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NAUH > SEC Filings for NAUH > Form 10-Q on 10-Jan-2014All Recent SEC Filings

Show all filings for NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. | Request a Trial to NEW EDGAR Online Pro

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


10-Jan-2014

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, master's and doctoral 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 and Texas; and distance learning operations and central administration offices in Rapid City, South Dakota.

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As of November 30, 2013, NAU had 2,625 students enrolled in courses at its physical locations only, 6,853 students enrolled in online courses only, and 1,908 students enrolled in a hybrid format taking both online courses and courses at a physical location. NAU supports the instruction of 4,551 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 0.8% of our revenues for the quarter ended November 30, 2013.

Key Financial Results Metrics

Revenue. Revenue is derived mostly from NAU's operations. For the six months ended November 30, 2013, approximately 91% 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 six months ended November 30, 2013 and 2012 were 2.6% and 3.7%, 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.

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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 November 30, 2013, and November 30, 2012, by degree type and by instructional delivery method.

                                    November 30, 2013            November 30, 2012            % Decrease for
                                     (Fall '14 Qtr)               (Fall '13 Qtr)               same quarter
                                   Number of Students           Number of Students           over prior year
Graduate                                           371                          393                      (5.6 )%
Undergraduate and Diploma                       11,015                       11,292                      (2.4 )%

Total                                           11,386                       11,685                      (2.6 )%

On-Campus                                        2,625                        2,704                      (2.9 )%
Online                                           6,853                        6,892                      (0.6 )%
Hybrid                                           1,908                        2,089                      (8.7 )%

Total                                           11,386                       11,685                      (2.6 )%

We experienced a 2.6% decrease in enrollment in the fall term 2014 over the fall term 2013. This decline was across all degree programs and course delivery methods. We believe our investment to expand and develop physical locations and academic programming and our strategic plan will be critical in returning to the growth and results of operations that we have seen over the recent years.

We plan to continue expanding and developing our academic programming focusing on growth at our 37 existing locations and potentially making strategic acquisitions. Enrollments will be subject to applicable regulatory requirements and market conditions. With these efforts, we anticipate our enrollments will once again trend upward. To the extent the economic downturn has caused enrollment growth in the past, our ability to maintain or increase that level of 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 enrollment trends will be correlated with 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 strategic acquisitions. If market conditions decline or if we are unable to open new physical locations, develop or expand academic programming or make strategic acquisitions, whether as a result of regulatory limitations or other factors, our growth rate will likely decline.

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.

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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 and 2013 Stock Option and Compensation 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.

Department of Education Rulemaking

As part of negotiated rulemaking process that took place over three sessions between September 9 and December 13, 2013, on December 11, 2013 the Department of Education (the Department) issued revised draft regulatory language to define whether certain educational programs, including all programs offered NAU, comply with the Higher Education Act's requirement of preparing students for gainful employment in a recognized occupation. Under the latest draft regulatory language, the Department would determine the eligibility of such programs for Title IV funds and require certain student notice requirements based on the following metrics:

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;

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; and

Program cohort default rate, which measures the percentage of an individual educational program's students, including both completers and non-completers, who default on their federal student loans.

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The Department's draft regulatory language also includes additional provisions, some of which are more restrictive than the terms of the gainful employment regulation proposed in 2011 in connection with the program integrity regulations. The negotiated rulemaking committee considered the Department's draft regulatory proposals during its first session on September 9-11, 2013, a second session November 18-20, 2013 and a third session on December 13, 2013. As the negotiated rulemaking committee did not reach consensus on the regulation, the Department can pursue a regulatory proposal however it chooses and is not bound by the discussions or tentative agreements of the negotiated rulemaking committee. We are evaluating the potential impact of the draft regulatory language, which may or may not reflect the Department's ultimate proposed regulation or final regulation after a subsequent notice and comment period.

On November 20, 2013, the Department announced its intention to establish another negotiated rulemaking committee to prepare proposed regulations to address program integrity and improvement issues for the Title IV programs, including but not limited to cash management of Title IV funds and the use of debit cards and the handling of Title IV credit balances, state authorization for programs offered through distance education or correspondence education, state authorization for foreign locations of institutions, and clock to credit hour conversion requirements. The Department has scheduled three sessions for this negotiating rulemaking committee, with the first session February 19-21, 2014, the second session March 26-28, 2014 and the third session April 23-25, 2014.

Results of Operations - Six Months Ended November 30, 2013 Compared to Six
Months Ended November 30, 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:



                                                      Six Months                 Six Months
                                                        Ended                      Ended
                                                     November 30,               November 30,
                                                         2013                       2012
                                                    In percentages             In percentages
Total revenues                                                100.0 %                    100.0 %
Operating expenses:
Cost of educational services                                   22.8                       22.9
Selling, general and administrative                            68.3                       63.8
Auxiliary expense                                               5.7                        5.6
Cost of condominium sales                                       0.3                        0.0
Loss (gain) on disposition of property                         (0.1 )                      0.1

Total operating expenses                                       97.0                       92.4
Operating income                                                3.0                        7.6
Interest expense                                               (0.6 )                     (0.8 )
Interest income                                                 0.1                        0.1
Other income                                                    0.1                        0.1

Income before income taxes                                      2.6                        7.0
Income tax expense                                             (1.0 )                     (2.8 )
Net income attributable to non-controlling
interest                                                        0.0                        0.0

Net income attributable to the Company                          1.6 %                      4.2 %

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For the six months ended November 30, 2013, our total revenue was $64.1 million, an increase of $0.2 million or 0.2%, as compared to total revenue of $64.0 million for the same period in 2012. The revenue was flat as a result of an enrollment decrease over the first six months that was offset by a board approved tuition increase of 3.5% effective September 2013. The enrollment decreases were the result of economic and market demand among our targeted student demographic. Our revenue for the six months ended November 30, 2013 consisted of $63.3 million from our NAU operations and $0.8 million from our other operations.

Total operating expenses were $62.2 million or 97% of total revenue for the six months ended November 30, 2013, which is an increase of $3.0 million compared to the same period in 2012. Income from operations was $2.0 million or 3.0% of total revenue for the six months ended November 30, 2013, which is a decrease of $2.9 million compared to the same period in 2012. Net income attributable to the Company was $1.0 million or 1.6% of total revenue for the six months ended November 30, 2013, a decrease of 61.8%, compared to the same period in 2012. The additional details regarding these variances are described in greater detail below.

NAU

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



                                                           Six Months                 Six Months
                                                             Ended                      Ended
                                                          November 30,               November 30,
                                                              2013                       2012
                                                         In percentages             In percentages
Total revenues                                                     100.0 %                    100.0 %
Operating expenses:
Cost of educational services                                        23.1                       23.1
Selling, general and administrative                                 67.8                       62.9
Auxiliary expense                                                    5.8                        5.7
Cost of condominium sales                                            0.0                        0.0
Loss on disposition of property                                      0.0                        0.0

Total operating expenses                                            96.7                       91.7
Operating income                                                     3.3                        8.3
Interest expense                                                    (0.7 )                     (0.8 )
Interest income                                                      0.1                        0.1
Other income                                                         0.0                        0.0

Income before non-controlling interest and taxes                     2.7 %                      7.6 %

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Total revenue. The total revenue for NAU for the six months ended November 30, 2013 was $63.3 million, a decrease of $0.1 million or 0.1%, as compared to total revenue of $63.4 million for the same period in 2012. The decrease was primarily due to an enrollment decrease which was a result of economic conditions and reduced demand among our targeted student demographic. We believe that NAU's well-defined strategic plan will return the Company to future increases in the revenues.

The academic revenue for the six months ended November 30, 2013 was $58.2 million, an increase of $0.2 million or 0.4%, as compared to academic revenue of $58 million for the same period in 2012. The increase was primarily due to an average tuition increase of 3.5% over the prior year offset by a decrease in enrollments. The auxiliary revenue was $5.1 million, a decrease of $0.3 million or 6.0%, as compared to auxiliary revenue of $5.4 million for the same period in 2012. This decrease in auxiliary revenue was primarily driven by decreased enrollment and vendor negotiations resulting in greater publisher discounts that were passed thru to the students in the form of lower book costs.

Cost of educational services. The educational services expense as a percentage of total revenue remained flat at 23.1% for the six months ended November 30, 2013 and 2012. This was a result of fixed costs such as facility expenses on a flat revenue base as compared to the prior year.

Selling, general and administrative expenses. The selling, general and administrative expenses as a percentage of net revenue increased by 4.9 percentage points for the six months ended November 30, 2013, to 67.8%, as compared to 62.9% for the same period in 2012. The selling, general and administrative expenses for the six months ended November 30, 2013 were $42.9 million, an increase of $3.0 million, or 7.6%, as compared to selling, general and administrative expenses of $39.9 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 should continue to see improvement as a percentage of revenue.

Auxiliary. Auxiliary expenses for the six months ended November 30, 2013 were $3.7 million, an increase of $0.1 million as compared to auxiliary expenses of $3.6 million for the same period in 2012.

Income before non-controlling interest and taxes. The income before non-controlling interest and taxes for the six months ended November 30, 2013 was $1.7 million, a decrease of $3.1 million or 64.0%, as compared to $4.8 million for the same period in 2012. This decrease is due to the additional expenses discussed above.

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Results of Operations - Three Months Ended November 30, 2013 Compared to Three
Months Ended November 30, 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                      Ended
                                                     November 30,               November 30,
                                                         2013                       2012
                                                    In percentages             In percentages
Total revenues                                                100.0 %                    100.0 %
Operating expenses:
Cost of educational services                                   22.9                       21.8
Selling, general and administrative                            64.9                       59.1
Auxiliary expense                                               5.1                        5.0
Cost of condominium sales                                       0.0                        0.0
Loss on disposition of property                                 0.1                        0.0

Total operating expenses                                       93.0                       85.9
Operating income                                                7.0                       14.1
Interest expense                                               (0.5 )                     (0.7 )
Interest income                                                 0.1                        0.1
Other income                                                    0.1                        0.0

Income before income taxes                                      6.7                       13.5
Income tax expense                                             (2.6 )                     (5.2 )
Net income attributable to non-controlling
interest                                                        0.0                        0.0

Net income attributable to the Company                          4.1 %                      8.3 %

For the three months ended November 30, 2013, our total revenue was $33.2 million, a decrease of $1.3 million or 3.9%, as compared to total revenue of $34.5 million for the same period in 2012. The decrease was primarily due to a decrease in credit hours of 4.4% and lower book sales as a result of lower credit hours during the fall quarter 2013 over the fall quarter 2012 offset by a 3.5% tuition increase effective with the fall 2013 quarter. Our revenue for the three months ended November 30, 2013 consisted of $32.9 million from our NAU operations and $0.3 million from our other operations. Total operating expenses were $30.8 million or 93.0% of total revenue for the three months ended . . .

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