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NAUH > SEC Filings for NAUH > Form 10-Q on 4-Apr-2014All Recent SEC Filings

Show all filings for NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.

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


4-Apr-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 Roueche 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 February 28, 2014, NAU had 2,504 students enrolled in courses at its physical locations only, 6,767 students enrolled in online courses only, and 1,810 students enrolled in a hybrid format taking both online courses and courses at a physical location. NAU supports the instruction of 4,500 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 1.3% of our revenues for the quarter ended February 28, 2014.

Key Financial Results Metrics

Revenue. Revenue is derived mostly from NAU's operations. For the nine months ended February 28, 2014, approximately 92% 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 nine months ended February 28, 2014 and 2013 were 2.5% and 3.4%, 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 February 28, 2014, and February 28, 2013, by degree type and by instructional delivery method.

                                   February 28, 2014             February 28, 2013             % Decrease for
                                    (Winter '14 Qtr)              (Winter '13 Qtr)              same quarter
                                   Number of Students            Number of Students           over prior year
Graduate                                           397                           414                      (4.1 )%
Undergraduate and Diploma                       10,684                        11,075                      (3.5 )%

Total                                           11,081                        11,489                      (3.6 )%

On-Campus                                        2,504                         2,610                      (4.1 )%
Online                                           6,767                         6,946                      (2.6 )%
Hybrid                                           1,810                         1,933                      (6.4 )%

Total                                           11,081                        11,489                      (3.6 )%

We experienced a 3.6% decrease in enrollment in the winter term 2014 over the winter term 2013. This decline was across all degree programs and course delivery methods. We believe our investment to grow our current physical location and expand 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 Plans 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

On March 25, 2014, the U.S. Department of Education (the "Department") proposed regulations 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. The proposed regulations would cause each educational program covered by the rule, which includes all of NAU's educational programs, to fail the requirement of preparing students for gainful employment if its graduates' student loan debt payments exceed 12% of their total earnings and 30% of their discretionary earnings, the same ratios as in the Department's proposed draft language that was issued during the negotiated rulemaking committee session in December 2013 and the Department's original rule published in June 2011. Also unchanged from the earlier proposed draft language, programs whose graduates have debt-to-earnings ratios of 8% to 12% or debt-to-discretionary-earnings ratios of 20% to 30% would fall in a "zone", and the institution would have to warn students that they might become ineligible for Title IV program funds. Programs that fail both debt-to-earnings tests twice in any three-year period or are in the zone for four consecutive years would be ineligible for Title IV program funds. Different from the original June 2011 rule but consistent with the proposed draft language from the negotiated rulemaking committee session in December 2013, the March 2014 proposed rule includes a programmatic cohort default rate component whereby programs whose borrower cohort default rates exceed 30% for three consecutive years would be ineligible for federal student financial aid.

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The debt-to-earnings ratios and programmatic cohort default rates are calculated under complex methodologies and definitions outlined in the proposed regulations and, in some cases, are based on data that may not be readily accessible to institutions. The proposed regulations also contain other provisions that, among other things, include disclosure, reporting and certification requirements. We are evaluating the potential impact of proposed regulations, which remain subject to comment by the public through May 27, 2014 and which may or may not reflect the Department's final regulations. We cannot predict the ultimate content or effective date of any new regulations that may emerge from this process or the potential impact on NAU's programs. However, any regulations that reduce or eliminate our students' access to Title IV program funds, that require us to change or eliminate programs or that increase our costs of compliance could materially decrease our revenue and liquidity, increase operating costs and adversely affect our overall business.

In February and March 2014, the Department held two negotiated rulemaking sessions related to proposed regulations to address program integrity and improvement issues for the Title IV programs, including but not limited to cash management of Title IV program 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. During the March 2014 negotiating session, the Department proposed draft regulatory language regarding state authorization for programs offered through distance education that would impose new requirements for students in such programs to be eligible for Title IV program funds and which, if ultimately promulgated into regulation, could materially decrease our revenue and liquidity, and adversely affect our overall business. The Department has scheduled a third session for this negotiated rulemaking committee on April 23-25, 2014 and has announced that a fourth session in May 2014 is likely.

In January, February and March - April 2014, the Department held three negotiated rulemaking sessions to implement the changes to the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act (20 U.S.C. 1092(f)), or the Clery Act, required by March 2013 amendments to the Violence Against Women Act, or VAWA. While the final regulations will likely not be implemented prior to July 1, 2015, the Department notified institutions in an Electronic Announcement in May 2013 that until the regulations go into effect, the Department expects institutions to make a good faith effort to comply with the statutory requirements. Among other things, VAWA requires institutions to compile statistics for certain crimes reported to campus security authorities or local police agencies. Under the statute, an institution must include the new required information in its Annual Security Report issued no later than October 1, 2014.

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Results of Operations - Nine Months Ended February 28, 2014 Compared to Nine
Months Ended February 28, 2013

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:



                                                   Nine Months                 Nine Months
                                                  Ended February              Ended February
                                                     28, 2014                    28, 2013
                                                  In percentages              In percentages
Total revenues                                              100.0 %                     100.0 %
Operating expenses:
Cost of educational services                                 22.8                        22.6
Selling, general and administrative                          68.0                        64.0
Auxiliary expense                                             4.9                         5.2
Cost of condominium sales                                     0.4                         0.0
(Gain) loss on disposition of property                       (0.1 )                       0.1

Total operating expenses                                     96.0                        91.9
Operating income                                              4.0                         8.1
Interest expense                                             (0.6 )                      (0.8 )
Interest income                                               0.1                         0.1
Other income                                                  0.1                         0.0

Income before income taxes                                    3.6                         7.4
Income tax expense                                           (1.4 )                      (2.9 )
Net income attributable to
non-controlling interest                                      0.0                         0.0

Net income attributable to the Company                        2.2 %                       4.5 %

For the nine months ended February 28, 2014, our total revenue was $95.8 million, a decrease of $0.2 million or 0.2%, as compared to total revenue of $96.0 million for the same period in 2013. The revenue was flat as a result of an enrollment decrease over the first nine 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 nine months ended February 28, 2014 consisted of $94.5 million from our NAU operations and $1.3 million from our other operations.

Total operating expenses were $91.9 million or 96% of total revenue for the nine months ended February 28, 2014, which is an increase of $3.7 million compared to the same period in 2013. Income from operations was $3.9 million or 4.0% of total revenue for the nine months ended February 28, 2014, which is a decrease of $3.9 million compared to the same period in 2013. Net income attributable to the Company was $2.2 million or 2.2% of total revenue for the nine months ended February 28, 2014, a decrease of 50.0%, compared to the same period in 2013. The additional details regarding these variances are described in greater detail below.

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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:



                                                          Nine Months                Nine Months
                                                             Ended                      Ended
                                                            February                   February
                                                            28, 2014                   28, 2013
                                                         In percentages             In percentages
Total revenues                                                     100.0 %                    100.0 %
Operating expenses:
Cost of educational services                                        23.1                       22.8
Selling, general and administrative                                 67.6                       63.2
Auxiliary expense                                                    5.0                        5.3
Cost of condominium sales                                            0.0                        0.0
Loss on disposition of property                                      0.0                        0.0

Total operating expenses                                            95.7                       91.3
Operating income                                                     4.3                        8.7
Interest expense                                                    (0.6 )                     (0.8 )
Interest income                                                      0.1                        0.1
Other income (loss)                                                  0.0                       (0.1 )

Income before non-controlling interest and taxes                     3.8 %                      7.9 %

Total revenue. The total revenue for NAU for the nine months ended February 28, 2014 was $94.5 million, a decrease of $0.7 million or 0.7%, as compared to total revenue of $95.2 million for the same period in 2013. 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 nine months ended February 28, 2014 was $87.7 million, an increase of $0.2 million or 0.2%, as compared to academic revenue of $87.5 million for the same period in 2013. 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 $6.8 million, a decrease of $0.9 million or 11.2%, as compared to auxiliary revenue of $7.6 million for the same period in 2013. 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 was 23.1% an increase of 0.6% for the nine months ended February 28, 2014 and 2013. This was a result of fixed costs such as facility expenses on a decreased revenue base as compared to the prior year.

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Selling, general and administrative expenses. The selling, general and administrative expenses as a percentage of net revenue increased by 4.4 percentage points for the nine months ended February 28, 2014, to 67.6%, as compared to 63.2% for the same period in 2013. The selling, general and administrative expenses for the nine months ended February 28, 2014 were $63.8 million, an increase of $3.6 million, or 6.0%, as compared to selling, general and administrative expenses of $60.2 million for the same period in 2013. This increase is due to $1.4 million in admissions and marketing costs, $0.8 million in rent and depreciation, $0.4 million in legal expenses, $0.3 million of new software and $0.3 million in the newly approved doctoral programs.

Auxiliary. Auxiliary expenses for the nine months ended February 28, 2014 were $4.7 million, a decrease of $0.3 million as compared to auxiliary expenses of $5.0 million for the same period in 2013. As discussed above, auxiliary expense decreased as a result of reduced enrollments and increased publisher discounts.

Income before non-controlling interest and taxes. The income before non-controlling interest and taxes for the nine months ended February 28, 2014 was $3.6 million, a decrease of $4.0 million or 52.5%, as compared to $7.5 million for the same period in 2013. This decrease is due to the additional expenses discussed above.

Results of Operations - Three Months Ended February 28, 2014 Compared to Three
Months Ended February 28, 2013

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 February              Ended February
                                                      28, 2014                    28, 2013
                                                   In percentages              In percentages
Total revenues                                               100.0 %                     100.0 %
Operating expenses:
Cost of educational services                                  22.8                        22.0
Selling, general and administrative                           67.3                        64.4
Auxiliary expense                                              3.2                         4.5
. . .
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