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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
 
Form 10-Q

(Mark One)
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended November 30, 2014
   
 
Or
   
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from                                                                         to 

Commission File No. 001-34751
 
National American University Holdings, Inc.
(Exact name of registrant as specified in its charter)

Delaware
83-0479936
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
5301 S. Highway 16
57701
Rapid City, SD
(Zip Code)
(Address of principal executive offices)
 

(605) 721-5200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes R  No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £
                        Accelerated filer £
Non-accelerated filer £    (Do not check  if a smaller reporting company)
       Smaller reporting company R
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes £  No R

As of December 31, 2014, 25,182,392 shares of common stock, $0.0001 par value were outstanding.
 


 
 
 
 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES

INDEX

 
 
 
 
Page of
Form 10-Q 
PART I. FINANCIAL INFORMATION
ITEM 1.
4
   
   
   
   
 
9
ITEM 2.
16
ITEM 3.
25
ITEM 4.
25
     
PART II. OTHER INFORMATION
ITEM 1.
26
ITEM 1A.
26
ITEM 2.
26
ITEM 3.
26
ITEM 4.
26
ITEM 5.
26
ITEM 6.
EXHIBITS
27
 
 
 

 
 
 
PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.
 
 
 
 
 
3

 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF NOVEMBER 30, 2014 AND CONDENSED
CONSOLIDATED BALANCE SHEET AS OF MAY 31, 2014
(In thousands except share data)
 
   
November 30,
 
May 31,
 
   
2014
   
2014
 
ASSETS
           
CURRENT ASSETS:
           
  Cash and cash equivalents
  $ 28,204     $ 4,154  
  Available for sale investments
    12,345       15,435  
Student receivables — net of allowance of $600 and $1,026 at November 30, 2014 and
       
    May 31, 2014, respectively
    3,576       16,532  
  Other receivables
    671       291  
  Deferred income taxes
    1,333       1,688  
  Prepaid and other current assets
    2,298       2,180  
           Total current assets
    48,427       40,280  
Total property and equipment - net
    38,980       43,258  
OTHER ASSETS:
               
  Condominium inventory
    377       744  
  Land held for future development
    312       312  
Course development — net of accumulated amortization of $2,593 and $2,421 at
       
    November 30, 2014 and May 31, 2014, respectively
    888       1,000  
  Note receivable - tenant improvements
    0       1,308  
  Deposit on property and equipment
    100       200  
  Other
    1,213       1,355  
           Total other assets
    2,890       4,919  
TOTAL
  $ 90,297     $ 88,457  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
  Current portion of capital lease payable
  $ 224     $ 206  
  Accounts payable
    3,031       3,411  
  Dividends payable
    1,135       1,134  
  Student accounts payable
    1,225       969  
  Income taxes payable
    1,752       1,158  
  Deferred income
    270       341  
  Accrued and other liabilities
    7,382       7,347  
           Total current liabilities
    15,019       14,566  
DEFERRED INCOME TAXES
    4,165       4,168  
OTHER LONG-TERM LIABILITIES
    6,191       6,431  
CAPITAL LEASE PAYABLE, NET OF CURRENT PORTION
    11,982       12,097  
COMMITMENTS AND CONTINGENCIES (Note 8)
               
STOCKHOLDERS' EQUITY:
               
Common stock, $0.0001 par value (50,000,000 authorized; 28,245,930 issued and
       
25,179,333 outstanding as of November 30, 2014; 28,177,827 issued and 25,117,454
       
    outstanding as of May 31, 2014)
    3       3  
  Additional paid-in capital
    58,213       59,191  
  Retained earnings
    14,302       11,573  
Treasury stock, at cost (3,066,597 shares at November 30, 2014 and 3,060,373
       
    at May 31, 2014)
    (19,442 )     (19,423 )
Accumulated other comprehensive loss, net of taxes - unrealized loss on available
       
   for sale securities
    (2 )     (3 )
Total National American University Holdings, Inc. stockholders' equity
    53,074       51,341  
Non-controlling interest
    (134 )     (146 )
Total stockholders' equity
    52,940       51,195  
TOTAL
  $ 90,297     $ 88,457  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS AND THREE MONTHS ENDED NOVEMBER 30, 2014 AND 2013
(In thousands except share data)
 
   
Six Months Ended
   
Three Months Ended
 
   
November 30,
   
November 30,
 
   
2014
   
2013
   
2014
   
2013
 
REVENUE:
                       
  Academic revenue
  $ 54,809     $ 58,233     $ 28,133     $ 30,583  
  Auxiliary revenue
    4,093       5,090       2,212       2,318  
  Rental income — apartments
    593       568       293       281  
  Condominium sales
    447       220       0       0  
                                 
           Total revenue
    59,942       64,111       30,638       33,182  
                                 
OPERATING EXPENSES:
                               
  Cost of educational services
    14,210       14,601       7,077       7,596  
  Selling, general and administrative
    35,943       43,765       17,301       21,543  
  Auxiliary expense
    2,865       3,668       1,562       1,698  
  Cost of condominium sales
    368       194       0       3  
  (Gain) loss on disposition of property
    (1,678 )     (70 )     0       27  
                                 
           Total operating expenses
    51,708       62,158       25,940       30,867  
                                 
OPERATING INCOME
    8,234       1,953       4,698       2,315  
                                 
OTHER INCOME (EXPENSE):
                               
  Interest income
    111       50       12       24  
  Interest expense
    (451 )     (399 )     (222 )     (147 )
  Other income — net
    100       80       42       36  
                                 
           Total other expense
    (240 )     (269 )     (168 )     (87 )
                                 
INCOME BEFORE INCOME TAXES
    7,994       1,684       4,530       2,228  
                                 
INCOME TAX EXPENSE
    (2,986 )     (687 )     (1,690 )     (865 )
                                 
NET INCOME
    5,008       997       2,840       1,363  
                                 
NET (INCOME) LOSS ATTRIBUTABLE TO NON-CONTROLLING
                               
           INTEREST
    (12 )     36       (14 )     (1 )
                                 
NET INCOME ATTRIBUTABLE TO NATIONAL AMERICAN
                               
          UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
    4,996       1,033       2,826       1,362  
                                 
OTHER COMPREHENSIVE INCOME (LOSS) — Unrealized gains
                               
         (losses) on investments, net of tax
    1       (7 )     6       (2 )
                                 
COMPREHENSIVE INCOME ATTRIBUTABLE TO  NATIONAL
                               
         AMERICAN UNIVERSITY HOLDINGS, INC.
  $ 4,997     $ 1,026     $ 2,832     $ 1,360  
                                 
                                 
Basic net earnings attributable to National American University
                               
          Holdings, Inc.
  $ 0.20     $ 0.04     $ 0.11     $ 0.05  
Diluted net earnings attributable to National American University
                               
          Holdings, Inc.
  $ 0.20     $ 0.04     $ 0.11     $ 0.05  
Basic weighted average shares outstanding
    25,136,778       25,075,120       25,151,291       25,094,063  
Diluted weighted average shares outstanding
    25,157,424       25,079,741       25,166,946       25,096,152  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5

 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2014 AND 2013
(In thousands except share data)
 
   
Equity attributable to National American University Holdings, Inc. and Subsidiaries
 
                     
Accumulated
                   
         
Additional
         
other
               
Total
 
   
Common
   
paid-in
   
Retained
   
comprehensive
   
Treasury
   
Non-controlling
   
stockholders'
 
   
stock
   
capital
   
earnings
   
income (loss)
   
stock
   
interest
   
equity
 
                                           
Balance - May 31, 2013
  $ 3     $ 57,656     $ 12,610     $ 7     $ (19,359 )   $ (129 )   $ 50,788  
Purchase of 12,730 shares common
                                                       
   stock for the treasury
    0       0       0       0       (48 )     0       (48 )
Share based compensation expense
    0       908       0       0       0       0       908  
Dividends declared ($0.045 per share)
    0       0       (2,260 )     0       0       0       (2,260 )
Net income
    0       0       1,033       0       0       (36 )     997  
Other comprehensive loss, net of tax
    0       0       0       (7 )     0       0       (7 )
Balance - November 30, 2013
  $ 3     $ 58,564     $ 11,383     $ 0     $ (19,407 )   $ (165 )   $ 50,378  
                                                         
Balance - May 31, 2014
  $ 3     $ 59,191     $ 11,573     $ (3 )   $ (19,423 )   $ (146 )   $ 51,195  
Purchase of 6,224 shares common
                                                       
   stock for the treasury
    0       0       0       0       (19 )     0       (19 )
Share based compensation expense
    0       (978 )     0       0       0       0       (978 )
Dividends declared ($0.045 per share)
    0       0       (2,267 )     0       0       0       (2,267 )
Net income
    0       0       4,996       0       0       12       5,008  
Other comprehensive income, net
                                                       
   of tax
    0       0       0       1       0       0       1  
Balance - November 30, 2014
  $ 3     $ 58,213     $ 14,302     $ (2 )   $ (19,442 )   $ (134 )   $ 52,940  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
6

 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30,  2014 AND 2013
(In thousands except share data)
 
   
Six Months Ended
 
   
November 30,
   
November 30,
 
   
2014
   
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 5,008     $ 997  
Adjustments to reconcile net income to net cash flows provided by operating activities:
         
Depreciation and amortization
    3,115       3,123  
Gain on disposition of property and equipment
    (1,678 )     (70 )
Provision for uncollectable tuition
    2,063       1,640  
Noncash compensation expense
    (978 )     908  
Deferred income taxes
    352       (42 )
Changes in assets and liabilities:
               
Accounts and other receivables
    10,513       (1,041 )
Student notes
    (21 )     80  
Condominium inventory
    367       188  
Prepaid and other current assets
    (200 )     (1,269 )
Accounts payable
    295       (237 )
Deferred income
    (71 )     60  
Other long-term liabilities
    (240 )     100  
Income tax receivable/payable
    594       312  
Accrued and other liabilities
    302       (82 )
                 
Net cash flows provided by operating activities
    19,421       4,667  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of available for sale investments
    (22,141 )     (23,988 )
Proceeds from sale of available for sale investments
    25,232       26,493  
Purchases of property and equipment
    (1,040 )     (1,546 )
Proceeds from sale of property and equipment
    3,464       500  
Course development
    (60 )     (182 )
Payment of deposit on property and equipment
    0       (1,556 )
Payments received on contract for deed
    157       273  
Payments received on note receivable
    1,390       206  
Other
    9       (23 )
                 
Net cash flows provided by investing activities
    7,011       177  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayments of capital lease payable
    (97 )     (66 )
Purchase of treasury stock
    (19 )     (48 )
Dividends paid
    (2,266 )     (2,130 )
                 
Net cash flows used in financing activities
    (2,382 )     (2,244 )
                 
           
(Continued)
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
7

 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2014 AND 2013
(In thousands except share data)
 
   
Six Months Ended
 
   
November 30,
   
November 30,
 
   
2014
   
2013
 
             
NET INCREASE IN CASH AND CASH EQUIVALENTS
  $ 24,050     $ 2,600  
                 
CASH AND CASH EQUIVALENTS — Beginning of year
    4,154       11,130  
                 
CASH AND CASH EQUIVALENTS — End of period
  $ 28,204     $ 13,730  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:
       
   Cash paid for income taxes
  $ 2,041     $ 417  
   Cash paid for interest
  $ 444     $ 417  
   Tenant improvements on capital lease financed through note receivable
  $ 0     $ 2,000  
   Property and equipment purchases included in accounts payable
  $ 0     $ 341  
   Dividends declared at November 30, 2014 and 2013
  $ 1,135     $ 1,134  
                 
           
(Concluded)
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
8

 
 
NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED NOVEMBER 30, 2014 AND NOVEMBER 30, 2013
(Dollar amounts, except share and per share amounts, in thousands)

1.  
STATEMENT PRESENTATION AND BASIS OF CONSOLIDATION
 
The accompanying unaudited condensed consolidated financial statements are presented on a consolidated basis. The accompanying financial statements include the accounts of National American University Holdings, Inc. (the “Company”), its subsidiary, Dlorah, Inc. (“Dlorah”), and its divisions, National American University (“NAU” or the “University”), and Fairway Hills.  The accompanying unaudited condensed consolidated financial statements have been prepared on a basis substantially consistent with the Company’s audited financial statements and in accordance with the requirements of the Securities and Exchange Commission (“SEC”) for interim financial reporting. As permitted under these rules, certain footnotes and other financial information that are normally required by accounting principles generally accepted in the United States (“U.S. GAAP”) can be condensed or omitted. The information in the condensed consolidated balance sheet as of May 31, 2014, was derived from the audited consolidated financial statements for the Company for the year then ended. Accordingly, these financial statements should be read in conjunction with the Company’s annual financial statements which were included in the Company’s 10-K filed on August 8, 2014.  Furthermore, the results of operations and cash flows for the six month periods ended November 30, 2014 and 2013 are not necessarily indicative of the results that may be expected for the full year. These financial statements include consideration of subsequent events through issuance.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by U.S. GAAP.

Unless the context otherwise requires, the terms “we”, “us”, “our” and the “Company” used throughout this document refer to National American University Holdings, Inc. and its wholly owned subsidiary, Dlorah, Inc., which owns and operates National American University, sometimes referred to as “NAU” or the “University”.

Estimates — The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated 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.

2.  
NATURE OF OPERATIONS
 
The Company, through Dlorah, owns and operates National American University. NAU is a regionally accredited, proprietary, multi-campus institution of higher learning, offering associate, bachelor’s, master’s and doctoral degree programs in business-related disciplines, such as accounting, applied management, business administration and information technology, and in healthcare-related disciplines, such as nursing and healthcare management.
 
The Company, through Dlorah’s Fairway Hills real estate division, also manages apartment units and develops and sells multi-family residential real estate in Rapid City, South Dakota.

3.  
RECENTLY ADOPTED AND NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which removes inconsistencies and weaknesses in revenue requirements, provides a more robust framework for addressing revenue issues, improves comparability of revenue recognition practices across entities, provides more useful information to users of the consolidated financial statements through improved disclosure requirements, and simplifies the preparation of the consolidated financial statements by reducing the number of requirements to which an entity must refer.   The ASU outlines five steps to achieve proper revenue recognition: identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies the performance obligation.  This standard is effective for public entities for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  This standard will be effective for the Company’s fiscal year 2018 in the first quarter ending August 31, 2017.  The Company is currently evaluating the impact implementation will have on the consolidated financial statements.
 
 
9

 
 
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, that will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances.  This standard will be effective for the Company’s fourth quarter ending May 31, 2017.  The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial statements.
 
4.  
CONTRACT FOR DEED
 
During fiscal year 2013, the Company signed a contract for deed on its former Rapid City campus located at 321 Kansas City Street for $4,000 and the sale did not meet the accounting requirements to be considered consummated because the buyer’s initial and continuing investment was not adequate in accordance with ASC 360-20-40, and the note receivable was not supported by specific evidence of collectability.  As such, at May 31, 2014 the property remained on the condensed consolidated balance sheets and continued to be depreciated because the asset had not met the held for sale criteria, the note receivable was not recorded, and interest income was recognized as received.

On July 11, 2014 the contract for deed was settled.  The Company collected the outstanding proceeds which included $3,230 principal and $85 of interest that was offset by $59 of lease-back payments and maintenance expenses related to the long-term operating lease.  All remaining liens on the property were released and deemed sold, resulting in a gain of $1,743.  Rent payments will be made directly to the lessor now that the contract for deed is paid in full.

For federal income tax purposes, the sale was recognized in full as of March 28, 2013 and will be brought into income as proceeds are received due to the installment sale treatment.    A portion of the taxable gain was due for the year ended May 31, 2013, and the remaining portion will be payable for the year ended May 31, 2015.

5.  
CAPITAL LEASE OBLIGATION
 
During the quarter ended November 30, 2013, the Company increased its capital lease obligation by $2,000 to account for tenant improvements.  The Company initially paid for the improvements; however, an agreement was entered into with the lessor to reimburse the Company under the terms of a $2,000 note receivable.  Payments under the note receivable directly offset the monthly payments to the lessor under the capital lease obligation.  On June 30, 2014 the landlord of the property paid the $1,373 remaining balance of the note receivable.

6.  
STOCKHOLDERS’ EQUITY
 
The Company’s outstanding stock-based awards consist of restricted stock awards, restricted stock units and stock options.  As of November 30, 2014, the Company had 892,541 shares available for future grants of stock-based compensation plans.

 
Restricted stock
 
A summary of restricted shares activity as of November 30, 2014 and 2013, and changes during the six month periods then ended is presented below:
 
Restricted Shares
 
Shares
   
Weighted Average Grant Date Fair Value
 
Non-vested shares at May 31, 2014
    608,170     $ 4.01  
Granted
    42,155       3.11  
Vested
    (28,170 )     3.55  
Canceled
    0       0  
Non-vested shares at November 30, 2014
    622,155     $ 3.97  

Restricted Shares
 
Shares
   
Weighted Average Grant Date Fair Value
 
Non-vested shares at May 31, 2013
    13,442     $ 4.46  
Granted
    477,229       3.76  
Modified     303,500       4.31  
Vested
    (16,001 )      4.30  
Canceled
    (88,000 )     3.95  
Non-vested shares at November 30, 2013
    690,170     $ 3.98  
 
 
10

 
 
During the quarter ended November 30, 2014, the Company awarded 42,155 restricted stock awards with time-based vesting at a grant date fair value of $3.11 per share to the members of the board of directors.  Shares vest one year from the grant date and require board service for the entire year.

During the quarter ended November 30, 2014, the Company reversed $0.9 million expense net of tax that was previously recorded in connection with performance based restricted stock awarded during the quarter ended August 31, 2013.  During the quarter ended November 30, 2014, it is the opinion of management that the performance shares will not be issued because the required metrics will not be achieved.
 
Stock options
 
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 consolidated statements of operations as operating expense based on their fair value over the requisite service period.
 
For stock options issued in the six months ended November 30, 2014 and for stock options modified during the six months ended November 30, 2013, the following assumptions were used to determine fair value:
 
   
For the six months ended November 30,
   
For the six months ended November 30,
 
Assumptions used:
 
2014
   
2013
 
Expected term (in years)
    5.500       5.990  
Expected volatility
    51.40 %     61.20 %
Weighted average risk free interest rate     1.52 %     0.85 %
Weighted average risk free interest rate range
     1.52 %      0.80-0.85 %
Weighted average expected dividend
    5.79 %     2.87 %
Weighted average expected dividend range     5.79 %     2.87 %
Weighted average fair value
  $ 0.88     $ 2.01  
 
The volatilities are based on historic volatilities from the traded shares of the Company over the past three years.  The Company has analyzed the forfeitures of stock and option grants and has deemed the effect to be immaterial and therefore did not include a forfeiture rate in the expense calculation. The expected term of options granted is the safe harbor period. The risk-free interest 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. Expected dividend is based on the historic dividend of the Company.
 
A summary of option activity under the Plan as of November 30, 2014 and 2013, and changes during the six month periods then ended is presented below:

Stock Options
 
Shares
   
Weighted average exercise price
   
Weighted average remaining contractual life (in years)
   
Aggregate intrinsic value ($000)
 
Outstanding at May 31, 2014
    75,750     $ 7.17              
Granted
    12,500       3.11              
Exercised
    0       0              
Forfeited or canceled
    (3,000 )     7.56              
Outstanding at November 30, 2014
    85,250     $ 6.56       7.5     $ -  
Exercisable at November 30, 2014
    72,750     $ 7.07       7.2     $ -  
                                 
Outstanding at May 31, 2013
    368,000     $ 7.67                  
Granted
    0       0                  
Exercised
    0       0                  
Modified     (303,500 )     7.46                  
Forfeited or canceled
     (2,250 )       6.71                  
Outstanding at November 30, 2013
    62,250     $ 8.75       7.0     $ -  
Exercisable at November 30, 2013
    60,000     $ 8.91       7.0     $ -  
 
 
11

 
 
Dividends
 
The following table presents details of the Company’s fiscal 2015 and 2014 dividend payments:
 
Date declared
Record date
Payment date
Per share
August 26, 2013
September 30, 2013
October 11, 2013
 $0.0450
October 28, 2013
December 30, 2013
January 10, 2014
 $0.0450
January 25, 2014
March 28, 2014
April 11, 2014
 $0.0450
April 7, 2014
June 30, 2014
July 11, 2014
 $0.0450
August 11, 2014
September 30, 2014
October 10, 2014
 $0.0450
October 6, 2014
December 31, 2014
(est) January 16, 2015
 $0.0450
 
7.  
EARNINGS PER SHARE
 
Basic earnings per share (“EPS”) is computed by dividing net income attributable to National American University Holdings, Inc. 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 and restricted stock.
 
The following is a reconciliation of the numerator and denominator for the basic and diluted EPS computations:
 
   
Six months ended
   
Three months ended
 
   
November 30,
   
November 30,
 
   
2014
   
2013
   
2014
   
2013
 
Numerator:
                       
Net income attributable to National American
                       
    University Holdings, Inc.
  $ 4,996     $ 1,033     $ 2,826     $ 1,362  
Denominator:
                               
Weighted average shares outstanding used to
                               
     compute basic net income per common share
    25,136,778       25,075,120       25,151,291       25,094,063  
Incremental shares issuable upon the assumed
                               
     vesting of stock options
            -               -  
Incremental shares issuable upon the assumed
                               
     vesting of restricted shares
    20,646       4,621       15,649       2,089  
Common shares used to compute diluted net income
                               
     per share
    25,157,424       25,079,741       25,166,940       25,096,152  
Basic net income per common share
  $ 0.20     $ 0.04     $ 0.11     $ 0.05  
                                 
Diluted net income per common share
  $ 0.20     $ 0.04     $ 0.11     $ 0.05  
 
A total of 85,250 shares of common stock subject to issuance upon exercise of stock options and 42,155 shares of common stock subject to vesting of restricted shares for the three and six months ended November 30, 2014, respectively, have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.

A total of 62,250 shares of common stock subject to issuance upon exercise of stock options and 28,170 shares of common stock subject to vesting of restricted shares for the three and six months ended November 30, 2013, respectively, have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.
 
8.  
COMMITMENTS AND CONTINGENCIES
 
From time to time, NAU is a party to various claims, lawsuits or other proceedings relating to the conduct of its business. Although the outcome of litigation cannot be predicted with certainty and some claims, lawsuits or other proceedings may be disposed of unfavorably, management believes, based on facts presently known, that the outcome of such legal proceedings and claims, lawsuits or other proceedings will not have a material effect on the Company’s consolidated financial position, cash flows or future results of operations.

On November 21, 2014, the U.S. Department of Education notified us of its final audit determination with respect to our Title IV compliance audit for the period June 1, 2012 through May 31, 2013.  The final audit determination asserts that we improperly disbursed Title IV program funds to students at our Wichita West campus location before it was approved as an additional location for Title IV program participation requirements by the Department in August 2013, resulting in a requirement to return approximately $664 in Title IV funds and assessed interest to the Department as it is deemed a return of previously recorded revenue.  This amount has been included in accrued liabilities at November 30, 2014 and shown as a direct reduction of academic revenue during the three months ended November 30, 2014, which has been timely remitted.
 
 
12

 

9.  
FAIR VALUE MEASUREMENTS
 
The following table summarizes certain information for assets and liabilities measured at fair value on a recurring basis:
     
Quoted prices in active markets
(level 1)
     
Other observable inputs (level 2)
   
Unobservable inputs
(level 3)
     
Fair value
    November 30, 2014
                   
Investments                    
CD’s and money market accounts   $ 243     $ 4,104  
-
   
4,347
Money market accounts included                        
in cash equivalents     14      
-
  -    
14
US treasury bills and notes     7,998      
-
  -    
7,998
    Total assets at fair value   $ 8,255     $
4,104
  $    
12,359
                         
    May 31, 2014                        
Investments  
 
 
   
 
 
 
 
 
 
 
CD’s and money market accounts   $
243
    $
3,197
  -   $ 3,440
Money market accounts included                        
in cash equivalents    
910
      -        
910
US treasury bills and notes    
11,995
      -   -    
11,995
    Total assets at fair value    
13,148
     
3,197
 
-
    16,345
 
Following is a summary of the valuation techniques for assets and liabilities recorded in the consolidated condensed balance sheets at fair value on a recurring basis:

CD’s and money market accounts:  Investments which have closing prices readily available from an active market are used as being representative of fair value.  The Company classifies these investments as level 1.  Market prices for certain CD’s are obtained from quoted prices for similar assets.  The Company 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. The Company classifies these investments as level 1.

Fair value of financial instruments:  The Company’s financial instruments include cash and cash equivalents, CD’s and money market accounts, US treasury bills and notes, receivables, payables, and capital lease payables.  The carrying values approximated fair values for cash and cash equivalents, receivables, and payables because of the short term nature of these instruments.  CD’s and money market accounts, and treasury bills and notes are recorded at fair values as indicated in the preceding disclosures.
 
 
13

 

10.  
SEGMENT REPORTING
 
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: 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 primarily real estate.  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 following table presents the reportable segment financial information, in thousands:
 
   
Six months ended November 30, 2014
   
Six months ended November 30, 2013
 
               
Consolidated
               
Consolidated
 
   
NAU
   
Other
   
Total
   
NAU
   
Other
   
Total
 
                                     
Revenue:
                                   
  Academic revenue
  $ 54,809     $ -     $ 54,809     $ 58,233     $ -     $ 58,233  
  Auxiliary revenue
    4,093       -       4,093       5,090       -       5,090  
  Rental income — apartments
    -       593       593       -       568       568  
  Condominium sales
    -       447       447       -       220       220  
                                                 
           Total revenue
    58,902       1,040       59,942       63,323       788       64,111  
                                                 
Operating expenses:
                                               
  Cost of educational services
    14,210       -       14,210       14,601       -       14,601  
  Selling, general &administrative
    35,060       883       35,943       42,935       830       43,765  
  Auxiliary expense
    2,865       -       2,865       3,668       -       3,668  
  Cost of condominium sales
    -       368       368       -       194       194  
 Loss (gain) on disposition of
                                               
    property
    113       (1,791 )     (1,678 )     26       (96 )     (70 )
                                                 
    Total operating expenses (income)
    52,248       (540 )     51,708       61,230       928       62,158  
                                                 
Income (loss) from operations
    6,654       1,580       8,234       2,093       (140 )     1,953  
                                                 
Other income (expense):
                                               
  Interest income
    18       93       111       32       18       50  
  Interest expense
    (443 )     (8 )     (451 )     (399 )     -       (399 )
  Other income  - net
    -       100       100       -       80       80  
                                                 
    Total other (expense) income
    (425 )     185       (240 )     (367 )     98       (269 )
                                                 
Income (loss) before taxes
  $ 6,229     $ 1,765     $ 7,994     $ 1,726     $ (42 )   $ 1,684  
                                                 
   
As of November 30, 2014
   
As of November 30, 2013
 
                   
Consolidated
                   
Consolidated
 
   
NAU
   
Other
   
Total
   
NAU
   
Other
   
Total
 
Total assets
  $ 79,672     $ 10,625     $ 90,297     $ 76,016     $ 13,572     $ 89,588  

 
 
14

 
 
   
Three months ended November 30, 2014
   
Three months ended November 30, 2013
 
               
Consolidated
               
Consolidated
 
   
NAU
   
Other
   
Total
   
NAU
   
Other
   
Total
 
                                     
Revenue:
                                   
  Academic revenue
  $ 28,133     $ -     $ 28,133     $ 30,583     $ -     $ 30,583  
  Auxiliary revenue
    2,212       -       2,212       2,318       -       2,318  
  Rental income — apartments
    -       293       293       -       281       281  
  Condominium sales
    -       -       -       -       -       -  
                                                 
           Total revenue
    30,345       293       30,638       32,901       281       33,182  
                                                 
Operating expenses:
                                               
  Cost of educational services
    7,077       -       7,077       7,596       -       7,596  
  Selling, general &administrative
    16,927       374       17,301       21,156       387       21,543  
  Auxiliary expense
    1,562       -       1,562       1,698       -       1,698  
  Cost of condominium sales
    -       -       -       -       3       3  
  (Gain) loss on disposition of
                                               
    property
    -       -       -       26       1       27  
                                                 
           Total operating expenses
    25,566       374       25,940       30,476       391       30,867  
                                                 
Income (loss) from operations
    4,779       (81 )     4,698       2,425       (110 )     2,315  
                                                 
Other income (expense):
                                               
  Interest income
    8       4       12       20       4       24  
  Interest expense
    (222 )     -       (222 )     (147 )     -       (147 )
  Other income  - net
    -       42       42       -       36       36  
                                                 
    Total other (expense) income
    (214 )     46       (168 )     (127 )     40       (87 )
                                                 
Income (loss) before taxes
    4,565       (35 )     4,530       2,298       (70 )     2,228  
                                                 
 
 
 
15

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

Certain of the statements included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as elsewhere in this quarterly report on Form 10-Q are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 (“Reform Act”). These statements are based on the Company’s current expectations and are subject to a number of assumptions, risks and uncertainties. In accordance with the Safe Harbor provisions of the Reform Act, the Company has identified important factors that could cause its actual results to differ materially from those expressed in or implied by such statements. The assumptions, uncertainties and risks include the pace of growth of student enrollment, our continued compliance with Title IV of the Higher Education Act, and the regulations thereunder, as well as regional accreditation standards and state regulatory requirements, competitive factors, risks associated with the opening of new campuses and hybrid learning centers, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions, risks relating to the timing of regulatory approvals, our ability to continue to implement our growth strategy, risks associated with the ability of our students to finance their education in a timely manner, and general economic and market conditions. Further information about these and other relevant risks and uncertainties may be found in the Company’s Annual Report on Form 10-K filed on August 8, 2014 and its other filings with the Securities and Exchange Commission (the “SEC”). The Company undertakes no obligation to update or revise any forward looking statement, except as may be required by law.

Background
 
National American University, or NAU, is a regionally accredited, proprietary, multi-campus institution of higher learning offering associate, bachelor’s, master’s and doctoral degree programs in business-related disciplines, such as accounting, management, business administration and information technology, and in healthcare-related disciplines, such as nursing and healthcare management. Courses are offered through educational sites as well as online. In August 2013, NAU was approved by the Higher Learning Commission to offer an Education Doctorate (Ed.D) in Community College Leadership, which is offered in Austin, Texas. Operations include 37 locations located in Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, Oregon, South Dakota and Texas; distance learning service centers in Indiana and Texas; and distance learning operations and central administration offices in Rapid City, South Dakota.
 
As of November 30, 2014, NAU had enrolled 2,558 students in courses at its physical locations, 6,418 students for its online programs, and 1,614 students at its hybrid learning centers that attended physical campus locations and also took classes online.  NAU supports the instruction of 2,000 additional students at affiliated institutions for which NAU provides online course hosting and technical assistance. NAU provides courseware development, technical support and online class hosting services to various colleges, technical schools and training institutions in the United States and Canada that do not have the capacity to develop and operate their own in-house online curriculum for their students. NAU does not share revenues with these institutions, but rather charges a fee for its services, enabling it to generate additional revenue by leveraging its current online program infrastructure.
 
The real estate operations consist of apartment facilities, condominiums and other real estate holdings in Rapid City, South Dakota. The real estate operations generated approximately 1.7% of our revenues for the quarter ended November 30, 2014.
 
 
16

 
 
Key Financial Results Metrics
 
Revenue. Revenue is derived mostly from NAU’s operations. For the six months ended November 30, 2014, approximately 91.4% of our revenue was generated from NAU’s academic revenue, which consists of tuition and fees assessed at the start of each term. The remainder of our revenue comes from NAU’s auxiliary revenue from sources such as NAU’s book sales, and the real estate operations’ rental income and condominium sales. Tuition revenue is reported net of adjustments for refunds and scholarships and is recognized on a daily basis over the length of the term. Upon withdrawal, students generally are refunded tuition based on the uncompleted portion of the term. Auxiliary revenue is recognized  as items are sold and is recorded net of any applicable sales tax.
 
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 expenses as a percentage of revenues for the six months ended November 30, 2014 and 2013 were 3.4% 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.
 
 
17

 
 
The following chart is a summary of our student enrollment on November 30, 2014 and 2013, by degree type and by instructional delivery method.
 
   
November 30, 2014
(Fall ‘15 Qtr)
   
November 30, 2013
(Fall ‘14 Qtr)
   
% Growth for same quarter over prior year
 
   
Number of Students
   
Number of Students
       
Continuing Ed
    460       0       100.0 %
Doctoral
    52       0       100.0 %
Graduate
    306       371       (17.5 )%
Undergraduate and Diploma
    9,772       11,015       (11.3 )%
                         
Total
    10,590       11,386       (7.0 )%
                         
On-Campus
    2,558       2,625       (2.6 )%
Online
    6,418       6,853       (6.3 )%
Hybrid
    1,614       1,908       (15.4 )%
                         
Total
    10,590       11,386       (7.0 )%
 
We experienced a 7.0% decrease in enrollment in the fall term 2014 over the fall term 2013. This decline was across all degree programs and course delivery methods with the exception of the newly created continuing education courses and doctoral program that was not in place during the prior year. We remain focused on improving our enrollment results through a number of strategic initiatives in marketing, a new branding campaign, focus on student persistence, and improved enrollment counselor system.
 
We plan to continue expanding and developing our academic programming focusing on growth at our 37 existing locations and potentially making strategic acquisitions. Enrollments will be subject to applicable regulatory requirements and market conditions. With these efforts, we anticipate our enrollments will once again trend upward. To the extent the economic downturn has caused enrollment growth i