U. S. SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
Commission File Number 1-31923
UNIVERSAL TECHNICAL INSTITUTE, INC.
20410 North 19th Avenue, Suite 200Phoenix, Arizona 85027(Address of principal executive offices)
(623) 445-9500(Registrant’s telephone number, including area code)
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 [ ] No [X*]
*The registrant became subject to the Securities Exchange Act of 1934 on December 16, 2003.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At February 12, 2004, there were outstanding 27,705,576 shares of the registrant’s common stock.
TABLE OF CONTENTS
UNIVERSAL TECHNICAL INSTITUTE, INC.INDEX TO FORM 10-QFOR THE QUARTER ENDING DECEMBER 31, 2003
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PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)(In thousands, except share amounts)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(In thousands, except per share amounts)
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UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)(In thousands)
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UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)(In thousands)
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UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED), continued(In thousands)
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(In thousands, expect per share amounts)
1. Nature of the Business
We are a provider of post-secondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians. We offer undergraduate degree, diploma and certificate programs at seven campuses and manufacturer-sponsored advanced programs at 22 dedicated training centers. We work closely with leading original equipment manufacturers (OEMs) in the automotive, diesel, collision repair, motorcycle and marine industries to understand their needs for qualified service professionals.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair statement of the results for the interim periods have been included. Operating results for the three months ended December 31, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2004. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our prospectus filed with the Securities and Exchange Commission on December 17, 2003 under Rule 424(b)(1).
The unaudited condensed consolidated financial statements include the accounts of Universal Technical Institute, Inc. (“UTI”) and our wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
3. New Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 changes the accounting and disclosure requirements for certain financial instruments that, under previous guidance, could be classified as equity. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Upon adoption of SFAS 150, effective July 1, 2003, we classified as a liability the redeemable preferred stock series A, series B and series C with a combined carrying value of approximately $25.5 million. Additionally, effective July 1, 2003 the dividends on these securities were included as a component of interest expense instead of preferred stock dividends in the consolidated statement of operations. SFAS No. 150 prohibits restatements of financial statements for periods prior to adoption, accordingly these changes were made prospectively.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –(Continued)(In thousands, expect per share amounts)
The following table presents a comparison of net income as if SFAS 150 had been adopted at the beginning of the earliest period presented:
4. Stock-Based Compensation
We account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation- Transition and Disclosure-An Amendment of SFAS No. 123,” which defines a fair value based method and addresses common stock and options given to employees as well as those given to non-employees in exchange for products and services. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123:
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The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. On December 15, 2003, we recognized our employees and awarded options to purchase approximately 1.5 million shares of our common stock with an exercise price of $20.50 per share. The exercise price represents the stock’s estimated fair market value at that time and the offering price for our shares in an initial public offering effective December 17, 2003. The following table illustrates the assumptions used for grants made during each of the three months ended December 31, 2002 and 2003:
5. Earnings per Common Share
SFAS No. 128, “Earnings Per Share,” requires the dual presentation of basic and diluted earnings per share on the face of the income statement and the disclosure of the reconciliation between the numerators and denominators of basic and diluted earnings per share calculations. The following schedule presents the calculation of basic and fully diluted earnings per share:
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6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
7. Debt
Effective December 17, 2003 and in conjunction with our initial public offering, we entered into an amendment to the Second Amendment and Restatement of Credit Agreement dated March 29, 2002. The amendment provided for application of the payment from our initial public offering to be applied on a pro-rata basis against all remaining scheduled installments on the term notes and reaffirmed March 31, 2007 as the maturity of our revolving line of credit. On December 23, 2003 we used proceeds received from our initial public offering to repay all of the then outstanding term debt totaling $31.5 million.
In addition, we recognized a charge of approximately $0.8 million related to the write off of unamortized deferred financing fees. At December 31, 2003 we had no outstanding borrowings on our line of credit and total availability was $12.1 million. Outstanding letters of credit at December 31, 2003 were $9.9 million to U.S. Department of Education and $8.0 to surety bond holders.
The Second Amendment and Restatement of Credit Agreement contains certain restrictive covenants, including but not limited to maintenance of certain financial ratios and restrictions on capital
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expenditures, indebtedness, contingent obligations, investments and certain payments. At December 31, 2003, we were in compliance with these covenants.
8. Income Taxes
Our deferred taxes are reflected in the accompanying Condensed Consolidated Balance as follows:
9. Common Stock
On December 22, 2003, we sold 3.25 million shares of our common stock in an initial public offering for approximately $59.2 million in net cash proceeds, after deducting underwriting commission and offering expenses of approximately $7.4 million. On December 22, 2003, we also consummated an exchange offer pursuant to which we offered to exchange the outstanding shares of our series A, series B and series C preferred stock for shares of our common stock at an exchange price equal to our initial public offering price. An aggregate total of approximately 6.5 thousand shares of series A, series B and series C preferred stock were presented for exchange representing a face value of approximately $6.5 million and accordingly we issued an aggregate of approximately 0.3 million shares of our common stock. In addition, our series D preferred stock automatically converted to common stock upon the consummation of our initial public offering. Accordingly the approximately 2.4 thousand shares of series D preferred stock representing a face value of $45.5 million was converted into approximately 10.3 million shares of common stock.
The $59.2 million in net proceeds received from the sale of our common stock was used to repay all the outstanding term debt totaling $31.5 million and redeem the remaining series A, series B and series C preferred stock totaling $12.9 million and pay the accrued dividends related to the series A, series B, series C and series D preferred stock totaling $12.6 million.
Upon the consummation of our initial public offering, our Amended and Restated Certificate of Incorporation became effective. The Amended and Restated Certificate of Incorporation increased the number of authorized common shares from approximately 37.0 million shares to 100.0 million shares and increased the number of authorized preferred shares from 25 thousand shares to 10.0 million shares of preferred stock. In addition, our board of directors and shareholders approved the Universal Technical Institute, Inc. 2003 Employee Stock Purchase Plan (“ESPP”) and the Universal Technical Institute, Inc. 2003 Stock Incentive Plan (“SIP”) to be effective upon the consummation of our initial public offering, whereby we have reserved 300 shares of common stock for the ESPP and approximately 4.4 million shares of common stock for the SIP.
10. Segment Reporting
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We follow SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” SFAS 131 establishes standards for the way that public business enterprises report certain information about operating segments in their financial reports. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in assessing performance of the segment and in deciding how to allocate resources to an individual segment. SFAS No. 131 also established standards for related disclosures about products and services, geographic areas and major customers.
Our principal business is providing post-secondary education. We also provide manufacturer-specific training, and these operations are managed separately from our campus operations. These operations do not currently meet the quantitative criteria for segments and therefore are not deemed reportable under SFAS No. 131 and are reflected in the Other category. Corporate expenses are allocated to Post-Secondary Education and the Other category.
Summary information by reportable segment is as follows:
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in this report and those in the prospectus of UTI filed with the Securities and Exchange Commission on December 17, 2003 under Rule 424(b)(1) under the Securities Act of 1933. That prospectus includes our audited consolidated financial statements for our fiscal years ended September 30, 2003 and 2002.
Critical Accounting Policies and Estimates
Our discussion of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. During the preparation of these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, bad debts, fixed assets, long-lived assets, including goodwill, income taxes and contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements.
We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Revenue recognition. Net revenues consist primarily of student tuition and fees derived from the programs we provide after reductions made for scholarships we sponsor. Tuition and fee revenue is recognized on a pro-rata (straight line) basis over the term of the course or program offered. If a student withdraws from a program prior to a specified date, any paid but unearned tuition is refunded. Approximately 97% of our net revenues for the three months ended December 31, 2003 and 96% of our net revenues for the three months ended December 31, 2002 consisted of tuition. Our net revenues vary from period to period in conjunction with our average student population. Our undergraduate programs are typically designed to be completed in 12 to 18 months and our advanced training programs range from eight to 27 weeks in duration. We supplement our core revenues with sales of textbooks and program supplies, student housing provided by us and other revenues. Sales of textbooks and program supplies, revenue related to student housing and other revenue are each recognized as sales occur or services are performed. Deferred tuition represents the excess of tuition payments received as compared to tuition earned and is reflected as a current liability in our consolidated financial statements because it is expected to be earned within the next twelve-month period.
Allowance for uncollectible accounts. We maintain an allowance for uncollectible accounts for estimated losses resulting from the inability, failure or refusal of our students to make required payments. We offer a variety of payment plans to help students pay that portion of their education expenses not covered by financial aid programs and this portion is unsecured and not guaranteed. Management analyzes accounts receivable, historical percentages of uncollectible accounts, customer credit worthiness, when applicable, and changes in payment history when evaluating the adequacy of the allowance for uncollectible accounts. We use an internal group of collectors, augmented by third party collectors as deemed appropriate, in our collection efforts. Although we believe that our reserves are adequate, if the
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financial condition of our students deteriorates, resulting in an impairment of their ability to make payments, or if we underestimate the allowances required, additional allowances may be necessary, which will result in increased selling, general and administrative expenses in the period such determination is made.
Healthcare and workers’ compensation costs. Claims and insurance costs which primarily relate to health insurance and workers’ compensation are accrued using current information and, in the case of healthcare costs, future estimates provided by consultants to reasonably measure current cost incurred but not invoiced for services provided. Although we believe our estimated liability recorded for healthcare and workers’ compensation costs are reasonable, actual results could differ and require adjustment of the recorded balance.
Tool Sets. We accrue the estimated cost of promotional tool sets offered to students at the time of enrollment and provided at a future date based upon satisfaction of certain criteria, including completion of certain course work. We accrue these costs based upon current student information and an estimate of students that will complete the requisite coursework. Although we believe our estimated liability for tool sets is reasonable, actual results could differ and require adjustment of the recorded balance.
Long-lived assets. We record our long-lived assets, such as property and equipment, at cost. We review the carrying value of our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable in accordance with the provisions of Statement of Financial Accounting Standards, or SFAS, No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We evaluate these assets to determine if their current recorded value is impaired by examining estimated future cash flows. These cash flows are evaluated by using weighted probability techniques as well as comparisons of past performance against projections. Assets may also be evaluated by identifying independent market values. If we determine that an asset’s carrying value is impaired, we will record a write-down of the carrying value of the identified asset and charge the impairment as an operating expense in the period in which the determination is made. Although we believe that the carrying value of our long-lived assets are appropriately stated, changes in strategy or market conditions or significant technological developments could significantly impact these judgments and require adjustments to recorded asset balances.
Goodwill. We assess the impairment of goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Accordingly, we test our goodwill for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred, by comparing its fair value to its carrying value. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. If we determine that an impairment has occurred, we are required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. Goodwill represents a significant portion of our total assets. At December 31, 2003, goodwill represented approximately 20.8% of our total assets, or $20.6 million, and resulted from our acquisition of the parent company of Motorcycle Mechanics Institute and Marine Mechanics Institute in January of 1998. Although we believe goodwill is appropriately stated in our consolidated financial statements, changes in strategy or market conditions could significantly impact these judgments and require an adjustment to the recorded balance.
Stock-based compensation. We account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, and comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Several companies recently elected to
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change their accounting policies and record the fair value of options as an expense. We currently are not required to record stock-based compensation charges if the employee stock option exercise price or restricted stock purchase price equals or exceeds the deemed fair value of our common stock at the grant date. Because no market for our common stock existed prior to completion of our initial public offering, our board of directors determined the fair value of our common stock based upon several factors, including our operating performance, forecasted future operating results, the terms of redeemable or convertible preferred stock issued by us, including the liquidation value and other preferences of our preferred stockholders and our expected valuation in an initial public offering.
Discussions of potential changes to APB 25 and SFAS 123 standards are ongoing and the parties responsible for authoritative guidance in this area may require changes to the applicable accounting standards. If we had estimated the fair value of the options on the date of grant using the Black-Scholes model and then amortized this estimated fair value over the vesting period of the options, our net income would have been adversely affected, as shown in the table below.
Accounting for income taxes. In preparing our consolidated financial statements, we assess the likelihood that our deferred tax assets will be realized from future taxable income. We establish a valuation allowance if we determine that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Changes in the valuation allowance are included in our statement of operations as provision for or benefit from income taxes. We exercise significant judgment in determining our provision for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business.
As of December 31, 2003, we had a valuation allowance of $16.2 million to reduce our deferred tax assets to an amount that management believes is more likely than not realizable. The valuation allowance primarily relates to a deferred tax asset arising from a capital loss carryforward from the sale of
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a discontinued business. In addition, we had deferred tax assets comprised primarily of compensation and related costs and accrued expenses associated with tool purchases. We use significant judgment in determining the amounts of those accrued expenses reflected in the underlying financial statements. Should we incur capital gains in the future, we would be able to realize all or part of the capital loss carryforward against which we have applied the valuation allowance. In that event, our current income tax expense would be reduced or our income tax benefits would be increased, resulting in an increase in net income or a reduction in net loss.
Results of Operations
The following table sets forth selected statements of operations data as a percentage of net revenues for each of the periods indicated.
Three Months Ended December 31, 2003 Compared to Three Months Ended December 31, 2002
Net revenues. Our revenues for the three months ended December 31, 2003 were $59.0 million, representing an increase of $13.7 million, or 30.1%, as compared to net revenues of $45.4 million for the three months ended December 31, 2002. This increase was primarily due to a 24.6% increase in the average undergraduate full-time student enrollment which increased to 12,856 at December 31, 2003 as compared to 10,319 at December 31, 2002.
Educational services and facilities expenses. Our educational services and facilities expenses for the three months ended December 31, 2003 were $25.6 million, representing an increase of $4.7 million, or 22.6 %, as compared to educational services and facilities expenses of $20.9 million for the three months ended December 31, 2002. This increase was primarily due to incremental educational expenses related to higher average student enrollments offset partially by $0.8 million reduction in estimated tool set expense. Our results for the three months ended December 31, 2003 also includes an additional charge of approximately $0.3 million for depreciation related to a change in the estimated
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useful life of the leasehold improvement at a campus that we intend to relocate within the next 9 to 12 months to provide additional capacity.
Educational services and facilities expenses as a percentage of net revenues decreased to 43.4% for the three months ended December 31, 2003 as compared to 46.0% for the three months ended December 31, 2002. The decrease in educational services and facilities as a percentage of net revenues is attributable to operating efficiencies resulting from increased average student enrollments at our existing facilities and the reduction of adjusting our estimated tool set expense.
Selling, general and administrative expenses. Our selling, general and administrative expenses for the three months ended December 31, 2003 were $19.4 million, an increase of $3.2 million, or 19.5%, as compared to selling, general and administrative expenses of $16.3 million for the three months ended December 31, 2002. This increase was due to an incremental increase in marketing and student enrollment expenses and an increase in administrative expenses resulting from a need to further establish the infrastructure necessary to support our current and future operations. This increase also includes approximately $0.8 million in costs associated with the start up of our new Pennsylvania campus. Selling, general and administrative expenses as a percentage of revenue decreased to 32.9% for the three months ended December 31, 2003 from 35.8% for the three months ended December 31, 2002. The decrease in selling, general and administrative as a percentage of revenue is attributable to efficiencies of scale.
Interest expense. Our interest expense for the three months ended December 31, 2003 was $0.8 million, representing a decrease of $0.4 million, or 32.7%, compared to interest expense of $1.2 million for the three months ended December 31, 2002. This decrease was primarily due to a reduction in the average debt balance outstanding and a decrease in the average interest paid on our indebtedness to 3.91% for the three months ended December 31, 2003 from 5.82% for the three months ended December 31, 2002.
Other expenses. Our other expenses for three months ended December 31, 2003 represent the write-off of unamortized deferred financing costs of approximately $0.8 million related to the early retirement of our term debt.
Income taxes. Our provision for income taxes for the three months ended December 31, 2003 was $5.0 million, or 40.2% of pretax income, compared to $2.5 million, or 35.0% of pretax income, for the three months ended December 31, 2002. The lower effective rate for the comparative three months ended December 31, 2002 is primarily attributable to the increase of our deferred tax assets as a result of applying a higher federal statutory rate.
Seasonality
Our net revenues and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population. 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, which ends on June 30, than in the remainder of our fiscal year because fewer students are enrolled during the summer months. Our expenses, however, do not vary significantly with changes in our student population and net revenues and, as a result, such expenses do not fluctuate significantly on a quarterly basis. We expect quarterly fluctuation in operating results to continue as a result of seasonal enrollment patterns. Such patterns may change however, as a result of new school openings, new program introductions, increased enrollments of adult students or acquisitions. In addition, our net revenues for the first fiscal quarter are adversely affected by the fact that we do not recognize revenue during the calendar year-end holiday break, which falls primarily in that quarter.
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Liquidity and Capital Resources
We finance our operating activities and our internal growth primarily through cash generated from operations.
A majority of our revenues are derived from Title IV Programs. Federal regulations dictate the timing of disbursements of funds under Title IV Programs. Students must apply for a new loan for each academic year (thirty-week periods). Loan funds are generally provided by lenders in two disbursements for each academic year. The first disbursement is usually received 30 days after the start of a student’s academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student’s academic year. Certain types of grants and other funding are not subject to a 30-day delay. Our undergraduate programs are typically designed to be completed in twelve to eighteen months. These timing factors together with the timing of when our students begin their programs effect our operating cash flow.
Net cash from operations increased $8.1 million, or 61.0%, from $13.2 million to $21.3 million for the three months ended December 31, 2002 and 2003, respectively. This increase was primarily attributable to increased operating performance of approximately $2.8 million and the timing of tuition funding which resulted in a decrease in accounts receivable of $5.8 million and an increase in deferred revenue of $4.4 million. The approximately $10.1 million combined effect of cash flow from accounts receivable and deferred revenue represents an approximately $7.2 million increase in cash flow from the comparable three months ended December 31, 2002 and is attributable to an increase in the average enrollment of undergraduate full-time students. These increases were offset partially by our use of cash related to the timing of payment of facility rent, annual liability insurance payments and reduction of accounts payable.
Net cash used in investing activities increased $2.2 million from $1.3 million to $3.5 million for the three months ended December 31, 2002 and 2003, respectively. This increase is primarily attributable to facility improvement and expansion efforts.
Capital expenditures are expected to increase as we upgrade current equipment and expand facilities or open new facilities to meet increased student enrollments. We expect to be able to fund these capital expenditures with cash generated from operations.
Although our current strategy is to continue our internal growth, strategic acquisitions would be considered. To the extent that potential strategic acquisitions are large enough to require financing beyond available cash from operations and borrowings under our senior credit facilities, we may incur additional debt or issue additional debt or equity securities.
Net cash provided by financing activities increased approximately $2.8 million from ($0.6) million to $2.1 million for the three months ended December 31, 2002 and 2003, respectively. This increase is attributable to the approximately $59.2 million of net cash received from our initial public offering in December, 2003 and our application of the net proceeds to repay our then outstanding long term debt in the principal amount of $31.5 million and redeem our remaining preferred stock and pay all accrued and unpaid dividends, together totaling approximately $25.5 million.
In conjunction with completing our initial public offering, we entered into an amendment to our Second Amendment and Restatement of Credit Agreement. The amendment provided for application of the payment from our initial public offering to be applied on a pro-rata basis against all remaining scheduled installments on the term debt and reaffirmed March 31, 2007 as the maturity of our revolving
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line of credit. At December 31, 2003 there were no outstanding borrowings on our line of credit and total availability was $12.1 million. Outstanding letters of credit at December 31, 2003 were $9.9 million to U.S. Department of Education and $8.0 million to surety bond holders.
The Second Amendment and Restatement of Credit Agreement contains certain restrictive covenants, including but not limited to maintenance of certain financial ratios and restrictions on capital expenditures, indebtedness, contingent obligations, investments and certain payments. At December 31, 2003, we were in compliance with these covenants.
Contractual Obligations
The following table sets forth, as of December 31, 2003, the aggregate amounts of our significant contractual obligations and commitments with definitive payment terms that will require significant cash outlays in the future.
Item 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk related to interest rate changes. However, as a result of completing our initial public offering, we have been able to repay in full our term debt leaving only miscellaneous capital equipment leases which are not material.
Cautionary Factors That May Affect Future Results
Our disclosure and analysis in this report contains forward-looking information about our company’s financial results, estimates and our business prospects that involve substantial risks and uncertainties. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements are expressions of our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Among the factors that could cause actual results to differ materially are the following:
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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 inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission. The prospectus that we filed with the SEC on December 17, 2003 under Rule 424(b)(1) under the Securities Act listed various important factors that could cause actual results to differ materially from expected and historic results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. Readers can find them under the heading “Risk Factors” in the prospectus. We incorporate that section of the prospectus in this filing and investors should refer to it. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties. Our filings with the SEC may be accessed at the SEC’s website at www.sec.gov.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2003 that have materially affected, or are reasonable likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to routine claims and suits brought against us in the ordinary course of business. In the opinion of management, the outcome of such routine claims will not have a material adverse effect on our business, financial condition, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On December 22, 2003, we consummated an exchange offer pursuant to which we offered to exchange the outstanding shares of our series A, series B and series C preferred stock for shares of our common stock. An aggregate of approximately 0.3 million shares of our common stock were issued in exchange for the preferred stock that were timely tendered for exchange pursuant to an exchange agreement between us and the holders of our series A, series B and series C preferred stock. The exchange offer did not involve any underwriters or any public offering and we believe that the exchange offer was exempt from the registration requirements pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended. The recipients of the securities in the exchange offer represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof. Accordingly, appropriate legends were affixed to the share certificates and instruments issued in this transaction.
Use of Proceeds from Our Initial Public Offering
On December 22, 2003, we completed our initial public offering of common stock. We sold 3.25 million shares and selling stockholders sold 5.375 million shares at an offering price of $20.50 per share. The shares were registered under the Securities Act on a registration statement on Form S-1 (Registration No. 333-109430). The registration statement was declared effective by the Securities and Exchange Commission on December 16, 2003. The managing underwriter for the offering was Credit Suisse First Boston.
We received gross proceeds of $66.6 million from the offering. The following table sets forth an estimate of the fees and expenses we incurred in connection with the offering.
The amounts set forth above are reasonable estimates rather than actual amounts. After deducting the foregoing expenses, our net proceeds were approximately $59.2 million.
From December 17, 2003 to December 31, 2003, we used approximately $31.5 million of the net proceeds of our offering to repay all outstanding indebtedness under our term A and term B loan facilities, $12.9 million to redeem the portion of our outstanding series A, series B and series C preferred stock that was not exchanged by the holders of such shares for shares of our common stock, $12.7 million to pay
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accrued but unpaid dividends on our series A, series B, series C and series D preferred stock, and $2.2 million for working capital and general corporate purposes.
Restrictions Upon Our Payment of Dividends
Our ability to declare and pay any dividends is currently restricted under the credit agreement for our senior credit facilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the period covered by this report, prior to the closing of our initial public offering of common stock, we solicited written consents of our stockholders to approve the following matters, and all of the matters described below were approved by the requisite voting power of our voting securities entitled to vote thereon:
All of the matters described above were approved by the required votes of our outstanding voting securities.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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EXHIBIT INDEX