Item 1B.
Unresolved Staff Comments.
None.
We lease our educational sites and administrative facilities except for our main educational site in Rapid City, South Dakota, which we own. Our educational sites are located in Colorado, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, South Dakota, and Texas and our corporate headquarters is located in Rapid City, South Dakota, as set forth under the heading “Educational Sites” under Item 1. As of June 30, 2011, we owned one and leased 31 educational sites (five of which are pending regulatory approvals) and administrative facilities.
We evaluate current utilization of our facilities and projected enrollment growth to determine facility needs. We believe our existing facilities are adequate for current requirements and that additional space can be obtained on commercially reasonable terms to meet future requirements.
From time to time, we are a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not at this time a party, as plaintiff or defendant, to any legal proceedings that, individually or in the aggregate, would be expected to have a material adverse effect on our business, financial condition or results of operation.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock began trading on the Nasdaq Global Market under the symbol “NAUH” on May 27, 2010. Our common stock traded on the Over-the-Counter Bulletin Board under the symbol “NAUH” through May 26, 2010.
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The following table sets forth the high and low last bid price (as traded on the Over-the-Counter Bulletin Board) or the high and low sales price (as traded on Nasdaq Global Market), as applicable, and dividends paid per share of our common stock by quarter for our past two most recent fiscal years. The over-the-counter market quotations listed below reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
Stockholders
As of August 2, 2011, there were approximately 26 holders of record of our common stock.
Dividends
Prior to our transaction with Dlorah, we did not pay any cash dividends. Prior to the closing of our follow-on public offering, which closed on June 1, 2010, pursuant to our second amended and restated certificate of incorporation, the holders of our Class A common stock, par value $0.0001, were entitled to a quarterly accruing dividend equal to $0.11 (for a total of $0.44 per year) per share of common stock into which such Class A common stock is convertible for each of the Company’s eight successive fiscal quarters following the first issuance of Class A common stock, paid when and if declared by our board of directors. If a dividend was paid on the Class A common stock, we must have also declared and paid a dividend on the common stock equal to one-fourth of the amount of the dividend paid to the Class A common stock. During our fiscal year 2010, we have paid two dividends on the Class A common stock and common stock, which were paid on January 4, 2010 and March 20, 2010. For each of those dividends, the record holders of Class A common stock received a dividend equal to $0.11 per share of common stock into which such Class A common stock was convertible, and the holders of common stock received a dividend of $0.0275 per share.
We also declared and paid a contingent special dividend that were payable promptly after the completion of our follow-on public offering on June 1, 2010, to our Class A common stockholders and common stockholders of record on May 20, 2010. The aggregate amount of the special dividend paid was approximately $11.1 million, or (a) approximately $0.64 per share of common stock into which a share of Class A common stock was convertible to holders of Class A common stock and (b) $0.16 per share of common stock payable to holders of common stock. Immediately prior to the completion of our follow-on public offering, all Class A common stock were converted into common stock. The payment of the special dividend represented the aggregate amount of the dividend that would be foregone by the Class A common stockholders by converting their Class A common stock into common stock in connection with the follow-on public offering and the corresponding required dividend to the common stockholders, using a present value discount to reflect that the dividend would be paid in advance of when it is otherwise payable.
Because no Class A common stock were outstanding following its conversion into common stock prior to the consummation of the follow-on public offering, we will have no further obligation to accrue or pay dividends on any of our outstanding capital stock. Nevertheless, during our fiscal year 2011, our board of directors have declared dividends on our common stock, and to the extent that funds are available, our board of directors currently intends to continue paying dividends on our common stock. The payment of any dividends in the future, however, will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, earnings, capital requirements, contractual restrictions, outstanding indebtedness and other factors deemed relevant by our board of directors.
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Use of Proceeds
In December 2007, we completed our initial public offering, or IPO, pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended (File No. 333-143098) that was declared effective by the Securities and Exchange Commission on November 26, 2007. Under the registration statement, we registered the offering and sale of 7,812,500 units, each unit consisting of one share of common stock, $0.0001 par value per share, and one warrant to purchase one share of common stock. A total of 6,626,300 units were sold in the offering at a price to the public of $8.00 per unit. After deducting underwriting discounts, commissions and offering expenses of approximately $4.2 million, we raised a total of $48.8 million.
In connection with the transaction with Dlorah on November 23, 2009, we used $3.3 million of our IPO proceeds to redeem all of the outstanding warrants that were publicly traded immediately before the consummation of the Dlorah transaction, and $3.7 million of our proceeds from the IPO to buyout an employment agreement and legal, accounting, filing, and insurance fees associated with being a public entity.
We have used and intend to use the remaining net proceeds from the IPO for general corporate purposes and growth initiatives, including expansion of educational sites.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information about our common stock that may be issued upon the exercise of options, warrants and rights under all of the our compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance as of May 31, 2011, which includes our 2009 Stock Option and Compensation Plan.
(1)
See “National American University Holdings, Inc. 2009 Stock Option and Compensation Plan” described in “Notes to Consolidated Financial Statements-Note 9-Stockholders’ Equity” for further description of our equity compensation plan.
(2)
Represents the weighted-average exercise price of outstanding securities and is calculated by taking into account the 53,000 shares of common stock subject to outstanding restricted stock units that become issuable as those units vest, for no consideration. The weighted-average exercise price of outstanding securities excluding those 53,000 shares of common stock that can be exercised for no consideration is $9.35.
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Item 6.
Item 6.
Selected Financial Data.
The following table shows our selected consolidated financial and operating data for each of the fiscal years ended May 31, 2011, 2010, 2009 and 2008. Dlorah was the accounting acquirer in our transaction as described in Note 15 to our consolidated financial statements. Accordingly, our historical financial information reflects the operations of Dlorah. The selected consolidated statements of financial data for the fiscal years ended May 31, 2011, 2010, 2009 and 2008 are derived from Dlorah’s audited consolidated financial statements prepared in accordance with accounting standards generally accepted in the United States. Our historical results are not necessarily indicative of our results for any future period.
This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes.
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Consists of income attributable to the Company, less income from non-controlling interest, plus income (loss) from non-controlling interest, minus interest income, plus interest expense, plus income taxes, plus depreciation and amortization. We use EBITDA as a measure of operating performance. However, EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, income as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies and is therefore limited as a comparative measure. Furthermore, as an analytical tool, EBITDA has additional limitations, including that (a) it is not intended to be a measure of free cash flow, as it does not consider certain cash requirements such as tax payments; (b) it does not reflect changes in, or cash requirements for, our working capital needs; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements, or future requirements for capital expenditures or contractual commitments. To compensate for these limitations, we evaluate our profitability by considering the economic effect of the excluded expense items independently as well as in connection with our analysis of cash flows from operations and through the use of other financial measures.
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We believe EBITDA is useful to an investor in evaluating our operating performance because it is widely used to measure a company’s operating performance without regard to certain non-cash expenses (such as depreciation and amortization) and expenses that are not reflective of our core operating results over time. We believe EBITDA presents a meaningful measure of corporate performance exclusive of our capital structure, the method by which assets were acquired and non-cash charges, and provides us with additional useful information to measure our performance on a consistent basis, particularly with respect to changes in performance from period to period.
The following table provides a reconciliation of net income attributable to the Company to EBITDA:
Student headcount is based on the headcount as of the last day of the university’s Spring term, which runs from March to May.
Item 7.
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.
Background
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 32 educational sites (five of which are pending regulatory approvals) located in Colorado, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, South Dakota and Texas, and distance learning operations and central administration offices located in Rapid City, South Dakota.
As of May 31, 2011, NAU had enrolled 3,751 students at its physical locations, 4,624 students for its online programs, and 1,640 students at its hybrid learning centers who attended physical campus locations and also took classes online. NAU supports the instruction of 4,000 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 charge a fee for its services, enabling it to generate additional revenue by leveraging its current online program infrastructure.
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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 fiscal year ended May 31, 2011.
Key Financial Results Metrics
Revenue. Revenue is derived mostly from NAU’s operations. For fiscal year ended May 31, 2011, approximately 92.9% 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.
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, 2011, 2010, and 2009 was 3.1%, 2.6%, and 2.6%, 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.
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The following chart is a summary of our student enrollment on May 31, 2011, and May 31, 2010, by degree type and by instructional delivery method.
We experienced a 14% growth in enrollment in spring term 2011 over spring term 2010. This growth was a significant increase over our historic enrollment growth, which has averaged approximately 11.75% annually since 1998. We believe this recent 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 $34 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, clothing, food and textbook shrinkage. The cost of condominium sales is the expense related to condominiums that are sold during the reporting period. The loss on disposition of property and equipment expense records the cost of disposed 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. 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.
Public company expenses. As a public company, we have begun and will continue to incur significant additional costs and expenses such as increased legal and audit fees, professional fees, director and officer insurance costs, board of director fees and expenses related to compliance with the Sarbanes-Oxley Act regulations and preparing and distributing periodic reports in compliance with obligations under the federal securities laws. In addition, we will likely have to hire additional personnel and expand our administrative functions to maintain compliance, with the regulatory obligations of being a public company. We estimate that the additional costs of being a public company will be between $1.0 million and $2.0 million annually, which we expect to fund through cash provided by operating activities.
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.
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.
Critical Accounting Policies and Estimates
The discussion of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these 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 financial statements. We believe the following critical accounting policies involve more significant judgments and estimates than others used in the preparation of our financial statements:
Revenue recognition. Academic revenue represented approximately 92.9%, 91.8%, and 90.9% of revenue for the fiscal years ended May 31, 2011, 2010, and 2009, 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.
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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, 2011, and 2010, the allowance for doubtful accounts was approximately $0.2 million, and $0.2 million respectively. During the fiscal years ended May 31, 2011, 2010, and 2009, bad debt expense was $3.4 million, $2.4 million, and $1.6 million, respectively. The bad debt expense was 3.1%, 2.6%, and 2.6% of total revenue for the fiscal years ended May 31, 2011, 2010 and 2009, 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.
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. Derecognition 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-not threshold 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.
Department of Education Rulemaking
On June 18, 2010, the Department of Education published the June NPRM related to a number of Title IV program integrity issues. The June NPRM addressed each of the 14 topics discussed at the negotiated rulemaking sessions held in November 2009, December 2009 and January 2010, including, among others, the definition of a high school diploma for the purposes of establishing institutional eligibility to participate in Title IV programs and student eligibility to receive Title IV aid, standards regarding the payment of incentive compensation, establishing requirements for institutions to submit information on program completers for programs that prepare students for gainful employment in recognized occupations, revising the definition of what constitutes a “substantial misrepresentation” made by an institution, standards regarding the sufficiency of a state’s authorization of an institution for the purpose of establishing an institution’s eligibility to participate in Title IV programs, and the definition of a credit hour for purposes of determining program eligibility for Title IV student financial aid. On July 26, 2010, the Department of Education published the July NPRM related to a definition of “gainful employment” for purposes of determining whether certain educational programs comply with the Title IV requirement of preparing students for gainful employment in a recognized occupation. On October 29 2010, the Department of Education published the Final Rules pertaining to the Title IV program integrity issues, addressing all 14 topics addressed in the June NPRM and the July NPRM, other than sections of the proposed definition of “gainful employment.” On June 13, 2011, the Department of Education published in the Gainful Employment Rule.
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The Final Rules became effective July 1, 2011, except for rules pertaining to verification and updating of student aid application information, which are effective July 1, 2012. The Gainful Employment Rule is effective July 1, 2012. On May 5, 2011, the Department of Education announced its intention to establish additional negotiated rulemaking committees to consider additional regulations under the Higher Education Act. The Department of Education held three public hearings in May 2011 at which interested parties presented issues for consideration by the rulemaking committees. The Department of Education also conducted roundtable discussions on teacher preparation, college completion, and the proposed “First in the World” competition. Compliance with these and other new and changing regulations could reduce our enrollments, increase our cost of doing business, and have a material adverse effect on our business. Although we are still in the process of analyzing these final regulations to determine what, if any, impact they may have on our business and institutions, we believe the new regulations discussed in “Regulatory Matters - Regulation of Federal Student Financial Aid Program - Incentive compensation; State Authorization; Misrepresentation; Gainful Employment; and Department of Education Review of New Programs are likely to have the most impact on our future operating results and financial conditions.
Federal Direct Loan Program.
On March 30, 2010, the President Health Care and Education Affordability Act of 2010, or HCEAA, which, among other things, eliminates the Federal Family Education Loan, or FFEL, program (in which private lenders originated Title IV loans) in favor of the Federal Direct Loan program (in which the Department of Education originates Title IV loans), such that no FFEL loans may be originated after June 30, 2010. We are approved to participate in the Federal Direct Loan program and have fully transitioned from the FFEL program to the Federal Direct Loan program as of July 1, 2010.
Results of Operations - For the Year Ended May 31, 2011 Compared to the Year Ended May 31, 2010
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:
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For the year ended May 31, 2011, we generated $106.8 million in revenue, an increase of 18.9% compared to the same period in 2010. This increase was attributable to enrollment growth, an average tuition increase of 4.3% effective September 2010, fees billed to affiliated institutions for our courseware development, technical support and online class hosting services, continued geographic and programmatic expansion and revenue from condominium sales. Our revenue for the year ended May 31, 2011 consisted of $105.4 million from our NAU operations and $1.4 million from our other operations. Total operating expenses were $90.4 million or 84.6% of total revenue for the year ended May 31, 2011, an increase of 23.6% compared to the same period in 2010 due to the additional expansion and development. Income before income taxes was $16.7 million or 15.6% of total revenue for the year ended May 31, 2011, an increase of 0.9% compared to the same period in 2010. Net income attributable to the Company was $10.3 million or 9.6% of total revenue for the year ended May 31, 2011, an increase of 2.3% compared to the same period in 2010.
NAU
The following table sets forth statements of operations data as a percentage of total revenue for each of the periods indicated:
Total revenue. The total revenue for NAU for the year ended May 31, 2011 was $105.4 million, an increase of $17.4 million or 19.8%, as compared to total revenue of $87.9 million for the year ended May 31, 2010. The increase was primarily due to the enrollment increase of approximately 14%, 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 downturn, 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 4.3% that was approved by NAU’s board of governors in April 2010 and became effective September 2010, 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, 2011 was $99.2 million, an increase of $16.8 million or 20.4%, as compared to academic revenue of $82.4 million for the year ended May 31, 2010. The increase was primarily due to the enrollment increase over the prior year. The auxiliary revenue was $6.2 million, an increase of $0.6 million or 11.3%, as compared to auxiliary revenue of $5.5 million for the year ended May 31, 2010. The increase in auxiliary revenue was primarily driven by increased enrollment growth in the sales of books and instructional materials.
Cost of educational services. The educational services expense as a percentage of total revenue decreased by 1.8% for the year ended May 31, 2011, to 21.4%, as compared to 23.2% for the year ended May 31, 2010. This decrease was a result of realizing continued economies of scale through enrollment growth and by counseling students to enroll in online courses, thereby increasing our student to instructor ratios. The educational services expenses for the year ended May 31, 2011, were $22.6 million, an increase of $2.2 million, or 10.6%, as compared to educational expenses of $20.4 million for the year ended May 31, 2010. 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 increased student enrollment.
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Selling, general and administrative expenses. The selling, general and administrative expense as a percentage of total revenue increased by 4.7% for the year ended May 31, 2011, to 59.5%, as compared to 54.8% for the year ended May 31, 2010. This increase was primarily the result of the university’s additional expenses relating to opening new locations. The selling, general and administrative expenses for the year ended May 31, 2011 were $62.7 million, an increase of $14.4 million, or 29.9% (with a significant portion of this increased detailed below), as compared to selling, general and administrative expenses of $48.2 million for the year ended May 31, 2010. The increase was attributed to additional support staff necessary to support our continued growth, increased admissions staff to support our growth plan and larger marketing costs to sustain our growth initiative.
In addition, we track the expenditures associated with new educational sites, new program development and program expansion within the selling, general and administrative expense category. For the year ended May 31, 2011, the total business expansion and development expenditures were $14.3 million as compared to $6.5 million for the same period in fiscal year 2010. Included in this total was $3.1 million for the continued development of the Austin, Texas, campus compared to $2.2 million for the same period in fiscal year 2010, $9.3 million for the expansion and development of hybrid learning centers in Missouri, Minnesota, Kansas, Texas, Oklahoma, and Colorado as compared to $2.0 million for the same period in fiscal year 2010, and $2.0 million for the continued expansion for the nursing programs in Denver, Colorado; Bloomington, Minnesota; Albuquerque, New Mexico; Rapid City, South Dakota; and Sioux Falls, South Dakota, as compared to $1.1 million for the same period in fiscal year 2010.
Auxiliary. Auxiliary expenses for the year ended May 31, 2011 were $2.9 million, an increase of $0.8 million, or 39.1%, as compared to auxiliary expenses of $2.1 million for the year ended May 31, 2010. This increase was primarily the result of the increase in cost of books resulting from higher book sales.
Income before non-controlling interest and taxes. The income before non-controlling interest and taxes for the year ended May 31, 2011, was $17.3 million, which remained flat as compared to the year ended May 31, 2010. We are executing our strategic growth initiatives by expanding existing academic programs, developing new academic programs and developing educational sites, which resulted in revenue being up over $17.4 million during the year ended May 31, 2011 compared to the same time period last fiscal year. Expenses were 83.7% of total revenue for the year ended May 31, 2011 and were 80.5% for the same period in fiscal year 2010. This increase is consistent with our efforts to grow with additional locations.
Other
The following table sets forth statements of operations data as a percentage of total revenue for each of the periods indicated:
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Our other operations total revenue for the year ended May 31, 2011 was $1.4 million, a decrease of $0.4 million or 22.2%, as compared to total revenue of $1.9 million for the year ended May 31, 2010. The decrease is due to fewer sales of condominiums in fiscal year 2011.
The rental income from apartments for the year ended May 31, 2011 was $1.0 million, an increase of $72,000 or 7.8%, as compared $0.9 million for the year ended May 31, 2010.
The condominium sales for the year ended May 31, 2011 were $0.4 million, a decrease of $0.5 million or 51.8%, as compared to $0.9 million for the year ended May 31, 2010.
The selling, general and administrative expenses as a percentage of total revenue increased by 36.1% for the year ended May 31, 2011 to 125.2%, as compared to 89.1% for the year ended May 31, 2010. The selling, general and administrative expenses for the year ended May 31, 2011 were $1.8 million, an increase of $0.2 million, or 9.3%, as compared to $1.6 million for the year ended May 31, 2010.
The cost of the condominium sales for the year ended May 31, 2011 was $0.4 million, a decrease of $0.4 million, or 49.9%, as compared to $0.8 million for the year ended May 31, 2010.
The loss before non-controlling interest and taxes for the year ended May 31, 2011 was $0.6 million, a decrease of $0.1 million, as compared to a loss of $0.7 million for the year ended May 31, 2010.
Results of Operations - For the Year Ended May 31, 2010 Compared to the Year Ended May 31, 2009
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:
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For the year ended May 31, 2010, we generated $89.8 million in revenue, an increase of 43.5% compared to the same period in 2009. This increase was attributable to enrollment growth, an average tuition increase of 4.4% effective September 2009, additional students served through affiliated institutions, continued geographic and programmatic expansion and revenue from condominium sales. Our revenue for the year ended May 31, 2010 consisted of $87.9 million from our NAU operations and $1.9 million from our other operations. Total operating expenses were $73.2 million or 81.5% of total revenue for the year ended May 31, 2010, an increase of 28.0% compared to the same period in 2009. Although we had a number of expenses we anticipate to be infrequent (approximately $5 million detailed as follows) impact our financial statements this past year, we continued to see a positive trend in increase of revenues and overall profitability. The Company successfully completed a reverse merger and a secondary public offering in the year ended May 31, 2010. As a result of these two activities, we had a number of infrequent transactions which were made to better position the Company going forward. We bought out two existing employment agreements with a cost of $2.7 million, the payment of advisory fees of $0.2 million, and recorded an expense of $2.1 million for stock grants issued to management. Income before income taxes was $16.5 million or 18.4% of total revenue for the year ended May 31, 2010, an increase of 236.9% compared to the same period in 2009. Net income attributable to the Company was $10.0 million or 11.2% of total revenue for the year ended May 31, 2010, an increase of 221.5% compared to the same period in 2009.
NAU
The following table sets forth statements of operations data as a percentage of total revenue for each of the periods indicated:
Total revenue. The total revenue for NAU for the year ended May 31, 2010 was $87.9 million, an increase of $27.0 million or 44.4%, as compared to total revenue of $60.9 million for the year ended May 31, 2009. The increase was primarily due to the enrollment increase of approximately 35%, 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 increase can also be attributed, in part, to the economic downturn, in which many working adults decided to utilize education to obtain a job, advance in a job or retain their current job. In addition, the increase is due to an average tuition increase of 4.4% that was approved by NAU’s board of governors in April 2009 and became effective September 2009. 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, 2010 was $82.4 million, an increase of $25.5 million or 44.9%, as compared to academic revenue of $56.9 million for the year ended May 31, 2009. The increase was primarily due to the enrollment increase over the prior year. The auxiliary revenue was $5.5 million, an increase of $1.5 million or 37.0%, as compared to auxiliary revenue of $4.0 million for the year ended May 31, 2009. The increase in auxiliary revenue was primarily due to additional students being served through our growth and the sales of books and instructional materials.
Cost of educational services. The educational services expense as a percentage of total revenue decreased by 5.4% for the year ended May 31, 2010, to 23.2%, as compared to 28.6% for the year ended May 31, 2009. This decrease was a result of realizing continued economies of scale through enrollment growth and by counseling students to enroll in online courses, thereby increasing our student to instructor ratios. The educational services expenses for the year ended May 31, 2010, were $20.4 million, an increase of $3.0 million, or 17.4%, as compared to educational expenses of $17.4 million for the year ended May 31, 2009. This increase was primarily attributable to the costs incurred for the additional faculty and staff members needed to provide and maintain the quality of our educational services to our increased student enrollment.
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Selling, general and administrative expenses. The selling, general and administrative expense as a percentage of total revenue decreased by 4.9% for the year ended May 31, 2010, to 54.8%, as compared to 59.7% for the year ended May 31, 2009. This decrease was primarily the result of the university’s ability to further leverage fixed costs across an increasing revenue base. The selling, general and administrative expenses for the year ended May 31, 2010 were $48.2 million, an increase of $11.9 million, or 32.7%, as compared to selling, general and administrative expenses of $36.3 million for the year ended May 31, 2009. The increase was attributed to additional support staff necessary to support our continued growth, increased admissions staff to support our growth plan and larger marketing costs to sustain our growth initiative.
In addition, we track the expenditures associated with new educational sites, new program development and program expansion within the selling, general and administrative expense category. For the year ended May 31, 2010, the total business expansion and development expenditures were $6.5 million as compared to $3.2 million for the same period in fiscal year 2009. Included in this total was $2.2 million for the continued development of the Austin, Texas, campus compared to $1.5 million for the same period in fiscal year 2009, $2.0 million for the expansion and development of hybrid learning centers in Missouri, Minnesota, Kansas and Colorado as compared to $60,000 for the same period in fiscal year 2009, and $2.0 million for the continued expansion for the nursing programs in Denver, Colorado; Bloomington, Minnesota; Albuquerque, New Mexico; Rapid City, South Dakota; and Sioux Falls, South Dakota, as compared to $1.6 million for the same period in fiscal year 2009.
Auxiliary. Auxiliary expenses for the year ended May 31, 2010 were $2.1 million, an increase of $0.5 million, or 30.2%, as compared to auxiliary expenses of $1.6 million for the year ended May 31, 2009. This increase was primarily the result of the increase in cost of books resulting from higher book sales.
Income before non-controlling interest and taxes. The income before non-controlling interest and taxes for the year ended May 31, 2010, was $17.3 million, an increase of $11.8 million, as compared to $5.4 million for the year ended May 31, 2009
Other
The following table sets forth statements of operations data as a percentage of total revenue for each of the periods indicated:
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Our other operations total revenue for the year ended May 31, 2010 was $1.9 million, an increase of $0.2 million or 10.5%, as compared to total revenue of $1.7 million for the year ended May 31, 2009. The increase is due to the sales of condominiums in fiscal year 2010.
The rental income from apartments for the year ended May 31, 2010 was $0.9 million, an increase of $28,000 or 3.1%, as compared $0.9 million for the year ended May 31, 2009.
The condominium sales for the year ended May 31, 2010 were $0.9 million, an increase of $148,000 or 18.9%, as compared to $0.8 million for the year ended May 31, 2009.
The selling, general and administrative expenses as a percentage of total revenue increased by 12.8% for the year ended May 31, 2010 to 89.1%, as compared to 76.3% for the year ended May 31, 2009. The selling, general and administrative expenses for the year ended May 31, 2010 were $1.6 million, an increase of $0.4 million, or 29.1%, as compared to $1.3 million for the year ended May 31, 2009. The cost of the condominium sales for the year ended May 31, 2010 was $0.8 million, an increase of $203,000, or 36.4%, as compared to $0.6 million for the year ended May 31, 2009.
Interest expense for the year ended May 31, 2010 was $0.4 million, a decrease of $59,000, or 12.9%, as compared to the year ended May 31, 2009.
The loss before non-controlling interest and taxes for the year ended May 31, 2010 was $0.7 million, an increase of $0.2 million, as compared to a loss of $0.5 million for the year ended May 31, 2009.
Liquidity and Capital Resources
Liquidity. At May 31, 2011, and May 31, 2010, cash, cash equivalents and marketable securities were $44.8 million and $19.8 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 certificate of deposits. Of the amounts listed above, the marketable securities for May 31, 2011 and May 31, 2010 were $19.1 million and $11.1 million, respectively.
We maintained two lines of credit to support ongoing operations. These lines of credit are available to support timing differences between inflows and outflows of cash. During both the fiscal year 2011 and 2010 the lines of credit were not utilized.
We retain a $3.0 million revolving line of credit with Wells Fargo Bank. Advances under the line bear interest at a variable rate based on prime and are secured by the Company’s checking, savings and investment accounts held by the bank. There were no advances outstanding against this line at May 31, 2011 and May 31, 2010.
We also retained a $2.0 million revolving line of credit with Great Western Bank. Advances under the line bore interest at a variable rate based on prime and are secured by substantially all assets of Dlorah and the personal guarantee of Robert Buckingham, our chair of the board of directors. This line expired in September 2010. There were no advances outstanding made on this credit line at May 31, 2010.
During 2008, our real estate operations started the construction of a new condominium building in Rapid City, South Dakota. The project was funded by a construction line of credit from Great Western Bank totaling $3.8 million. The line of credit was paid in full and closed during the year ended May 31, 2010.
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 near future. These expenditures include our plans for continued expansion and development of new programming, development of new hybrid learning centers and growth of our affiliate relationships. We spent over $14.3 million on capital expenditures for our fiscal year ended May 31, 2011, as compared to $6.5 million last fiscal year. Also, we believe that we are positioned to further supplement our liquidity with debt, if needed.
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Operating Activities. Net cash provided by operating activities was $15.8 million and $13.1 million for the years ended May 31, 2011 and 2010, respectively. The increase is related primarily to the increase in results of operations after adjustments for certain non-cash items which included a $2.0 million increase in deferred income taxes and a $1.0 million increase in provision for uncollectible tuition. The increase is partially offset by cash used for working capital.
Net cash provided by operating activities for the fiscal year ended May 31, 2010 was $13.1 million as compared to $9.2 million for the fiscal year ended May 31, 2009. This improvement is consistent with the improvement in revenue and the change in other working capital accounts.
Investing Activities. Net cash used in investing activities was $15.2 million for the year ended May 31, 2011, as compared to the net cash used in investing activities of $11.6 million for the year ended May 31, 2010. The increase in the cash used in investing activities was related to the purchase of investments offset by proceeds received from the sale of investments. Our investment committee is focused on capital preservation.
For the year ended May 31, 2010, the cash flows used in investing activities was $11.6 million as compared to $2.4 million for the previous fiscal year. This increase is primarily attributable to purchasing more investments in 2010 than in 2009.
Financing Activities. Net cash provided by financing activities was $16.4 million and $3.7 million for the years ended May 31, 2011 and 2010, respectively. The increase of $12.7 million is related to the additional issuance of common stock in 2011 for $32.1 million as well as $5.9 million received for warrant conversions. These inflows were offset by $7.5 million paid for the purchase of our treasury stock and $13.4 million for dividends.
Net cash provided by financing activities for May 31, 2010 was $3.7 million as compared to net cash used by financing in May 31, 2009 of $5.4 million. This $9 million change is due to repayments of the long term debt of $8.7 million in 2010, cash received in the reverse merger of $22.1 million, cash paid for the merger costs of $3.4 million, and dividends paid of $3.8 million in 2010.
The table below sets forth our contractual commitments associated with operating leases as of May 31, 2011:
Off-Balance Sheet Arrangements
Other than operating leases, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Impact of Inflation
We believe inflation has had a minimal impact on results of operations for both the year ended May 31, 2011, and the years ended May 31, 2010 and 2009. We also increase tuition (usually once a year) to assist offsetting inflationary impacts without creating a hardship for students. Consistent with our operating plan, a yearly salary increase in December (supported by evaluations and recommendations from supervisors) is considered to help alleviate the inflationary effects on staff. There can be no assurance that future inflation will not have an adverse impact on operating results and financial condition.
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Item 7A.
Item 7A.
Quantitative and Qualitative Disclosure About Risk.
Market risk. We have no derivative financial instruments or derivative commodity instruments. Cash in excess of current operating requirements is invested in short-term certificates of deposit and money market instruments.
Interest rate risk. Interest rate risk is managed by investing excess funds in cash equivalents and marketable securities bearing variable interest rates tied to various market indices. As such, future investment income may fall short of expectations due to changes in interest rates or losses in principal may occur if securities are forced to be sold which have declined in market value due to changes in interest rates. At May 31, 2011, a 10% increase or decrease in interest rates would not have a material impact on future earnings, fair values or cash flows. To date there have been no material drawings on the lines of credit.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
National American University Holdings, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
National American University Holdings, Inc. and subsidiaries
Rapid City, South Dakota
We have audited the accompanying consolidated balance sheets of National American University Holdings, Inc. and subsidiaries (the “Company”) as of May 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended May 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of National American University Holdings, Inc. and subsidiaries as of May 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of May 31, 2011, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 5, 2011, expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, MN
August 5, 2011
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
National American University Holdings, Inc. and subsidiaries
Rapid City, South Dakota
We have audited the internal control over financial reporting of National American University Holdings, Inc. and subsidiaries (the “Company”) as of May 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2011, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended May 31, 2011, of the Company and our report dated August 5, 2011, expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, MN
August 5, 2011
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NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MAY 31, 2011 AND 2010
(In thousands except share data)
The accompanying notes are an integral part of these consolidated financial statements.
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NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED MAY 31, 2011, 2010 AND 2009
(In thousands except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
(continued)
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NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 2011, 2010 AND 2009
(In thousands except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
(concluded)
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NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED MAY 31, 2011, 2010 AND 2009
(In thousands except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
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NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 2011, 2010 AND 2009
(In thousands except per share data)
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
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NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 2011, 2010 AND 2009
(In thousands except per share data)
(concluded)
The accompanying notes are an integral part of these consolidated financial statements.
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NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED MAY 31, 2011, 2010 AND 2009
(Dollar amounts, except per share, in thousands)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - National American University Holdings, Inc., formerly known as Camden Learning Corporation (the “Company”), was incorporated in the State of Delaware on April 10, 2007. The Company was a special purpose acquisition company formed to serve as a vehicle for the acquisition of an operating business. On November 23, 2009, Dlorah, Inc., a South Dakota corporation (“Dlorah”), became a wholly-owned subsidiary of the Company (the “Transaction”), pursuant to an Agreement and Plan of Reorganization between the Company and Dlorah. In connection with the Transaction, the stockholders of Dlorah received approximately 77% of the equity of the Company, and Dlorah was deemed to be the acquirer for accounting purposes. The Transaction has been accounted for as a reverse merger accompanied by a recapitalization. As a result of the Transaction, the historical results of Dlorah became the historical results of the Company. The accompanying consolidated statements of operations for the year ended May 31, 2009, and stockholders’ equity and cash flows for the year ended May 31, 2009, have been updated to reflect the effects of the recapitalization on common stock, stockholders’ equity accounts and earnings per share.
The Company’s common stock is listed on the Nasdaq Global Market. The Company owns and operates National American University (“NAU” or the “University”). 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, 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 educational sites located in Colorado, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, South Dakota and Texas, and distance learning operations and central administration offices located in Rapid City, South Dakota. A substantial portion of NAU’s academic income is dependent upon federal student financial aid programs, employer tuition assistance, online learning programs and contracts to provide instruction and course materials to other educational institutions. To maintain eligibility for financial aid programs, NAU must comply with Department of Education requirements, which include, among other items, the maintenance of certain financial ratios.
The Company, through its Fairway Hills real estate division, also manages apartment units and develops and sells multi-family residential real estate in the Rapid City, South Dakota area.
Approximately 93%, 92% and 91% of the Company’s total revenues for the years ended May 31, 2011, 2010 and 2009, respectively were derived from NAU’s academic revenue.
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Principles of Consolidation - The Company’s fiscal year end is May 31. The Company consolidates the accounts of all wholly owned divisions, including NAU, the Fairway Hills Park and Recreational Association, the Park West Owners’ Association, the Vista Park Owners’ Association, and the Company’s interest in Fairway Hills Section III Partnership (the “Partnership”). The Partnership is 50% owned by the Company and 50% owned by individual family members, most of whom are also either direct or indirect stockholders of the Company. All material intercompany transactions and balances have been eliminated in consolidation.
The Partnership is deemed to be a variable interest entity (“VIE”) under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810-10, Consolidation. An enterprise is required to consolidate a VIE if that enterprise is the primary beneficiary. An enterprise is considered the primary beneficiary if it has a variable interest that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.
The Company has determined that the Partnership qualifies as a VIE and that the Company is the primary beneficiary of the Partnership. Accordingly, the Company consolidated assets, liabilities, and net income of the Partnership within its consolidated balance sheets and statements of operations. As of May 31, 2011 and 2010, the consolidated balance sheets include Partnership assets of $1,001 and $1,107, respectively, and Partnership liabilities of $59 and $64, respectively. The consolidated statements of operations included Partnership net (loss) income of $76, $8, and $(26) for the years ended May 31 2011, 2010 and 2009, respectively.
Estimates - The preparation of financial statements in conformity with the United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. On an ongoing basis, the Company evaluates the estimates and assumptions, including those related to bad debts, income taxes, and certain accruals. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash is held in bank accounts that periodically exceed insured limits; however, no losses have occurred, and the Company feels the risk of loss is not significant.
Investments - The Company’s investments consist of government-backed bonds and certificates of deposit. These securities are classified as “available-for-sale.” Available-for-sale securities represent securities carried at fair value in the accompanying consolidated balance sheets. Unrealized gains and losses deemed to be temporary are reported net of taxes and included in accumulated other comprehensive income within stockholders’ equity. Realized gains and losses and declines in value deemed to be other-than-temporary on available-for-sale securities are included in other income - net in the accompanying consolidated statement of operations. Fair value of the securities is based upon quoted market prices in active markets or estimated fair value when quoted market prices are not available. The cost basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis. The net realized gains and losses on sales of investments totaled $0 for each of the years ended May 31, 2011 and 2010, and 2009.
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The Company’s investments were comprised of the following at May 31(in thousands):
As of May 31, 2011, the Company’s investment maturity dates are as follows (in thousands):
Declines in the fair value of individual securities classified as available-for-sale below their amortized cost that are determined to be other than temporary result in write-downs of the individual securities to their fair value, with the resulting write-downs included in current earnings as realized losses. Unrealized losses that may occur are generally due to changes in interest rates and, as such, are considered by the Company to be temporary. Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investments in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Student Accounts Receivable - Student accounts receivable are recorded at estimated net realizable value and are revised periodically based on estimated future collections. Interest and service charges are applied to all past due student accounts receivable; however, collections are first applied to principal balances until such time that the entire principal balance has been received. Student accounts are charged off only when reasonable collection means are exhausted. The University has determined that most accounts with an outstanding balance of 180 days after the start of the term are uncollectable. Bad debt expense is included in cost of educational services on the consolidated statements of operations.
Other Receivables - Other receivables consist of institutional, which are amounts due from other educational institutions to which the University provides instruction and course materials, and are stated at net realizable value.
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Bookstore Inventory - Inventories consist mainly of textbooks and supplies. Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.
Property and Equipment - Property and equipment are stated at cost. Renewals and improvements are capitalized, while repairs and maintenance are expensed when incurred. Upon the retirement, sale or disposition of assets, costs and related accumulated depreciation are eliminated from the accounts and any gain or loss is reflected in operating income. For financial statement purposes, depreciation is computed using the straight-line method over the following estimated useful lives:
For tax purposes, depreciation is computed using the straight-line and accelerated methods.
Property and equipment - net consists of the following as of May 31 (in thousands):
Capitalized Course Development Costs - The University internally develops curriculum and electronic instructional materials for certain courses. The curriculum is primarily developed by employees and contractors. The curriculum is integral to the learning system. Customers do not acquire the curriculum or future rights to it.
The Company capitalizes course development costs. Costs that qualify for capitalization are external direct costs, payroll, and payroll-related costs. Costs related to general and administrative functions are not capitalizable and are expensed as incurred. Capitalization ends at such time that the course and/or material is available for general use by faculty and students. After becoming available for general use, the costs are amortized on a course-by-course basis over a period of three to five years. After the amortization period commences, the cost of maintenance and support is expensed as incurred. If it is determined that the curriculum will not be used, the capitalized curriculum costs are written off and expensed in the period of this determination.
Impairment of Long-Lived Assets - Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. For assets that are to be held and used, an impairment loss is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows, or internal and external appraisals, as applicable. Assets to be held for sale are carried at the lower of carrying value or fair value, less cost to sell. The Company had no impairments in 2011, 2010, or 2009.
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Condominium Inventory - Condominium inventory is stated at cost (including capitalized interest). Condominium construction costs are accumulated on a specific identification basis. Under the specific identification basis, cost of revenues includes all applicable land acquisition, land development and specific construction costs (including direct and indirect costs) of each condominium paid to third parties. Land acquisition, land development and condominium construction costs do not include employee related benefit costs. The specific construction and allocated land costs of each condominium, including models, are included in direct construction. Allocated land acquisition and development costs are estimated based on the total costs expected in a project. Direct construction also includes amounts paid through the closing date of the condominium for construction materials and contractor costs. Condominium inventory is recorded as a long term asset due to the normal operating cycle being greater than one year.
Deferred Income Taxes - Deferred income taxes are provided using the asset and liability method whereby deferred tax assets and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Non-Controlling Interest - The non-controlling interest presented on the consolidated statements of operations represents the individual owners’ share of the Partnership’s income or loss. The consolidated balance sheet amount “Non-controlling interest” represents the individual owners’ share of the Partnership obligations in excess of Partnership assets. The Company has determined the non-controlling owners to have a legal obligation to fund such deficits and believes it is fully collectable at May 31, 2011.
Financial Instruments - As of May 31, 2011 and 2010, the Company’s financial instruments consisted of cash equivalents and investments. The difference between the carrying value of these financial instruments and their fair value was not material as of May 31, 2011 and 2010.
Academic Revenue Recognition - Academic revenue represents tuition revenue and the revenue generated through affiliate relationships. Tuition revenue and affiliate revenue is recorded ratably over the length of respective courses. Academic revenue also includes certain fees and charges assessed at the start of each term. The portion of tuition and registration fees payments received but not earned is recorded as student accounts payable and reflected as a current liability on the accompanying consolidated balance sheets, as such amount represents revenue that the Company expects to earn within the next year. Academic revenue is reported net of adjustments for refunds and scholarships. If a student withdraws prior to the completion of the academic term, students are refunded the portion of tuition and registration fees already paid, that pursuant to the Company’s refund policy and applicable federal and state law and accrediting agency standards, the Company is not entitled to. Refunds and scholarships are recorded during the respective terms.
Auxiliary Revenue - Auxiliary revenue represents revenues from the University’s food service, bookstore, and dormitory operations. Revenue is recognized as items are sold and services are performed.
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Rental Income - Rental income is primarily obtained from tenants of three apartment complexes under short-term operating leases. Tenants are required to pay rent on a monthly basis. Rent not paid by the end of the month is considered past due, while rent paid in advance is included in deferred income on the accompanying consolidated balance sheets. If a tenant becomes 60 days past due, eviction procedures are started.
Rental Expense - The University accounts for rent expense under its long-term operating leases using the straight-line method. Certain of the University’s operating leases contain rent escalator provisions. Accordingly, a $4,248 and $2,380, deferred rent and tenant improvement liability at May 31, 2011 and 2010, respectively, is recorded in other long-term liabilities on the accompanying consolidated balance sheets.
Advertising - The University follows the policy of expensing the cost of advertising as incurred. Advertising costs of $10,521, $7,614 and $6,151 for 2011, 2010 and 2009, respectively, are included in selling, general, and administrative expenses on the accompanying consolidated statements of operations.
Business Expansion and Development - The University continues to commit resources to the development of new branch campuses and new programs, as well as the expansion of existing programs into new markets. During the year ended May 31, 2011, the University continued to develop a campus in Austin, Texas; additional hybrid learning centers in Centennial, Colorado; Colorado Springs, Colorado; Wichita, Kansas; Burnsville, Minnesota; Minnetonka, Minnesota; Lee’s Summit, Missouri; Bellevue, Nebraska; Tulsa, Oklahoma; Allen, Texas; Lewisville, Texas; Mesquite, Texas; South Austin, Texas and continued to develop and expand the nursing and distance learning programs. Business expansion and development costs include salaries, marketing and advertising, and other third-party expenses incurred to support such development and expansion. The amounts are included in selling, general, and administrative expenses in the accompanying consolidated statements of operations and totaled $14,326, $6,529 and $3,241 in 2011, 2010 and 2009, respectively.
Basic earnings per share (EPS) is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share reflect the potential dilution that could occur assuming vesting, conversion or exercise of all dilutive unexercised options, warrants and restricted stock. As described in Note 9, the Company had one class of common stock outstanding as of May 31, 2011. The class A stock was converted to common stock on May 27, 2010; and, due to the limited number of days between the conversion and the end of the year, the Company utilized the two class method to calculate and report earnings per share for each class of stock for 2010. For purposes of calculating basic and diluted earnings per share, undistributed earnings are allocated to the Class A stock and common stock based on the proportion of weighted average outstanding shares of each class of stock for the year ending May 31, 2010. During 2009, only one class of common stock was outstanding and there were no dilutive securities outstanding.
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The following is a reconciliation of the numerator and denominator for the basic and diluted EPS computations:
3.
RECENTLY ADOPTED AND NEW ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued a new standard to update FASB ASC Topic 810, Consolidation. This standard is intended to improve financial reporting by enterprises involved with variable interest entities. This standard is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. This standard was adopted by the Company on June 1, 2010 and had no impact on its consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update 2010-06 Fair Value Measurement and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This guidance provides for the following new required disclosures related to fair value measurements: 1) the amounts of and reasons for significant transfers in and out of level one and level two inputs and 2) separate presentation of purchases, sales, issuances, and settlements on a gross basis rather than as one net number for level three reconciliations. The guidance also clarifies existing disclosures as follows: 1) provide fair value measurement disclosures for each class of assets and liabilities and 2) provide disclosures about the valuation techniques and inputs used for both recurring and nonrecurring level two or level three inputs. The new disclosures and clarifications of existing disclosures were effective for the Company’s fourth quarter ended May 31, 2010. Disclosures about purchases, sales, issuances, and settlements in the roll forward of activity for level three fair value measurements were effective for the Company’s first quarter ending August 31, 2011. The Company has adopted this standard, but it did not have a material effect on the Company’s consolidated financial statements.
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In May 2011, the FASB issued ASC Update 2011-04 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The new guidance is intended to create a consistent definition of fair value and common requirements for measurement of and disclosure about fiar value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments provide clarification on the application of certain existing fair value measurement guidance and enhance disclosure requirements, including the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy and expanded qualitative and qualitative for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The Company will adopt this standard for the year ending May 31, 2012, although it is not expected to have a material effect on the Company’s consolidated financial statements.
In June 2011, the FASB issued ASC Update 2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASC Update 2011-05 amends current U.S. GAAP to increase the prominence of items reported in comprehensive income and to move toward convergence with IFRS by requiring that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASC Update 2011-05 does not change the items reported in comprehensive income or earnings per share calculations, but does change presentation of comprehensive income within the financial statements. This standard will be effective for the Company’s fiscal quarter ended August 31, 2012 with retrospective application required. As this standard impacts presentation requirements only, the adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
4.
DEPARTMENT OF EDUCATION REQUIREMENTS
The University extends unsecured credit to a portion of the students who are enrolled throughout the campuses for tuition and other educational costs. A substantial portion of credit extended to students is repaid through the students’ participation in various federal financial aid programs authorized by Title IV Higher Education Act of 1965, as amended (HEA). The University is required under 34 CFR 600.5(d) to maintain at least 10% of its revenues from non-Title IV HEA program funds. The University believes they are in compliance with this requirement for the years ended May 31, 2011, 2010 and 2009, as shown in the underlying calculation:
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To participate in Title IV Programs, a school must be authorized to offer its programs of instruction by relevant state education agencies, be accredited by an accrediting commission recognized by the Department of Education (DOE), and be certified as an eligible institution by the DOE. For this reason, the schools are subject to extensive regulatory requirements imposed by all of these entities. After the schools receive the required certifications by the appropriate entities, the schools must demonstrate their compliance with the DOE regulations of the Title IV Programs on an ongoing basis. Included in these regulations is the requirement that the Company must satisfy specific standards of financial responsibility. The DOE evaluates institutions for compliance with these standards each year, based upon the institution’s annual audited financial statements, as well as following a change in ownership of the institution. Under regulations which took effect July 1, 1998, the DOE calculates the institution’s composite score for financial responsibility based on its (i) equity ratio, which measures the institution’s capital resources, ability to borrow and financial viability; (ii) primary reserve ratio, which measures the institution’s ability to support current operations from expendable resources; and (iii) net income ratio, which measures the institution’s ability to operate at a profit. This composite score can range from -1 to +3.
An institution that does not meet the DOE’s minimum composite score requirements of 1.5 may establish its financial responsibility by posting a letter of credit or complying with additional monitoring procedures as defined by the DOE. Based on the consolidated financial statements for the 2011, 2010 and 2009 fiscal years, the University’s calculations result in a composite score of 3.0, 2.4, and 1.6, respectively. Therefore the University currently meets the minimum composite score requirement as most recently required by the DOE.
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Future minimum lease payments on noncancelable operating leases for the five years ending May 31 are as follows (in thousands):
The effective tax rate varies from the statutory federal income tax rate for the following reasons:
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Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred assets (liabilities) as of May 31 were as follows (in thousands):
The Company follows guidance of ASC Topic 740, Income Taxes, formerly FIN No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, which requires that income tax positions must be more likely than not to be sustained based solely on their technical merits in order to be recognized. The Company has recorded no liability for uncertain tax positions. The Company has elected to record interest and penalties from unrecognized tax benefits in the tax provision.
The Company files income tax returns in the U.S. federal jurisdiction and various states. Because of closure of an Internal Revenue Service examination, the Company is no longer subject to U.S. federal income tax examinations for years before 2007 and, generally, is no longer subject to state and local income tax examinations by tax authorities for years before 2005.
The Company was selected for an Internal Revenue Service examination covering its 2009 tax return which is based on the fiscal year ended May 31, 2010. The examination is in progress, and management has no estimate of any tax liability that may occur as a result of this examination.
8.
EMPLOYEE COMPENSATION PLANS
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Compensation Plans - The Company had entered into an employment agreement dated January 3, 2005, as amended to date, with Robert Buckingham, a former executive officer of the Company. The agreement required, among other things, an annual incentive payment of 10% of the Company’s annual income as defined in the agreement, which was paid out annually. For the years ended May 31, 2010 and 2009, the Company recorded $793 and $709, respectively, as an expense in selling, general, and administrative expenses in the accompanying consolidated statements of operations. Furthermore, the agreement provided for a deferred compensation payment payable upon retirement or death equal to one year’s salary.
On March 19, 2010, the Company entered into a Termination of Employment Agreement and Release Agreement (the “Termination Agreement”). Under the Termination Agreement, the parties terminated the Employment Agreement, which contained the terms and conditions of Mr. Buckingham’s employment with the Company as an executive officer of the Company, and which was filed as an exhibit to the Company’s Current Report on Form 8-K on November 30, 2009.
The Company has also entered into employment agreements with Dr. Ronald Shape, Chief Executive Officer and Chief Financial Officer, and Dr. Jerry Gallentine, President, that require, among other things, an annual incentive payment as defined in the agreements. The incentive payments are paid in installments each year, are recorded in selling, general and administrative expenses and accrued other liabilities in the accompanying consolidated financial statements, and total $634, $749 and $338 for 2011, 2010 and 2009, respectively.
On May 2, 2011, the Company approved a Chief Executive Officer Compensation Plan and a Cabinet Level Officer Compensation Plan, in connection with establishing the overall compensation levels for the executive management team of the Company for the 2012 fiscal year. Each compensation plan has a base salary component, quarterly achievement award component and an annual achievement award component as defined in the agreements.
9.
STOCKHOLDERS’ EQUITY
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Share-Based Compensation
In December 2009, the Company adopted the 2009 Stock Option and Compensation Plan (the “Plan”) pursuant to which the Company may grant restricted stock awards, restricted stock units and stock options to aid in recruiting and retaining employees, officers, directors and other consultants. Restricted stock awards accrue dividends that are paid when the shares vest. Restricted stock units awards do not accrue dividends prior to vesting. Grants are issued at prices determined by the compensation committee, generally equal to the closing price of the stock on the date of the grant, vest over various terms (generally three years), and expire ten years from the date of the grant. The Plan allows vesting based upon performance criteria; all current restricted shares grants outstanding are performance based vesting and all current stock option awards outstanding are time-based vesting instruments. Certain option and share awards provide for accelerated vesting if there is a change in control of the Company (as defined in the Plan). The fair value of stock options granted is calculated using the Black-Scholes option pricing model. Share options issued under the Plan may be incentive stock options or nonqualified stock options. At May 31, 2011, all stock options issued have been nonqualified stock options. A total of 1,300,000 shares were authorized by the Plan. Shares forfeited or canceled are eligible for reissuance under the Plan. At May 31, 2011, 904,202 shares of Common Stock remain available for issuance under the Plan.
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The Company accounts for stock option-based compensation by estimating the fair value of options granted using a Black-Scholes option valuation model. The Company recognizes the expense for grants of stock options on a straight-line basis in the statement of operations as operating expense based on their fair value over the requisite service period.
Expected volatilities are based on historic volatilities from traded shares of a selected publicly traded peer group. The Company has no historical data to estimate forfeitures. The expected term of options granted is the safe harbor period approved by the Securities and Exchange Commission using the vesting period and the contract life as factors. The risk-free rate for periods matching the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
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From time to time, the Company is a party to various claims, proceedings, or lawsuits relating to the conduct of its business. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims, or proceedings may be disposed of unfavorably to the Company, management believes, based on facts presently known, that the outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s consolidated financial position, cash flows or future results of operations.
The Company is subject to extensive regulation by federal and state governmental agencies and accrediting bodies. On an ongoing basis, the Company evaluates the results of internal compliance monitoring activities and those of applicable regulatory agencies and, when appropriate, records liabilities to provide for the estimated costs of any necessary remediation. There are no current outstanding regulatory actions, but the Company cannot predict the outcome of future program reviews and any unfavorable outcomes could have a material adverse effect on the results of the Company’s results of operations, cash flows, and financial position.
During the quarter ended August 31, 2010, the Company received a request for information from the U.S. Senate Committee on Health, Education, Labor and Pensions relating to the Committee’s ongoing hearings relating to for-profit colleges receiving Title IV student financial aid. The Company incurred a total of $2.2 million in additional legal fees for this request.
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The Company maintains a self-insured health insurance plan for employees. Under this plan, the Company pays a monthly fee to its administrator, as well as claims submitted by their participants. As there generally is a lag between the time a claim is incurred by a participant and the time the claim is submitted, the Company has recorded a liability for outstanding claims of approximately $271 and $311 at May 31, 2011 and 2010, respectively. Such liability is reported with accrued liabilities in the accompanying consolidated balance sheets. At May 31, 2011, the Company’s maximum aggregate risk was approximately $2,440. The maximum specific risk per participant is $50 per year, although total risk for all participants will not exceed the noted maximum aggregate risk for the year.
During 2008, the Company broke ground on a new building that will contain 24 condominium units to be sold to the general public that was completed in 2009. These condominium units are accounted for within condominium inventories within the consolidated balance sheets, and the sales of the condominium units are recorded within condominium sales within the consolidated statements of operations. Nine units have been sold as of May 31, 2011.
In addition, five units of an existing 48-unit apartment building have been sold as condominiums, with the remaining units available for sale or lease. These condominium units are accounted for within net property and equipment within the consolidated balance sheets, and the sales of the condominium units are recorded within other income - net within the consolidated statements of operations.
Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that are included in each category at May 31, 2011 and 2010:
Level 1 - Quoted prices in active markets for identical assets or liabilities. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted market prices.
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Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The type of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using observable inputs. Level 2 assets consist of certificates of deposit that are valued at cost, which approximates fair value.
Level 2 instruments require more management judgment and subjectivity as compared to Level 1 instruments. For instance:
•
Determine which instruments are most similar to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating and instrument type, and subjectively select an individual security or multiple securities that are deemed most similar to the security being priced; and
•
Determining whether a market is considered active requires management judgment.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The type of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation. The Company does not have any Level 3 assets or liabilities.
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Following is a summary of the valuation techniques for assets and liabilities recorded in our Consolidated Balance Sheets at fair value on a recurring basis:
Cd’s and money market accounts: Investment which have closing prices readily available from an active market are used as being representative of fair value. NAU classifies these investments as Level 1. Market prices for certain Cd’s are obtained from quoted prices for similar assets. NAU classifies these investments as Level 2.
U.S. treasury bills and notes: Closing prices are readily available from active markets and are used as being representative of fair value. NAU classifies these investments as level 1.
In August 2009, the Company, then known as Camden Learning Corporation, and Dlorah entered into an Agreement and Plan of Reorganization, under which the Company agreed to purchase all of the ownership interests in Dlorah for cash and stock.
The Transaction closed on November 23, 2009, and on that date, Dlorah became a wholly owned subsidiary of the Company. The stockholders of Dlorah received shares and warrants representing approximately 77% of the Company’s issued capital shares. The acquisition was accounted for as a reverse merger accompanied by a recapitalization of the Company. Under this accounting method, Dlorah was considered the acquirer for accounting purposes because it obtained effective control of the Company as a result of the acquisition. This determination was primarily based on the following facts: Dlorah’s retention of a significant voting interest in the Company; Dlorah’s appointment of a majority of the members of the Company’s initial board of directors; Dlorah’s operations comprising the ongoing operations of the Company; and Dlorah’s senior management serving as the senior management of the Company. Under this method of accounting, the recognition and measurement provisions of the accounting guidance for business combinations do not apply and therefore, the Company did not recognize goodwill or other intangible assets. Instead, the Transaction has been treated as the equivalent of Dlorah issuing stock for the net monetary assets of the Company, primarily cash, which are stated at their carrying value. Because of the reverse merger, the historical results represent those of Dlorah.
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Additionally, the Company entered into an employment agreement with its chairman of the board of directors through December 2011, which was later terminated (see Note 8).
Operating segments are defined as business areas or lines of an enterprise about which financial information is available and evaluated on a regular basis by the chief operating decision makers, or decision-making groups, in deciding how to allocate capital and other resources to such lines of business.
The Company operates two operating and reportable segments: National American University (NAU) and other. The NAU segment contains the revenues and expenses associated with the university operations and the allocated portion of corporate overhead. The other segment contains everything else. These operating segments are divisions of the Company for which separate financial information is available and evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.
General administrative costs of the Company are allocated to specific divisions of the Company.
The majority of the Company’s revenue is derived from the NAU division, which provides undergraduate and graduate education programs. NAU derives its revenue primarily from student tuition. The other division operates multiple apartment and condominium complexes and derives its revenues primarily from condominium sales and rental income (in thousands).
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17.
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth selected unaudited quarterly financial information for the last eight quarters.
The EPS data for the first quarter ended August 31, 2009 is not applicable as the Company was not a public company, and the Company’s earnings were only attributable to Class A shareholders.
We evaluated subsequent events after the balance sheet date of May 31, 2011, through the date the consolidated financial statements were issued. We did not identify any additional material events or transactions occurring during this subsequent event reporting period that required further recognition or disclosure in these consolidated financial statements.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of May 31, 2011. Based upon such review, the Chief Executive Officer and Chief Financial Officer have concluded that the Company had in place, as of May 31, 2011, effective controls and procedures designed to ensure that information required to be disclosed by the
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Company (including consolidated subsidiaries) in the reports it files or submits under the Securities Exchange Act of 1934, as amended, and the rules thereunder, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. Under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal controls over financial reporting as of May 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Based on management’s assessment using this framework, management concluded that the Company’s internal control over financial reporting was effective as of May 31, 2011.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited the consolidated financial statements in accordance with the standards of the Public Company Oversight Board (United States) and, as part of this audit, has issued its report on the effectiveness of the Company’s internal control over financial reporting, as stated in their report included in the Annual Report on Form 10-K.
None.
PART III
Certain information required by Part III is incorporated by reference from our definitive Proxy Statement for the 2011 Annual Meeting of Stockholders (the “Proxy Statement”), which will be filed with the SEC pursuant to Regulation 14A within 120 days after May 31, 2011. Except for those portions specifically incorporated in this annual report on Form 10-K by reference to our Proxy Statement, no other portions of the Proxy Statement are deemed to be filed as part of this Form 10-K.
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required by this item is incorporated herein by reference to the information set forth in the Company’s Proxy Statement for the 2011 Annual Meeting of Stockholders.
The information required by this item is incorporated herein by reference to the information set forth in the Company’s Proxy Statement for the 2011 Annual Meeting of Stockholders.
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Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated herein by reference to the information set forth in the Company’s Proxy Statement for the 2011 Annual Meeting of Stockholders.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is incorporated herein by reference to the information set forth in the Company’s Proxy Statement for the 2011 Annual Meeting of Stockholders.
Item 14.
Item 14.
Principal Accountant Fees and Services.
The information required by this item is incorporated herein by reference to the information set forth in the Company’s Proxy Statement for the 2011 Annual Meeting of Stockholders.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
All required financial statements of the registrant are set forth under Item 8 of this annual report on Form 10-K.
(a)(2) Financial Statement Schedules
None required.
(b) Exhibits
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
National American University Holdings, Inc.
By: /s/ Ronald L. Shape
Name: Ronald L. Shape, Ed. D.
Title: Chief Executive Officer and Chief Financial Officer
(principal executive officer, principal financial officer
and principal accounting officer)
Dated as of August 5, 2011.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of August 5, 2011.
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