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NAUH > SEC Filings for NAUH > Form 10-K on 2-Aug-2013All Recent SEC Filings




Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion together with the financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations, and involves risks and uncertainties. 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," "Special Note Regarding Forward-Looking Statements" and elsewhere in this annual report.


National American University, or NAU, is a regionally accredited, for-profit, multi-campus institution of higher learning offering associate, bachelor's and master's degree programs in business-related disciplines, such as accounting, applied management, business administration and information technology, and in healthcare-related disciplines, such as nursing and healthcare management. Courses are offered through educational sites as well as online via the Internet. Operations include 37 educational sites (two of which are pending regulatory approvals, Houston, Texas and the Rouche Graduate Center in Austin, Texas) located in Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, Oregon, South Dakota and Texas, distance learning service centers in Indiana, Missouri and Texas and distance learning operations and central administration offices in Rapid City, South Dakota.

As of May 31, 2013, NAU had enrolled 2,661 students at its physical locations, 6,790 students for its online programs, and 2,021 students at its hybrid learning centers that attended physical campus locations and also took classes online. NAU supports the instruction of 2,500 additional students at affiliated institutions for whom NAU provides online course hosting and technical assistance. NAU provides courseware development, technical support and online class hosting services to various colleges, technical schools and training institutions in the United States and Canada who do not have the capacity to develop and operate their own in-house online curriculum for their students. NAU does not share revenues with these institutions, but rather charges a fee for its services, enabling it to generate additional revenue by leveraging its current online program infrastructure.

The real estate operations consist of apartment facilities, condominiums and other real estate holdings in Rapid City, South Dakota. The real estate operations generated approximately 1.0% of our revenues for the fiscal year ended May 31, 2013.

Key Financial Results Metrics

Revenue. Revenue is derived mostly from NAU's operations. For fiscal year ended May 31, 2013, approximately 91.0% of our revenue was generated from NAU's academic revenue, which consists of tuition and fees assessed at the start of each term. The remainder of our revenue comes from NAU's auxiliary revenue from sources such as NAU's food services, bookstore, dormitory and motel operations and the real estate operations rental income and condominium sales. Tuition revenue is reported net of adjustments for refunds and scholarships and is recognized on a daily basis over the length of the term. Upon withdrawal, students generally are refunded tuition based on the uncompleted portion of the term. Auxiliary revenue is recognized when earned.


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Factors affecting net revenue include:

the number of students who are enrolled and who remain enrolled in courses throughout the term;

the number of credit hours per student;

the student's degree and program mix;

changes in tuition rates;

the affiliates with which NAU is working as well as the number of students at the affiliates; and

the amount of scholarships for which students qualify.

We record unearned tuition for academic services to be provided in future periods. Similarly, we record a tuition receivable for the portion of the tuition that has not been paid. Tuition receivable at the end of any calendar quarter largely represents student tuition due for the prior academic quarter. Based upon past experience and judgment, we establish an allowance for doubtful accounts to recognize those receivables we anticipate will not be paid. Any uncollected account more than six months past due on students who have left NAU is charged against the allowance. Bad debt expense as a percentage of revenues for the fiscal years ended May 31, 2013, 2012, and 2011 was 3.5%, 3.5% and 3.1%, respectively.

We define enrollments for a particular reporting period as the number of students registered in a course on the last day of the reporting period. Enrollments are a function of the number of continuing students registered and the number of new enrollments registered during the specified period. Enrollment numbers are offset by inactive students, graduations and withdrawals occurring during the period. Inactive students for a particular period are students who are not registered in a class and, therefore, are not generating net revenue for that period.

We believe the principal factors affecting NAU's enrollments and net revenue are the number and breadth of the programs being offered; the effectiveness of our marketing, recruiting and retention efforts; the quality of our academic programs and student services; the convenience and flexibility of our online delivery platform; the availability and amount of federal and other funding sources for student financial assistance; and general economic conditions.

The following chart is a summary of our student enrollment on May 31, 2013, and May 31, 2012, by degree type and by instructional delivery method.

                                      May 31, 2013                  May 31, 2012                % Growth for
                                    (Spring '13 Qtr)              (Spring  '12 Qtr)             same quarter
                                   Number of Students            Number of Students            over prior year
Graduate                                            397                          392                        1.3 %
Undergraduate and Diploma                        11,075                       10,829                        2.3 %

Total                                            11,472                       11,221                        2.2 %

On-Campus                                         2,661                        3,029                      (12.1 %)
Online                                            6,790                        6,230                        9.0 %
Hybrid                                            2,021                        1,962                        3.0 %

Total                                            11,472                       11,221                        2.2 %


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We experienced a 2.2% growth in enrollment in spring term 2013 over spring term 2012. We believe this growth is attributable to four main factors: investment in the expansion and development of physical locations; investment in the expansion of current academic programs and development of new academic programs; the development of a disciplined student recruitment process; and the current economic downturn, in which many working adults have decided to utilize education to obtain a job, advance in a job or retain their current job. We also believe we have realized a significant increase in enrollments since 2005 due to our investment of approximately $82 million to expand and develop physical locations and academic programming. In addition, we believe that our strategic plan was critical in obtaining the growth and results of operations that we have seen over the last year.

We plan to continue expanding and developing our academic programming, opening additional physical locations and, potentially, making acquisitions. This growth will be subject to applicable regulatory requirements and market conditions. With these efforts, we anticipate our positive enrollment trends will continue. To the extent the economic downturn has caused enrollment growth, our ability to maintain or increase that portion of our growth will depend on how economic factors are perceived by our target student market in relation to the advantages of pursuing higher education. If current market conditions continue, we believe that the extent to which these enrollment trends will continue will be correlated with the opening of additional physical locations, the number of programs that are developed, the number of programs that are expanded to other locations, and, potentially, the number of locations and programs added through acquisitions. If market conditions decline or if we are unable to open new physical locations, develop or expand academic programming or make acquisitions, whether as a result of regulatory limitations or other factors, our growth rate will likely return to more historic levels.

Expenses. Expenses consist of cost of educational services, selling, general and administrative, auxiliary expenses, the cost of condominium sales, and the loss on disposition of property and equipment. Cost of educational services expenses contain expenditures attributable to the educational activity of NAU. This expense category includes salaries and benefits of faculty and academic administrators, costs of educational supplies, faculty reference and support material and related academic costs, and facility costs. Selling, general and administrative expenses include the salaries of the learner services positions (and other expenses related to support of students), salaries and benefits of admissions staff, marketing expenditures, salaries of other support and leadership services (including finance, human resources, compliance and other corporate functions), as well as depreciation, bad debt expenses and other related costs associated with student support functions. Auxiliary expenses include expenses for the cost of goods sold, including costs associated with books. The cost of condominium sales is the expense related to condominiums that are sold during the reporting period. The gain or loss on disposition of property and equipment expense records the cost incurred or income received in the disposal of assets that are no longer used by us.

Factors affecting comparability

Set forth below are selected factors we believe have had, or which we expect to have, a significant effect on the comparability of our recent or future results of operations:

Introduction of new programs and specializations. We plan to develop additional degree and diploma programs and specializations over the next several years. When introducing new programs and specializations, we invest in curriculum development, support infrastructure and marketing research. Revenues associated with these new programs are dependent upon enrollments, which are lower during the periods of introduction. During this period of introduction and development, the rate of growth in revenues and operating income has been, and may be, adversely affected, in part, due to these factors. Historically, as the new programs and specializations develop, increases in enrollment are realized, cost-effective delivery of instructional and support services are achieved, economies of scale are recognized and more efficient marketing and promotional processes are gained.

Stock-based compensation. We expect to incur increased non-cash, stock based compensation expense in connection with existing and future issuances under our Stock Plan or other equity incentive plans as compared with prior years in an effort to create a consistent and comprehensive compensation package for management.


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Seasonality. Our operations are generally subject to seasonal trends. While we enroll students throughout the year, summer and winter quarter new enrollments and revenue are generally lower than enrollments and revenue in other quarters due to the traditional custom of summer breaks and the holiday break in December and January. In addition, we generally experience an increase in enrollments in the fall of each year when most students seek to begin their postsecondary education.

Critical Accounting Policies and Estimates

The discussion of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. Management evaluates its estimates and judgments, including those discussed below, on an ongoing basis. These estimates are based on historical experience and on various other assumptions that management believes to be 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 the consolidated financial statements. We believe the following critical accounting policies involve more significant judgments and estimates than others used in the preparation of our consolidated financial statements:

Revenue recognition. Academic revenue represented approximately 91.0%, 92.4%, and 92.9% of revenue for the fiscal years ended May 31, 2013, 2012, and 2011, respectively. We recognize revenue from tuition ratably over the length of the respective term. Academic revenue is tuition revenue, fees and charges assessed at the start of each term. If a student drops or withdraws from a course during the first week of classes, we refund 100% of the charges for tuition and fees, beyond the first week but during the first 60% of scheduled classes, the percentage of tuition charges refunded is based on a daily proration on a percent of the term completed. If the last day of attendance is beyond 60% of the scheduled classes, tuition and fees are not refunded. Deferred revenue and student deposits in any period represent the excess of tuition, fees and other student payments received as compared to amounts recognized as revenue on the statement of operations, and are reflected as current liabilities on the balance sheet.

Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability, failure or refusal of the students to make required payments. We determine the adequacy of the allowance for doubtful accounts based on an analysis of aging of the accounts receivable and with regard to historical bad debt experience. Accounts receivable balances are generally written off when deemed uncollectible at the time the account is returned by an outside collection agency. However, accounts that are 180 days old are fully reserved and management continues collection efforts until it is determined that the possibility of collection is unlikely. Bad debt expense is recorded as a selling, general and administrative expense. As of May 31, 2013, and 2012, the allowance for doubtful accounts was approximately $0.9 million and $0.8 million respectively. During the fiscal years ended May 31, 2013, 2012, and 2011, bad debt expense was $4.5 million, $4.2 million, and $3.4 million, respectively. The bad debt expense was 3.5%, 3.5%, and 3.1% of total revenue for the fiscal years ended May 31, 2013, 2012 and 2011, respectively.

Accounting for Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the new rate is enacted.


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We evaluate and account for uncertain tax positions using a two-step approach. Recognition (step one) occurs when we conclude that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. De-recognition of a tax position that was previously recognized would occur when we subsequently determine that a tax position no longer meets the more-likely-than-notthreshold of being sustained.

Share-Based Compensation. We measure and recognize compensation expense for all share-based awards issued to employees and directors based on estimated fair values of the share awards on the date of grant. We record compensation expense for all share-based awards over the vesting period.

Regulation and Oversight

We are subject to extensive regulation by state education agencies, accrediting commissions and federal government agencies, particularly by the U.S. Department of Education (the "Department of Education") under the Higher Education Act of 1965, as amended (the "Higher Education Act") and the regulations promulgated thereunder by the Department of Education. The regulations, standards and policies of these agencies cover substantially all of our operations. For a more complete description of this regulation and oversight, see "Item I - Business - Regulatory Matters."

Department of Education Rulemaking. On April 16, 2013, the Department of Education published a Notice of Proposed Rulemaking ("NPRM") on several matters, including cash management of Title IV program funds, state authorization for programs offered through distance education or correspondence education, and gainful employment. The Department of Education began holding hearings on these topics in May 2013 with the intent to begin the rulemaking process in September 2013. After consideration of the information received at these hearings, the Department of Education announced its intention to establish a separate negotiated rulemaking committee solely with respect to gainful employment. The committee on gainful employment is scheduled to meet in two sessions in September and October 2013. These negotiated rulemaking processes are expected to produce new regulations, which may be effective as soon as July 1, 2014.

Compliance with new and changing regulations could reduce our enrollments, increase our cost of doing business, and have a material effect on our business. To the extent that any laws or regulations are adopted that limit our participation in Title IV programs or the amount of student financial aid for which the students at our institutions are eligible, our enrollments, revenues and results of operation could be materially affected.

State Authorization. To be eligible to participate in Title IV programs, an institution must be licensed or authorized to offer its educational programs by the states in which it is physically located, in accordance with the Department of Education's regulations. The Department of Education's Final Rule published on October 29, 2010 requires, among other things, institutions to demonstrate specific state authorization to operate educational programs beyond secondary education. In New Mexico, one of the other states where we maintain operations, we are currently exempt under state law from a requirement to be licensed by the New Mexico Higher Education Department because of our regional accreditation by the HLC. However, in order to comply with the Final Rules, we have voluntarily submitted an application for licensure to the New Mexico Higher Education Department, which remains pending as of this date. See "Item I - Business - Regulatory Matters - State Authorization."


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Results of Operations - For the Year Ended May 31, 2013 Compared to the Year

Ended May 31, 2012

National American University Holdings, Inc.

The following table sets forth statements of operations data as a percentage of
total revenue for each of the periods indicated:

                                                      Year-Ended                 Year-Ended
                                                     May 31, 2013               May 31, 2012
                                                    In percentages             In percentages
Total revenues                                                100.0 %                    100.0 %
Operating expenses:
Cost of educational services                                   22.6                       23.4
Selling, general and administrative                            64.2                       65.2
Auxiliary expense                                               5.2                        4.0
Cost of condominiums sales                                      0.1                        0.0
(Gain)/Loss on disposition of property                          0.1                       (0.3 )

Total operating expenses                                       92.2                       92.3
Operating income                                                7.8                        7.7
Interest expense                                               (0.8 )                     (0.5 )
Interest income                                                 0.1                        0.1
Other income                                                    0.1                        0.1

Income before income taxes                                      7.2                        7.4
Income tax expense                                             (2.9 )                     (3.1 )
Net income attributable to non-controlling
interest                                                       (0.1 )                     (0.1 )

Net income attributable to the Company                          4.2                        4.2

For the year ended May 31, 2013, we generated $129.2 million in revenue, an increase of 8.7% compared to the same period in 2012. This increase was attributable to enrollment growth, an average tuition increase of 5.4% effective September 2012, fees billed to affiliated institutions for our courseware development, technical support and online class hosting services, continued geographic and programmatic expansion. Our revenue for the year ended May 31, 2013 consisted of $127.9 million from our NAU operations and $1.3 million from our other operations. Total operating expenses were $119.2 million or 92.2% of total revenue for the year ended May 31, 2013, an increase of 8.6% compared to the same period in 2012 due to the additional expansion and development. Income before income taxes was $9.2 million or 7.2% of total revenue for the year ended May 31, 2013, an increase of 4.1% compared to the same period in 2012. Net income attributable to the Company was $5.4 million or 4.2% of total revenue for the year ended May 31, 2013, an increase of 7.9% compared to the same period in 2012. The additional details regarding these variances are described in greater detail below.


The following table sets forth statements of operations data as a percentage of
total revenue for each of the periods indicated:

                                                           Year-Ended                 Year-Ended
                                                          May 31, 2013               May 31, 2012
                                                         In percentages             In percentages
Total revenues                                                     100.0 %                    100.0 %
Operating expenses:
Cost of educational services                                        22.9                       23.6
Selling, general and administrative                                 63.5                       64.2
Auxiliary expense                                                    5.3                        4.1

Total operating expenses                                            91.7                       91.9

Operating income                                                     8.3                        8.1

Interest expense                                                    (0.8 )                     (0.5 )
Interest income                                                      0.1                        0.1
Income before non-controlling interest and taxes                     7.6                        7.7


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Total revenue. The total revenue for NAU for the year ended May 31, 2013 was $127.9 million, an increase of $10.0 million or 8.5%, as compared to total revenue of $117.8 million for the year ended May 31, 2012. The increase was primarily due to the enrollment increase of approximately 2.2%, which was consistent with our investment in new program development, program expansion, development of new educational sites and student retention initiatives, over the prior year. The enrollment increase can also be attributed, in part, to the current economic climate, in which many working adults have decided to utilize education to obtain a job, advance in a job or retain their current job. In addition, the increase in total revenue is due to an average tuition increase of 5.4% that was approved by NAU's board of governors and became effective September 2012, and fees billed to affiliated institutions for our courseware development, technical support and online class hosting services. We believe that management's execution of NAU's well-defined strategic plan contributed to the increase in revenues.

The academic revenue for the year ended May 31, 2013 was $117.6 million, an increase of $7.8 million or 7.1%, as compared to academic revenue of $109.8 million for the year ended May 31, 2012. The increase was primarily due to the enrollment increase over the prior year. The auxiliary revenue was $10.3 million, an increase of $2.3 million or 28.4%, as compared to auxiliary revenue of $8.0 million for the year ended May 31, 2012. The increase in auxiliary revenue was primarily driven by increased enrollment growth and the implementation of a new online bookstore vendor that was in place for all of 2013 as compared to only one quarter in 2012.

Cost of educational services. The educational services expense as a percentage of academic segment revenue decreased by 0.7% for the year ended May 31, 2013, to 22.9%, as compared to 23.6% for the year ended May 31, 2012. This decrease was a result of fixed costs such as facility expenses on an increasing revenue base. The educational services expenses for the year ended May 31, 2013, were $29.2 million, an increase of $1.4 million, or 4.9%, as compared to educational expenses of $27.8 million for the year ended May 31, 2012. This increase was primarily due to increases in instructional compensation and related expenses. These increases were attributable to the increased faculty and staff members needed to provide and maintain the quality of our educational services to our . . .

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