, Inc.
      I T T Educational Services, Inc.
 
Strayer Education, Inc.
      Lincoln Educational Services Corporation
 
 
Notes:
 
 
 
 
      A. The lines represent quarterly index levels derived from compounded daily returns that include all dividends.
      B. The indexes are reweighted daily, using the market capitalization on the previous trading day.
      C. If the quarterly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
      D. The index level for all series was set to $100 on 09/30/2010.
            Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved.


57


ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected consolidated financial and operating data as of and for the periods indicated. You should read the selected financial data set forth below together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements included elsewhere in this Report on Form 10-K. The selected consolidated statement of operations data and the selected consolidated balance sheet data as of and for the years ended September 30, 2015, 2014, 2013, 2012 and 2011 have been derived from our audited consolidated financial statements.
 
 
Year Ended September 30,
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
($'s in thousands, except per share amounts)
Statement of Operations Data: (1)
 
 
 
 
 
 
 
 
 
 
Revenues (2)
 
$
362,674

 
$
378,393

 
$
380,322

 
$
413,629

 
$
451,983

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Educational services and facilities
 
194,416

 
200,054

 
199,540

 
211,979

 
223,628

Selling, general and administrative (3)
 
177,481

 
172,002

 
174,757

 
187,397

 
183,695

Total operating expenses (3)
 
371,897

 
372,056

 
374,297

 
399,376

 
407,323

Income (loss) from operations (2) (3)
 
(9,223
)
 
6,337

 
6,025

 
14,253

 
44,660

Interest (expense) income, net (4)
 
(2,125
)
 
(1,624
)
 
234

 
302

 
252

Equity in earnings of unconsolidated affiliate (5)
 
527

 
471

 

 

 

Other income, net
 
140

 
563

 
655

 
545

 
291

Income (loss) before taxes (2)
 
(10,681
)
 
5,747

 
6,914

 
15,100

 
45,203

Income tax expense (benefit)
 
(1,532
)
 
3,710

 
3,013

 
5,985

 
18,239

Net income (loss) (3)
 
$
(9,149
)
 
$
2,037

 
$
3,901

 
$
9,115

 
$
26,964

Net income (loss) per share:
 
 
 
 
 
 
 
 
 
 
   Basic
 
$
(0.38
)
 
$
0.08

 
$
0.16

 
$
0.37

 
$
1.10

   Diluted
 
$
(0.38
)
 
$
0.08

 
$
0.16

 
$
0.37

 
$
1.09

Weighted average shares (in thousands):
 
 
 
 
 
 
 
 
 
 
   Basic
 
24,391

 
24,640

 
24,515

 
24,711

 
24,427

   Diluted
 
24,391

 
24,920

 
24,704

 
24,937

 
24,740

Cash dividends declared per common share
 
$
0.32

 
$
0.40

 
$
0.40

 
$
0.30

 

Other Data: (1)
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization (8)
 
$
19,155

 
$
20,474

 
$
22,156

 
$
23,819

 
$
24,842

Number of campuses 
 
12

 
11

 
11

 
11

 
11

Average undergraduate enrollments
 
13,200

 
14,400

 
15,000

 
16,500

 
18,500

Balance Sheet Data: (1)
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (6) (7)
 
$
29,438

 
$
38,985

 
$
34,596

 
$
44,611

 
$
52,203

Current assets (6) (7)
 
$
108,057

 
$
127,532

 
$
134,079

 
$
135,594

 
$
134,339

Working capital (6)
 
$
11,563

 
$
25,197

 
$
41,380

 
$
35,847

 
$
28,451

Total assets (3) (5)
 
$
274,302

 
$
288,069

 
$
280,194

 
$
268,768

 
$
266,453

Total shareholders' equity (6)
 
$
113,475

 
$
133,192

 
$
139,164

 
$
146,388

 
$
141,643


(1)
In 2015, we opened a campus in Long Beach, California, which contributed to the fluctuation in operations and financial position during 2015.


58


(2)
The decline in our average undergraduate full-time student enrollment from 2011 - 2015 contributed to the decrease in revenues, income from operations, and income before taxes.

(3)
In 2015, we recorded a non-cash impairment charge of $12.4 million to write off goodwill for our MMI Phoenix, Arizona campus based on our annual impairment test.

(4)
In 2015 and 2014, we began recording interest expense related to amortization of the financing obligation for our Long Beach, campus and for our Lisle, Illinois campus, respectively.

(5)
In October 2014, we entered into a 15-year lease agreement for a build-to-suit facility related to the design and construction of a new campus in Long Beach, California. We recorded approximately $12.3 million in property and equipment with corresponding amount of financing obligation as of September 30, 2015.

In 2014, we entered into amended lease agreements for certain buildings on our Orlando, Florida campus, which extended the lease terms, modified the scheduled rental payments and allowed us to expand the square footage of one building. Construction occurred during June through October 2014. For accounting purposes, we were considered the owner during the construction period, and during that period, the existing building and the addition were considered one unit of account. Accordingly, as of September 30, 2014, we recorded the existing building and a corresponding short-term financing obligation of approximately $4.6 million on our consolidated balance sheet. The facility was placed into service effective November 1, 2014. We determined that we do not have continuing involvement after the construction period was complete, and that the lease will be accounted for as an operating lease. Accordingly, the asset and the corresponding short-term financing obligation were derecognized from our consolidated balance sheet.

In 2012, we entered into various agreements to relocate our Glendale Heights, Illinois campus to and design and build a campus in Lisle, Illinois. Pursuant to these agreements, we invested approximately $4.0 million to acquire an equity interest of approximately 28% in a related joint venture. We recorded approximately $25.2 million and $2.4 million in property and equipment with a corresponding amount as a construction liability as of September 30, 2013 and 2012, respectively. We recognize our proportionate share of the joint venture's net income or loss during each accounting period as a change in our investment. Our equity in earnings was $0.5 million for each of the years ended September 30, 2015 and September 30, 2014.

(6)
In 2015, we paid cash dividends of $0.10 per share in December, March and June totaling $7.3 million. In 2014 and 2013, we paid quarterly cash dividends of $0.10 per share totaling $9.9 million and $9.8 million, respectively. In 2012, we paid quarterly cash dividends of $0.10 per share in March, June, and September totaling $7.4 million. In 2015, 2014, 2013 and 2012, we used cash and cash equivalents to repurchase approximately $6.6 million, $1.4 million, $5.4 million and $1.8 million, respectively, of our common shares, which decreased cash and cash equivalents, current assets, working capital and shareholders' equity.

(7)
In 2015, we purchased the majority of the buildings and land for our Houston, Texas campus. The purchase price of $9.4 million, excluding fees, was allocated between buildings ($7.7 million) and land ($1.7 million) based on the ratio of appraised values, which decreased cash and current assets. At the time of purchase, we had leasehold improvements related to the purchased building recorded at $5.0 million in historical cost and $4.3 million of accumulated depreciation. The historical cost and accumulated depreciation for these assets were removed from the related classification and the net book value was recorded into building and building improvements. The buildings and building improvements will be depreciated over a useful life of 30 years.

(8)
Excludes depreciation of training equipment obtained in exchange for services of $1.2 million, $1.2 million and $1.1 million for the years ended September 30, 2015, 2014 and 2013, respectively.




59



ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the "Selected Financial Data" and the consolidated financial statements and the related notes included elsewhere in this Report on Form 10-K. This discussion contains forward-looking statements that are based on our 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 are the leading provider of postsecondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians as measured by total average undergraduate full-time enrollment and graduates. We offer undergraduate degree or diploma programs at 12 campuses across the United States. We also offer manufacturer specific advanced training programs, including student-paid electives, at our campuses and manufacturer or dealer sponsored training at certain campuses and dedicated training centers. We have provided technical education for 50 years.

Our revenues consist principally of student tuition and fees derived from the programs we provide and are presented after reductions related to discounts and scholarships we sponsor, refunds for students who withdraw from our programs prior to specified dates and the portion of tuition students have funded through our proprietary loan program. We generally 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 and other revenues, all of which are recognized as sales occur or services are performed. In aggregate, these additional revenues represented approximately 2% or less of our total revenues in each year for the three-year period ended September 30, 2015. Tuition revenue and fees generally vary based on the average number of students enrolled and average tuition charged per program.

Average undergraduate full-time student enrollments vary depending on, among other factors, the number of continuing students at the beginning of a period, new student enrollments during the period, students who have previously withdrawn but decide to re-enroll during the period, graduations and withdrawals during the period. Our average undergraduate full-time 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 campuses and opening additional campuses is expected to influence our average undergraduate full-time student enrollment. We currently offer start dates at our campuses that range from every three to six weeks throughout the year in our undergraduate programs. The number of start dates of advanced training programs varies by the duration of those programs and the needs of the manufacturers which sponsor them.

Our tuition charges vary by type and length of our programs and the program level, such as undergraduate or advanced training. We implemented tuition rate increases of up to 5% for the year ended September 30, 2015, and 2% to 4% for the years ended September 30, 2014 and 2013. We regularly evaluate our tuition pricing based on individual campus markets, the competitive environment and ED regulations.

Most students at our campuses rely on funds received under various government-sponsored student financial aid programs, predominantly Title IV Programs and various veterans benefits programs, to pay a

60


substantial portion of their tuition and other education-related expenses. Approximately 66% of our revenues, on a cash basis, were collected from funds distributed under Title IV Programs for the year ended September 30, 2015. This percentage differs from our Title IV percentage as calculated under the 90/10 rule due to the prescribed treatment of certain Title IV stipends under the rule. Additionally, approximately 20% of our revenues, on a cash basis, were collected from funds distributed under various veterans benefits programs for the year ended September 30, 2015.

We extend credit for tuition and fees, for a limited period of time, to the majority of our students. Our credit risk is mitigated through the students’ participation in federally funded financial aid and veterans benefit programs unless students withdraw prior to the receipt by us of Title IV or veterans benefit funds for those students. The financial aid and veterans benefits programs are subject to political and budgetary considerations. There is no assurance that such funding will be maintained at current levels. Extensive and complex regulations govern the financial assistance programs in which our students participate. Our administration of these programs is periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for the initiation of potential adverse actions, including a suspension, limitation, placement on reimbursement status or termination proceeding, which could have a material adverse effect on our business.

If any of our institutions were to lose its eligibility to participate in federal student financial aid or veterans benefit programs, the students at that institution, and other locations of that institution, would lose access to funds derived from those programs and would have to seek alternative sources of funds to pay their tuition and fees. The receipt of financial aid and veterans benefit funds reduces the students’ amounts due to us and has no impact on revenue recognition, as the transfer relates to the source of funding for the costs of education which may occur through Title IV, veterans benefit or other funds and resources available to the student. Additionally, we bear all credit and collection risk for the portion of our student tuition that is funded through our proprietary loan program.

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 and other campus administration employees compensation and benefits, 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 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 corporate office headquarters; 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.

2015 Overview

Operations

Lower student population levels as we began 2015, combined with lower new student starts throughout the year, resulted in an 8.3% decline in our average undergraduate full-time student enrollment to approximately 13,200 students for the year ended September 30, 2015. We started approximately 12,400 students during the year ended September 30, 2015, which represents a decrease of 8.8% as compared to a decrease of 9.3% for the year

61


ended September 30, 2014. The decrease in starts was primarily the result of certain macro-economic headwinds and regulatory challenges.

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

Incentive compensation changes which became effective July 1, 2011 limited the means by which we may compensate our admissions representatives and required significant changes to our compensation and performance management processes.
Competition for prospective students continues to increase from within our sector and from our industry partners and other manufacturers, as well as with traditional post-secondary educational institutions;
The state of the general macro-economic environment and its impact on price sensitivity and the ability and willingness of students and their families to incur debt;
Unemployment; during periods when the unemployment rate declines or remains stable as it has in recent years, prospective students have more employment options; and
Adverse media coverage, legislative hearings, regulatory actions and investigations by attorneys general and various agencies related to allegations of wrongdoing on the part of other companies within the education and training services industry, which have cast the industry in a negative light.
For further discussion on regulatory changes, see “Business - Regulatory Environment - Regulation of Federal Student Financial Aid Programs-Congressional Action” included elsewhere in this Report on Form10-K.

Our revenues for the year ended September 30, 2015 were $362.7 million, a decline of $15.7 million, or 4.2%, from the prior year. Revenues were negatively impacted by the decline in our average undergraduate full-time student enrollment. The decrease was partially offset by tuition rate increases. Additionally, our results of operations were impacted by an increase in advertising expenses, as we continue to invest in efforts to optimize our media mix, and the goodwill impairment expense. Offsetting the increase in advertising expenses were decreases in compensation costs, bad debt expense and contract services expense. We incurred an operating loss of $9.2 million and a net loss of $9.1 million for the year ended September 30, 2015, compared to operating income of $6.3 million and net income of $2.0 million for the year ended September 30, 2014, as a result of the overall decline in revenues for the period.

In response to these challenges, we continue to manage discretionary operating costs, develop our strong industry relationships and provide alternative financial solutions to help students achieve their educational goals. We continue to work to help students choose course and program structures that make getting an education more affordable and to balance our scholarship offerings with increased financial support from employers of our graduates. Additionally, we have taken steps to optimize our advertising spend, balancing the quality and quantity of inquiries, and we have implemented programs to improve the effectiveness of our admissions processes. Finally, we remain focused on adding new campus locations in key regions where there is strong student interest and employer demand for our graduates.

Transactions
    
Houston, Texas

In March 2015, we purchased the majority of the buildings and land for our Houston, Texas campus. The purchase price of $9.4 million, excluding fees, was allocated between the buildings ($7.7 million) and land ($1.7 million) based on the ratio of appraised values. Additionally, we entered into amended lease agreements for the buildings and land we did not acquire at our Houston, Texas campus, which extended the lease terms through

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December 31, 2018 and amended the payment schedules. See Note 8 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion.

Long Beach, California

In October 2014, we entered into a 15-year lease agreement for a build-to-suit facility related to the design and construction of a new campus in Long Beach, California. Under the agreement, we retained substantially all of the construction risk and therefore, for accounting purposes, were considered the owner during the construction period. Although we were owners during the construction period, we do not own the underlying land. Therefore, we have an imputed operating lease expense related to our use of the land that will be recognized from the time we entered into the agreement through the initial lease term. We opened this campus in August 2015. See Note 9 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion. We anticipate this new campus will become profitable in 2016.

Orlando, Florida

In 2014, we entered into amended lease agreements for certain buildings on our Orlando, Florida campus, which extended the lease terms to August 31, 2022 and modified the scheduled rental payments. Additionally, one of the amendments included a provision which allowed us to expand the square footage at one building by approximately 13,500 square feet.

Construction was completed in October 2014, and we began teaching our Automotive Technology and Diesel Technology II programs at this campus in January 2015. We determined that we do not have continuing involvement after the construction period was complete and that the lease will be accounted for as an operating lease. See Note 8 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion.

Veterans' Benefits

The percentage of our revenues, on a cash basis, which were collected from funds distributed under various veterans' benefits programs was approximately 20%, 20% and 18% for the years ended September 30, 2015, 2014 and 2013, respectively.

There continues to be Congressional activity around the requirements of the 90/10 Rule, such as reducing the 90% maximum under the rule to 85% or including military and veteran funding in the 90% portion of the calculation. Potential changes to the 90/10 Rule could negatively impact our eligibility to participate in Title IV Programs. A loss of eligibility would adversely affect our students’ access to Title IV Program funds they need to pay their educational expenses.

As described in “Business - Regulatory Environment - Other Federal and State Programs - Veterans' Benefits” included elsewhere in this Report on Form 10-K, we are subject to limitations on the percentage of students per program receiving benefits under certain veterans’ benefits programs, unless the program qualifies for certain exemptions. If the VA determines that an institution is out of compliance with the applicable limit, the VA will continue to provide benefits to current students but will not provide benefits to newly enrolled students until the institution demonstrates compliance.
Our access to military installations for student recruitment has become more limited due to recent changes in the Transition Assistance Program (Transition Goals, Plans, Success) and increased enforcement of the requirement to possess an MOU with certain individual military installations. Each of our institutions has an MOU with the U.S. Department of Defense. We have MOUs with certain key individual installations and are pursuing MOUs at additional locations. We continue to strengthen and develop relationships with our existing contacts and with new contacts in order to maintain and rebuild our access to military installations.

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Automotive Technology and Diesel Technology II Integration
    
We began teaching the Automotive Technology and Diesel Technology II curricula at our Orlando, Florida campus in January 2015. Additionally, we began offering this curricula at our Long Beach, California campus at the time of opening in August 2015.

As discussed in “Business - Regulatory Environment - Other Federal and State Programs - Veterans' Benefits” included elsewhere in this Form 10-K, the VA shares responsibility for VA benefit approval and oversight with designated SAAs. SAAs play a critical role in evaluating institutions and their programs to determine if they meet VA benefit eligibility requirements. Processes and approval criterion as well as interpretation of applicable requirements can vary from state to state. Therefore, approval in one state does not necessarily result in approval in all states.

During 2015, we received approval from the California SAA to use veterans’ benefits to fund courses taught using this curricula in California under the alternative method we proposed. Additionally, we received approval from the Florida SAA to use veterans’ benefits to fund all course combinations taught using this curricula in Florida under the alternative methodology. Since July 2012, the Texas SAA has approved the use of Veterans benefits to fund tuition under our original Automotive Technology and Diesel Technology II delivery method at our Dallas/Ft. Worth, Texas campus. During 2015, we have been in contact with the Texas SAA regarding a potential transition to an alternative delivery method for Veterans at this campus. The Texas SAA has recently communicated that the program at this campus remains approved while we work to implement a unique delivery methodology. We are evaluating our options for implementing changes in response to guidance received from the Texas SAA. 

Graduate Employment

Identifying employment opportunities and preparing our graduates for these careers is critical to our ability to help our graduates benefit from their education.  Accordingly, we dedicate significant resources to maintaining an effective employment team, as described in "Business - Graduate Employment" included in Part I, Item 1 of this Report of Form 10-K. We believe that our graduate employment services provide our students with a compelling value proposition and enhance the employment opportunities for our graduates. We saw improvement in graduate employment rates for all of our programs except collision repair for students who graduated in 2014, as compared to 2013.

Our employment rates for 2014 and 2013 graduates were 88%. The employment calculation is based on all graduates, including those that completed manufacturer specific advanced training programs, from October 1, 2013 to September 30, 2014 and October 1, 2012 to September 30, 2013, respectively, excluding graduates not available for employment because of continuing education, military service, health, incarceration, death or international student status. Graduates are counted as employed based on a verified understanding of the graduate's job duties to assess and confirm that the graduates primary job responsibilities are in his or her field of study. See Business - Graduate Employment" in this Report on Form 10-K for further discussion of our graduate employment activities. For 2014, we had approximately 9,900 total graduates, of which approximately 9,200 were available for employment. Of those graduates available for employment, approximately 8,100 were employed within one year of their graduation date, for a total of 88%. For 2013, we had approximately 10,600 total graduates, of which approximately 9,900 were available for employment. Of those graduates available for employment, approximately 8,700 were employed within one year of their graduation date, for a total of 88%.

Regulatory Environment

For a detailed discussion of the regulatory environment and related risks, see “Business - Regulatory Environment”, and Item 1A, “Risk Factors”, included elsewhere in this Report on Form 10-K.


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Incentive Compensation

On November 27, 2015, ED published guidance in the Federal Register that it characterized as clarifying and providing additional information about the revised regulations. This new guidance allows for increased flexibility with regard to compensation for admissions representatives that is based upon students' graduation from, or completion of, educational programs. ED has reconsidered its previous interpretation and now indicated the regulations do not prohibit compensation for admissions representatives that is based upon students' graduation from, or completion of, educational programs. Enrollment-based compensation continues to be prohibited. In assessing the legality of a compensation structure, ED will evaluate whether compensation labeled as graduation-based or completion-based is in substance enrollment-based compensation. Consequently, ED’s recently published guidance eliminates certain restrictions on compensation, and we may adjust our compensation practices in accordance with the recently issued guidance.

Gainful Employment
    
ED published a final gainful employment rule on October 31, 2014. Most parts of the new rule were effective on July 1, 2015, except new disclosure requirements which take effect January 1, 2017. The final rule requires institutions to satisfy one of two debt-to-earnings ratios in order to maintain Title IV Program eligibility. The rule also requires institutions to make certain certifications respecting each of their gainful employment programs, to annually report certain information to ED, and to make disclosures to prospective students and the public. For a summary of the final rules, see “Business - Regulatory Environment - Regulation of Federal Student Financial Aid Programs - Gainful Employment”. We are not able to develop reliable projections of our programs' performance under the final rules because the data previously provided by ED is dated and we do not have access to the recent Social Security Administration earnings data which will be used in the calculations.
Accreditation
In 2014, one of our programs at our Orlando, Florida campus did not achieve the ACCSC's graduation benchmark and was placed on outcomes reporting. We provided updated graduation data through January 2015 to ACCSC in February 2015. ACCSC accepted our response and voted to remove the program from outcomes reporting with a stipulation that we provide additional data, which was submitted in October 2015 as requested. We received notification from ACCSC in October 2015 that the stipulation was met and no further reporting is required. In 2015, one of our programs at our Norwood, Massachusetts campus did not achieve the ACCSC's graduation or employment benchmarks and was placed on heightened monitoring status. The program had only three graduates during the 2011 reporting period and therefore we have decided to discontinue the program. The request to discontinue was sent to ACCSC in October 2015; once approved, heightened monitoring status will no longer be applicable for the program. See “Business - Regulatory Environment - Accreditation" for additional discussion.
In 2015, our Avondale, Arizona; Houston, Texas; Phoenix, Arizona and Rancho Cucamonga, California campuses received the “School of Excellence” designation by ACCSC.  The School of Excellence Award recognizes ACCSC-accredited institutions for their commitment to the expectations and rigors of ACCSC accreditation, as well as the efforts made by the institution in maintaining high-levels of achievement among their students. In order to be eligible for the School of Excellence Award, an ACCSC-accredited institution must meet the conditions of renewing accreditation without any finding of non-compliance, satisfy all requirements necessary to be in good standing with ACCSC and demonstrate that the majority of the schools’ student graduation and graduate employment rates for all programs offered meet or exceed the average rates of graduation and employment among all ACCSC-accredited institutions.
Massachusetts Regulations

On June 20, 2014 the Massachusetts Attorney General (MA AG) published disclosure and business practice regulations applicable to proprietary schools operating in or recruiting from Massachusetts or providing services

65


to residents of that state.  As published, the regulations were effective immediately. The disclosure obligations include, among other information, graduation, loan non-payment and placement data requirements that are uniquely defined by the MA AG and differ from data and calculation requirements historically applied to our schools by other regulating agencies and our accreditor. In addition to required disclosures, the regulations also require various business practice changes including, among other items, a 72-hour waiting period between disclosing required data to a prospective student and entering into an enrollment agreement with that student as well as significant limitations on contact between our admissions representatives and prospective students. We believe that we have made good faith efforts to comply with these disclosure requirements. These regulations have resulted in substantial changes to our recruiting operations in the New England region and to our Norwood, Massachusetts campus. We continue to experience increases in our cost of doing business and pressure on the number of inquiries compared to the number of student applications.
    
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 from Title IV Programs for two consecutive fiscal years as calculated under a cash basis formula mandated by ED. The loss of such eligibility would begin on the first day following the conclusion of the second consecutive year in which the institution exceeded the 90% limit and, as such, any Title IV Program funds already received by the institution and its students during a period of ineligibility would have to be returned to ED or a lender, if applicable. Additionally, if an institution exceeds the 90% level for a single year, ED will place the institution on provisional certification for a period of at least two years, and could impose other restrictions or conditions on the institution's Title IV eligibility. For the years ended September 30, 2015, 2014 and 2013, approximately 73%, 74% and 76%, respectively, of our revenues, on a cash basis, were derived from funds distributed under Title IV Programs, as calculated under the 90/10 rule.

2016 Outlook

For the year ending September 30, 2016, we expect new student starts to be up in the low single digits, however, given the number of students currently in school and the timing of the anticipated start growth, we expect our average student population to be down in the mid to high single digits as a percentage compared with the year ended September 30, 2015.  While annual tuition increases will slightly offset the decline in average students, we expect revenue to decline approximately two percent. To support new student growth for this year and next, we will continue to invest in growth opportunities during the year which will result in lower operating income and minimal levels of EBITDA. Capital expenditures are expected to be approximately $19.5 million to $20.5 million for the year ending September 30, 2016. Due to the seasonality of our business and normal fluctuations in student populations, we would expect volatility in our quarterly results.


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Results of Operations
The following table sets forth selected statements of operations data as a percentage of revenues for each of the periods indicated.
 
 
 
Year Ended September 30,
 
 
2015
 
2014
 
2013
Revenues
 
100.0
 %
 
100.0
 %
 
100
%
Operating expenses:
 
 
 
 
 
 
Educational services and facilities
 
53.6
 %
 
52.9
 %
 
52.5
%
Selling, general and administrative
 
48.9
 %
 
45.4
 %
 
45.9
%
Total operating expenses
 
102.5
 %
 
98.3
 %
 
98.4
%
Income (loss) from operations
 
(2.5
)%
 
1.7
 %
 
1.6
%
Interest income (expense), net
 
(0.5
)%
 
(0.5
)%
 
0.1
%
Other income
 
0.1
 %
 
0.3
 %
 
0.1
%
Total other income (expense)
 
(0.4
)%
 
(0.2
)%
 
0.2
%
Income (loss) before income taxes
 
(2.9
)%
 
1.5
 %
 
1.8
%
Income tax expense (benefit)
 
(0.4
)%
 
1.0
 %
 
0.8
%
Net income (loss)
 
(2.5
)%
 
0.5
 %
 
1.0
%

We opened a new campus in Long Beach, California in August 2015. For the year ended September 30, 2015, this campus had revenues of $0.7 million and operating expenses of $7.6 million, including corporate allocations of $2.5 million.

Year Ended September 30, 2015 Compared to Year Ended September 30, 2014
Revenues. Our revenues for the year ended September 30, 2015 were $362.7 million, a decrease of $15.7 million, or 4.2%, as compared to revenues of $378.4 million for the year ended September 30, 2014. The 8.3% decrease in our average undergraduate full-time student enrollment resulted in a decrease in revenues of approximately $30.2 million. The decrease was partially offset by tuition rate increases of up to 5%, depending on the program. Our revenues for the years ended September 30, 2015 and 2014 excluded $21.1 million and $23.2 million, respectively, of tuition related to students participating in our proprietary loan program. We recognized $5.4 million and $3.5 million of revenues and interest under the proprietary loan program for the years ended September 30, 2015 and 2014, respectively.
Educational services and facilities expenses. Our educational services and facilities expenses for the year ended September 30, 2015 were $194.4 million, representing a decrease of $5.7 million, or 2.8%, as compared to $200.1 million for the year ended September 30, 2014.
    
Our educational services and facilities expenses for the year ended September 30, 2015 for our Long Beach, California campus were $4.1 million, including corporate allocations of $0.2 million.

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The following table sets forth the significant components of our educational services and facilities expenses:
 
 
Year Ended September 30,
 
 
2015
 
2014
 
 
(In thousands)
Salaries expense
 
$
86,025

 
$
87,809

Employee benefits and tax
 
15,643

 
16,566

Bonus expense
 
1,225

 
816

Stock-based compensation
 
294

 
587

Compensation and related costs
 
103,187

 
105,778

Occupancy costs
 
36,127

 
36,270

Other educational services and facilities expense
 
14,100

 
15,109

Depreciation and amortization expense
 
17,805

 
18,469

Supplies and maintenance
 
9,981

 
9,647

Tools and training aids expense
 
8,959

 
9,237

Contract services expense
 
4,257

 
5,544

 
 
$
194,416

 
$
200,054

Compensation and related costs decreased $2.6 million for the year ended September 30, 2015, as compared to the prior year:
Salaries expense decreased $1.8 million due to the restructuring undertaken in September and October 2014 and planned employee attrition during the year resulting from our focus on controlling costs. The restructuring and attrition primarily impacted non-instructor positions and related salaries expense, resulting in a decrease of approximately $2.7 million for the year ended September 30, 2015. Instructor salaries remained consistent with the prior year. The decreases were partially offset by normal salary merit increases.
Employee benefits and tax decreased $1.0 million as a result of the decrease in salaries expense as well as a decrease in self-insurance medical claims.
Bonus expense increased $0.4 million primarily due to attainment of non-financial metrics at a rate higher than the prior year. Additionally, bonus expense increased as a result of long-term incentive cash awards granted during September 2014 in lieu of stock compensation for certain employees.

Compensation and related costs for our Long Beach, California campus for the year ended September 30, 2015 were $0.9 million, including corporate allocations of $0.1 million.
    
Contract services expense decreased $1.2 million during the year ended September 30, 2015, as compared to the same period in the prior year. The decrease was primarily due to expenses incurred in the prior year comparable period in support of the relocation of our Glendale Heights, Illinois campus to Lisle, Illinois as well as expenses associated with outsourcing certain financial aid processes.


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Selling, general and administrative expenses. Our selling, general and administrative expenses for the year ended September 30, 2015 were $177.5 million, representing an increase of $5.5 million, or 3.2%, as compared to $172.0 million for the year ended September 30, 2014.

Our selling, general and administrative expenses for the year ended September 30, 2015 for our Long Beach, California campus were $3.5 million, including corporate allocations of $2.3 million.

The following table sets forth the significant components of our selling, general and administrative expenses:
 
 
Year Ended September 30,
 
 
2015
 
2014
 
 
(In thousands)
Salaries expense
 
$
66,570

 
$
72,435

Employee benefits and tax
 
13,221

 
14,886

Bonus expense
 
4,016

 
2,759

Stock-based compensation
 
3,971

 
5,134

Compensation and related costs
 
87,778

 
95,214

Advertising expense
 
44,688

 
39,221

Other selling, general and administrative expenses
 
23,965

 
25,673

Goodwill impairment expense
 
12,357

 

Contract services expense
 
4,586

 
4,702

Depreciation and amortization expense
 
2,518

 
3,220

Bad debt expense
 
1,589

 
3,972

 
 
$
177,481

 
$
172,002

Compensation and related costs decreased $7.4 million for the year ended September 30, 2015, as compared to the prior year:
Salaries expense decreased approximately $5.8 million primarily due to the restructuring undertaken in September and October 2014 and planned employee attrition over the last year resulting from our focus on controlling costs. The restructuring primarily impacted admissions employees and related salaries expense. The decrease was partially offset by normal salary merit increases.
Severance charges had a minimal impact on the year ended September 30, 2015 as compared to the prior year, as charges for the second phase of the restructuring undertaken in October 2014 and for other employee turnover were primarily offset by severance charges related to the first phase of the restructuring in September 2014.
Employee benefits and tax decreased $1.7 million as a result of the decrease in salaries expense as well as a decrease in self-insurance medical claims.
Stock compensation decreased $1.1 million primarily due to a reduction in overall grant levels over the past several years.
Bonus expense increased $1.2 million primarily due to attainment of non-financial metrics at a rate higher than the prior year. Additionally, bonus expense increased as a result of long-term incentive cash awards granted during September 2014 in lieu of stock compensation for certain employees.
Compensation and related costs for our Long Beach, California campus for the year ended September 30, 2015 were $1.2 million, including corporate allocations of $0.4 million.

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Advertising expense increased $5.5 million for the year ended September 30, 2015, as compared to the prior year. The increases were primarily attributable to higher inquiry generation expenses, as we continue to invest in efforts to optimize our media mix; additionally, competitive pressures led to price increases and a tighter market for television and internet advertising. Partially offsetting the increase was a decrease in production costs due to certain commercial and direct mail campaigns completed in the prior year. We continue to focus on identifying the optimal balance between quality and quantity of inquiries from potential students. Advertising expense as a percentage of revenues for the year ended September 30, 2015 was approximately 12.3%. We anticipate our advertising expense will be in the range of 12%—13% of revenue for the year ending September 30, 2016.

We recorded a non-cash goodwill impairment charge of $12.4 million at September 30, 2015 to write off the full carrying value of goodwill at our MMI Phoenix, Arizona campus. This non-cash charge had no impact on liquidity or cash flows from operations. There was no impairment related to our MMI Orlando, Florida campus for the year ended September 30, 2015. No goodwill impairment was incurred in 2014.

Bad debt expense decreased $2.4 million for the year ended September 30, 2015 as compared to the prior year. During the three months ended March 31, 2015, we reversed approximately $1.0 million of bad debt expense recorded in 2011 and 2012 for processing issues related to student funds received from a non-Title IV federal funding agency. Based on communication with the agency, we determined it was no longer probable that we will be required to return such funds.
Other expense. Our other expense for the year ended September 30, 2015 was $1.5 million, an increase of $0.9 million as compared to $0.6 million for the year ended September 30, 2014. The increase is primarily attributable to an increase in interest expense related to amortization of the financing obligation related to our Lisle, Illinois and Long Beach, California campuses. See Note 9 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion.
Income taxes. Our income tax benefit for the year ended September 30, 2015 was $1.5 million, or 14.3% of pre-tax loss, compared to income tax expense of $3.7 million, or 64.6% of pre-tax income, for the year ended September 30, 2014. The effective income tax rate in each period differed from the federal statutory tax rate of 35% primarily as a result of state income taxes, net of related federal income tax benefits, and an increase in tax expense related to share-based compensation during the year ended September 30, 2015. In 2015, our effective tax rate also reflects the $12.4 million goodwill impairment.

At the time of our initial public offering in December 2003, we began awarding stock-based compensation in the form of stock options with a contractual life of 10 years. In subsequent years, we have awarded other forms of stock-based compensation with varying terms. In 2006, we adopted the authoritative guidance on accounting for stock-based compensation, which gave rise to deferred tax assets related to stock-based compensation timing differences between book expense and tax deductions, as well as a pro forma pool of windfall tax benefits. When tax deductions from stock-based compensation awards are less than the cumulative book compensation expense, the tax effect of the resulting difference (shortfall) is charged first to additional paid-in capital to the extent of our pro forma pool of windfall tax benefits, with any remainder written off to income tax expense. Such write-offs may be the result of expiration, exercise or vesting of prior stock-based compensation awards. The write-off of the deferred tax asset is a non-cash charge and is not a result of current operations.
The write-off of the deferred tax asset resulted in $1.8 million in income tax expense for the year ended September 30, 2015. Although we cannot predict the price of our stock, if our stock price remains relatively consistent with its current trading price, the impact of any adjustments to the deferred tax asset and related income tax expense for the year ending September 30, 2016 is expected to be in the range of $1.4 million to $1.6 million.
In future periods, we may experience variability in our income tax expense and our pro forma pool of windfall tax benefits may fluctuate, both of which depend on the price of our common stock and the timing of expiration, exercise and vesting of stock-based compensation awards. This could result in variable income tax

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rates that are substantially different from the federal statutory tax rate, including the potential for recording income tax expense during periods incurring a loss before income taxes. While we will continue to experience an impact to our deferred tax asset in all future periods with stock-based compensation activity, the most significant impact to income tax expense is expected to occur through 2016, as stock options, which are currently underwater, expire.
Net income (loss). As a result of the foregoing, we reported net loss for the year ended September 30, 2015 of $9.1 million, as compared to net income of $2.0 million for the year ended September 30, 2014.    

Year Ended September 30, 2014 Compared to Year Ended September 30, 2013
 
Revenues. Our revenues for the year ended September 30, 2014 were $378.4 million, a decrease of $1.9 million, or 0.5%, as compared to revenues of $380.3 million for the year ended September 30, 2013. The 4.0% decrease in our average undergraduate full-time student enrollment resulted in a decrease in revenues of approximately $15.2 million. The decrease was partially offset by tuition rate increases between 2% and 4%, depending on the program, and an increase of $2.0 million in industry training revenue. Our revenues for the years ended September 30, 2014 and 2013 excluded $23.2 million and $19.5 million, respectively, of tuition related to students participating in our proprietary loan program. We recognized $3.5 million and $2.3 million of revenues and interest under the proprietary loan program for the years ended September 30, 2014 and 2013, respectively.

During 2014, we increased the amount of scholarships granted to our students to assist those who have a financial need in funding a portion of their education. Because scholarships are recognized ratably over the term of the student’s course or program in accordance with our revenue recognition policy, an increase in scholarships does not immediately impact revenues. Discounts to revenues related to scholarships applied for students currently attending our programs increased approximately $1.4 million for the year ended September 30, 2014.

Educational services and facilities expenses. Our educational services and facilities expenses for the year ended September 30, 2014 were $200.1 million, representing an increase of $0.6 million, or 0.3%, as compared to $199.5 million for the year ended September 30, 2013.

The following table sets forth the significant components of our educational services and facilities expenses:
 
 
Year Ended September 30,
 
 
2014
 
2013
 
 
(In thousands)
Salaries expense
 
$
87,809

 
$
86,963

Employee benefits and tax
 
16,566

 
16,746

Bonus expense
 
816

 
928

Stock-based compensation
 
587

 
617

Compensation and related costs
 
105,778

 
105,254

Occupancy costs
 
36,270

 
37,151

Other educational services and facilities expense
 
20,653

 
20,956

Depreciation and amortization expense
 
18,469

 
18,600

Supplies and maintenance
 
9,647

 
9,351

Tools and training aids expense
 
9,237

 
8,228

 
 
$
200,054

 
$
199,540

Compensation and related costs increased $0.5 million for the year ended September 30, 2014, as compared to the prior year. The increase was primarily attributable to the the first phase of a restructuring undertaken

71


in September 2014, which resulted in severance expense of approximately $0.3 million. The restructuring was completed to continue to align our cost structure with our lower average student population. Salaries expense included an increase for normal salary merit increases, offset by planned employee attrition throughout the year resulting from our focus on cost controls. Additionally, bonus expense decreased primarily due to operating results lower than bonus payout thresholds during the current year as well as a reduction in the bonus plan payout levels for 2014.
In October 2014, we completed the second phase of the restructuring resulting in severance expense of approximately $0.4 million.
In December 2013, we recorded an asset and related financing obligation for our Lisle, Illinois campus. See Note 9 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion. The related depreciation expense on the asset was approximately $1.6 million for the year ended September 30, 2014. The increase was offset by a decrease in depreciation expense on other assets, as a higher percentage of our fixed assets are fully depreciated.
In January 2014, we entered into amended lease agreements for certain buildings on our Orlando, Florida campus which extended the lease terms, modified the scheduled rental payments and allowed us to expand the square footage at one of the buildings. In connection with the expansion, we removed certain leasehold improvements and recorded a loss of approximately $0.2 million.

Tools and training aids expense increased $1.0 million for the year ended September 30, 2014, as compared to the prior year. The increase was primarily related to the integration of our Automotive Technology and Diesel Technology II curricula at our Sacramento, California and Orlando, Florida campuses, partly offset by a decrease related to our Avondale, Arizona campus as the curricula was fully integrated during 2013.

Selling, general and administrative expenses. Our selling, general and administrative expenses for the year ended September 30, 2014 were $172.0 million, representing a decrease of $2.8 million, or 1.6%, as compared to $174.8 million for the year ended September 30, 2013.

The following table sets forth the significant components of our selling, general and administrative expenses:
 
 
Year Ended September 30,
 
 
2014
 
2013
 
 
(In thousands)
Salaries expense
 
$
72,435

 
$
73,309

Employee benefits and tax
 
14,886

 
15,406

Stock-based compensation
 
5,134

 
5,607

Bonus expense
 
2,759

 
2,797

Compensation and related costs
 
95,214

 
97,119

Advertising expense
 
39,221

 
36,986

Other selling, general and administrative expenses
 
24,343

 
24,014

Contract services expense
 
4,702

 
4,836

Bad debt expense
 
3,972

 
4,720

Depreciation and amortization expense
 
3,220

 
4,651

Legal expense
 
1,330

 
2,431

 
 
$
172,002

 
$
174,757


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The following factors contributed to the decrease in compensation and related costs of $1.9 million for the year ended September 30, 2014, as compared to the prior year:

Salaries expense decreased approximately $0.9 million as a result of compensation changes for our field admissions representatives effective July 1, 2014 and planned employee attrition throughout the year resulting from our focus on cost controls, partially offset by normal salary merit increases.
Severance charges had a minimal impact on the year ended September 30, 2014, as compared to the prior year, as charges for the first phase of a restructuring undertaken in September 2014 were largely offset by severance charges related to the retirement of our Chairman of our Board of Directors during the year ended September 30, 2013.
Stock compensation decreased, primarily due to a reduction in overall grant levels over the past several years.
Employee benefits and tax decreased, primarily due to a decrease in self-insurance medical claims.
In October 2014, we completed the second phase of a restructuring, resulting in severance expense of approximately $0.8 million.
Advertising expense increased $2.2 million for the year ended September 30, 2014, as compared to the prior year. A portion of the increases were attributable to higher inquiry generation expenses; competitive pressures led to price increases and a tighter market for television and internet advertising. We are focusing on identifying the optimal balance between quality and quantity of inquiries from potential students. Advertising expense as a percentage of revenues for the year ended September 30, 2014 was approximately10.4%.
Depreciation and amortization expense decreased $1.5 million as a higher percentage of our fixed assets are fully depreciated. We have reduced spending for fixed asset purchases over the past few years as part of our cost control efforts as our student populations have decreased.
Legal expense decreased $1.1 million for the year ended September 30, 2014, as compared to the prior year. As discussed in Part I, Item 3 of our Annual Report on Form 10-K filed with the SEC on December 4, 2013, we settled legal matters for which we previously incurred significant legal costs.
Other income (expense). Our other expense for the year ended September 30, 2014 was $0.6 million, an increase of $1.5 million as compared to other income of $0.9 million for the year ended September 30, 2013. The increase is primarily attributable to an increase in interest expense related to amortization of the financing obligation related to our Lisle, Illinois campus.
Income taxes. Our provision for income taxes for the year ended September 30, 2014 was $3.7 million, or 64.6% of pre-tax income, compared to $3.0 million, or 43.6% of pre-tax income, for the year ended September 30, 2013. The effective income tax rate in each period differed from the federal statutory tax rate of 35% primarily as a result of state income taxes, net of related federal income tax benefits, and an increase in tax expense related to share-based compensation during the year ended September 30, 2014.

At the time of our initial public offering in December 2003 we began awarding stock-based compensation in the form of stock options with a contractual life of 10 years. In subsequent years, we have awarded other forms of stock-based compensation with varying terms. In 2006, we adopted the authoritative guidance on accounting for stock-based compensation which gave rise to deferred tax assets related to stock-based compensation timing differences between book expense and tax deductions, as well as a pro forma pool of windfall tax benefits. When tax deductions from stock-based compensation awards are less than the cumulative book compensation expense, the tax effect of the resulting difference (shortfall) is charged first to additional paid-in capital to the extent of our

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pro forma pool of windfall tax benefits, with any remainder recognized as income tax expense. In December 2013 and March and September 2014, certain stock-based compensation awards vested or expired, which required a write-off of the related deferred tax asset through income tax expense as our pro forma windfall pool of available excess tax benefits was no longer sufficient to absorb the shortfall. The write-off of the deferred tax asset was a non-cash charge during the period and was not a result of current operations.
The write-off of the deferred tax asset resulted in $0.9 million in income tax expense for the year ended September 30, 2014.
Net income. As a result of the foregoing, we reported net income for the year ended September 30, 2014 of $2.0 million, as compared to net income of $3.9 million for the year ended September 30, 2013.    

Non-GAAP financial measures

Our adjusted earnings before interest, tax, depreciation and amortization (adjusted EBITDA) for the years ended September 30, 2015, 2014 and 2013 were $24.1 million, $29.1 million and $29.9 million, respectively. Adjusted EBITDA is a non-GAAP financial measure which is provided to supplement, but not substitute for, the most directly comparable GAAP measure. We choose to disclose this non-GAAP financial measure because it provides an additional analytical tool to clarify our results from operations and helps to identify underlying trends. Additionally, this measure helps compare our performance on a consistent basis across time periods. To obtain a complete understanding of our performance, this measure should be examined in connection with net income determined in accordance with GAAP. Since the items excluded from this measure should be examined in connection with net income in determining financial performance under GAAP, this measure should not be considered to be an alternative to net income as a measure of our operating performance or profitability. Exclusion of items in our non-GAAP presentation should not be construed as an inference that these items are unusual, infrequent or non-recurring. Other companies, including other companies in the education industry, may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure across companies. Investors are encouraged to use GAAP measures when evaluating our financial performance.

Adjusted EBITDA reconciles to net income as follows:
 
 
 
Year Ended September 30,
 
 
2015
 
2014
 
2013
 
 
 
 
 
Net income (loss)
 
$
(9,149
)
 
$
2,037

 
$
3,901

Interest expense (income), net
 
2,125

 
1,624

 
(234
)
Income tax expense (benefit)
 
(1,532
)
 
3,710

 
3,013

Depreciation and amortization (1)
 
20,323

 
21,689

 
23,251

Goodwill impairment expense
 
12,357

 

 

Adjusted EBITDA
 
$
24,124

 
$
29,060

 
$
29,931


(1) Includes depreciation of training equipment obtained in exchange for services of $1.2 million, $1.2 million and $1.1 million for the years ended September 30, 2015, 2014 and 2013, respectively.


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Student retention/completion rate

Our consolidated student retention/completion rate is based on new students that began one of our programs during a fiscal year and completed or are still attending as of September 30 of the following fiscal year. The following table sets forth our consolidated student retention/completion rate during each of the periods indicated:

 
 
Year Ended September 30,
 
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
Consolidated student retention/completion
 
65
%
 
65
%
 
66
%

Liquidity and Capital Resources
    
Based on past performance and current expectations, we believe that our cash flows from operations, cash on hand and investments will satisfy our working capital needs, capital expenditures, commitments and other liquidity requirements associated with our existing operations.

We believe that the strategic use of our cash resources includes funding our new campus as well as subsidizing funding alternatives for our students. Additionally, we evaluate the repurchase of our common stock, payment of dividends, consideration of strategic acquisitions, expansion of programs at existing campuses, opening additional campus locations and other potential uses of cash. In December 2014, March 2015 and June 2015, we paid a cash dividend of $0.10 per share on our common stock. In September 2015, we declared a cash dividend of $0.02 per share on our common stock, which was paid October 5, 2015. The dividend was reduced to create a more reasonable yield while enabling additional cash investments intended to grow our student population and provide a greater return for investors. To the extent that potential acquisitions are large enough to require financing beyond cash from operations, we may issue debt resulting in increased interest expense. Additionally, to the extent that we enter into leasing transactions that result in financing obligations or capital leases, our interest expense would increase. Our aggregate cash and cash equivalents and current investments were $57.5 million and $84.9 million as of September 30, 2015 and 2014, respectively.

Our principal source of liquidity is operating cash flows. A majority of our revenues are derived from Title IV Programs and various veterans benefits programs. Federal regulations dictate the timing of disbursements of funds under Title IV Programs. Students must apply for new funding for each academic year consisting of thirty-week periods. DL subsidized and unsubsidized loan funds are generally provided in two disbursements for each academic year. The first disbursement for first-time borrowers 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. Under our proprietary loan program, we bear all credit and collection risk and students are not required to begin repayment until six months after the student completes or withdraws from his or her program. These factors, together with the timing of when our students begin their programs, affect our operating cash flow.

Operating Activities

Our net cash provided by operating activities was $8.2 million, $27.1 million, and $26.7 million for the years ended September 30, 2015, 2014 and 2013, respectively. The cash provided by operating activities in 2015 was primarily attributable to net loss of $9.1 million and adjustments of $32.2 million for non-cash and other items, partially offset by $14.8 million related to the change in our operating assets and liabilities.

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Changes in operating assets and liabilities
For the year ended September 30, 2015, the changes in our operating assets and liabilities resulted in cash outflows of $14.8 million. The outflows were primarily attributable to changes in receivables, income tax payable, and deferred revenue. The increase in receivables resulted in a cash outflow of $11.4 million, and was primarily attributable to the timing of cash receipts on behalf of our students, and a decrease in our allowance for doubtful accounts. The decrease in income tax payable resulted in a cash outflow of $3.1 million and was primarily due to the timing of tax payments. The decrease in deferred revenue resulted in a cash outflow of $1.7 million and was primarily attributable to the timing of student starts, the lower number of students in school and where they were at period end in relation to the completion of their program at September 30, 2015 compared to September 30, 2014. Partially offsetting the cash outflows for the year ended September 30, 2015 was a cash inflow of $4.4 million resulting from increases in accounts payable and accrued expenses and accrued tool sets and other current liabilities. The increase in accounts payable and accrued expenses was primarily due to the opening of our Long Beach, California campus in 2015, and the increase in accrued tool sets and other current liabilities was attributed to the dividend payable at September 30, 2015.
For the year ended September 30, 2014, the changes in our operating assets and liabilities resulted in cash outflows of $2.3 million. The outflows were primarily attributable to changes in income tax payable, receivables, accounts payable and accrued expenses and deferred rent. The increase in income tax payable resulted in a cash inflow of $4.1 million and was primarily due to the timing of tax payments. The increase in receivables, net resulted in a cash outflow of $2.7 million and was primarily attributable to the timing of cash receipts on behalf of our students in conjunction with the establishment of a receivable for reimbursable construction expenses incurred for our Orlando, Florida campus expansion. The decrease in accounts payable and accrued expenses resulted in a cash outflow of $1.9 million and was due primarily to the timing of payments in combination with a decrease in accrued legal expense following the settlement of litigation during the year ended September 30, 2013. The decrease in deferred rent liability resulted in a cash outflow of $1.6 million and was due to amortization of the deferred rent balance related to tenant incentives associated with our home office lease.
For the year ended September 30, 2013, the changes in our operating assets and liabilities resulted in cash outflows of $6.8 million. The outflows were primarily attributable to changes in deferred revenue. The decrease in deferred revenue resulted in a cash outflow of $5.6 million and was primarily attributable to the timing of student starts, the lower number of students in school and where they were at period end in relation to the completion of their program at September 30, 2013 compared to September 30, 2012. Partially offsetting the cash outflows was a cash inflow of $1.5 million related to a decrease in prepaid expense and other current assets. The decrease in prepaid expenses and other current assets was primarily related to the reimbursement of certain construction expenses related to the relocation of our Glendale Heights, Illinois campus to, and the design and construction of, a new campus in Lisle, Illinois.

Investing Activities
For the year ended September 30, 2015, cash used in investing activities was $2.7 million and was primarily related to $29.0 million in purchases of property and equipment and $26.1 million for the purchase of investments. Approximately $9.7 million of the purchase of property and equipment was related to the purchase of the majority of the buildings and land for our Houston, Texas campus facility and $12.5 million related to the construction of our new Long Beach, California campus. The remainder was related to the purchases of new and replacement training equipment for our ongoing operations. The cash outflows were partially offset by approximately $51.8 million of proceeds received upon the maturity of our investments.
For the year ending September 30, 2016, we anticipate investing in capital expenditures in the range of $19.5 million to $20.5 million. We anticipate investing approximately $2.1 million for a future campus location and approximately $6.0 million for expansion of programs at existing campuses.

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For the year ended September 30, 2014, cash used in investing activities was $9.2 million and was primarily related to $12.0 million in purchases of property and equipment and approximately $61.7 million for the purchase of investments. Approximately $5.5 million of the purchase of property and equipment was invested in the integration of our Automotive Technology and Diesel Technology II program curricula at our Sacramento,