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NAUH > SEC Filings for NAUH > Form 10-Q on 4-Oct-2013All Recent SEC Filings

Show all filings for NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.

Form 10-Q for NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.


4-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Certain of the statements included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as elsewhere in this quarterly report on Form 10-Q are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform Act"). These statements are based on the Company's current expectations and are subject to a number of assumptions, risks and uncertainties. In accordance with the Safe Harbor provisions of the Reform Act, the Company has identified important factors that could cause its actual results to differ materially from those expressed in or implied by such statements. The assumptions, uncertainties and risks include the pace of growth of student enrollment, our continued compliance with Title IV of the Higher Education Act, and the regulations thereunder, as well as regional accreditation standards and state regulatory requirements, competitive factors, risks associated with the opening of new campuses and hybrid learning centers, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions, risks relating to the timing of regulatory approvals, our ability to continue to implement our growth strategy, risks associated with the ability of our students to finance their education in a timely manner, and general economic and market conditions. Further information about these and other relevant risks and uncertainties may be found in the Company's Annual Report on Form 10-K filed on August 2, 2013 and its other filings with the Securities and Exchange Commission (the "SEC"). The Company undertakes no obligation to update or revise any forward looking statement, except as may be required by law.

Background

National American University, or NAU, is a regionally accredited, proprietary, multi-campus institution of higher learning offering associate, bachelor's and master's degree programs in business-related disciplines, such as accounting, 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. In addition, in August 2013, NAU was approved by the Higher Learning Commission to offer an Education Doctorate (Ed.D) in Community College Leadership, which will be offered in Austin, Texas. Operations include 37 locations (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 and Texas; and distance learning operations and central administration offices in Rapid City, South Dakota.

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As of August 31, 2013, NAU had enrolled 2,357 students in courses at its physical locations, 6,592 students for its online programs, and 1,794 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 which 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 that 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 1.6% of our revenues for the quarter ended August 31, 2013.

Key Financial Results Metrics

Revenue. Revenue is derived mostly from NAU's operations. For the three months ended August 31, 2013, approximately 89% 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 book sales, 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.

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 anticipated 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 expenses as a percentage of revenues for the three months ended August 31, 2013 and 2012 were 2.4% and 4.6%, respectively.

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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 August 31, 2013 and 2012, by degree type and by instructional delivery method.

                                                                                               % Growth for
                                     August 31, 2013              August 31, 2012              same quarter
                                    (Summer  '14 Qtr)            (Summer  '13 Qtr)           over prior year
                                   Number of Students           Number of Students
Graduate                                           339                          338                       0.3 %
Undergraduate and Diploma                       10,404                       10,012                       3.9 %

Total                                           10,743                       10,350                       3.8 %

On-Campus                                        2,357                        2,536                      (7.1 )%
Online                                           6,592                        6,068                       8.6 %
Hybrid                                           1,794                        1,746                       2.7 %

Total                                           10,743                       10,350                       3.8 %

We experienced a 3.8% growth in enrollment in the summer term 2014 over the summer term 2013. We believe we have realized a significant, yet steady increase in enrollments since 2005 due to our investment in the expansion and development of 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 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 add admissions staff, develop or expand academic programming or make acquisitions, whether as a result of regulatory limitations or other factors, our growth rate will likely decline.

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Expenses. Expenses consist of cost of educational services, selling, general and administrative, auxiliary expenses, the cost of condominium sales, and the gain/loss on disposition of property and equipment. Cost of educational services expenses contains 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), legal expenses, expenses related to expansion and development of academic programs and physical locations, 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 and clothing. The cost of condominium sales is the expense related to condominiums that are sold during the reporting period. The gain/loss on disposition of property and equipment expense records the remaining book value 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, subject to applicable regulatory approvals. 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 2009 Stock Option and Compensation Plan, the 2013 Restricted Stock Unit Plan or other equity incentive plans.

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 post-secondary education.

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Department of Education Rulemaking

On August 30, 2013, as part of its previously announced negotiated rulemaking process to define whether certain educational programs comply with the Higher Education Act's requirement of preparing students for gainful employment in a recognized occupation, the Department of Education issued draft regulatory language that would determine eligibility for Title IV funds and require certain student notice requirements, based on whether an educational program satisfies annual metrics related to student loan borrowing and earnings of graduates. These metrics are as follows:

Debt-to-discretionary earnings ratio, which compares (i) the annual repayment required on student loan debt incurred by students who completed the program to (ii) their discretionary earnings; and

Debt-to-earnings ratio, which compares (i) the annual repayment required on student loan debt incurred by students who completed the program to
(ii) their actual annual earnings.

The Department's draft regulatory language also includes additional provisions, some of which are more restrictive than the terms of the regulation proposed in 2011 in connection with the program integrity regulations. The negotiated rulemaking committee considered the Department's draft regulatory language during its first session on September 9-11, 2013, and is scheduled to hold its second session October 21-23, 2013. We are evaluating the potential impact of the draft regulatory language, which may be significantly revised in connection with the negotiated rulemaking sessions and subsequent notice and comment period.

Results of Operations - Three Months Ended August 31, 2013 Compared to Three
Months Ended August 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:



                                                   Three Months                Three Months
                                                   Ended August                Ended August
                                                     31, 2013                    31, 2012
                                                  In percentages              In percentages
Total revenues                                              100.0 %                     100.0 %
Operating expenses:
Cost of educational services                                 22.6                        24.2
Selling, general and administrative                          71.8                        69.4
Auxiliary expense                                             6.4                         6.3
Cost of condominium sales                                     0.6                         0.0
(Gain) loss on disposition of property                       (0.3 )                       0.2

Total operating expenses                                    101.1                       100.1
Operating loss                                               (1.1 )                      (0.1 )
Interest expense                                             (0.8 )                      (0.8 )
Interest income                                               0.1                         0.1
Other income                                                  0.1                         0.1

Loss before income taxes                                     (1.7 )                      (0.7 )
Income tax benefit                                            0.6                         0.1
Net income attributable to
non-controlling interest                                      0.1                         0.0

Net loss attributable to the Company                         (1.0 )%                     (0.6 )%

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For the three months ended August 31, 2013, our total revenue was $30.9 million, an increase of $1.5 million or 5.0%, as compared to total revenue of $29.5 million for the same period in 2012. The increase was primarily due to the execution of our strategic growth plan which resulted in an average enrollment increase of 3.8% for the three months ended August 31, 2013 over the prior year and to a board approved tuition increase that became effective September 2012. The enrollment increases were driven by our investment in new programs, expansion of existing programs to new markets and an improved enrollment management system of monitoring and improving our recruitment processes. Our revenue for the three months ended August 31, 2013 consisted of $30.4 million from our NAU operations and $0.5 million from our other operations.

Total operating expenses were $31.3 million or 101.1% of total revenue for the three months ended August 31, 2013, which is an increase of $1.8 million compared to the same period in 2012. Loss from operations was $(0.4) million or
(1.1)% of total revenue for the three months ended August 31, 2013, which is a decrease of $0.3 million compared to the same period in 2012. Net loss attributable to the Company was $0.3 million or (1.0)% of total revenue for the three months ended August 31, 2013 as compared to $0.2 million or (0.6)% of total revenue for the three months ended August 31, 2012.

We experience losses in the first quarter due to the seasonality of our business which results in lower enrollment in the summer quarter. In addition, our fixed costs have increased due to additional admissions staffing and institutional support to ensure the quality of our academic programs, increased rent expense due to the transition of three campuses from temporary to permanent sites and increased shared based compensation expense used to aid in recruiting and retaining employees, officers, directors and other consultants.

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NAU

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



                                                        Three Months                Three Months
                                                        Ended August                Ended August
                                                          31, 2013                    31, 2012
                                                       In percentages              In percentages
Total revenues                                                   100.0 %                     100.0 %
Operating expenses:
Cost of educational services                                      23.0                        24.5
Selling, general and administrative                               71.6                        68.5
Auxiliary expense                                                  6.5                         6.3
Loss on disposition of property                                    0.0                         0.0

Total operating expenses                                         101.1                        99.3
Operating income                                                  (1.1 )                       0.7
Interest expense                                                  (0.8 )                      (0.9 )
Interest income                                                    0.0                         0.1
Other income                                                       0.0                         0.0

Loss before non-controlling interest and taxes                    (1.9 )%                     (0.1 )%

Total revenue. The total revenue for NAU for the three months ended August 31, 2013 was $30.4 million, an increase of $1.2 million or 4.3%, as compared to total revenue of $29.2 million for the same period in 2012. The increase was primarily due to the average enrollment increase of 3.8% for the three months ended August 31, 2013 over the same period in 2012. In addition, the increase in total revenue is due to a board approved average tuition increase of 5.4% that became effective September 2012 and fees billed to affiliate institutions for our courseware development, technical support and online class hosting services. We believe that NAU's well-defined strategic plan continues to contribute to the increase in the revenues.

The academic revenue for the three months ended August 31, 2013 was $27.6 million, an increase of $1.2 million or 4.4%, as compared to academic revenue of $26.5 million for the same period in 2012. The increase was primarily due to the enrollment increase over the prior year. The auxiliary revenue was $2.8 million, an increase of $0.1 million or 2.7%, as compared to auxiliary revenue of $2.7 million for the same period in 2012. This increase in auxiliary revenue was primarily driven by increased enrollment growth.

Cost of educational services. The educational services expense as a percentage of total revenue decreased by 1.5 percentage points for the three months ended August 31, 2013, to 23.0%, as compared to 24.5% for the same period in 2012. This decrease was a result of fixed costs such as facility expenses on an increasing revenue base.

Selling, general and administrative expenses. The selling, general and administrative expenses as a percentage of net revenue increased by 3.1 percentage points for the three months ended August 31, 2013, to 71.6%, as compared to 68.5% for the same period in 2012. The selling, general and administrative expenses for the three months ended August 31, 2013 were $21.8 million, an increase of $1.8 million, or 9.0%, as compared to selling, general and administrative expenses of $20.0 million for the same period in 2012. Included in these numbers are the additional admissions staffing and institutional support to bring the developmental campuses online which is required to ensure the operation of these new locations and to support the quality of our academic programs. As these locations mature and the revenue base grows the costs associated with these locations will continue to see improvement as a percentage of revenue. Also included is an increase in rent expense as a result of three campuses transitioning from temporary, start-up sites to permanent long-term locations and to share based compensation expense used to aid in recruiting and retaining employees, officers, directors and other consultants.

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Auxiliary. Auxiliary expenses for the three months ended August 31, 2013 were $2.0 million, an increase of $0.1 million as compared to auxiliary expenses of $1.8 million for the same period in 2012. The increase is due to increased cost of books sold which is a result of a 3.8% increase in enrollments.

Income before non-controlling interest and taxes. The loss before non-controlling interest and taxes for the three months ended August 31, 2013 was $0.6 million an increase of $0.4 million as compared to a $0.2 million loss for the same period in 2012. This is discussed above in more detail.

Liquidity and Capital Resources

Liquidity. At August 31, 2013, and May 31, 2013, cash, cash equivalents and marketable securities were $32.0 million and $31.9 million, respectively. Consistent with our cash management plan and investment philosophy, a portion of the excess cash was invested in United States securities directly or through money market funds, as well as in bank deposits and certificates of deposit. Of the amounts listed above, the marketable securities at August 31, 2013 and May 31, 2013 were $23.2 million and $20.7 million, respectively.

We maintain one line of credit to support ongoing operations. This line of credit is available to support timing differences between inflows and outflows of cash. During the first three months of fiscal year 2014 ended August 31, 2013, the line of credit was not utilized. We retain this $3.0 million revolving line of credit with Great Western Bank. Advances under the line bear interest at a variable rate based on prime and are unsecured. There were no advances outstanding against this line at August 31, 2013 and May 31, 2013.

Based on our current operations and anticipated growth, the cash flows from operations and other sources of liquidity are anticipated to provide adequate funds for ongoing operations and planned capital expenditures for the next 12 months. These expenditures include our plans for continued expansion and development of new programming and growth of our affiliate relationships. Our current focus is to fit expenditures with enrollment patterns. Also, we believe that we are positioned to further supplement our liquidity with debt, if needed.

Operating Activities. Net cash provided by operating activities for the three months ended August 31, 2013 and 2012 were $1.7 million and $0.7 million, respectively. This increase is due to a reduction in cash used to fund working capital, primarily due to improved collections of our accounts and other receivables and the sale of a condominium unit. This was offset by adjustments for uncollectable tuition and non-cash compensation.

Investing Activities. Net cash used by investing activities was $3.0 million for the three months ended August 31, 2013, as compared to the net cash provided by investing activities of $1.0 million for the three months ended August 31, 2012. The increase in the cash used by investing activities was primarily related to the selling and buying of investments, which resulted in net spending of $2.5 million in fiscal 2014 as compared to net proceeds of $3.5 million in fiscal 2013. This was offset by slower expansion and development in the current year resulting in the decrease in purchases of property and equipment of $1.6 million for the three months ended August 31, 2013 as compared to the three months ended August 31, 2012 and the receipt of $0.5 million related to the sale of the dormitory building of the former Rapid City campus.

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