National American University Holdings, Inc. - Quarter Report: 2011 November (Form 10-Q)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

Cash and cash equivalents

Available for sale investments

Student receivables — net of allowance of $983 and $223 at November 30, 2011 and May 31, 2011, respectively

Other receivables

Bookstore inventory

Income tax receivable

Deferred income taxes

Prepaid and other current assets

 

Total current assets

 

 

Total Property and Equipment — Net

 

 

OTHER ASSETS:

Condominium inventory

Land held for future development

Course development — net of accumulated amortization of $1,556 and $1,415 at November 30, 2011 and May 31, 2011, respectively

Other

 

 

 

 

TOTAL

 

 

 

CURRENT LIABILITIES:

Current portion of capital lease payable

Accounts payable

Dividends payable

Student accounts payable

Income tax payable

Deferred income

Accrued and other liabilities

 

Total current liabilities

 

 

DEFERRED INCOME TAXES

 

 

OTHER LONG-TERM LIABILITIES

 

 

CAPITAL LEASE PAYABLE, NET OF CURRENT PORTION

 

 

COMMITMENTS AND CONTINGENCIES (Note 7)

 

STOCKHOLDERS’ EQUITY:

Common stock, $0.0001 par value (50,000,000 authorized; 28,057,419 issued and 26,914,658 outstanding as of November 30, 2011; 27,546,499 issued and 26,546,499 outstanding as of May 31, 2011

Additional paid-in capital

Retained earnings

Treasury stock, at cost (1,142,761 shares at November 30, 2011 and 1,000,000 shares at May 31, 2011)

Accumulated other comprehensive income

 

Total National American University Holdings, Inc. stockholders’ equity

 

Non-controlling interest

Total equity

 

 

TOTAL

 

REVENUE:

Academic revenue

Auxiliary revenue

Rental income — apartments

Condominium sales

 

 

Total revenue

 

 

OPERATING EXPENSES:

Cost of educational services

Selling, general and administrative

Auxiliary expense

Cost of condominium sales

(Gain) loss on disposition of property

 

 

Total operating expenses

 

 

OPERATING INCOME

 

 

OTHER INCOME (EXPENSE):

Interest income

Interest expense

Other income — net

 

 

Total other income (expense)

 

 

INCOME BEFORE INCOME TAXES

 

INCOME TAX EXPENSE

 

 

NET INCOME

 

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST

 

 

NET INCOME ATTRIBUTABLE TO NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC. AND SUBSIDIARIES

 

OTHER COMPREHENSIVE LOSS —

Unrealized losses on investments

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO NATIONAL AMERICAN UNIVERSITY HOLDINGS, INC.

 

 

Basic net earnings attributable to National American University Holdings, Inc.

Diluted net earnings attributable to National University Holdings, Inc.

 

Basic weighted average shares outstanding

Diluted weighted average shares outstanding

Balance — May 31, 2010

Issuance of 4,550,000 shares common stock net of issuance cost of $1,578

Share based compensation expense

Dividends declared

Comprehensive income:

Net income

Unrealized loss on investments

 

Balance — November 30, 2010

 

 

Balance — May 31, 2011

Conversion of 1,516,247 warrants to 510,920 shares common stock

Purchase of treasury stock

Excess tax benefits from stock based compensation

Share based compensation expense

Dividends declared

Comprehensive income:

Net income

Unrealized loss on investments

 

Balance — November 30, 2011

 

CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income

Adjustments to reconcile net income to net cash flows provided by operating activities:

Depreciation and amortization

(Gain) loss on disposition of property and equipment

Provision for uncollectable tuition

Noncash compensation expense

Excess tax benefits from stock based compensation

Deferred income taxes

Changes in assets and liabilities:

Accounts and other receivables

Student notes

Bookstore inventory

Prepaid and other current assets

Condominium inventories

Accounts payable

Deferred income

Other long-term liabilities

Income tax receivable/payable

Accrued and other liabilities

 

 

Net cash flows provided by operating activities

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of available for sale investments

Proceeds from sale of available for sale investments

Purchases of property and equipment

Proceeds from sale of property and equipment

Course development

Other

 

 

Net cash flows provided by (used in) investing activities

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

Repayments of capital lease payable

Issuance of common stock

Cash paid for stock issuance

Excess tax benefits from stock based compensation

Purchase of treasury stock

Dividends paid

 

 

Net cash flows provided by (used in) financing activities

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

CASH AND CASH EQUIVALENTS — Beginning of year

 

 

CASH AND CASH EQUIVALENTS — End of period

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:

Cash paid for income taxes

 

Cash paid for interest

 

Capital lease additions

 

 

Dividends declared at November 30, 2011 and November 30, 2010

 

The accompanying unaudited condensed 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”), 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. These financial statements are condensed and do not contain all disclosures required in annual financial statements. 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 5, 2011. Furthermore, the results of operations and cash flows for the six month periods ended November 30, 2011 and November 30, 2010, 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. All intercompany transactions and balances have been eliminated.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States (“GAAP”).

Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. On an ongoing basis, the Company evaluates the estimates and assumptions, including those related to bad debts, income taxes and certain accruals. Actual results could differ from those estimates.

The Company, formerly known as Camden Learning Corporation, was incorporated in the State of Delaware on April 10, 2007. The Company was a special purpose acquisition company formed to serve as a vehicle for the acquisition of an operating business. On November 23, 2009, Dlorah became a wholly-owned subsidiary of the Company (the “Transaction”), pursuant to an Agreement and Plan of Reorganization between the Company and Dlorah. In connection with the Transaction, the stockholders of Dlorah received approximately 77% of the equity of the Company, and Dlorah was deemed to be the acquirer for accounting purposes. The Transaction has been accounted for as a reverse merger accompanied by a recapitalization. As a result of the Transaction, the historical results of Dlorah became the historical results of the Company.

The Company’s common stock is listed on The Nasdaq Global Market. The Company owns and operates National American University (“NAU” or the “University”). NAU is a regionally accredited, proprietary, multi-campus institution of higher learning, offering Associate, Bachelor’s and Master’s degree programs in business-related disciplines, such as accounting, applied management, business administration and information technology, and in healthcare-related disciplines, such as nursing and healthcare management. Courses are offered through educational sites, as well as online via the Internet. Operations include educational sites located in Colorado, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, South Dakota and Texas, and distance learning operations and central administration offices located in Rapid City, South Dakota. A substantial portion of NAU’s academic income is dependent upon federal student financial aid programs, employer tuition assistance, online learning programs and contracts to provide instruction and course materials to other educational institutions. To maintain eligibility for financial aid programs, NAU must comply with Department of Education requirements, which include, among other items, the maintenance of certain financial ratios.

The Company, through its Fairway Hills real estate division, also manages apartment units and develops and sells multi-family residential real estate in the Rapid City, South Dakota area.

For the three and six months ended November 30, 2011, 94% of the Company’s total revenues was derived from NAU academic revenue. For the three and six months ended November 30, 2010, 93% and 92%, respectively, of the Company’s total revenues was derived from NAU’s academic revenue.

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, warrants and restricted stock.

The following is a reconciliation of the numerator and denominator for the basic and diluted EPS computations:

Numerator:

Net Income attributable to National American Universtiy Holdings, Inc.

 

Denominator:

Weighted average shares outstanding used to compute basic net income per common share

Incremental shares issuable upon the assumed exercise of stock options

Incremental shares issuable upon the assumed exercise of restricted shares

Incremental shares issuable upon the assumed exercise of warrants

 

Common shares used to compute diluted net income per share

 

Basic net income per common share

Diluted net income per common share

A total of 249,250 and 237,500 shares of common stock subject to issuance upon exercise of stock options for the three and six months ended November 30, 2011, respectively, have been excluded from the calculation of diluted EPS as the effect would have been anti-dilutive.

Outstanding options of 110,000 were not included in the computation of diluted net income per common share for the three and six months ended November 30, 2010 because their effect would be antidilutive.

In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Fair Value Measurement and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This guidance provides for the following new required disclosures related to fair value measurements: 1) the amounts of and reasons for significant transfers in and out of level one and level two inputs and 2) separate presentation of purchases, sales, issuances, and settlements on a gross basis rather than as one net number for level three reconciliations. The guidance also clarifies existing disclosures as follows: 1) provide fair value measurement disclosures for each class of assets and liabilities and 2) provide disclosures about the valuation techniques and inputs used for both recurring and nonrecurring level two or level three inputs. The new disclosures and clarifications of existing disclosures were effective for the Company’s fourth quarter ended May 31, 2010. Disclosures about purchases, sales, issuances, and settlements in the roll forward of activity for level three fair value measurements were effective for the Company’s first quarter ended August 31, 2011. The Company has adopted this standard, but it did not have a material effect on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The new guidance is intended to create a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments provide clarification on the application of certain existing fair value measurement guidance and enhance disclosure requirements, including the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy and expanded quantitative and qualitative disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The Company will adopt this standard for the year ending May 31, 2012, although it is not expected to have a material effect on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” which requires comprehensive income to be reported in either a single statement or in two consecutive statements reporting net income and other comprehensive income. The amendment does not change what items are reported in other comprehensive income or the U.S. GAAP requirement to report reclassification of items from other comprehensive income to net income. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”, which defers the requirement within ASU 2011-05 to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. During the deferral, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the issuance of ASU 2011-05. These standards will be effective for the Company’s fiscal quarter ending August 31, 2012 with retrospective application required. As this standard impacts presentation requirements only, the adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

The authorized capital stock for the Company is 51,000,000, consisting of (i) 50,000,000 shares of common stock, par value $0.0001 and (ii) 1,000,000 shares of preferred stock, par value $0.0001, and (iii) 100,000 shares of class A common stock, par value $0.0001. All shares of class A common stock were converted to common stock during the year ended May 31, 2010 at a rate of 157.3 shares of common stock for each share of class A common stock.

Of the authorized shares, 26,914,658 shares of common stock were outstanding as of November 30, 2011 and 26,546,499 shares of common stock were outstanding as of May 31, 2011. No shares of preferred stock were outstanding. On January 31, 2011, the Company’s Board of Directors authorized the repurchase of up to an additional 1,000,000 shares, not to exceed $10,000, of the Company’s outstanding common stock in open market or privately negotiated transactions. The Board determined, among other things, that the repurchase program would offset dilution from the exercise of existing warrants to purchase shares of common stock. During the third quarter fiscal 2011, the Company repurchased 1,000,000 shares for $7,505. As of March 31, 2011, there were no remaining shares authorized to be repurchased under this directive.

On November 4, 2011, The Company’s Board of Directors authorized the repurchase of up to $10,000 of its outstanding common stock in open market or privately negotiated transactions. The timing and actual number of shares purchased will depend on a variety of factors such as price, corporate and regulatory requirements, and other prevailing market conditions. The plan has not been assigned a predetermined date of expiration, but may be limited or terminated without prior notice. During the second quarter of fiscal 2011, 127,867 shares were repurchased for $1,072

During the year ended May 31, 2010, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission for the offer and sale of up to 7,000,000 shares of its common stock (half coming from selling stockholders), plus 1,050,000 shares to cover over-allotment. The sale of 7,000,000 shares closed on June 1, 2010, and the sale of the 1,050,000 over-allotment shares closed on June 5, 2010. Also, in connection with the Transaction, the former Dlorah stockholders were issued, in the aggregate, warrants to purchase up to 2,800,000 shares of common stock at $5.50 per share that expired if not converted by November 23, 2011. These warrants contained a cashless exercise feature. In fiscal 2011, 1,283,753 warrants were converted into 1,123,846 shares of common stock. In the first quarter of fiscal 2012, 954,166 warrants were converted into 354,466 shares of stock via the cashless exercise feature and warrants totaling 562,081 were converted into 156,454 shares of stock in second quarter of fiscal 2012 via the cashless exercise feature. All 2,800,000 were converted by November 23, 2011, and there are no warrants outstanding at November 30, 2011

In December 2009, the Company adopted the 2009 Stock Option and Compensation Plan (the “Plan”) pursuant to which the Company may grant restricted stock awards, restricted stock units and stock options to aid in recruiting and retaining employees, officers, directors and other consultants. Restricted stock awards accrue dividends that are paid when the shares vest. Restricted stock units awards do not accrue dividends prior to vesting. Grants are issued at prices determined by the compensation committee, generally equal to the closing price of the stock on the date of the grant, vest over various terms (generally three years), and expire ten years from the date of the grant. The Plan allows vesting based upon performance criteria. Certain option and share awards provide for accelerated vesting if there is a change in control of the Company (as defined in the Plan). The fair value of stock options granted is calculated using the Black-Scholes option pricing model. Share options issued under the Plan may be incentive stock options or nonqualified stock options. At November 30, 2011, all stock options issued have been nonqualified stock options. A total of 1,300,000 shares were authorized by the Plan. Shares forfeited or canceled are eligible for reissuance under the Plan. At November 30, 2011, 733,314 shares of Common Stock remain available for issuance under the Plan.

The fair value of restricted stock awards was calculated using the Company’s stock price as of the associated grant date, and the expense is accrued ratably over the vesting period of the award.

During the quarter ended August 31, 2010, the company granted 53,000 restricted stock units (“RSUs”) with a grant date fair value of $5.52 per share; these shares vested May 31, 2011 based on the Company’s profitability.

In August 2011, the Company issued 41,500 RSUs with performance based vesting at a grant date fair value of $10.59 per share. The number of shares earned will be determined by the Company’s profitability.

In connection with share based compensation awards with performance requirements, Company management must estimate the likelihood that the performance criteria will be attained. This involves assumptions about future performance. Management reviews these estimates to ensure that the expense associated with performance awards is properly stated at each reporting date. During the quarter ended November 30, 2011, the management determined achieving the performance level required under the August 2011 performance share grants was not likely. As a result, compensation expense totaling $9 recorded in the previous quarter has been reversed.

In August 2011, the Company also awarded 1,888 restricted stock awards with time based vesting at a grant date fair value of $10.59 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.

Compensation expense associated with restricted stock awards and restricted stock unit awards totaled $51 and $159, respectively for the three months ended November 30, 2011 and 2010. For the six months ended November 30, 2011 and 2010, compensation totaled $116 and $306, respectively. At November 30, 2011 unamortized compensation cost of restricted stock and restricted stock unit awards totaled $563. The unamortized cost is expected to be recognized over a weighted-average period of 2.2 years as of November 30, 2011.

A summary of restricted shares activity under the Plan as of November 30, 2011 and 2010, and changes during the six month periods then ended is presented below:

Nonvested shares at May 31, 2011

Granted

Vested

Forfeited

 

Nonvested shares at November 30, 2011

 

Nonvested at May 31, 2010

Granted

Vested

Forfeited

 

Nonvested at November 30, 2010

 

The Company accounts for stock option-based compensation by estimating the fair value of options granted using a Black-Scholes option valuation model. The Company recognizes the expense for grants of stock options on a straight-line basis in the statement of operations as operating expense based on their fair value over the requisite service period. There were no stock options issued during the quarter ended November 30, 2011.

For stock options issued during the six months ended November 30, 2011 and 2010, the following assumptions were used to determine fair value:

Expected term (in years)

Expected volatility

Weighted average risk free interest rate

Weighted average expected dividend

Weighted average fair value

Expected volatilities are based on historic volatilities from traded shares of a selected publicly traded peer group. The Company has limited historical data to estimate forfeitures. 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, 2011 and 2010, and changes during the six month periods then ended is presented below:

Outstanding at May 31, 2011

Granted

Exercised

Forfeited or canceled

 

Outstanding at November 30, 2011

 

Exercisable at November 30, 2011

 

Outstanding at May 31, 2010

Granted

Exercised

Forfeited or canceled

 

Outstanding at November 30, 2010

 

Exercisable at November 30, 2010

 

The Company recorded compensation expense of stock options of $101 and $48 for the three months ended November 30, 2011 and 2010, respectively. For the six months ended November 30, 2011 and 2010, compensation expense of $164 and $97, respectively, was recorded in the statement of operations. As of November 30, 2011 there was $643 of total unrecognized compensation cost related to unvested stock option based compensation arrangements granted under the Plan. The unamortized cost is expected to be recognized over a weighted-average period of 2.3 years as of November 30, 2011.

The Company plans to issue new shares as settlement of options exercised. There were no options exercised during the six months ended November 30, 2011.

The holders of class A common stock were entitled to a quarterly dividend equal to $0.11 per quarter (for a total of $0.44 per year) per share of the common stock into which such class A common stock was convertible, paid when and if declared by the board of directors in accordance with the merger agreement for the Transaction. When a dividend was paid on the class A common stock, a dividend equal to one-fourth of the per share amount of any class A common stock dividend paid was also paid to holders of common stock. On May 10, 2010, the Company announced that on April 26, 2010, its board of directors declared, subject to the satisfaction of the condition set forth below, a one-time special cash dividend in the amount of $0.1609694 per share on each share of the Company’s common stock and in the amount of $0.6438774 per share on each share of the Company’s common stock issuable upon conversion of the class A common stock. This special dividend totaled $11,116 of which $11,108 was paid on June 4, 2010 with the difference related to the restricted shares which will be payable once the restrictions lapse. All the dividends required under the merger agreement for the Transaction have been declared and paid.

August 30, 2010

October 25, 2010

January 31, 2011

May 2, 2011

August 29, 2011

November 4, 2011

The effective tax rates for the six months ended November 30, 2011 and November 30, 2010, were 39.6%. The effective tax rates for the three months ended November 30, 2011 and November 30, 2010, were 39.5% and 40.5%, respectively.

From time to time, the Company is a party to various claims, proceedings, or lawsuits relating to the conduct of its business. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims, or proceedings may be disposed of unfavorably to the Company, management believes, based on facts presently known, that the outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s consolidated financial position, cash flows or future results of operations.

The Company is subject to extensive regulation by federal and state governmental agencies and accrediting bodies. On an ongoing basis, the Company evaluates the results of internal compliance monitoring activities and those of applicable regulatory agencies and, when appropriate, records liabilities to provide for the estimated costs of any necessary remediation. In March 2011, the Department announced a program review site visit for NAU, which occurred in April 2011. The periods covered by the program review were the 2008-2009, 2009-2010 and 2010-2011 Title IV award years, (which each award year commencing July 1 and ending June 30). NAU received the Department’s preliminary program review report on June 16, 2011, which contained findings regarding the manner in which NAU calculated returns of Title IV program funds for online students that withdrew before completing their educational program, certain discrepancies between NAU’s published campus crime statistics and similar information on its website, and aspects of its written policy on returns of title IV program funds. With respect to the first finding, NAU was required to perform a full file review for each of the three award years and, where necessary, revise the last date of attendance and prior returns of Title IV funds calculations for online students. NAU submitted the results of this file review and its responses to the program review findings, on October 19, 2011. The Department has not yet issued a final program review determination with respect to this matter, which when issued may contain financial liabilities and may be appealed. The Company has accrued $0.4 million as an estimated liability. Other than this pending program review, there are no current outstanding regulatory actions, but the Company cannot predict the outcome of future program reviews and any unfavorable outcomes could have a material adverse effect on the results of the Company’s results of operations, cash flows, and financial position.

During the quarter, the Company entered into a $3 million unsecured revolving line of credit with Great Western Bank. Advances under this line bear interest at prime. There were no advances outstanding against this line at November 30, 2011.

As part of our ongoing operations, we entered into an arrangement for addition space that will house the Corporate headquarters, distance learning operations, and the Rapid City

campus operations that obligates us to make future payments under a capital lease obligation, which totaled $25.1 million, had a net present value of $12.2 million as of November 30, 2011 and was recognized as current and non-current capital lease payable of $0.1 million and $12.1 million, respectively, and was included in net property, plant and equipment in our condensed consolidated balance sheet.

The following is a schedule of future minimum commitments for the capital lease as of November 30, 2011:

2012

2013

2014

2015

2016

Thereafter

 

Total future minimum lease obligation

Less: Imputed interest on capital leases

 

Net present value of lease obligations

 

During 2008, the Company broke ground on a new building designed to contain 24 condominium units to be sold to the general public that was completed in 2009. These condominium units are accounted for within condominium inventories within the condensed consolidated balance sheets, and the sales of the condominium units are recorded within condominium sales within the condensed consolidated statements of operations. Nine units have been sold as of November 30, 2011.

In addition, six units of an existing 48-unit apartment building have been sold as condominiums, with the remaining units available for sale or lease. These condominium units are accounted for within net property and equipment within the consolidated balance sheets, and the sales of the condominium units are recorded as a gain on disposition of property within the condensed consolidated statements of operations.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Following is a description of each category in the fair value hierarchy and the financial assets and liabilities of the Company that are included in each category at November 30, 2011 and May 31, 2011:

Level 1 — Quoted prices in active markets for identical assets or liabilities. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted market prices.

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The type of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts or priced with models using observable inputs. Level 2 assets consist of certificates of deposit that are valued at cost, which approximates fair value. Level 2 instruments require more management judgment and subjectivity as compared to Level 1 instruments. For instance:

Determining which instruments are most similar to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates, maturity, issuer, credit rating and instrument type, and subjectively selecting an individual security or multiple securities that are deemed most similar to the security being priced; and

Determining whether a market is considered active requires management judgment.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The type of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation. The Company does not have any Level 3 assets or liabilities.

In accordance with the fair value hierarchy, the following table shows the fair value as of November 30, 2011 and May 31, 2011, of those financial assets that are measured at fair value on a recurring basis, according to the valuation techniques the Company used to determine their fair market value. No other financial assets or liabilities are measured at fair value on a recurring or nonrecurring basis at November 30, 2011 or May 31, 2011.

Investments

CD’s and money market accounts

US treasury bills and notes

 

Total assets at fair value

 

 

Investments

CD’s and money market accounts

US treasury bills and notes

 

 

Total assets at fair value

 

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.

Operating segments are defined as business areas or lines of an enterprise about which financial information is available and evaluated on a regular basis by the chief operating decision makers, or decision-making groups, in deciding how to allocate capital and other resources to such lines of business.

The Company operates two operating and reportable segments: National American University (NAU) and other. The NAU segment contains the revenues and expenses associated with the University operations and the allocated portion of corporate overhead. The other segment contains everything else. These operating segments are divisions of the Company for which separate financial information is available and evaluated regularly by executive management in deciding how to allocate resources and in assessing performance.

General administrative costs of the Company are allocated to specific divisions of the Company.

The majority of the Company’s revenue is derived from the NAU division, which provides undergraduate and graduate education programs. NAU derives its revenue primarily from student tuition. The other division operates multiple apartment and condominium complexes and derives its revenues primarily from condominium sales and rental income (in thousands).

Revenue:

Academic revenue

Auxiliary revenue

Rental income — apartments

Condominium sales

 

 

Total revenue

 

 

Operating expenses:

Cost of educational services

Selling, general &administrative

Auxiliary expense

Cost of condominium sales

(Gain) loss on disposition of property

 

 

Total operating expenses

 

 

Income (loss) from operations

 

 

Other income (expense):

Interest income

Interest expense

Other income — net

 

 

Total other income (expense)

 

 

Income (loss) before taxes

 

Total assets

 

Revenue: