News Column

NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 8, 2014

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, master's and doctoral degree programs in business-related disciplines, such as accounting, applied management, business administration and information technology, and in healthcare-related disciplines, such as nursing and healthcare management. Courses are offered through educational sites as well as online via the Internet. Operations include 37 educational sites (two of which are pending regulatory approvals, Houston, Texas and the Roueche Graduate Center in Austin, Texas) located in Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, Oregon, South Dakota and Texas, distance learning service centers in Indiana, Missouri and Texas and distance learning operations and central administration offices in Rapid City, South Dakota. As of May 31, 2014, NAU had 2,686 students enrolled at its physical locations, 6,481 students enrolled for its online programs, and 1,690 students enrolled at its hybrid learning centers that attended physical campus locations and also took classes online. NAU supports the instruction of 2,500 additional students at affiliated institutions for whom NAU provides online course hosting and technical assistance. NAU provides courseware development, technical support and online class hosting services to various colleges, technical schools and training institutions in the United States and Canada who do not have the capacity to develop and operate their own in-house online curriculum for their students. NAU does not share revenues with these institutions, but rather charges a fee for its services, enabling it to generate additional revenue by leveraging its current online program infrastructure.



The real estate operations consist of apartment facilities, condominiums and other real estate holdings in Rapid City, South Dakota. The real estate operations generated approximately 1.0% of our revenues for the fiscal year ended May 31, 2014.

-68-



--------------------------------------------------------------------------------

Table of Contents

Key Financial Results Metrics

Revenue. Revenue is derived mostly from NAU's operations. For fiscal year ended May 31, 2014, approximately 92.0% 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 online bookstore 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 services are performed.



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, 2014, 2013, and 2012 was 3.0%, 3.5% and 3.5%, 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.



The following chart is a summary of our student enrollment on May 31, 2014, and May 31, 2013, by degree type and by instructional delivery method.

May 31, 2014 May 31, 2013 % Change for (Spring '14 Qtr) (Spring '13 Qtr) same quarter Number of Students Number of Students over prior year Continuing Ed 12 0 100 % Doctoral 37 0 100 % Graduate 322 397 (18.9 %) Undergraduate 10,486 11,075 (5.3 %) Total 10,857 11,472 (5.4 %) On-Campus 2,686 2,661 0.9 % Online 6,481 6,790 (4.6 %) Hybrid 1,690 2,021 (16.4 %) Total 10,857 11,472 (5.4 %) -69-



--------------------------------------------------------------------------------

Table of Contents

We experienced a 5.4% decline in enrollment in spring term 2014 over spring term 2013. This decline was across all degree programs and course delivery methods. We believe our investment to grow our current physical locations and expand academic programming and our strategic plan will be critical in returning to the growth and results of operations that we have seen over the recent years. We plan to continue expanding and developing our academic programming and potentially making acquisitions. This growth will be subject to applicable regulatory requirements and market conditions. With these efforts, we anticipate positive enrollment trends. To the extent the economic downturn has changed enrollment rates, our ability to maintain or increase enrollment 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 we are able to increase enrollment 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 enrollment 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. The cost of condominium sales is the expense related to condominiums that are sold during the reporting period. The gain or loss on disposition of property and equipment expense records the cost incurred or income received in the disposal of assets that are no longer used by us.



Factors affecting comparability

Set forth below are selected factors we believe have had, or which we expect to have, a significant effect on the comparability of our recent or future results of operations: Introduction of new programs and specializations. We plan to develop additional degree and diploma programs and specializations over the next several years. When introducing new programs and specializations, we invest in curriculum development, support infrastructure and marketing research. Revenues associated with these new programs are dependent upon enrollments, which are lower during the periods of introduction. During this period of introduction and development, the rate of growth in revenues and operating income has been, and may be, adversely affected, in part, due to these factors. Historically, as the new programs and specializations develop, increases in enrollment are realized, cost-effective delivery of instructional and support services are achieved, economies of scale are recognized and more efficient marketing and promotional processes are gained. Stock-based compensation. We expect to incur increased non-cash, stock based compensation expense in connection with existing and future issuances under our 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. -70-



--------------------------------------------------------------------------------

Table of Contents

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 postsecondary education.



Critical Accounting Policies and Estimates

The discussion of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated 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 consolidated financial statements. We believe the following critical accounting policies involve more significant judgments and estimates than others used in the preparation of our consolidated financial statements: Revenue recognition. Academic revenue represented approximately 92%, 91% and 92% of revenue for the fiscal years ended May 31, 2014, 2013, and 2012, 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. Student accounts payable 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. 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, 2014, and 2013, the allowance for doubtful accounts was approximately $1.0 million and $0.9 million, respectively. During the fiscal years ended May 31, 2014, 2013, and 2012, bad debt expense was $3.9 million, $4.5 million, and $4.2 million, respectively. The bad debt expense was 3.0%, 3.5%, and 3.5% of total revenue for the fiscal years ended May 31, 2014, 2013 and 2012, 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. -71-



--------------------------------------------------------------------------------

Table of Contents

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. De-recognition 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. Annually, we make predictive assumptions regarding future stock price volatility, employee exercise behavior, dividend yield, and the forfeiture rate. For more information on these assumptions, please refer to Note 10 to the consolidated Financial Statements in Item 8 of this report. Regulation and Oversight We are subject to extensive regulation by state education agencies, accrediting commissions and federal government agencies, particularly by the Department of Education under the Higher Education Act and the regulations promulgated thereunder by the Department of Education. The regulations, standards and policies of these agencies cover substantially all of our operations. For a more complete description of this regulation and oversight, see "Item I - Business - Regulatory Matters." Department of Education Rulemaking. On March 25, 2014, the Department of Education published a Notice of Proposed Rulemaking in the Federal Register containing proposed regulations to define whether certain educational programs, including all programs offered by NAU, comply with the Higher Education Act's requirement of preparing students for gainful employment in a recognized occupation. The proposed regulations would require each educational program covered by the rule to achieve threshold rates in three debt measure categories related to an annual debt to annual earnings ratio, an annual debt to discretionary income ratio, and a program cohort default rate. The proposed regulations would cause each educational program covered by the rule, which includes all of NAU's educational programs, to fail the requirement of preparing students for gainful employment if its graduates' student loan debt payments exceed 12% of their total earnings and 30% of their discretionary earnings. Programs whose graduates have debt-to-earnings ratios of 8% to 12% or debt-to-discretionary-earnings ratios of 20% to 30% would fall in a "zone", and the institution would have to warn students that they might become ineligible for Title IV program funds. Programs that fail both debt-to-earnings tests twice in any three-year period or are in the zone for four consecutive years would be ineligible for Title IV program funds. With respect to the programmatic cohort default rate component, programs whose borrower cohort default rates exceed 30% for three consecutive years would be ineligible for federal student financial aid. The debt-to-earnings ratios and programmatic cohort default rates are calculated under complex methodologies and definitions outlined in the proposed regulations and, in some cases, are based on data that may not be readily accessible to institutions. The proposed regulations also contain other provisions that, among other things, include disclosure, reporting and certification requirements. We are evaluating the potential impact of the proposed regulations. The proposed regulations were subject to comment by the public through May 27, 2014, after which the Department of Education will consider revisions to the proposed regulations. The proposed regulations may or may not reflect the Department of Education's final regulations. New final Department of Education regulations published on or before November 1, 2014 typically would have an effective date of July 1, 2015, although it is unknown at this time whether these regulations might have an earlier or later effective date. We cannot predict the ultimate content or effective date of any new regulations that may emerge from this process or the potential impact on NAU's programs. However, any regulations that reduce or eliminate our students' access to Title IV program funds, that require us to change or eliminate programs or that increase our costs of compliance could have an adverse effect on our business. -72-



--------------------------------------------------------------------------------

Table of Contents

Beginning in February 2014, the Department of Education held negotiated rulemaking sessions related to proposed regulations to address program integrity and improvement issues for the Title IV programs, including but not limited to, cash management of Title IV program funds and the use of debit cards and the handling of Title IV credit balances, state authorization for programs offered through distance education or correspondence education, state authorization for foreign locations of institutions, clock to credit hour conversion requirements, the definition of "adverse credit" for borrowers of certain loans, and the application of repeat coursework provisions to graduate and undergraduate programs. During the March 2014 negotiating session, the Department of Education proposed draft regulatory language regarding state authorization for programs offered through distance education that would impose new requirements for students in such programs to be eligible for Title IV program funds and which, if ultimately promulgated into regulation, could materially decrease our revenue and liquidity, and adversely affect our overall business. Because the Department of Education and negotiators did not reach consensus on the entire package of draft regulations, the Department of Education is authorized to propose regulations without being bound by any agreements made in the negotiation process. We cannot predict the ultimate content or effective date of any new regulations that may emerge from this negotiated rulemaking process or the potential impact on NAU's programs. However, any regulations that reduce or eliminate our students' access to Title IV program funds, that require us to change or eliminate programs or that increase our costs of compliance could have an adverse effect on our business. Between January and April 2014, the Department of Education held three negotiated rulemaking sessions to implement the changes to the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act (20 U.S.C. 1092(f)), or the Clery Act, required by March 2013 amendments to the Violence Against Women Act, or VAWA. At the final meeting of the negotiated rulemaking committee on April 1, 2014, the committee reached consensus on the Department's proposed regulations, which were subsequently published for a 30-day public comment period on June 20, 2014. Among other things, VAWA and the revised Clery Act regulations require institutions to compile statistics on additional categories of crimes reported to campus security authorities or local police agencies, to implement ongoing crime awareness and prevention programs for students and employees, and to ensure that institutional disciplinary proceedings for certain enumerated crimes meet specific standards. While the Department of Education's final regulations remain pending, the Department of Education notified institutions in a "Dear Colleague Letter" dated July 14, 2014 that until final regulations go into effect, the Department of Education expects institutions to make a good faith effort to comply with the statutory requirements beginning October 1, 2014. State Authorization. To be eligible to participate in Title IV programs, an institution must be licensed or authorized to offer its educational programs by the states in which it is physically located, in accordance with the Department of Education's regulations. The Department of Education's Final Rule published on October 29, 2010 requires, among other things, institutions to demonstrate specific state authorization to operate educational programs beyond secondary education. In New Mexico, one of the other states where we maintain operations, we are currently exempt under state law from a requirement to be licensed by the New Mexico Higher Education Department because of our regional accreditation by the HLC. However, in order to comply with the Final Rules, we have voluntarily submitted an application for licensure to the New Mexico Higher Education Department, which remains pending as of this date. See "Item I - Business - Regulatory Matters - State Authorization." -73-



--------------------------------------------------------------------------------

Table of Contents

Results of Operations - For the Year Ended May 31, 2014 Compared to the Year Ended May 31, 2013

National American University Holdings, Inc.

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

Year-Ended Year-Ended May 31, 2014 May 31, 2013 In percentages In percentages Total revenues 100.0 % 100.0 % Operating expenses: Cost of educational services 23.1 22.6 Selling, general and administrative 66.8 64.2 Auxiliary expense 4.9 5.2 Cost of condominiums sales 0.3 0.1 Loss on disposition of property 0.0 0.1 Total operating expenses 95.1 92.2 Operating income 4.9 7.8 Interest expense (0.6 ) (0.8 ) Interest income 0.1 0.1 Other income 0.1 0.1 Income before income taxes 4.5 7.2 Income tax expense (1.8 ) (2.9 ) Net income attributable to non-controlling interest 0.0 (0.1 ) Net income attributable to the Company 2.7 4.2 For the year ended May 31, 2014, we generated $127.8 million in revenue, a decrease of 1.1% compared to the same period in 2013. This decrease was attributable to a decline in enrollment that was offset by an average tuition increase of 3.5% effective September 2013, fees billed to affiliated institutions for our courseware development, technical support and online class hosting services, and continued geographic and programmatic expansion. Our revenue for the year ended May 31, 2014 consisted of $126.2 million from our NAU operations and $1.6 million from our other operations. Total operating expenses were $121.5 million or 95.1% of total revenue for the year ended May 31, 2014, an increase of 2.0% compared to the same period in 2013 due to increases of $0.8 million in admissions staffing, $0.6 million in depreciation expense; $0.5 million in new software costs and $0.5 million in insurance premiums. Income before income taxes was $5.8 million or 4.5% of total revenue for the year ended May 31, 2014, a decrease of 37.1% compared to the same period in 2013. Net income attributable to the Company was $3.5 million or 2.7% of total revenue for the year ended May 31, 2014, a decrease of 36.0% compared to the same period in 2013. The additional details regarding these variances are described in greater detail below. NAU



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

Year-Ended Year-Ended May 31, 2014 May 31, 2013 In percentages In percentages Total revenues 100.0 % 100.0 % Operating expenses: Cost of educational services 23.4 22.9 Selling, general and administrative 66.3 63.5 Auxiliary expense 4.9 5.3 Loss on disposition of property 0.2 0.0 Total operating expenses 94.8 91.7 Operating income 5.2 8.3 Interest expense (0.6 ) (0.8 ) Interest income 0.0 0.1 Income before non-controlling interest and taxes 4.6 7.6 Total revenue. The total revenue for NAU for the year ended May 31, 2014 was $126.2 million, a decrease of $1.7 million or 1.3%, as compared to total revenue of $127.9 million for the year ended May 31, 2013. The decrease was primarily due to the decreased enrollments of approximately 5.4%. The enrollment decrease can also be attributed, in part, to the current improving economic climate, in which many working adults have chosen not to attend school. The decreased enrollment rates were offset by an average tuition increase of 3.5% that was approved by NAU's board of governors and became effective in September 2013, and fees billed to affiliated institutions for our courseware development, technical support and online class hosting services. -74-



--------------------------------------------------------------------------------

Table of Contents

The academic revenue for the year ended May 31, 2014 was $117.1 million, a decrease of $0.5 million or 0.4%, as compared to academic revenue of $117.6 million for the year ended May 31, 2013. The decrease was primarily due to the decreased enrollments over the prior year, as discussed above. The auxiliary revenue was $9.1 million, a decrease of $1.2 million or 11.5%, as compared to auxiliary revenue of $10.3 million for the year ended May 31, 2013. The decrease in auxiliary revenue was primarily driven by decreased enrollments that translated into decreased book sales. Cost of educational services. The educational services expense as a percentage of academic segment revenue increased by 0.5% for the year ended May 31, 2014, to 23.4%, as compared to 22.9% for the year ended May 31, 2013. The educational services expenses for the year ended May 31, 2014, were $29.5 million, an increase of $0.3 million, or 0.1%, as compared to educational expenses of $29.2 million for the year ended May 31, 2013. This increase was a result of fixed costs such as facility expenses on a decreasing revenue base. Selling, general and administrative expenses. The selling, general and administrative expense as a percentage of total academic segment revenue increased by 2.8% for the year ended May 31, 2014, to 66.3%, as compared to 63.5% for the year ended May 31, 2013. The selling, general and administrative expenses for the year ended May 31, 2014 were $83.6 million, an increase of $2.4 million, or 3.0% as compared to selling, general and administrative expenses of $81.2 million for the year ended May 31, 2013. The increase is due to increases of $0.8 million in admissions staffing to convert prospective students, $0.6 million in depreciation expense as a result of recent expansion, $0.5 million in new software costs, and $0.5 million in insurance premiums. Auxiliary. Auxiliary expenses for the year ended May 31, 2014 were $6.2 million, a decrease of $0.5 million, or 8.0%, as compared to auxiliary expenses of $6.8 million for the year ended May 31, 2013. This decrease was primarily the result of lower enrollments that translated into lower book sales and cost of books sold. Income before non-controlling interest and taxes. The income before non-controlling interest and taxes for the year ended May 31, 2014, was $5.9 million, a decrease of $3.8 million, or 39.1% compared to the year ended May 31, 2013. The impact is due to additional expenses as explained above.



Results of Operations - For the Year Ended May 31, 2013 Compared to the Year Ended May 31, 2012

National American University Holdings, Inc.

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

Year-Ended Year-Ended May 31, 2013 May 31, 2012 In percentages In percentages Total revenues 100.0 % 100.0 % Operating expenses: Cost of educational services 22.6 23.4 Selling, general and administrative 64.2 65.2 Auxiliary expense 5.2 4.0 Cost of condominium sales 0.1 0.0 Loss on disposition of property 0.1 (0.3 ) Total operating expenses 92.2 92.3 Operating income 7.8 7.7 Interest expense (0.8 ) (0.5 ) Interest income 0.1 0.1 Other income 0.1 0.1 Income before income taxes 7.2 7.4 Income tax expense (2.9 ) (3.1 ) Net income (loss) attributable to non-controlling interest 0.1 (0.1 ) Net income attributable to the Company 4.2 4.2 -75-



--------------------------------------------------------------------------------

Table of Contents

For the year ended May 31, 2013, we generated $129.2 million in revenue, an increase of 8.7% compared to the same period in 2012. This increase was attributable to enrollment growth, an average tuition increase of 5.4% effective September 2012, fees billed to affiliated institutions for our courseware development, technical support and online class hosting services, and continued geographic and programmatic expansion. Our revenue for the year ended May 31, 2013 consisted of $127.9 million from our NAU operations and $1.3 million from our other operations. Total operating expenses were $119.2 million or 92.2% of total revenue for the year ended May 31, 2013, an increase of 8.6% compared to the same period in 2012 due to the additional expansion and development. Income before income taxes was $9.2 million or 7.2% of total revenue for the year ended May 31, 2013, an increase of 4.1% compared to the same period in 2012. Net income attributable to the Company was $5.4 million or 4.2% of total revenue for the year ended May 31, 2013, an increase of 7.9% compared to the same period in 2012. The additional details regarding these variances are described in greater detail below. NAU



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

Year-Ended Year-Ended May 31, 2013 May 31, 2012 In percentages In percentages Total revenues 100.0 % 100.0 % Operating expenses: Cost of educational services 22.9 23.6 Selling, general and administrative 63.5 64.2 Auxiliary expense 5.3 4.1 Loss on disposition of property 0.0 0.0 Total operating expenses 91.7 91.9 Operating income 8.3 8.1 Interest expense (0.8 ) (0.5 ) Interest income 0.1 0.1 Income before non-controlling interest and taxes 7.6 7.7 Total revenue. The total revenue for NAU for the year ended May 31, 2013 was $127.9 million, an increase of $10.0 million or 8.5%, as compared to total revenue of $117.8 million for the year ended May 31, 2012. The increase was primarily due to the enrollment increase of approximately 2.2%, 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 climate, 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 5.4% that was approved by NAU's board of governors and became effective September 2012, 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. -76-



--------------------------------------------------------------------------------

Table of Contents

The academic revenue for the year ended May 31, 2013 was $117.6 million, an increase of $7.8 million or 7.1%, as compared to academic revenue of $109.8 million for the year ended May 31, 2012. The increase was primarily due to the enrollment increase over the prior year. The auxiliary revenue was $10.3 million, an increase of $2.3 million or 28.4%, as compared to auxiliary revenue of $8.0 million for the year ended May 31, 2012. The increase in auxiliary revenue was primarily driven by increased enrollment growth and the implementation of a new online bookstore vendor that was in place for all of 2013 as compared to only one quarter in 2012. Cost of educational services. The educational services expense as a percentage of academic segment revenue decreased by 0.7% for the year ended May 31, 2013, to 22.9%, as compared to 23.6% for the year ended May 31, 2012. This decrease was a result of fixed costs such as facility expenses on an increasing revenue base. The educational services expenses for the year ended May 31, 2013, were $29.2 million, an increase of $1.4 million, or 4.9%, as compared to educational expenses of $27.8 million for the year ended May 31, 2012. 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 as well as for the new programs such as cardiovascular technology. Selling, general and administrative expenses. The selling, general and administrative expense as a percentage of total academic segment revenue decreased by 0.7% for the year ended May 31, 2013, to 63.5%, as compared to 64.2% for the year ended May 31, 2012. The selling, general and administrative expenses for the year ended May 31, 2013 were $81.2 million, an increase of $5.5 million, or 7.3% as compared to selling, general and administrative expenses of $75.7 million for the year ended May 31, 2012. The increase was attributed to additional support staff necessary to support our continued growth and increased admissions staff to support our growth plan. Auxiliary. Auxiliary expenses for the year ended May 31, 2013 were $6.8 million, an increase of $2.0 million, or 42.8%, as compared to auxiliary expenses of $4.7 million for the year ended May 31, 2012. This increase was primarily the result of closing our physical bookstores and engaging a third-party vendor to create an online bookstore. Income before non-controlling interest and taxes. The income before non-controlling interest and taxes for the year ended May 31, 2013, was $9.7 million, an increase of $0.6 million, or 7.0% compared to the year ended May 31, 2012. 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 $10.0 million during the year ended May 31, 2013 compared to the same time period last fiscal year. Expenses were 91.7% of total revenue for the year ended May 31, 2013 and were 91.9% for the same period in fiscal year 2012. This decrease is consistent with our efforts to reduce costs.



Liquidity and Capital Resources

Liquidity. At May 31, 2014, and May 31, 2013, cash, cash equivalents and marketable securities were $19.6 million and $31.9 million, respectively. Consistent with our cash management plan and investment philosophy, a portion of the excess cash was invested in United States securities directly or through money market funds, as well as in bank deposits and certificate of deposits. Of the amounts listed above, the marketable securities for May 31, 2014 and May 31, 2013 were $15.4 million and $20.7 million, respectively. -77-



--------------------------------------------------------------------------------

Table of Contents

We retain a $3.0 million revolving line of credit with Great Western Bank. Advances under the line bear interest at a variable rate based on prime and are secured by the Company's checking, savings and investment accounts held by the bank. There were no advances outstanding against the line at May 31, 2014 and May 31, 2013. Based on our current operations and anticipated growth, the cash flows from operations and other sources of liquidity are anticipated to provide adequate funds for ongoing operations and planned capital expenditures for the 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 believe that we are positioned to further supplement our liquidity with debt, if needed. Operating Activities. Net cash used by operating activities was $4.1 million for the year ended May 31, 2014 compared to net cash provided by operating activities of $16.0 million for the year ended May 31, 2013. This decrease is primarily the result of a $16.1 million increase in cash used for working capital, which includes a $10.7 million increase in accounts receivable due to spring money being paid during the summer term and a $3.0 million decrease in accounts payable due primarily to the fact that we're not constructing new locations this year. In addition, net income decreased by $2.0 million due to a decrease in enrollment rates as further described above in the Results of Operations section, and non-cash items included a $3.0 million decrease in the deferred tax liability offset by higher depreciation and amortization and stock compensation expense Net cash provided by operating activities was $16.0 million and $12.9 million for the years ended May 31, 2013 and 2012, respectively. This increase is related primarily to the increase in Results of Operations and certain non-cash items which included a $1.4 million increase in depreciation and amortization and the result of a decrease in cash used for working capital, which included a $3.5 million increase in other long-term liabilities and accounts payable and an offset of a $1.2 million increase in accounts and other receivables. Investing Activities. Net cash provided by investing activities was $1.7 million for the year ended May 31, 2014, as compared to the net cash used in investing activities of $14.8 million for the year ended May 31, 2013. The increase in the cash provided by investing activities was primarily related to the selling and buying of investments in fiscal year 2014, which resulted in net cash provided of $5.3 million compared to net cash purchases of $5.9 million in fiscal year 2013. The company invests its cash reserves in government treasury bills and the difference is in the timing of the purchases and sales and the length the term of the security purchased. In addition, purchases of property, plant and equipment was reduced by $4.1 million as the Company reduced the rate of growth and need for new physical locations. Additionally a payment of $400 was received on the tenant improvement allowance receivable on the Rapid City Central Administration building. Net cash used in investing activities was $14.8 million for the year ended May 31, 2013, as compared to the net cash used in investing activities of $9.4 million for the year ended May 31, 2012. This increase in cash used in investing activities was primarily the result of decreased proceeds received from the sale of investments, net of purchase of investments, of $10.0 million. This decrease was offset by a $4.5 million decrease in the purchase of property and equipment. Financing Activities. Net cash used in financing activities was $4.6 million for May 31, 2014 as compared to net cash used in financing activities of $5.7 million for the year ended May 31, 2013. The decrease is due to $1.7 million decrease in stock repurchases in 2014 offset by $0.5 million increase in dividends paid. Net cash used in financing activities was $5.7 million for May 31, 2013 as compared to net cash used in financing activities of $13.5 million for the year ended May 31, 2012. The decrease is due to $1.8 million of stock repurchases in 2013 compared to $10.1 million of repurchases in 2012. -78-



--------------------------------------------------------------------------------

Table of Contents

The table below sets forth our contractual commitments associated with operating leases as of May 31, 2014: Payments Due By Period (in thousands) Total Within 1 year 1-3 Years 3-5 Years More than 5 years Operating leases $ 43,126 $ 5,739 $ 10,933$ 10,690 $ 15,764



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 increase tuition (usually once a year) to assist in 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 impact on operating results and financial condition.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters