Item
1. Business. Overview
National American
University Holdings, Inc. is a provider of professional and
technical postsecondary education primarily designed for working
adults and other non-traditional students. We own and operate
National American University, a regionally accredited, proprietary,
multi-campus institution of higher learning founded in 1941. In
1998, the university began offering online degree programs. Through
campus-based, blended, and fully online instruction, the university
offers diploma, associate, baccalaureate, master’s, and
doctoral degrees in business-related disciplines, such as
accounting, management, business administration, and information
technology; in healthcare-related disciplines, such as occupational
therapy, medical assisting, nursing, surgical technology, and
healthcare information and management; in legal-related
disciplines, such as paralegal, criminal justice, and professional
legal studies; and in higher education. The mission is to prepare
students of diverse interests, cultures, and abilities for careers
in our core fields in a caring and supportive
environment.
Since
2013, increasing numbers of students have been transitioning from
ground-based programs to fully online or blended offerings.
Multiple locations are evolving to become online support centers as
opposed to locations for ground-based programs. These locations use
small physical facilities in strategic geographic areas, allowing
students to work with staff online or in person for assistance with
their educational choices and related services while completing the
majority of their coursework online. Working adults and other
non-traditional students remain attracted to the flexibility of
online programs and the personal attention provided at our physical
facilities. As a result, we are realigning our ground-based
resources and distance-learning infrastructure to support the
growing percentage of students in blended and online offerings, as
well as to support our efforts in serving military students and
students from closed institutions through formal teach-out and
transfer arrangements. As of May 31, 2018, NAU operated 24
locations across the states of Colorado, Indiana, Kansas,
Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, South Dakota,
and Texas. Distance learning operations and central administration
offices operate from Rapid City, South Dakota. During the third
quarter of fiscal year 2017, we consolidated three campus-based
operations in Texas and Minnesota, realigning them to expand
administrative and enrollment services support in key locations of
our university system. Simultaneously, we opened locations to serve
military students and community college graduates.
In
addition to the university operations, NAUH operates a real estate
business known as Fairway Hills Developments, or Fairway Hills. The
real estate business rents apartment units and develops and sells
condominium units in the Fairway Hills Planned Residential
Development area of Rapid City, South Dakota. Fairway Hills
completed construction on a 24-unit luxury apartment complex in the
first quarter of fiscal year 2018.
The
university’s enrollment declined from 8,185 students as of
May 31, 2016 to 6,703 students as of May 31, 2017, and then
decreased to 5,648 students as of May 31, 2018, representing a
decrease of approximately 18.1% from 2016 to 2017 and a decrease of
15.7% from 2017 to 2018. Across the system, eight undergraduate
locations experienced year-over-year growth; our graduate school
achieved 22.7% growth and our doctoral school achieved 13.3% growth
in the Spring 2018 Quarter. We believe the decline in student
enrollment and revenue is the result of the regulatory scrutiny of
the industry and the current economic environment. Over the past
year, the rate of decline has slowed and is comparable or better to
institutions across the higher education landscape. Similar to our
peers, many working adults have chosen not to attend
school.
Notwithstanding the
unfavorable economic environment, we believe the opportunity exists
to increase profit by controlling costs and further leveraging our
online offerings and physical locations. During the same periods,
total revenue declined from $96.1 million for the fiscal year ended
May 31, 2016, to $86.6 million for fiscal year ended May 31, 2017,
and then decreased to $77.2 million for the fiscal year ended May
31, 2018, representing annual decreases of 9.9% and 10.9%,
respectively. Income before income taxes for the fiscal year ended
May 31, 2016 was a loss of $8.2 million, compared to a loss of $7.8
million for the fiscal year ended May 31, 2017, and a loss of $12.3
million for the fiscal year ended May 31, 2018.
Revenue
for the NAU segment declined from $95.0 million in fiscal year 2016
to $85.4 million in fiscal year 2017 and decreased to $74.8 million
in fiscal year 2018, representing a decrease of 10.1% between 2016
and 2017 and a decrease of 12.5% from 2017 to 2018. Loss before
income taxes for the NAU segment was $8.2 million in fiscal year
2016, decreasing to a loss of $7.8 million in fiscal year 2017 and
then increasing to a loss of $12.1 million in fiscal year 2018.
Total assets for the NAU segment decreased from $60.6 million in
fiscal year 2016 to $44.4 million in fiscal year 2017, and
decreased to $35.4 million in fiscal year 2018.
Revenue
for the Other segment (primarily Fairway Hills), increased from
$1.1 million in fiscal year 2016 to $1.2 million in fiscal year
2017 and increased to $2.4 million in fiscal year 2018,
representing an increase of 4.5% between 2016 and 2017, and an
increase of 108.1% from 2017 to 2018. Income before taxes for this
segment went from a loss of $0.02 million in fiscal year 2016 to a
gain of $0.02 million in fiscal year 2017 and then decreased to a
loss of $0.2 million in fiscal year 2018. Total assets for the
Other segment increased from $7.9 million in fiscal year 2016 to
$13.2 million in fiscal year 2017 and then increased to $13.4
million in fiscal year 2018.
University
History
Founded
in 1941, NAU, then operating under the name National School of
Business, offered specialized business training designed for women
in western South Dakota wanting to work outside the home. During
the late 1960s and early 1970s, the university progressed from a
two-year business school to a four-year college of business and
embarked on a recruitment of qualified graduates of one- and
two-year programs from accredited business schools in the eastern
United States. Such programs allowed students to continue their
education and receive appropriate transfer credits for their
previous academic achievements. In 1974, the university, then known
as National College, added its first branch campus in Sioux Falls,
SD, followed later that year by branch campuses in Denver and
Colorado Springs, CO, and Minneapolis and St. Paul, MN. The
university offered conveniently scheduled courses that would lead
to a degree appealing to working adults and other non-traditional
students. Today, the university continues its mission to provide
quality professional and technical education for predominantly
underserved working adult students and to ensure that students
transferring credits can do so with minimal disruption to degree
progression and timeline to completion.
Over
the past three years, NAU has particularly focused its academic
initiatives on market needs and on educational research that
addresses the social, emotional, financial, and academic needs and
issues of underserved working adults. Through these initiatives, we
have purposefully redesigned the student and student-faculty
experience, have expanded research and scholarship, and have
revised programs to maximize transfer credit and credit for prior
learning options. We have created new math and writing course
pathways, launched co-requisite remedial offerings, built
incentives for attending full-time, and integrated career services
and career development across the curricula. We have addressed
high-failure gateway courses and have implemented intrusive
advising and support services based on student success analytics to
improve learning, make gains in persistence and completion, and
reduce time to degree. Simultaneously, we are revitalizing our
performance-based, competency-driven curricula as we rework the
instructional design of our courses through D2L/BrightSpace and
fully embed mobile-first technologies. In this same time period,
NAU has engaged with accreditors, state postsecondary agencies, and
state boards of nursing to serve students displaced by closed
schools, providing those students with pathways to complete their
desired educational programs.
The
university continues to manage changing needs for educational
sites; to add campus-based, blended, and online undergraduate and
graduate programs; and to develop new technologies to support
student learning, persistence, and degree progression and
completion. New offerings launched or in development include
cybersecurity, forensics, surgical technology, vocational nursing,
health information management, aviation, strategic intelligence,
counterterrorism, and strategic security and protection. For many
years, the university has sustained affiliations with vocational
institutions in Canada, providing consulting in the development and
delivery of online programs. In 2016, NAU launched Canada-Online, a
subset of online health, paralegal, and business-related associate
and baccalaureate degree programs specifically designed to allow
transfer and degree-completion options for Canadian students in
affiliated institutions graduating with diplomas. In June 2017, the
university launched the College of Military Studies, which provides
comprehensive military student support services and undergraduate
and graduate programs customized for veterans, active military, and
their families.
Corporate
Information
National American
University Holdings, Inc., formerly known as Camden Learning
Corporation, was organized under the laws of the State of Delaware
on April 10, 2007, as a blank check company to acquire one or more
domestic or international assets of an operating business in the
education industry. On November 23, 2009, as a result of the merger
transaction with Dlorah, Inc., a South Dakota corporation, which
owns and operates NAU, Dlorah became our wholly owned subsidiary.
For accounting purposes, Dlorah was the acquirer and accounted for
the transaction as a recapitalization. Accordingly, the
consolidated financial statements included in this annual report on
Form 10-K reflect the results of Dlorah. We conduct substantially
all of our business and generate substantially all of our revenue
through Dlorah. Our primary business is the operation of National
American University, which generated 96.9% of our revenue in fiscal
year 2018. We also have Fairway Hills, a multi-family residential
real estate operation in Rapid City, South Dakota, which generated
3.1% of our revenue in fiscal year 2018. The NAU website is
www.national.edu. The information on the website is not
incorporated by reference in this Annual Report on Form 10-K. We
upload the Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act on the website as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the
Securities and Exchange Commission.
Our
Core Values
Since
inception, the following core values have guided the university,
which we believe have contributed to our success in obtaining and
retaining students and faculty:
●
offer high quality
instructional programs and services;
●
provide a caring
and supportive learning environment; and
●
offer technical and
professional career programs.
These
core values have remained our foundation as we expanded from a
single education site offering specialized business training to a
multi-state, diversified, educational institution with diploma,
associate, baccalaureate, master’s, and doctoral degrees. We
promote understanding and support of our mission and core values
through participation of students, faculty, staff administrators
and the board of governors in the governance and administrative
structures of the university. We have adopted and implemented
policies and procedures to ensure adherence to our core values and
to operate with integrity as we fulfill our mission.
Our
commitment to these core values is evidenced in the daily
interactions among our students, faculty, staff, and
administrators:
●
the strong academic
and learning support structures, services, and resources for
students;
●
the overall ease of
the registration process;
●
the transferability
of credits;
●
the career-focused
professional and technical programs;
●
the caring and
supportive attitude by faculty toward students; and
●
the opportunity to
specialize learning through program emphasis areas.
Approach
to Academic Quality
We have
identified several academic initiatives to promote a high level of
academic quality, including:
Student engagement,
learning, academic achievement, persistence to credential, and
career success.
The urgency of now is to assist working
adults in getting the credit they deserve at NAU; to teach, assess,
mentor, and support until every student acquires the skills,
knowledge, and abilities they need; and to create policies,
processes, programs, and learning experiences that exceed
expectations.
Comprehensive overhaul of
all NAU course curricula, student educational experience, and
learning management system.
We are reconceiving the entire
student experience online and updating all assignments,
assessments, and competency clusters across learning outcomes in
ways that allow them to be unbundled into micro-credentials or
integrated into new course and program combinations. We design our
curricula to address specific career-oriented objectives we believe
working adult and other non-traditional students are seeking. We
have invested significant human and financial resources in the
implementation of this curricula development to support faculty and
students in achieving prescribed student learning outcomes. The
performance-based curricula are designed and delivered by faculty
members who are committed to delivering a high quality, current and
relevant education to prepare students for their
professions.
Qualified faculty.
NAU seeks to hire and retain highly qualified faculty members with
relevant practical experience and the necessary skills to provide a
high-quality education for its students. More than 90% of our
faculty members hold graduate degrees. We seek faculty members who
can integrate relevant, practical experiences from their
professional careers into the courses they teach. We also invest in
the professional development of our faculty members by providing
training in campus and online teaching techniques, hosting events
and discussion forums that foster sharing of best practices and
continually assessing teaching effectiveness through administrative
reviews and student evaluations.
Standardized course
design.
We employ a standardized curriculum development
process to promote consistent, authentic learning experiences in
our online courses, and implement this curriculum through blended
instructional delivery at the campus locations. We continue to
review programs in an effort to ensure they remain consistent,
up-to-date and effective in producing the desired student learning
outcomes. We also regularly review student survey data to identify
opportunities for course modifications and
enhancements.
NAU
has completed implementation and upgrade of BrightSpace by D2L.
Upgrades include live chat, texting, live tutoring, and other new
tools for faculty-student engagement. In addition, the
D2L/Brightspace course room prototype for all 450+ undergraduate
and graduate courses has been developed and is being tested by NAU
staff, faculty, and students. We have defined a curricular model
that evaluates the competencies, learning outcomes, and related
assignments and assessments across an academic program. By 2019,
all programs and courses should have the ability to be unbundled
and offered on a pure competency-based and laddered credential
model.
Effective student
services.
We establish teams of academic and administrative
personnel who act as the primary support for our students,
beginning at the application stage and continuing through
graduation. In recent years, we have also concentrated on improving
the technology used to support student learning, including
enhancing our online learning platform and student services. As a
result, many of support services, including academic,
administrative, library and career services are accessible online,
allowing users to access these services at a time and in a manner
convenient to them.
Continual academic
oversight.
The provost’s office, in conjunction with
other academic offices, conducts academic oversight and assessment
functions for all programs, and evaluates the content, delivery
method, faculty performance and desired student learning outcomes.
We continually assess outcomes data to determine whether students
graduate with the knowledge and skills necessary to succeed in the
workplace. The provost also initiates and manages periodic
examinations of the curricula to evaluate and verify academic
program quality and workplace applicability. Based on these
processes and student feedback, we determine whether to create new
programs, modify current programs, or discontinue those that do not
meet our standards or market needs.
Board of Governors.
We maintain a separate board of governors to oversee the academic
mission of the university. Among other things, the board of
governors is responsible for determining the mission and purposes
of the university, approving educational programs and ensuring the
well-being of students, faculty and staff. A majority of the board
of governors’ members are independent, experienced in
education, administration, business, international business,
government, law, communications, and occupational therapy. Board
membership has remained stable for many years. The oversight and
guidance of the board of governors has been critical to the
development and the maintenance of academic standards.
Industry
and Outlook
NAU
operates in the same market as for-profit and non-profit public and
private professional and technical institutions and community
colleges. Competition is generally based on location, program
offerings, modality, the quality of instruction, placement rates,
selectivity of admissions, recruiting, and tuition rates. We
compete for enrollments by offering more frequent start dates, more
flexible hours, better instructional resources, more hands-on
training, shorter program length and greater assistance with job
placement. We also compete with other career schools by focusing on
offering high demand, career-oriented programs, providing
individual attention to students and focusing on flexible degrees
for working adults and other non-traditional students. We believe
we can compete effectively in our respective local markets because
of the diversity of our program offerings, quality of instruction,
strength of our brand, reputation and success in placing students
with employers.
Our
competition differs in each market depending on the curriculum
offered. Because schools can add new programs in a relatively short
period of time, typically within six to twelve months, new
competitors within an academic program area can emerge
quickly.
Certain
institutions have competitive advantages over us. Non-profit and
public institutions receive substantial government subsidies,
government and foundation grants and tax-deductible contributions
and have other financial resources generally not available to
for-profit schools. In addition, some of our for-profit competitors
have a more extended or dense network of schools and campuses,
which may enable them to recruit students more efficiently from a
wider geographic area. Furthermore, some of our competitors,
including both traditional colleges and universities and other
for-profit schools, have substantially greater financial resources
and name recognition, which may enable them to compete more
effectively for potential students. We expect to face continued
competition as a result of new entrants to the online education
market with similar programmatic offerings.
Competitive
Strengths
We
believe the following strengths enable us to compete effectively in
the postsecondary education market:
Our physical locations and
program and delivery mix allow for greater leverage of
assets.
Our locations provide students face-to-face, blended
and online learning as well as a range of student services. In
addition, these locations provide an opportunity for students to
take certain courses at our educational sites while taking the
majority of their classes online. This approach provides students
with a more flexible class experience and allows us an opportunity
to further leverage our fixed assets.
Our diversified, technical,
and professional program mix.
Programs target in-demand
associate, baccalaureate, master’s, and doctoral programs in
professional and technical areas, including business, accounting,
information technology, legal studies, allied health, and nursing.
Program evaluation and development processes allow the university
to continually update academic offerings relevant to the field, as
well as design new programs to meet current industry
needs.
Our Doctorate in Education
(Ed.D.) with nationally recognized leadership.
The Ed.D.
program includes nationally renowned community college leaders and
faculty who have served as presidents and chief officers of
community colleges for more than 40 years and who have published
numerous books and articles on leadership of community colleges in
the last several decades. The doctoral program and its recognized
faculty bring great visibility to the university and has produced
partnerships with community colleges and enrollments comparable to
the largest community college leadership programs in the
country.
Our multiple accreditations
and regulatory approvals.
NAU is regionally accredited
through the Higher Learning Commission (“HLC”). In
addition, many of our programs maintain specialized or professional
accreditation and approvals.
Our affiliations with other
educational institutions.
NAU began offering online academic
programs in 1998, and has continually developed expertise in
curricula and technology related to online education. We have
established a number of affiliations with other educational
institutions to provide curriculum development services and
technology support services. We also believe NAU provides an
appealing opportunity for displaced students of closed schools who
seek to continue their education through transfer- and teach-out
options.
Our commitment to high
demand professional and technical programs.
We are committed
to offering quality, performance-based educational programs to meet
the needs of employers. Our programs are designed to help our
students achieve their career objectives in a competitive job
market. The entire student experience online is being re-conceived
and all assignments, assessments, and competency clusters across
learning outcomes are being updated in ways that allow them to be
unbundled into micro-credentials or integrated into new course and
program combinations. Qualified faculty members, who often have
practical experience in their respective fields, teach our programs
and offer students “real-world experience”
perspectives. We periodically review and assess our programs and
faculty to ensure that our programs are current and meet the
changing demands of employers.
Our focus on individual
attention to students.
We believe in providing individual
attention to our students to ensure an excellent educational
experience. We provide student support services, including
administrative, financial aid, library, career, and technology
support, to help maximize their success. We also provide personal
guidance to our students during the admissions process, academic
advising, financial services, learner support and career
services.
Our focus on flexible
scheduling.
We have designed our program offerings and our
online delivery platform with flexible scheduling to meet the needs
of working adults and other non-traditional students. We offer
on-site day, evening, and weekend classes, as well as online and
blended degree and diploma programs. We believe working adults and
other non-traditional students are attracted to the convenience and
flexibility of our programs because they can study and interact
with faculty and classmates during times and at places that suit
their needs.
Our focus on improving
processes.
In collaboration with the IT team, academic
leaders have developed and launched or will launch three new
cloud-based comprehensive service points for math, writing, career,
and library support—as well as 24/7 student support. The
results from previous quarters indicate that the successful
completion rate in math has risen. Use of the math and writing
support systems and tutoring have doubled in the past year. The IT
team in collaboration with academics developed ROCKET and TEAMS 3,
a cloud-based version of NAU’s signature undergraduate
persistence and completion system to improve faculty and advisor
response time. The cloud-based system allows faculty, advisors,
campus directors, and college and associate deans to track student
progress, attendance, grades, posted assignments, etc., to
intervene proactively if a student becomes in any way at risk. The
university has also implemented a new process to ensure that
faculty and directors of student success respond to at-risk student
alerts within 24 hours and post a resolution within 48 if at all
possible.
Our focus on improving
faculty-student engagement.
Over the course of spring and
summer quarters all new and continuing undergraduate faculty
complete an orientation on new expectations for weekly synchronous
and asynchronous faculty-student engagement in discussion boards,
assignments, labs, and other support within every course. Faculty
evaluations now include the expectation for substantive and
iterative engagement; new expectations for discussions are now in
place for students and faculty; and the ongoing overhaul of all
courses is embedding new technology tools that enhance engagement
and synchronous interaction.
Our focus on faculty
development and scholarship.
Within the Harold D. Buckingham
Graduate School, the graduate and undergraduate faculty worked
collaboratively to host the first conference on faculty scholarship
and the adult learner. The 2017 iteration will focus on increasing
awareness, showcasing graduate faculty and student research and
scholarship, and improving publicity and participation. The new
process to ensure faculty and student scholarship and research in
the master’s programs has resulted in 100 percent graduate
faculty participation in some form of professional development
and/or scholarship each year. Further, all courses and programs are
planned to be revised by 2019 to integrate real-world research into
student activities.
Our focus on the
military.
In
June 2017, the university launched the College of Military Studies
(CMS) to focus and provide informed quality education and a premier
customer service platform response to the needs and demands of
servicemen and women, their dependents, and veterans. The CMS is
also focusing on safeguarding veterans’ benefits and ensuring
the military student population is well-served.
Our experienced executive
management team with strong operating history.
NAU’s
executive management team possesses extensive experience in the
management and operation of postsecondary education institutions.
The president and chief executive officer, Dr. Ronald Shape, began
his career in higher education with us in 1991. He began teaching
courses in accounting, auditing and finance in 1995, became the
chief fiscal officer in 2002, and the chief executive officer in
April 2009. Dr. Lynn Priddy, provost and chief academic officer of
the university, joined NAU in 2013. She began her career in
education in 1986, serving as English faculty, director, dean, and
vice president of several institutions. In 1999, she joined the
largest regional accreditor, the Higher Learning Commission, where
she served fourteen years, the last five as vice president. Dr.
David Heflin is the chief financial officer and joined NAU in June
2015. Dr. Heflin began his career in education in 2001. From 2001
to 2005, Dr. Heflin served as chief financial officer and chief
operating officer at the University of Sioux Falls. From 2005 to
2008, he served Clayton State University as vice president of
business and operations. From 2008 to 2014, Dr. Heflin led the
Colorado Technical University of Sioux Falls as campus president.
Dr. Heflin is a licensed certified public accountant and has been a
member of the American Institute of Certified Public Accountants
since 1983. Michael Buckingham was appointed president of the real
estate operations in November 2009. Mr. Buckingham oversees the
maintenance of all the facilities in the NAU system, as well as
properties being developed by the real estate operations. Mr.
Buckingham served as corporate vice president of Dlorah from 1992,
and the president of Dlorah’s real estate operations from
1988, until the closing of the Dlorah merger in 2009.
Business
Development and Expansion
There
has been a fundamental shift in how our student population chooses
to engage in their educational pursuits and in response we have
expanded our online operations. We will continue to focus on the
market for ground based academic programs (such as nursing,
surgical technician, medical assistant, etc.) that is delivered in
a very focused space. We may continue to consolidate on-ground
operations to promote efficiencies and superior service for
students. There are several approaches to building the online
operations of the university, including integrating online
operations in one location, acquiring certain assets of
Henley-Putnam University, and expanding our Canadian
operations.
NAU has
integrated the operations of the Rapid City and Kansas City online
operations. This integrated operation is fully functional and is
providing stability to the overall online enrollment of the
university. We expect this integrated operation will add the
necessary capacity to scale and grow our online enrollment
population for the foreseeable future.
The
asset purchase transaction with Henley-Putnam University closed on
March 21, 2018, and the university is working on the integration of
programs, students, faculty, and staff into NAU. The acquisition of
these assets provides additional, high demand, academic programs
and certificates that will be offered through NAU’s Henley
Putnam School of Strategic Security, housed under NAU’s
College of Military Studies. We will be using traditional marketing
networks along with the network that HPU had developed to provide
greater exposure to these programs. These programs are offered
entirely online.
We also
continue to focus on growth in the Canadian operations. The
Canadian opportunity allows us the potential to further diversify
our holdings and provide a new source of enrollment growth. NAU
continues to focus on building the Canadian infrastructure that
will support this growth for the foreseeable future. The Canadian
operation is provided entirely online.
NAU
began offering academic degree and diploma programs online in 1998,
through what we refer to as our online campus. We were one of the
first regionally accredited universities to be approved by the HLC
to offer full degree programs under an Internet-based delivery
methodology. We have invested heavily in the creation and evolution
of a sophisticated and reliable online delivery system. The online
campus has grown as an organizational structure, providing a scope
of service consistent with the university’s other campuses.
Careful consideration was afforded to preserving the
student-centered philosophy of the university while capitalizing on
the technological advancements in online delivery. Students can now
access all support services, tutoring, library, career services,
courses, and program information via their smart phones. In
addition, IT has implemented electronic forms, replacing
paper-based systems, and has launched auto-population of grades
from D2L to CampusVue. NAU conducts virtual graduation that allows
for live-streaming of graduates, faculty, and testimonials. The
organization of the online campus continues to evolve in response
to increasing enrollment and the expanding sphere of quality
services available to our students.
Recognizing the
current and future impact of globalization on higher education, we
have worked actively to enroll international students. During the
late 1990s, we started developing international affiliations with
foreign colleges and universities. Such affiliations provide
students from other countries the opportunity to study at
universities in the United States to complete their studies. Many
academically capable and motivated students from foreign countries
desire to take coursework at American colleges or universities but
are not able to do so for various reasons, including inadequate
financial resources, family and work obligations in their home
countries and immigration restrictions.
Growth
Strategies
Expand academic program
offerings.
NAU continues to focus on offering a variety of
in-demand degree programs in multiple locations and delivery
formats. On all levels, we consider changes in student
demographics, demand for degree programs and employment outlook in
our business development decision-making processes. The planning
process includes long-range planning, feasibility studies, market
research and a variety of other research projects involving
changing job markets. In that regard, we continue to address
current societal and economic trends and engage in appropriate
analysis and planning for the programs and markets we seek to
develop. New program offerings typically build on existing programs
and incorporate additional specialized courses, which offer
students the opportunity to pursue programs that address their
specific educational objectives while allowing us to expand our
program offerings with modest incremental investment.
Increase enrollment in
existing academic programs.
We focus on increasing
enrollment in our core academic programs by refining our marketing
and recruiting efforts to identify, and enroll students seeking
degrees or diplomas in the academic programs we offer. We also
focus on retaining students so they may achieve their educational
goals. We believe that the depth and quality of our existing core
programs will provide opportunity for additional
growth.
The
business-related master’s programs continue to increase in
enrollment, benefitting from the dual credit at the
bachelor’s level and other solid changes and improvements
made at the graduate school.
Expand relationships with
private sector and government employers.
We seek additional
relationships with healthcare systems, businesses, and other
employers, including governmental and military employers, through
which we can market our program offerings to their employees. These
relationships provide enrollment opportunities for the
university’s programs, build recognition among employers in
our core disciplines, and enable us to identify new degree and
diploma programs that are in demand by students and
employers.
Leverage
infrastructure.
We intend to continue investing in our
people, processes, and technology infrastructure. As we overhaul
the learning management system, the goal is to create the NAU
experience that refreshes and engages working adult learners,
solidifying NAU as the place for our students to achieve a better
life and more fulfilling work. NAU also offers an innovative hybrid
teaching and learning experience not bound by geography. Through
Mondo Synchronous Learning (Mondo SL), we can offer real-time
learning experiences through the 70-inch Mondo Pads to NAU students
that bridge campuses, build diverse communities of learners,
showcase our best instructors, and provide access to the
traditional campus experience. We believe these investments have
prepared us to deliver our academic programs to a larger student
population with only modest incremental investment. We intend to
leverage these investments as we seek to grow enrollment, which we
believe will allow us to increase our operating margins over
time.
Continue to expand
affiliations with other educational institutions.
NAU
provides online course hosting and technical assistance to
approximately 2,500 students through affiliated institutions. We
will continue to seek to expand the number of affiliations with
other educational institutions to provide online program services.
These services can meet the needs of other institutions while
providing us with additional sources of revenue.
Pursue strategic
acquisitions.
We will consider acquisitions of educational
institutions with the potential for program replication, new areas
of study, new markets with attractive growth opportunities, further
expansion of our online delivery capability and advanced degree
programs.
Accreditation
and Program Approvals
The
quality of our academic programs is evidenced by institutional and
program-specific accreditations and approvals. We received initial
accreditation from the HLC in 1985. Since then, we have continued
to grow and expand, and have obtained HLC approval for new
geographic sites and graduate degree programs. In addition to
institution-wide accreditation, numerous specialized commissions
accredit or approve specific programs or schools, particularly in
healthcare and professional fields. Accreditation or approval of
specific programs by one of these specialized commissions signifies
that those programs have met the additional standards of those
agencies. For a list of our institutional and specialized or
professional accreditation see “Regulatory Matters —
Accreditation.”
We are
approved for veterans training and for administering various
educational programs sponsored by federal and state agencies, such
as the Bureau of Indian Affairs, the Social Security Administration
and various state rehabilitation services.
Programs
and Areas of Study
NAU
offers the Doctor of Education, a Master of Business
Administration, Master of Management, Master of Science in Nursing,
Bachelor of Science, Associate of Applied Science and Associate of
Science degrees, with a variety of program options leading to each
of these degrees. Many of the degree programs offer emphasis areas.
We also offer diploma programs consisting of a series of courses
focused on particular areas of study for students seeking to
enhance their skills and knowledge in the areas of information
technology and allied health.
As of
May 31, 2018, we offered the following degree, diploma and
certificate programs:
|
Graduate
Degrees
|
Associate
Degrees
|
|
Ed.
D Community College Leadership
|
Accounting
|
|
Master of
Business Administration
|
Business
Administration
|
|
Master of
Business Administration with:
|
Business
Logistics
|
|
● Emphasis
in Accounting
|
Computer Support
Specialist
|
|
● Emphasis
in Aviation Management
|
Construction
Management
|
|
● Emphasis
in E-Marketing
|
Criminal
Justice
|
|
● Emphasis
in Health Care Administration
|
Emergency Medical
Services
|
|
● Emphasis
in Human Resource Management
|
Health and Beauty
Management
|
|
● Emphasis
in Information Technology Management
|
Health
Information Technology
|
|
● Emphasis
in International Business
|
Information
Technology
|
|
● Emphasis
in Management
|
Management
|
|
● Emphasis
in Operations and Configuration Management
|
Medical
Administrative Assistant
|
|
● Emphasis
in Project and Process Management
|
Medical
Assisting
|
|
Executive Master
of Business Administration
|
Medical
Laboratory Technician
|
|
|
Medical Staff
Services Management
|
|
Master of
Management
|
Occupational
Therapy Assistant
|
|
Master of
Management with:
|
Associate of
Science in Nursing
|
|
● Emphasis
in Aviation Management
|
Paralegal
Studies
|
|
● Emphasis
in Criminal Justice Management
|
Professional
Legal Studies
|
|
● Emphasis
in E-Marketing
|
Small Business
Management
|
|
● Emphasis
in Health Care Administration
|
Surgical
Technology
|
|
● Emphasis
in Higher Education
|
|
|
● Emphasis
in Human Resource Management
|
|
|
● Emphasis
in Information Technology Management
|
|
|
● Emphasis
in Operations and Configuration Management
|
Diplomas
|
|
● Emphasis
in Project and Process
Management
|
Accounting and
Bookkeeping
|
|
|
Computer Support
Specialist
|
|
Master of Science
in Nursing
|
Healthcare
Coding
|
|
Master of Science
in Nursing with:
|
Medical
Assisting
|
|
● Emphasis
in Care Coordination
|
Medical Billing
and Coding
|
|
● Emphasis
in Education
|
Network and
Server
Administrator
|
|
● Emphasis
in Nursing Administration
|
Office
Applications and Software Support
|
|
● Emphasis
in Nursing Informatics
|
Vocational
Nursing
|
|
|
Henley-Putnam
School of Strategic Studies
|
|
Master of Science in
Nursing
Master of Science in Nursing
with:
●
Emphasis
in Care Coordination
●
Emphasis
in Education
●
Emphasis
in Nursing Administration
●
Emphasis
in Nursing Informatics
Bachelor’s
Degrees
Accounting
Aviation Management
Business Administration
Business Administration
with:
●
Emphasis
in Accounting
●
Emphasis
in Entrepreneurship
●
Emphasis
in Financial Management
●
Emphasis
in Human Resource Management
●
Emphasis
in Management
●
Emphasis
in Management Information Systems
●
Emphasis
in Marketing
●
Emphasis
in Supply Chain Management
●
Emphasis
in Tourism and Hospitality Management
Construction Management
Criminal Justice
Emergency Medical Services
Management
Energy Management
Health Information
Management
Healthcare Management
Information Technology
Information Technology
with:
●
Emphasis
in Applications Development
●
Emphasis
in Cybersecurity and Forensics
●
Emphasis
in Database Administration/Microsoft
●
Emphasis
in Management Information Systems
●
Emphasis
in Network Management/Microsoft
●
Emphasis
in Web Development
Bachelor of Science in
Nursing
Organizational Leadership
Paralegal Studies
Professional Legal Studies
|
B.S.
Intelligence Management
B.S. Strategic Security and Protection
Management
B.S. Intelligence
Management
B.S. Terrorism and Counterterrorism
Studies
M.S. Intelligence
Management
M.S. Strategic Security and Protection
Management
M.S. Terrorism and Counterterrorism
Studies
D.S.S. Strategic Security
Mid-Level Certificate in
Counterterrorism
Senior-Level Certificate in
Counterterrorism
Certificate in Intelligence and Terrorism
Profiling
Advanced Certificate in Intelligence Collection
and Analysis
Certificate in Strategic
Intelligence
Mid-Level Certificate in Intelligence
Analysis
Senior-Level Certificate in Intelligence
Analysis
Advanced Certificate in Physical Security and
Risk Assessment
Mid-Level Certificate in Executive
Protection
Senior-Level Certificate in Executive
Protection
Certificate in
Cybersecurity
Certificate in Homeland
Security
Advanced Certificate in Security
Management
Certificate in Strategic Security
Management
Entry-Level Certificate in
Counterterrorism
Certificate in Intelligence
Collection
Certificate in Intelligence Collection and
Analysis
Entry-Level Certificate in Intelligence
Analysis
Arabic Certificate
Dari Certificate
Farsi Certificate
French Certificate
Hindi Certificate
Mandarin Chinese
Certificate
Portuguese Certificate
Russian Certificate
Spanish Certificate
Urdu Certificate
Certificate in Physical Security and Risk
Assessment
Entry-Level Certificate in Executive
Protection
Certificate in Security
Certificate in Security
Management
|
Third-Party
Relationships
Collaborations
We work
with local businesses and corporations where our educational sites
are located to offer a variety of courses and schedule formats to
assist busy professionals. For certain programs, we offer
customized courses and schedules and on-site classes. For example,
we have relationships with hospitals and healthcare centers so
students in the nursing and allied health programs can complete
their clinical and practicum experiences on-site.
We also
collaborate with local and national entities to provide educational
programs that they desire. Examples of these collaborations include
military memoranda of understanding and governmental and
educational alliances. Among these alliances is our affiliation
with the Serviceman’s Opportunity College, which was
developed in response to the special needs of adult continuing
education for people in the armed forces.
Affiliations
NAU
began offering online academic programs in 1998, and has
continually developed expertise in curricula and technology related
to online education. We have established a number of affiliations
with other educational institutions to provide curriculum
development services and technology support services. We also
believe NAU provides an appealing opportunity for displaced
students of closed schools who seek to continue their education
through transfer- and teach-out options.
Associate to Bachelor’s Degree Completion
Program
Our
associate to bachelor’s degree completion programs, also
called the 2 + 2 degree completion programs, are based on strategic
affiliations with various higher education institutions in the
United States. These programs allow students with an associates
degree to transfer into a bachelor’s degree.
Educational
and Administrative Sites
The
central administration is in Rapid City, South Dakota. We lease our
educational, administrative and student services sites from third
parties. As of May 31, 2018, we provided educational offerings and
support services in the following locations:
|
State
|
Address
|
Approximate Size
|
|
Colorado:
|
8242 S. University
Blvd., Suite 100
|
4,600 sq. ft.
|
|
|
Centennial,
CO 80122-3178
|
|
|
|
|
|
|
|
1079 Space Center
Dr.
|
5,500 sq. ft.
|
|
|
Colorado Springs,
CO 80915-3612
|
|
|
|
|
|
|
|
1915 Jamboree Dr.,
Suite 185
|
9,300 sq.
ft.
|
|
|
Colorado Springs,
CO 80920-5378
|
|
|
|
|
|
|
Indiana:
|
3600 Woodview
Trace, Suite 200
|
16,375 sq.
ft.
|
|
|
Indianapolis, IN
46268-3167
|
|
|
|
|
|
|
Kansas:
|
10310 Mastin
St.
|
25,500 sq.
ft.
|
|
|
Overland Park, KS
66212-5451
|
|
|
|
|
|
|
|
7309 E. 21st St.
North, Suite G40
|
10,100 sq.
ft.
|
|
|
Wichita, KS
67206-1179
|
|
|
|
|
|
|
|
801 Campus
Drive
|
1,300 sq.
ft.
|
|
|
Garden City, KS
67206-1179
|
|
|
|
|
|
|
Minnesota:
|
7801 Metro Parkway,
Suite 200
|
20,400 sq.
ft.
|
|
|
Bloomington, MN
55425-1536
|
|
|
|
|
|
|
|
6200 Shingle Creek
Parkway, Suite 130
|
14,300 sq.
ft.
|
|
|
Brooklyn Center, MN
55430-2131
|
|
|
|
|
|
|
|
1550 W. Highway
36
|
14,800 sq.
ft.
|
|
|
Roseville, MN
55113-4035
|
|
|
|
|
|
|
|
3906 E Frontage
Highway 52 Rd. NW
|
7,150 sq.
ft.
|
|
|
Rochester, MN
55901-0108
|
|
|
|
|
|
|
|
10901 Red Circle
Dr., Suite 150
|
5,200 sq.
ft.
|
|
|
Minnetonka, MN
55343-4545
|
|
|
|
|
|
|
|
513 W.
Travelers Trail
|
6,000 sq.
ft.
|
|
|
Burnsville,
MN 55337-2548
|
|
|
Missouri:
|
3620
Arrowhead Ave.
|
18,300
sq. ft.
|
|
|
Independence, MO
64057-1791
|
|
|
|
|
|
|
|
7490 NW
87th St.
|
16,700
sq. ft.
|
|
|
Kansas
City, MO 64153-1934
|
|
|
|
|
|
|
|
401 NW
Murray Rd.
|
7,000
sq. ft.
|
|
|
Lee’s Summit,
MO 64081-1425
|
|
|
|
|
|
|
Nebraska:
|
3604
Summit Plaza Dr.
|
9,500
sq. ft.
|
|
|
Bellevue, NE
68123-1065
|
|
|
|
|
|
|
New
Mexico:
|
4775
Indian School Rd. NE, Suite 200
|
24,400
sq. ft.
|
|
|
Albuquerque, NM
87110-3976
|
|
|
|
|
|
|
|
10131
Coors Blvd., NW Suite I-01
|
6,200
sq. ft.
|
|
|
Albuquerque, NM
87114-4045
|
|
|
|
|
|
|
Oklahoma:
|
8040 S.
Sheridan Rd.
|
8,600
sq. ft.
|
|
|
Tulsa,
OK 74133-8945
|
|
|
|
|
|
|
South
Dakota:
|
5301
Mount Rushmore Rd. *
|
99,600
sq. ft.
|
|
|
Rapid
City, SD 57701-8931
|
|
|
|
|
|
|
|
1000
Ellsworth St., Suite 2400B
|
6,700
sq. ft.
|
|
|
Ellsworth AFB, SD
57706-4943
|
|
|
|
|
|
|
|
5801 S.
Corporate
|
22,400q.
ft.
|
|
|
Sioux
Falls, SD 57108-5027
|
|
|
|
|
|
|
|
925
29th St. SE
|
4,700
sq. ft.
|
|
|
Watertown, SD
57201-9123
|
|
|
|
|
|
|
Texas:
|
13801
Burnet Rd., Suite 300
|
20,400
sq. ft.
|
|
|
Austin,
TX 78727-1281
|
|
|
|
|
|
|
|
6836
Austin Center Blvd, Suite 270
|
10,300
sq. ft.
|
|
|
Austin,
TX 78731-3188
|
|
|
|
|
|
|
|
4522
Fredericksburg Rd., Suite A100
|
37,343
sq. ft.
|
|
|
San
Antonio, TX 78201
|
|
|
|
|
|
|
|
1015
West University Ave. Suite 700
|
7,170
sq. ft.
|
|
|
Georgetown, TX
78628-5355
|
|
|
|
|
|
|
|
203
West Jasper, Suite 200
|
2,021
sq. ft.
|
|
|
Killeen, TX
78752
|
|
|
|
|
|
|
|
300 N.
Coit Road, Suite 225
|
4,700
sq. ft.
|
|
|
Richardson, TX
75080-5400
|
|
|
|
475 State Highway
121 S. By-pass, Suite 150
|
5,500 sq.
ft.
|
|
|
Lewisville, TX
75067-8193
|
|
|
|
|
|
|
|
18600 LBJ
Freeway
|
16,800 sq.
ft.
|
|
|
Mesquite, TX
75150-5628
|
|
|
|
|
|
|
|
11511 Katy Freeway,
Suite 200
|
3,007 sq.
ft.
|
|
|
Houston, TX
77079-1744
|
|
* Rapid
City Campus, Distance Learning Operations & Central
Administration
The
university periodically offers credit and non-credit offerings in
other locations. Our on-site programs not only offer students,
faculty, and staff an opportunity to participate in a more
traditional college experience, but also provide online students,
faculty, and staff with a sense of connection to the
university.
Faculty
and Other Employees
NAU’s faculty
includes full-time and part-time campus-based and online faculty
members. Approximately 61% of our current faculty members hold a
master’s degree in their respective field and approximately
26% hold a doctoral degree or first professional degree. During
fiscal year 2018, the university employed approximately 73
full-time and 666 part-time faculty members; more than 550 faculty
members are active each quarter. These numbers reflect an effort by
the institution to effectively manage redundant course offerings
and to maintain academically sound class sizes. Average class size
ranges from less than 8 students on ground to 17 students online
depending on the academic program. The average class size system
wide is about 13 students per class.
We
follow a specific process for hiring faculty in accordance with
published standards for faculty members based on state regulations,
HLC requirements, and specialized standards.
NAU
recruits qualified faculty through postings on the
university’s website, as well as placement of advertisements
in local and national media. We review official transcripts to
validate academic qualifications and faculty vitae to verify
academic preparation consistent with the university’s
qualification guidelines, as well as engagement in relevant
professional activities.
Training,
evaluating and recognizing faculty members originates with the
college dean and associate academic deans. All faculty members
complete an online faculty orientation, coordinated by the system
academics office, which consists of seven modules addressing the
university’s mission and core values, the instructor’s
role at the university, learning concepts and theories, good
practices in teaching and assessment, classroom management, and
accreditation standards and regulatory requirements related to
academics. Regularly scheduled webinars are also available for
faculty development each quarter. In addition, the campus directors
and full-time faculty are responsible for local orientation and
in-service programs for faculty, schedules for faculty appraisal,
promotions, and merit increase recommendations, as well as formal
and informal efforts to retain faculty members. Central academics
establishes and upholds the university’s policies and
practices for faculty appraisal. We provide ongoing and meaningful
feedback on individual performance to our faculty members for their
professional growth and for the continued advancement of the
university. Retention of quality adjunct faculty is a
priority.
Faculty
and staff are encouraged to actively participate in a variety of
academic and non-academic organizations. Faculty members
participate in a wide variety of professional associations and
activities at the local, state and regional level. We encourage our
faculty and staff to stay current on changes and trends within
higher education, as well as their respective industries.
Participation in professional organizations by faculty and staff
bring current information relevant to the university’s
mission and programming to students and the workplace.
In
addition to our faculty, as of May 31, 2018, we employed
approximately 500 staff and administrative personnel in university
services, academic advising and support, enrollment services,
university administration, financial aid, information technology,
human resources, corporate accounting, finance, and other
administrative functions. None of our employees is a party to any
collective bargaining or similar agreement with the
university.
Marketing,
Recruitment, and Retention
Marketing.
We engage
in a range of activities designed to generate awareness among
prospective students, such as building brand awareness via internet
platforms, television and radio advertising, direct mail, email,
and print. The marketing department’s goal is to distribute
relevant content to our target audiences in order to gain brand
awareness, create a desire to attend NAU by engaging our audiences,
and support admissions in enrollment growth. NAU’s audience
is primarily adult learners choosing to advance their education for
personal and career-related goals.
Recruitment.
Once a
prospective student has indicated an interest in enrolling, the
university’s lead management system identifies and directs an
admissions representative to initiate prompt communication. The
enrollment and completion advisor serves as the primary, direct
contact for the prospective student, and the advisor’s goal
is to help the student gain sufficient knowledge and understanding
of the university’s programs so the prospective student can
assess whether the university’s offerings satisfy his or her
goals.
Retention.
We
utilize our enrollment and completion advisors and a director of
student success at each location to support students in advancing
from matriculation through attainment of educational goals. Team
members monitor various risk factors, such as the failure to buy
books for a registered course, lack of attendance or failure to
participate in online orientation exercises. Upon identifying an
at-risk student, the university can interact with the student to
assist him or her in continuing his or her program of
study.
Student
Support Services
Encouraging
students to complete their degree programs is critical to our
success. We invest great effort in developing and providing
resources that simplify the student enrollment process, acclimate
students to our programs and online environment, and support the
student educational experience. Many of our support services,
including academic, administrative and library services, are
accessible online, allowing users to access these services at a
time and in a manner convenient for them.
The
student support services we provide include:
Academic and learner
support services.
We provide students with a variety of
services designed to support their academic studies. We offer
students entrance orientation, academic advising, technical
support, research services, writing services, ADA accommodations,
access to counseling, and tutoring. New faculty-student high-touch,
high-engagement strategies continue to improve both persistence
rates and academic achievement at the graduate level.
Administrative
services.
We provide students access to a variety of
administrative services in person as well as telephonically and via
the Internet. For example, students can review class schedules,
apply for financial aid, pay tuition, and access their unofficial
transcripts online. The university’s financial service
representatives provide personalized online and telephonic support
to the students.
Library services.
We
provide a mix of online and on-campus library resources, services,
and instruction to support the educational and research endeavors
of our students, faculty and staff, including physical and online
libraries and online library resources available 24/7. We plan to
launch new cloud-based service points for library support in the
future.
Career services.
For
those students seeking to change careers or explore new career
opportunities, we offer career services support, including resume
review and evaluation, career planning workshops and access to
career services information for advice and support. We plan to
launch new cloud-based service points for career services support
in the future.
Technology support
services.
We provide online technical support to help
students remedy technology-related issues. We also provide online
tutorials and “Frequently Asked Questions” for students
who are new to online coursework.
Admissions
Prospective
students complete an application to enroll in our programs. Once
the application has been submitted, an admissions representative
and student services personnel assist the applicant through the
admissions process, course registration and matriculation.
Financial services representatives, if needed, assist with
financial aid. Prospective students complete placement tests to
determine any missing skills, which enables the university to best
serve students by enrolling them in classes to build those skills,
thereby increasing their chances of success.
Applicants to the
university’s Doctor of Education (Ed.D.) in Community College
Leadership Program (CCLP) requires a master’s degree or
higher from a regionally accredited institution of higher education
in the United States or, an international higher education
institution recognized by the ministry of education or other
appropriate government agency and a transcript evaluation from an
organization approved by the National Association of Credential
Evaluation Services (NACES); a minimum cumulative grade point
average of 3.00 (of a possible 4.00 GPA) achieved for all previous
graduate coursework; three years of related professional
experience; and a willingness to matriculate through the program of
study as a member of a cohort.
International
applicants to the university’s doctoral program must provide
evidence of completion of a graduate degree in the form of official
transcripts from (i) a regionally accredited institution of higher
education in the United States; or (ii) an international higher
education institution recognized by the ministry of education or
other appropriate government agency and a transcript evaluation
from an organization approved by NACES; must complete and submit
the International Financial Certification form and attach an
original bank statement. International students are required, as
part of the application process, to show evidence of sufficient
funding during their studies. The amount and source of funds are
also shown on the Certificate of Eligibility (I-20) needed to apply
for an F-1 visa. In addition, students planning to bring a spouse
and/or children are required to show additional funds for those
individuals. Applicants must demonstrate proficiency in English
through satisfaction of one of the following
requirements:
a. Provide
an official Test of English as a Foreign Language (TOEFL) score
report indicating a minimum score of 550 for a paper-based, 213 for
a computer-based or 80 for an Internet-based exam (The TOEFL must
have been taken within the past two calendar years. Official test
scores must be sent from the testing agency to National American
University. When ordering TOEFL test results, include the
university’s school code of 6464.).
b. Provide
an official International English Language Testing System (IELTS)
score report with an overall minimum score of 6.0. (The IELTS must
have been taken within the past two calendar years. Official test
scores must be sent from the testing agency to National American
University.)
c. Provide
evidence of completion of two trimesters (or equivalent) of
college-level English (excluding ESL courses) with a grade of C or
higher at a college or university whose language of instruction is
English.
d. Provide
evidence of English language proficiency as deemed appropriate by
National American University.
Applicants to the
MBA and MM programs must have a minimum of a baccalaureate degree
or equivalent from an institution recognized or accredited by an
appropriate government or third-party agency.
Applicants to the
university’s Executive MBA program must have a minimum of a
baccalaureate degree or equivalent from an institution recognized
or accredited by an appropriate government or third-party agency,
and a minimum of seven years of acceptable management
experience.
Applicants to the
university’s MSN program must have graduated from a
baccalaureate degree program in nursing from an accredited
institution; have a current active unencumbered registered nurse
(RN) license from any state within the United States; and have a
minimum cumulative grade point average (CGPA) of 3.0 or above on a
4.0 scale during the baccalaureate degree completion.
International
applicants to the university’s master’s programs must
provide evidence of completion of a baccalaureate degree in the
form of official transcripts from (i) an international higher
education institution recognized by the ministry of education or
other appropriate government agency and a transcript evaluation
from an organization approved by NACES or (ii) a U.S. higher
education institution; must complete and submit the International
Financial Certification form and attach an original bank statement.
International students are required, as part of the application
process, to show evidence of sufficient funding during their
studies. The amount and source of funds are also shown on the
Certificate of Eligibility (I-20) needed to apply for an F-1 visa.
In addition, students planning to bring a spouse and/or children
are required to show additional funds for those individuals.
Applicants must demonstrate proficiency in English through
satisfaction of one of the following requirements:
a. Provide
an official TOEFL score report indicating a minimum score of 550
for a paper-based, 213 for a computer-based or 80 for an
Internet-based exam (The TOEFL must have been taken within the past
two calendar years. Official test scores must be sent from the
testing agency to National American University. When ordering TOEFL
test results, include the university’s school code of
6464.).
b. Provide
an official IELTS score report with an overall minimum score of
6.0. (The IELTS must have been taken within the past two calendar
years. Official test scores must be sent from the testing agency to
National American University.)
c. Provide
evidence of completion of two trimesters (or equivalent) of
college-level English (excluding ESL courses) with a grade of C or
higher at a college or university whose language of instruction is
English.
d. Provide
evidence of English language proficiency as deemed appropriate by
National American University.
Undergraduate
applicants must have graduated from a recognized high school (or
the Department of Education or state-required accepted equivalent)
or submit an official transcript from an accredited higher
education institution in the United States indicating completion of
a postsecondary education program of at least two years that is
acceptable for full credit toward a bachelor’s degree, with a
minimum cumulative grade point average of 2.0. Non-native English
speaking applicants must provide an official TOEFL score report
indicating a minimum score of 520 for a paper-based, 190 for a
computer-based, or 68 for an Internet-based exam; or provide an
official Test of English for International Communication (TOEIC)
score report indicating a minimum score of 750 (not applicable to
student enrolled in the nursing program); or provide an official
IELTS score report with an overall minimum score of 5.; or provide
evidence of completion of two semesters (or the equivalent) of
college-level English (excluding ESL courses) with a grade of
“C” or higher at an accredited college or university
whose language of instruction is English; or provide evidence of
English language proficiency by completing the Accuplacer ESL
English assessment exam with minimum scores or 102 or higher in
reading, 100 or higher in sentence meaning, 95 or higher in
language usage and 5 or higher in writing sample.
Enrollment
Enrollments have
decreased from 6,703 students as of May 31, 2017 to 5,648 students
as of May 31, 2018, representing an annual decrease of
approximately 15.7% mainly as a result of a decrease in
undergraduate and diploma students. As of May 31, 2018, we had
4,342 students enrolled in our online programs, 724 students
enrolled on-campus, and 582 students enrolled through our hybrid
learning centers. The average age of our students is approximately
36 years.
The
following is a summary of our student enrollment at May 31, 2018,
and May 31, 2017, by degree type and by instructional delivery
method:
|
|
May 31, 2018 (Spring '18 Qtr)
|
May 31, 2017 (Spring '17 Qtr)
|
|
|
|
|
|
|
|
% Change for same quarter over prior year
|
|
|
|
|
|
|
|
|
Continuing Ed
|
59
|
1.0
%
|
170
|
2.5
%
|
-65.3
%
|
|
Doctoral
|
111
|
2.0
%
|
98
|
1.5
%
|
13.3
%
|
|
Graduate
|
449
|
8.0
%
|
366
|
5.4
%
|
22.7
%
|
|
Undergraduate and Diploma
|
5,029
|
89.0
%
|
6,069
|
90.5
%
|
-17.1
%
|
|
Total
|
5,648
|
100.0
%
|
6,703
|
100.0
%
|
-15.7
%
|
|
|
|
|
|
|
|
|
On-Campus
|
724
|
12.8
%
|
1,309
|
19.5
%
|
-44.7
%
|
|
Online
|
4,342
|
76.9
%
|
4,691
|
70.0
%
|
-7.4
%
|
|
Hybrid
|
582
|
10.3
%
|
703
|
10.5
%
|
-17.2
%
|
|
Total
|
5,648
|
100.0
%
|
6,703
|
100.0
%
|
-15.7
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Ed, Doctoral, Grad
|
619
|
|
634
|
|
-2.4
%
|
Tuition
and Fees
Our
tuition rates vary by educational site. Total tuition varies based
upon several factors, including the number of credit hours for each
program, the degree level of the program, and geographic
location.
Our
students finance their education through a variety of sources,
including government sponsored financial aid, private and NAU
provided scholarships, employer provided tuition assistance,
veteran’s benefits, private loans, and cash payments. A
substantial portion of our students rely on funds received under
various government sponsored student financial aid programs,
predominately Title IV programs. In the fiscal years ended May 31,
2018, 2017, and 2016, approximately 82.1%, 82.6%, and 86.8%,
respectively, of our revenues (calculated on a cash basis) were
attributable to funds derived from Title IV programs. In the
future, we expect to continue the current initiatives to increase
revenue from sources other than Title IV programs, such as
continuing education programming that is not eligible for Title IV
program funding.
We have
a refund policy for tuition and fees based upon quarterly start
dates. If a student drops or withdraws from a course during the
first week of classes, 100% of the charges for tuition and fees are
refunded. After the first week but during the first 60% of
scheduled classes the percentage of tuition charges refunded for a
student who totally withdraws from NAU is based on a daily
proration based on a percent of the term completed thru the last
day of attendance. If the last day of attendance is beyond 60% of
the scheduled classes, tuition and fees are not refunded. A $75
administrative fee is assessed against each prorated refund. A
refund minus a $75 administrative fee is made within 45 days of the
day the student’s withdrawal is determined. If the student
was a financial aid recipient, federal regulations establish a
methodology for determining the amount of Title IV funds that must
be returned to the financial aid programs for students not
completing 60% of the enrollment period.
Technology
Systems
We
remain focused on leveraging the use of technology to increase
efficiencies in our academic programs and our general
administrative operations. This commitment requires not only
institutional budget expenditures, but also orientation and
training in the use of this technology.
To
service our online teaching, we utilize Desire2Learn
TM
, or D2L, an Internet-based learning
management system. The features of this product include content
display and organization, synchronous and asynchronous chat,
private messaging, quizzing, student surveys and assignment
submission and student tracking and grading. The system is used to
present online courses to both domestic and international students.
In collaboration with the IT team, academic leaders have developed
and launched or will launch three new cloud-based comprehensive
service points for math, writing, career, and library
support—as well as student support 24/7.
Together with the
IT team, academics has developed ROCKET and TEAMS 3, the online,
cloud-based version of NAU’s signature undergraduate
persistence and completion system. The cloud-based system allows
faculty, advisors, campus directors, and college deans and
associate deans to track student progress, attendance, grades,
posted assignments, etc., so as to intervene proactively if a
student becomes in any way at risk.
Recognizing the
need to manage content used in the D2L learning management system,
we implemented the Desire2Learn Learning Object Repository™
application to input, organize, manage and display course
materials. This application provides an Internet-based, content
entry and editing interface that allows content experts to create
and edit course content. Additionally, it organizes text, images,
documents and multimedia resources in a relational database,
allowing the university to more easily identify and re-task
existing content for new projects and courses through the use of
Meta data. Finally, the application is integrated with the learning
management system and is used to display and deliver content
seamlessly through D2L to students.
Intellectual
Property
We rely
on a combination of copyrights, trademarks, service marks, trade
secrets, domain names and agreements with third parties to protect
proprietary rights. Through the extensive development of electronic
instructional materials, on-campus and online courseware and
related processes, we continue to accumulate intellectual property
that has provided the basis for improving quality of instruction,
programs and services to our students.
We rely
on trademark and service mark protections in the United States and
other countries for our name and distinctive logos, along with
various other trademarks and service marks related to specific
offerings. We own federal registrations for the principal
trademarks, National American University
®
and NAU
®
in the United States. These marks
are important symbols for us and are used on our educational
services and educational materials and a range of other items,
including clothing and other memorabilia. These brands appear in
advertising and are seen by members of the public as well as direct
constituents. We own domain name rights to
“national.edu” as well as its derivatives, and a number
of “nau” related domain names.
NAU
publishes intellectual property policies in both the faculty and
employee handbooks that outline the ownership of creative works and
inventions produced by employees within the scope of their
employment, compliance with copyright law, and the use of
copyrighted materials. When content experts are hired to develop
curriculum, they are required to execute a standard agreement to
confirm that all materials created under the scope of their work
becomes NAU’s exclusive intellectual property. These
agreements also require the content experts to comply with all laws
related to copyright and the use of copyrighted
materials.
Real
Estate Operations
Fairway
Hills, the real estate operations, conducts business through
various projects and associations, including Fairway Hills I and
II, Park West, Vista Park, Fairway Hills Park and Recreational
Association, the Vista Park Homeowners’ Association and the
Park West Homeowners’ Association. Fairway Hills I and
Fairway Hills II are apartment buildings consisting of a total of
52 rental units, referred to as Doral Apartments, of which 98% were
leased as of May 31, 2018. Park West originally consisted of 48
apartment units and is owned by a partnership that is 50% owned by
the Company and 50% owned by members of the Buckingham family
(including Robert Buckingham, chairman of our board of directors,
and his siblings and the spouses and estates of his siblings). Two
of the original Park West apartments were combined into one large
unit and later sold. Four additional apartments were sold,
resulting in 42 rental apartments. Park West is 98% leased as of
May 31, 2018. Vista Park consists of 24 total condominium units of
which a total of 21 had been sold as of May 31, 2018. Prices for
Vista Park condominium units start at approximately $215,000. Early
in the fiscal year ended May 31, 2018, Fairway Hills completed
construction on a 24-unit luxury apartment complex referred to as
Arrowhead View, of which all 24 units were under lease as of May
31, 2018.
In
connection with the development of Vista Park and the Park West
apartments, Fairway Hills has created two homeowners’
associations, the Vista Park Homeowner’s Association and the
Park West Homeowner’s Association, each of which is a
non-profit corporation, to manage and sell the condominiums. In
addition, the Fairway Hills Park and Recreational Association,
which is also a non-profit corporation, was created to operate as a
homeowner’s association covering substantially all of the
Fairway Hills development.
Environmental
Our
facilities and operations are subject to a variety of environmental
laws and regulations governing, among other things, the use,
storage and disposal of solid and hazardous substances and waste,
and the clean-up of contamination at our facilities or off-site
locations to which we send or have sent waste for disposal. If we
do not maintain compliance with any of these laws and regulations,
or are responsible for a spill or release of hazardous materials,
we could incur costs for clean-up, damages, and fines or
penalties.
Compliance
with Applicable Laws
We
strive to comply with applicable federal, state, and local laws and
regulations. We have a designated university compliance officer and
maintain an institutional compliance program that:
●
monitors compliance
and, when gaps or violations occur, develops responses to correct
deficiencies in a timely manner;
●
communicates
institutional principles designed to deter wrongdoing and to
promote ethical conduct. Further, audits are periodically conducted
to ensure compliance with applicable laws;
●
ensures that
federally required Title IV student financial assistance program
compliance attestation examinations are conducted annually to
determine compliance and to identify any deficiencies requiring
correction;
●
ensures an audit of
401(k) retirement plans is conducted annually for compliance with
applicable laws and fiduciary duties; and
●
engages an
independent auditing firm to audit the annual financial
statements.
REGULATORY MATTERS
NAU is
subject to extensive regulation by state education agencies,
accrediting commissions, and the United States federal government
through the U.S. Department of Education (the “Department of
Education”) under the Higher Education Act of 1965, as
amended (the “Higher Education Act”). The regulations,
standards and policies of these agencies cover substantially all
our operations, including the educational programs, facilities,
instructional and administrative staff, administrative procedures,
marketing, recruiting, finances, results of operations and
financial condition.
As an
institution of higher education that grants degrees and diplomas,
we are required to comply with the requirements of state education
authorities. To participate in federal programs of student
financial assistance, we are required to be accredited by an
accrediting commission recognized by the Department of Education.
Accreditation is a non-governmental process through which an
institution submits to qualitative review by an organization of
peer institutions, based on the standards of the accrediting
commission and the stated aims and purposes of the institution. The
Higher Education Act requires accrediting commissions recognized by
the Department of Education to review and monitor many aspects of
an institution’s operations and to take appropriate action if
the institution fails to meet the accrediting commission’s
standards.
NAU’s
operations are also subject to regulation by the Department of
Education due to our participation in Title IV programs. To
participate in Title IV programs, a school must receive and
maintain authorization by the appropriate state education agency or
agencies, be accredited by an accrediting commission recognized by
the Department of Education and be certified as an eligible
institution by the Department of Education. Prior to July 1, 2010,
Title IV programs included educational loans provided directly by
the federal government, grant programs for students with
demonstrated financial need, and educational loans issued by
private banks with below-market interest rates that were guaranteed
by the federal government in the event of a student’s default
on repayment of the loan. As of July 1, 2010, the federal
government provides all educational loans under Title
IV.
We plan
and implement our business activities to comply with the standards
of these regulatory agencies. Our chief executive officer and chief
financial officer, also provide oversight designed to ensure that
we meet the requirements of this regulatory
environment.
State
Authorization and Regulation
NAU is
subject to extensive regulations by the states in which we are
authorized or licensed to operate. State laws and regulations
typically establish standards in areas such as instruction,
qualifications of faculty, administrative procedures, marketing,
recruiting, financial operations and other operational matters,
which can be different than and conflict with the requirements of
the Department of Education and other applicable regulatory bodies.
State laws and regulations may limit our ability to offer
educational programs and offer certain degrees. Some states may
also prescribe financial regulations that are different from those
of the Department of Education and many require the posting of
surety bonds.
In
addition, several states have jurisdiction over educational
institutions offering online degree programs although there is no
physical location or other presence in the state. The institution
may be enrolling or offering educational services to students who
reside in the state, conducting practicums or sponsoring
internships in the state, employing faculty who reside in the state
or advertising or recruiting prospective students in the state.
State regulatory requirements for online education vary, are not
well developed in many states, are imprecise or unclear in some
states and can change frequently.
We have
determined that our activities in certain states constitute a
presence requiring licensure or authorization under the current
requirements of the state education agency, and in other states we
have approvals in connection with our marketing and recruiting
activities. We review the state licensure requirements to determine
whether our activities constitute a presence or otherwise require
licensure or authorization by the state education agency. When
necessary we submit additional applications for licensure or
authorization.
We are
required by the Higher Education Act to be authorized by applicable
state educational agencies in South Dakota and other states where
we are physically located to participate in Title IV programs. On
December 19, 2016, the Department of Education published final
regulations regarding state authorization for programs offered
through distance education and state authorization for foreign
locations of institutions. Among other provisions, these final
regulations require that an institution participating in the Title
IV federal student aid programs and offering postsecondary
education through distance education be authorized by each state in
which the institution enrolls students, if such authorization is
required by the state. The Department of Education would recognize
authorization through participation in a state authorization
reciprocity agreement, if the agreement does not prevent a state
from enforcing its own laws. The final regulations also require
that foreign additional locations and branch campuses be authorized
by the appropriate foreign government agency and, if at least 50%
of a program can be completed at the location/branch, be approved
by the institution’s accrediting agency and be reported to
the state where the main campus is located. The final regulations
also require institutions to: document the state process for
resolving complaints from students enrolled in programs offered
through distance education or correspondence courses; and make
certain public and individualized disclosures to enrolled and
prospective students about their distance education programs. The
final regulations regarding state authorization for foreign
locations of domestic institutions became effective July 1, 2018.
On June 29, 2018, the Department of Education delayed the effective
date of these final regulations with respect to distance education
from July 1, 2018, to July 1, 2020. See “Regulatory Matters
– Regulation of Federal Student Financial Aid Programs
– State Authorization.”
In
addition, in recent years several states have voluntarily entered
into State Authorization Reciprocity Agreements
(“SARA”) that establish standards for interstate
offering of postsecondary distance education courses and programs.
If an institution’s home state participates in SARA and
authorizes the institution to provide distance education in
accordance with SARA standards, then the institution need not
obtain additional authorizations for distance education from any
other SARA member state. The SARA participation requirements and
process are administered by the four regional higher education
compacts in the United States (the Midwestern Higher Education
Compact, the New England Board of Higher Education, the Southern
Regional Education Board and the Western Interstate Commission for
Higher Education) and are overseen by the National Council for
State Authorization Reciprocity Agreements. NAU is approved to
participate in SARA, through the SARA Coordinator of the South
Dakota Board of Regents as a state portal agency with its most
recent approval effective from April 20, 2018 through April 19,
2019.
We do
not believe that any of the states in which we are currently
licensed or authorized, other than South Dakota, Colorado, Indiana,
Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma and
Texas, are individually material to our operations. If we fail to
comply with state licensing requirements, we may lose our state
licensure or authorizations. If we lose state licensure in a state
in which we have a physical location, or in a state where we are
required to maintain authorization for online education activities,
we would also lose Title IV eligibility in that state. If we are
found not to be in compliance with state requirements for online
learning, and a state seeks to restrict one or more of our business
activities within its boundaries, we may not be able to recruit
students from that state and may have to cease providing
educational programs to students in that state or may be subject to
other sanctions, including fines or penalties. Compliance with
these new and changing laws, regulations or interpretations related
to state authorization and offering programs via online delivery
could increase our cost of doing business and affect our ability to
recruit students in particular states, which could, in turn,
adversely affect enrollments, revenues and our
business.
State
Professional Licensure
Many
states have specific licensure requirements that an individual must
satisfy to be licensed as a professional in specified fields,
including fields such as education and healthcare. These
requirements vary by state and by field. A student’s success
in obtaining licensure following graduation typically depends on
several factors, including the background and qualifications of the
individual graduate, as well as the following factors, among
others:
●
whether the
institution and the program were approved by the state in which the
graduate seeks licensure, or by a professional
association;
●
whether the program
from which the student graduated meets all requirements for
professional licensure in that state;
●
whether the
institution and the program are accredited and, if so, by what
accrediting commissions; and
●
whether the
institution’s degrees are recognized by other states in which
a student may seek to work.
Many
states also require that graduates pass a state test or examination
as a prerequisite to becoming certified in certain fields, such as
nursing. Many states also may require a criminal background
clearance before granting certain professional licensures or
certifications. The catalog informs students that it is incumbent
upon the student to verify whether a specific criminal background
clearance is required in their field of study prior to beginning
course work.
Accreditation
We have
been institutionally accredited since 1985 by the Higher Learning
Commission (HLC), a regional accrediting commission recognized by
the Department of Education. Our accreditation by the HLC was most
recently affirmed in January 2015. Accreditation is a private,
non-governmental process for evaluating the quality of educational
institutions and their programs in areas, including student
performance, governance, integrity, educational quality, faculty,
physical resources, administrative capability and resources and
financial stability. To be recognized by the Department of
Education, accrediting commissions must comply with Department of
Education regulations, which require, among other things, that
accrediting agencies adopt specific criteria for their review of
educational institutions, conduct peer review evaluations of
institutions, and publicly designate those institutions that meet
their criteria. An accredited institution is subject to periodic
review by its accrediting commissions to determine whether it
continues to meet the performance, integrity and quality required
for accreditation.
There
are six regional accrediting commissions recognized by the
Department of Education, each with a specified geographic scope of
coverage, which together cover the entire United States. Most
traditional, public and private non-profit, degree-granting
colleges and universities are accredited by one of these six
regional accrediting commissions. The HLC, which accredits NAU,
accredits other degree-granting public and private colleges and
universities in the states of Arizona, Arkansas, Colorado,
Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri,
Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, South Dakota,
West Virginia, Wisconsin and Wyoming.
Accreditation by
the HLC is important for several reasons, one being that it enables
students to receive Title IV financial aid. Other colleges and
universities depend, in part, on an institution’s
accreditation in evaluating transfers of credit and applications to
graduate schools. Employers rely on the accredited status of
institutions when evaluating candidates’ credentials, and
students and corporate and government sponsors under tuition
reimbursement programs consider accreditation as assurance that an
institution maintains quality educational standards. If we fail to
satisfy the criteria of the HLC, we could lose our accreditation by
that commission, which would cause us to lose our eligibility to
participate in Title IV programs.
The
reauthorization of the Higher Education Act in 2008, and Department
of Education regulations that became effective July 1, 2010,
require accrediting commissions to monitor the growth of
institutions that they accredit. The HLC requires all affiliated
institutions, including NAU, to complete an annual data report. If
the non-financial data, enrollment information, or any other
information submitted by the institution indicate problems, rapid
change or significant growth, the HLC staff may require that the
institution address any concerns arising from the data report in
the next comprehensive evaluation or may recommend additional
monitoring. In addition, the Department of Education regulations
that became effective July 1, 2010 require the HLC to notify the
Department of Education if an institution accredited by the HLC
that offers distance learning programs, such as NAU, experiences an
increase in its headcount enrollment of 50% or more in any fiscal
year. The Department of Education may consider that information in
connection with its own regulatory oversight
activities.
In additi
on to institution-wide accreditation, there are
numerous specialized accrediting commissions that accredit specific
programs or schools within their jurisdiction, many of which are in
healthcare and professional fields. Accreditation of specific
programs by one of these specialized accrediting commissions
signifies that those programs have met the additional standards of
those agencies. In addition to being accredited by the HLC at the
institutional level, we also had the following specialized
accreditations as of May 31, 2018:
|
Specialized or Programmatic Accreditation or Approval
|
|
Accrediting
or Approving Body
|
|
Selected
Business Degree Programs (Associate of Applied Science, Bachelor of
Science, Master of Management, Master of Business Administration
degrees)
|
|
International
Assembly for Collegiate Business Education
|
|
|
|
|
|
Medical
Laboratory Technician (Kansas City [Zona Rosa], Missouri
campus)
|
|
National
Accrediting Agency for Clinical Laboratory Sciences
|
|
|
|
|
|
Health
Information Technology (online program) Management
|
|
Commission on
Accreditation for Health Informatics and Information
|
|
|
|
|
|
Invasive
Cardiovascular Technology (Austin, Texas campus)
|
|
Commission on
Accreditation of Allied Health Education Programs on the
recommendation of the Joint Review Committee on Education in
Cardiovascular Technology
|
|
|
|
|
|
Medical
Assisting (Albuquerque, New Mexico;Georgetown and Mesquite, Texas;
Bellevue, Nebraska;Rochester and Roseville, Minnesota; Colorado
Springs, and Centennial, Colorado; Independence, Kansas City [Zona
Rosa], Missouri; Overland Park, and Wichita, Kansas; Sioux Falls,
South Dakota; Tulsa, Oklahoma, campuses)
|
|
Commission on
Accreditation of Allied Health Education Programs on the
recommendation of the Medical Assisting Education Review
Board
|
|
|
|
|
|
Occupational
Therapy Assistant (Centennial, Colorado. and Independence,
Missouri. campuses)
|
|
Accreditation
Council for Occupational Therapy Education
|
|
|
|
|
|
Paralegal
Studies (Rapid City and Sioux Falls, South Dakota;
Roseville,
Minnesota, campuses)
|
|
American Bar
Association
|
|
|
|
|
|
Pharmacy
Technician (Roseville, Minnesota;Independence, Missouri.
campuses)
|
|
American Society of
Health-System Pharmacists
|
|
|
|
|
|
Surgical
Technology (Overland Park and Wichita, Kansas; Tulsa, Oklahoma,
campuses)
|
|
Accrediting Bureau
of Health Education
Schools
|
|
|
|
|
|
Veterinary
Technology (Rapid City, South Dakota campus)
|
|
Committee on
Veterinary Technician Education and Activities
|
|
|
|
|
|
Associate
of Science Nursing Program (Kansas City [Zona Rosa], Missouri
campus
|
|
Missouri Board of
Nursing Full Approval
|
|
|
|
|
|
Bachelor
of Science in Nursing Program (Albuquerque, New Mexico
campus)
|
|
New
Mexico Board of Nursing Full Approval
|
|
|
|
|
|
Bachelor
of Science in Nursing Program (Rapid City, and Sioux Falls, South
Dakota. campuses)
|
|
South
Dakota Board of Nursing Interim Approval
|
|
|
|
|
|
Bachelor
of Science in Nursing Program (Austin, Texas campus)
|
|
Texas
Board of Nursing Initial Approval
|
|
|
|
|
|
Bachelor
of Science in Nursing and Licensed Practical Nurse Bridge to
Bachelor of Science in
Nursing Program
(Overland Park, and Wichita, Kansas. campuses)
|
|
Kansas
State Board of Nursing Approval
|
|
|
|
|
|
Bachelor
of Science and Master of Science in Nursing Programs
|
|
Commission on
Collegiate Nursing Education Initial Accreditation
|
|
|
|
|
|
Online
Registered Nurse to Bachelor of Science in Nursing Program
(Distance Learning)
|
|
South
Dakota Board of Nursing Approval
|
|
|
|
|
|
Pre-
and Post-licensure baccalaureate degree programs in nursing
(Distance Learning) (all states except Tennessee)
|
|
Commission on
Collegiate Nursing Education Initial Accreditation
|
|
|
|
|
If we
fail to satisfy the standards of any of these specialized
accrediting commissions, we could lose the specialized
accreditation for the affected programs, which could result in
materially reduced student enrollments in those
programs.
Regulation
of Federal Student Financial Aid Programs
To be
eligible to participate in Title IV programs, an institution must
comply with specific requirements contained in the Higher Education
Act and the regulations issued thereunder by the Department of
Education. An institution must, among other things, be licensed or
authorized to offer its educational programs by the state or states
in which it is physically located (in our case, South Dakota,
Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska, New
Mexico, Oklahoma, and Texas) and maintain institutional
accreditation by an accrediting commission recognized by the
Department of Education.
The
substantial amount of federal funds disbursed to schools through
Title IV programs, the large number of students and institutions
participating in these programs and allegations of fraud and abuse
by certain for-profit educational institutions have caused Congress
to require the Department of Education to exercise considerable
regulatory oversight over for-profit educational institutions. As a
result, for-profit educational institutions, including ours, are
subject to extensive oversight and review. Because the Department
of Education periodically revises its regulations and changes its
interpretations of existing laws and regulations, we cannot predict
with certainty how the Title IV program requirements will be
applied in all circumstances.
Significant factors
relating to Title IV programs that could adversely affect us
include the following:
Congressional
Action.
Congress must reauthorize the Higher Education Act
on a periodic basis, usually every five to six years. The most
recent reauthorization of the Higher Education Act occurred in
August 2008, which means that the next reauthorization was due in
2013. Congress failed to pass a one-time reauthorization bill;
therefore, an automatic one-year extension to December 2014 was
established. In late 2014, Congress passed an extension to further
delay reauthorization. Congress has taken actions required to
continue to extend Title IV programs while a Higher Education Act
reauthorization remains pending and the Title IV programs remain
authorized and functioning. Congress must continue to pass
legislation to extend the Act until a reauthorization can occur. We
cannot predict when or whether Congress may reauthorize the Higher
Education Act, but it is possible that Congress may work to either
reauthorize the Higher Education Act in its entirety or pass a
series of smaller bills that focus on individual parts of the
Higher Education Act, primarily Title IV programs.
In
addition, Congress must determine funding levels for Title IV
programs on an annual basis and can change the laws governing Title
IV programs at any time. Apart from Title IV programs, eligible
veterans and military personnel may receive educational benefits
for the pursuit of higher education. A reduction in federal funding
levels for Title IV programs, or for programs providing educational
benefits to veterans and military personnel, could reduce the
ability of some students to finance their education. Any action by
Congress that significantly reduces Title IV program funding or the
ability of our students to participate in Title IV programs could
have a material effect on our enrollments, business, financial
condition and results of operations. Congressional action also may
require us to modify our practices in ways that could increase
administrative costs and reduce profit margins, which could have a
material effect on our business, financial condition and results of
operations.
Various
Congressional hearings and roundtable discussions have been held,
beginning in 2010, by the U.S. Senate Committee on Health,
Education, Labor and Pensions (“HELP Committee”) and
other Congressional members and committees regarding various
aspects of the education industry, including student debt, student
recruiting, student outcomes and accreditation matters. In July
2012, the majority staff of the HELP Committee released a report
analyzing information requested from 30 companies operating
proprietary institutions (including us and other publicly traded
companies providing proprietary postsecondary education services).
While stating that proprietary colleges and universities have an
important role to play in higher education and should be
well-equipped to meet the needs of non-traditional students who now
constitute the majority of the postsecondary educational
population, the report was highly critical of these institutions.
Further, in July 2014, the majority staff of the HELP Committee
released a report claiming that eight of the ten top recipients of
post-9/11 GI Bill funds are for-profit companies.
In
recent years, various pieces of legislation have been proposed in
Congress that, if adopted, would affect our business. For example,
from time to time, legislation is introduced to make a proprietary
institution ineligible to participate in Title IV programs if it
derives more than 85% of its revenues from federal funds, including
Title IV programs, revenues from the GI Bill and Department of
Defense Tuition Assistance funds. Some legislation would also
prohibit proprietary institutions, including us, from using
federally-derived funds for marketing, advertising and recruiting
expenses. This and similar proposals could be used as a basis of
discussion during the reauthorization of the Higher Education
Act.
On
December 13, 2017, the U.S. House of Representatives Committee on
Education and the Workforce approved legislation to reauthorize the
Higher Education Act. If enacted in its current form, this
legislation would substantially amend the HEA, including changes to
Title IV programs and provisions governing institutional
participation therein. We cannot predict when or whether the full
House of Representatives will vote on the legislation, nor when or
whether similar legislation will be considered by the U.S. Senate.
Any actions that change the requirements for our participation in
Title IV programs or the amount of student financial aid for which
our students are eligible could negatively impact our
business.
Government-wide Focus on
Proprietary Educational Institutions.
In October 2014, the
Department of Education announced an interagency task force
composed of the Department of Education, the U.S. Federal Trade
Commission (the "FTC"), the U.S. Departments of Justice, Treasury
and Veterans Affairs, the Consumer Financial Protection Bureau (the
"CFPB"), the SEC, and numerous state attorneys general. Attorneys
general in several states have become more active in enforcing
consumer protection laws, especially related to recruiting
practices and the financing of education at proprietary educational
institutions. In addition, several state attorneys general have
recently partnered with the CFPB to review industry practices. The
FTC has also recently issued civil investigative demands to several
other U.S. proprietary educational institutions, which require the
institutions to provide documents and information related to the
advertising, marketing, or sale of secondary or postsecondary
educational products or services, or educational accreditation
products or services. If our past or current business practices are
found to violate applicable consumer protection laws, or if we are
found to have made misrepresentations to our current or prospective
students about our educational programs, we could be subject to
monetary fines or penalties and possible limitations on the manner
in which we conduct our business, which could materially and
adversely affect our business, financial condition, results of
operations and cash flows. To the extent that more states or
government agencies commence investigations, act in concert, or
direct their focus on us, the cost of responding to these inquiries
and investigations could increase significantly, and the potential
impact on our business would be substantially greater.
U.S. Military Tuition
Assistance.
Service members of the United States Armed
Forces are eligible to receive tuition assistance from their branch
of service through the Uniform Tuition Assistance Program (the
“tuition assistance program”) of the Department of
Defense. Service members may use this tuition assistance to pursue
postsecondary degrees at postsecondary institutions that are
accredited by accrediting agencies that are recognized by the
Department of Education. Each branch of the armed forces has
established its own rules for the tuition assistance programs of
the Department of Defense. Institutions cannot enroll service
members under tuition assistance program unless they have signed a
Memorandum of Understanding, which, among other things, requires an
institution to agree to support Department of Defense regulatory
guidance, adhere to a bill of rights that is specified in the
regulations, and participate in the proposed Military Voluntary
Education Review program. In addition, institutions must also agree
to adhere to the principles and criteria established by the Service
Members Opportunity Colleges Degree Network System regarding the
transferability of credit and the awarding of credit for military
training and experience.
In
2010, Congress and the Department of Defense increased their focus
on Department of Defense tuition assistance that is used for
distance education and programs at proprietary institutions. In
2012, President Obama issued an Executive Order regarding the
establishment of “Principles of Excellence” for
educational institutions receiving funding from the tuition
assistance programs administered by the Department of Defense and
veterans educational benefits programs administered by the
Department of Veterans Affairs. The goals of the Principles of
Excellence are broadly stated and relate to disclosures on costs
and amounts of costs covered by federal educational benefits,
marketing standards, state authorization, accreditation approvals,
standard institutional refund policies, educational plans and
academic and financial advising. In August 2013, the Department of
Defense began incorporating the Principles of Excellence outlined
in the President’s 2012 Executive Order into their current
Memorandum of Understanding.
We
cannot predict whether further focus on military tuition assistance
will result in legislation or further rulemaking affecting our
participation in Title IV programs. To the extent that any laws or
regulations are adopted that limit our participation in Title IV
programs or the amount of student financial aid for which our
students are eligible, our enrollments, revenues and results of
operation could be materially affected.
Changes in Department of
Education Regulations.
As part of its negotiated rulemaking
process, the Department of Education consults with members of the
postsecondary education community to identify issues of concern and
attempts to agree on proposed regulatory revisions to address those
issues before formally proposing regulations. If the Department of
Education and negotiators cannot 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.
On
November 1, 2016, the Department of Education published final
regulations that, among other provisions, establish new standards
and processes for determining whether a Direct Loan Program
borrower has a defense to repayment (“Borrower
Defense”) on a loan due to acts or omissions by the
institution at which the loan was used by the borrower for
educational expenses. These final regulations (the “2016
Borrower Defense Final Rule”) were published with an
effective date of July 1, 2017. Among other topics, the 2016
Borrower Defense Final Rule establishes permissible borrower
defense claims for discharge, procedural rules under which claims
will be adjudicated, time limits for borrowers’ claims, and
guidelines for recoupment by the Department of Education of
discharged loan amounts from institutions of higher education. The
2016 Borrower Defense Final Rule also prohibits schools from using
any pre-dispute arbitration agreements, prohibits schools from
prohibiting relief in the form of class actions by student
borrowers, and invalidates clauses imposing requirements that
students pursue and internal dispute resolution process before
contacting authorities regarding concerns about an institution. For
proprietary institutions, the 2016 Borrower Defense Final Rule
describes the threshold for loan repayment rates that will require
specific disclosures to current and prospective students and the
applicable loan repayment rate methodology. The 2016 Borrower
Defense Final Rule also establishes important new financial
responsibility and administrative capacity requirements for both
not-for-profit and for-profit institutions participating in the
Title IV programs. For example, certain events would automatically
trigger the need for a school to obtain a letter of credit,
including for publicly traded institutions, if the SEC warns the
school that it may suspend trading on the school’s stock the
school failed to timely file a required annual or quarterly report
with the SEC or the exchange on which the stock is traded notifies
the school that it is not in compliance with exchange requirements
or the stock is delisted. Other events would require a
recalculation of an institution’s composite score of
financial responsibility including, for a proprietary institution
whose score is less than 1.5, any withdrawal of an owner’s
equity by any means, including by declaring a dividend, unless the
equity is transferred within the affiliated group on whose basis
the composite score was calculated. The 2016 Borrower Defense Final
Rule also sets forth events that are discretionary triggers for
letters of credit, meaning that if any of them occur, the
Department of Education may choose to require a letter of credit,
increase an existing letter of credit requirement or demand some
other form of surety from the institution. The 2016 Borrower
Defense Final Rule provides that if an institution fails to meet
the composite score requirement for longer than three years under
provisional certification, the Department of Education may mandate
additional financial protection from the institution or any party
with "substantial control" over the institution. Such parties with
"substantial control" must agree to jointly and severally guarantee
the Title IV liabilities of the institution at the end of the
three-year provisional certification period. Under current
regulations, a party may be deemed to have "substantial control"
over an institution if, among other factors, the party directly or
indirectly holds an ownership interest of 25% or more of an
institution, or is a member of the board of directors, a general
partner, the chief executive officer or other executive officer of
the institution.
On June
15, 2017, the Department of Education announced an indefinite delay
to its implementation of the 2016 Borrower Defense Final Rule, and
on June 16, 2017 published a notice of intent to establish a
negotiated rulemaking committee to develop proposed revisions to
the rule. On August 30, 2017, the Department of Education published
a Federal Register notice requesting nominations for individuals to
serve on this negotiated rulemaking committee, and on October 24,
2017, the Department of Education promulgated an interim final rule
under which the effective date of most substantive provisions of
the 2016 Borrower Defense Final Rule were delayed until July 1,
2019. The negotiated rulemaking committee sessions occurred in
November 2017, January 2018, and February 2018, during which the
Department of Education and negotiators failed to reach consensus
on a revised regulation. Additionally, on July 6, 2017, the
attorneys general of 18 states and the District of Columbia filed
suit against the Department of Education claiming that its delay of
the 2016 Borrower Defense Final Rule violated applicable law,
including the Administrative Procedure Act. On September 12, 2018,
the U.S. District Court for the District of Columbia issued a
decision concluding that the above-described delay of the 2016
Borrower Defense Final Rule was improper. The Court further ordered
additional oral argument on the matter of remedies, and thus has
not yet entered or finalized a remedial order in connection with
its decision. The Department of Education may appeal the
court’s decision and any subsequent remedial order. We
therefore cannot predict with any certainty the final outcome or
impact of this litigation.
On July
31, 2018, the Department of Education published in the Federal
Register a proposed rule (the “2018 Borrower Defense Proposed
Rule”) which would replace most substantive provisions of the
2016 Borrower Defense Final Rule. The 2018 Borrower Defense
Proposed Rule would establish a federal standard for individual
borrowers to raise as a defense to repaying loans disbursed on or
after July 1, 2019. This proposed regulation would permit borrowers
to challenge repayment of loans based on misrepresentation, defined
to include acts or omissions by an institution which are false,
misleading or deceptive, and which are made with knowledge of their
falsity, deception, or misleading nature, or with reckless
disregard for the truth. The 2018 Borrower Defense Proposed Rule
seeks comment as to whether such a defense may be raised
affirmatively or may only arise defensively, out of a collection
action. The proposed regulation also would establish a five-year
window following a final decision on borrower defense for the
Department of Education to seek recoupment from an institution. The
2018 Borrower Defense Proposed Rule would permit schools to use
class-action waivers and pre-dispute arbitration agreements, but
would require schools to provide additional disclosures and
borrower counseling when including such provisions in enrollment
agreements. The 2018 Borrower Defense Proposed rule also sets forth
automatic and discretionary triggers under which the Department of
Education may require the school to provide a letter of credit,
cash, or other form of surety, or may agree to provide surety
through an offset of future Title IV funds for a six-to-twelve
month period. For example, certain events would automatically
trigger the need for a school to obtain a letter of credit or other
surety, including for publicly traded institutions, if the SEC
warns the school that it may suspend trading on the school’s
stock, the school failed to timely file a required annual or
quarterly report with the SEC, or the exchange on which the stock
is traded notifies the school that it is not in compliance with
exchange requirements or the stock is delisted. Other events would
require a recalculation of an institution’s composite score
of financial responsibility including, for a proprietary
institution whose score is less than 1.5, any withdrawal of an
owner’s equity by any means, including by declaring a
dividend, unless the equity is transferred within the affiliated
group on whose basis the composite score was calculated; or for any
institution, the incursion of a borrower defense liability which
reduces the institution’s composite score to under 1.0. The
2018 Borrower Defense Proposed Rule also sets forth events that are
discretionary triggers for letters of credit or other forms of
surety, meaning that if any of them occur, the Department of
Education may choose to require a letter of credit, increase an
existing letter of credit requirement or demand some other form of
surety from the institution. The 2018 Borrower Defense Proposed
Rule also includes provisions regarding the treatment of operating
leases in the financial responsibility composite score methodology,
would more specifically define and require disclosures concerning
the composite score’s inclusion of debt obtained for
long-term purposes, and would revise limited aspects of the
composite score formula to account for changes in accounting
terminology. Following a 30-day public comment period, the
Department of Education is expected to issue a final rule by
November 1, 2018, taking effect July 1, 2019. We cannot predict the
extent to which that final rule may differ from the 2018 Borrower
Defense Proposed Rule, or may differ from the previously
promulgated 2016 Borrower Defense Final Rule, or the impact that
any such revised rule might have on our business.
On
December 19, 2016, the Department of Education published final
regulations regarding state authorization for programs offered
through distance education and state authorization for foreign
locations of institutions. Among other provisions, these final
regulations require that an institution participating in the Title
IV federal student aid programs and offering postsecondary
education through distance education be authorized by each state in
which the institution enrolls students, if such authorization is
required by the state. The Department of Education would recognize
authorization through participation in a state authorization
reciprocity agreement, if the agreement does not prevent a state
from enforcing its own laws. The final regulations also require
that foreign additional locations and branch campuses be authorized
by the appropriate foreign government agency and, if at least 50%
of a program can be completed at the location/branch, be approved
by the institution’s accrediting agency and be reported to
the state where the main campus is located. The final regulations
would also require institutions to: document the state process for
resolving complaints from students enrolled in programs offered
through distance education or correspondence courses; and make
certain public and individualized disclosures to enrolled and
prospective students about their distance education programs. The
final regulations regarding state authorization for foreign
locations of domestic institutions became effective July 1, 2018.
On June 29, 2018, the Department of Education delayed the effective
date of these final regulations with respect to distance education
from July 1, 2018, to July 1, 2020. We cannot predict with
certainty the impact that such regulations might have on our
business.
On June
22, 2017, the Department of Education announced that in accordance
with Executive Order 13777, “Enforcing the Regulatory Reform
Agenda,” it is seeking public comment on regulations that may
be “appropriate for repeal, replacement, or
modification.” 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.
Gainful Employment.
Under the Higher Education Act, proprietary schools generally are
eligible to participate in Title IV programs in respect of
educational programs that lead to “gainful employment in a
recognized occupation.”
On
October 31, 2014, the Department of Education published final
regulations to define “gainful employment” which became
effective on July 1, 2015. Historically, the concept of
“gainful employment” has not been defined in detail.
The gainful employment regulations require each educational program
offered by a proprietary institution to achieve threshold rates in
two debt measure categories: an annual debt-to-annual earnings
(“DTE”) ratio and an annual debt-to-discretionary
income (“DTI”) ratio.
The
ratios are calculated under complex methodologies and definitions
outlined in the final regulations and, in some cases, are based on
data that may not be readily accessible to us. The DTE ratio is
calculated by comparing (i) the annual loan payment required on the
median student loan debt incurred by students receiving Title IV
Program funds who completed a particular program and (ii) the
higher of the mean or median of those students’ annual
earnings approximately two to four years after they graduate. The
DTI ratio is calculated by comparing (x) the annual loan payment
required on the median student loan debt incurred by students
receiving Title IV Program funds who completed a particular program
and (y) the higher of the mean or median of those students’
discretionary income approximately two to four years after they
graduate.
An
educational program must achieve a DTE ratio at or below 8%, or a
DTI ratio at or below 20%, to be considered “passing.”
An educational program with a DTE ratio greater than 8% but less
than or equal to 12%, or a DTI ratio greater than 20% but less than
or equal to 30%, is considered to be “in the zone.” An
educational program with a DTE ratio greater than 12% and a DTI
ratio greater than 30% is considered “failing.” An
educational program will cease to be eligible for students to
receive Title IV Program funds if its DTE and DTI ratios are
failing in two out of any three consecutive award years or if both
of those rates are failing or in the zone for four consecutive
award.
The
gainful employment regulations also require an institution to
provide warnings to current and prospective students in programs
which may lose Title IV eligibility at the end of an award or
fiscal year. If an educational program could become ineligible
based on its ratios for the next award year, the institution must:
(1) deliver a warning to current and prospective students in the
program and (2) not enroll, register or enter into a financial
commitment with a prospective student until three business days
after the warning is provided or a subsequent warning is provided
if more than thirty days have passed since the first warning. If a
program becomes ineligible for students to receive Title IV program
funds, the institution cannot seek to reestablish eligibility of
that program, or establish the eligibility of a similar program
having the same classification of instructional program
(“CIP”) code with the same first four digits of the CIP
code of the ineligible program for three years.
Additionally, the
gainful employment regulations require an institution to certify to
the Department of Education that its educational programs subject
to the regulations, which include all programs offered by NAU, meet
the applicable requirements for graduates to be professionally or
occupationally licensed or certified in the state in which the
institution is located. If we are unable to certify that our
programs meet the applicable state requirements for graduates to be
professionally or occupationally certified in that state, then we
may need to cease offering certain programs in certain states or to
students who are residents in certain states.
In
January 2017, the Department of Education issued to institutions
final debt-to-earnings rates for the first gainful employment debt
measurement year. Two of our programs, both of which are no longer
enrolling students, were determined to be failing programs under
those debt-to-earnings rates. Five of our programs, one of which is
no longer enrolling students, were determined to be
“zone” programs under those rates. We continue to
evaluate making changes to our educational program offerings as a
result of gainful employment regulations. Effective September 6,
2017, we have suspended enrollment in the Associates of Applied
Science in Veterinary Technology program and plan to phase out the
program by August 31, 2018. Effective June 6, 2017, we also
suspended enrollments in the Associates in Medical Assisting and
plan to phase out the program by August 31, 2019.
The
failure of any program or programs offered by NAU to satisfy any
gainful employment regulations could render that program or
programs ineligible for Title IV program funds. If a particular
educational program ceased to become eligible for Title IV program
funds, either because it fails to prepare students for gainful
employment in a recognized occupation or due to other factors, we
may choose to cease offering that program. We also could be
required to make changes to certain programs or to increase student
loan repayment efforts in order to comply with the rule or to avoid
the uncertainty associated with such compliance.
On June
16, 2017, the Department of Education published a notice of intent
to establish a negotiated rulemaking committee to develop proposed
revisions to the gainful employment regulations. On August 30,
2017, the Department of Education published a Federal Register
notice requesting nominations for individuals to serve on this
negotiated rulemaking committee, and announced that this committee
would meet for three sessions. The sessions occurred in December
2017, February 2018, and March 2018. The Department of Education
and negotiators failed to reach consensus on a revised rule, and on
August 14, 2018, the Department of Education published in the
Federal Register a proposed rule (the “Gainful Employment
Proposed Rule”) which, if enacted as a final rule, would
rescind the current gainful employment regulations applicable to
all of our educational programs. Among other things, the Gainful
Employment Proposed Rule would remove from the Department of
Education’s regulations the debt-to-earnings metric
calculations for our programs, and sanctions and alternate earnings
appeals related to those calculations, and related reporting,
disclosure, and certification requirements. In the Gainful
Employment Proposed Rule, the Department of Education also seeks
comment on whether all institutions participating in the federal
student financial aid programs should be required to disclose net
price, completion rates, withdrawal rates, program size, graduate
eligibility for state licensure, or any other items currently
required under the gainful employment regulations. Following a
30-day public comment period, the Department of Education is
expected to issue a final rule by November 1, 2018, taking effect
July 1, 2019. We cannot predict the extent to which that final rule
may differ from the Gainful Employment Proposed Rule, or may differ
from the current gainful employment regulations, or the impact that
any such revised rule might have on our business.
On July
5, 2017, the Department of Education announced that it would allow
additional time, until July 1, 2018, for institutions to comply
with certain disclosure requirements in the gainful employment
regulations. On June 15, 2018, the Department of Education further
announced that it would allow additional time, until July 1, 2019,
for institutions to comply with those disclosure requirements.
Continued compliance with the gainful employment regulations could
increase our cost of doing business, reduce our enrollments and
have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Incentive
Compensation.
Under the Higher Education Act, an educational
institution that participates in Title IV programs may not make any
commission, bonus or other incentive payments to any persons or
entities involved in recruitment or admissions activities or in the
awarding of financial aid. The statutory prohibition against
incentive compensation applies to any person engaged in student
recruitment or admissions activities or in making financial aid
award decisions, and any higher level employees with responsibility
for such activities. Since July 1, 2011 the Department of
Education’s implementing regulations have effectively deemed
any commission, bonus, or other incentive compensation based in any
part, directly or indirectly, on securing enrollment or awarding
financial aid to be inconsistent with the statutory prohibition
against incentive compensation payments The Department of Education
also issued a “Dear Colleague” letter in March 2011
providing additional guidance regarding the scope of the
prohibition on incentive compensation and to what employees and
types of activities the prohibition applies. The July 1, 2011
revisions to the Department of Education’s regulations
required us to change our compensation practices and has had and
will continue to have a significant impact on the rate at which
students enroll in our programs and on our business, financial
condition and results of operations.
Whistleblower
Claims.
In recent years, several for-profit education
companies have been faced with whistleblower lawsuits under the
Federal False Claims Act, known as “qui tam” cases, by
current or former employees alleging violations of the prohibition
against incentive compensation. In such cases, the
whistleblower’s claims are reviewed under seal by the
Department of Justice for potential intervention. If the Department
of Justice elects to intervene, it assumes primary control over the
litigation. These types of claims against for-profit educational
companies, and the Department of Justice’s interest in
intervention, are expected to increase in the future. If the
Department of Education were to determine that we violated any
requirement of Title IV programs, or if we were to be found liable
in a False Claims action, or if any third parties we have engaged
were to violate this law, we could be fined or sanctioned by the
Department of Education or subjected to other monetary liability or
penalties that could be substantial, including the possibility of
treble damages under a False Claims action, any of which could harm
our reputation, impose significant costs and have a material effect
on our business, financial condition and results of
operations.
In
April 2017, a former NAU employee filed a qui tam suit against NAU,
NAUH, and Dlorah, Inc., alleging certain violations of the Higher
Education Act and Title IV program requirements, including alleged
misrepresentations to a programmatic accrediting agency, alleged
miscalculating its percentage of revenues derived from Title IV
program funds under the 90/10 Rule, and alleged noncompliance with
the incentive compensation prohibition. The U.S. government
decided to not intervene in the lawsuit at that time, and the
complaint was then unsealed by the court in January 2018, with an
amended complaint being filed on April 24, 2018. The U.S.
government reserved the right to intervene at a later time.
The case is styled U.S. ex rel. Brian Gravely v. National American
University, et al., No. 5:17-cv-05032-JLV, and remains pending in
the U.S. District Court for the District of South Dakota.
NAU, NAUH, and Dlorah, Inc., have filed an answer to the
amended complaint, deny any legal wrongdoing or liability. We
cannot predict the outcome of this litigation, nor its ability to
harm our reputation, impose litigation costs, or materially
adversely affect our business, financial condition, and results of
operations.
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 regulations require that institutions demonstrate
specific state authorization to operate educational programs beyond
secondary education and clarify what is required for an institution
to be considered “legally authorized” in a state for
purpose of participation in Title IV programs. Specifically, the
Department of Education considers an institution to be legally
authorized by a state if the state has a process, applicable to all
institutions except tribal and federal institutions, to review and
appropriately act on complaints concerning the institution and to
enforce applicable state laws, and the institution further
satisfies one of the following requirements:
●
the state
establishes the institution by name as an educational institution
by charter, statute, constitutional provision or other action
issued by an appropriate state agency or state entity, and the
institution is authorized to operate educational programs beyond
secondary education, including programs leading to a certificate or
degree;
●
the institution
complies with applicable state approval or licensure requirements,
except that a state may exempt an institution from any such
requirement based on (1) the institution’s accreditation by
one or more accrediting agencies recognized by the Department of
Education or (2) the institution being in operation for at least 20
years; and
●
the state has a
process, applicable to all institutions except federal and tribal
institutions, to review and appropriately act on complaints
concerning the institution and applicable state laws.
We
operate physical facilities offering educational programs in South
Dakota, Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska,
New Mexico, Oklahoma, and Texas. In each of these states, we
maintain the required authorizations to offer our educational
programs under state law.
Where
required under applicable law, these authorizations from state
educational agencies are very important to us. To maintain
requisite state authorizations, we are required to continuously
meet standards relating to, among other things, educational
programs, facilities, instructional and administrative staff,
marketing and recruitment, financial operations, addition of new
locations and educational programs and various operational and
administrative procedures. Failure to comply with applicable
requirements of the state educational agencies in South Dakota,
Colorado, Kansas, Indiana, Minnesota, Missouri, Nebraska, New
Mexico, Oklahoma, and Texas could result in us losing our
authorization to offer educational programs in those states. If
that were to occur, the applicable state educational agency could
force us to cease operations in that state. Even if the applicable
state educational agency does not require the university to cease
operations on an immediate basis, the loss of authorization by the
state educational agency in such state would then cause our
campuses in such state to lose eligibility to participate in Title
IV programs, and such loss of Title IV program eligibility could
force us to cease operations in such state. Alternatively, the
state educational licensing agencies could restrict our ability to
offer certain degree programs. Additionally, if the Department of
Education were to determine that our authorizations in South
Dakota, Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska,
New Mexico, Oklahoma, and Texas did not satisfy the Department of
Education’s state authorization requirements, the campuses in
the relevant states could lose their eligibility to participate in
Title IV programs, and such loss of Title IV program eligibility
could force us to cease operations in such state.
As
described above under “Changes in Department of Education
Regulations,” the Department of Education published final
regulations regarding state authorization for programs offered
through distance education and state authorization for foreign
locations of institutions. The final regulations regarding state
authorization for foreign locations of domestic institutions became
effective July 1, 2018. On June 29, 2018, the Department of
Education delayed the effective date of these final regulations
with respect to distance education from July 1, 2018, to July 1,
2020. Among other provisions, these final regulations require that
an institution participating in the Title IV federal student aid
programs and offering postsecondary education through distance
education be authorized by each state in which the institution
enrolls students, if such authorization is required by state.
Independent of this matter of federal regulation, several states
have jurisdiction over educational institutions offering online
programs that have no physical location or other presence in the
state. The institution may be enrolling or offering educational
services to students who reside in the state, conducting practica
or sponsoring internships in the state, employing faculty who
reside in the state or advertising or recruiting prospective
students in the state. Thus, our activities in certain states
constitute a presence requiring licensure or authorization under
requirements of state educational agency law, regulation, or
policy, even though we do not have a physical facility in such
states. Therefore, in addition to the states where we maintain
physical facilities, we have either obtained or are currently in
the process of obtaining approvals or exemptions that we believe
are necessary because they may constitute a presence requiring
state licensure or authorization based on the laws, rules or
regulations of that state. Notwithstanding our efforts to obtain
approvals or exemptions, state regulatory requirements for online
education vary among the states, are not well developed in many
states, are imprecise or unclear in some states and can change
frequently. Because we enroll students in online programs in all 50
states and the District of Columbia, we expect that regulatory
authorities in other states where we are not currently licensed or
authorized may request that we seek additional licenses or
authorizations for these institutions in their states in the
future. In recent years several states have voluntarily entered
into State Authorization Reciprocity Agreements
(“SARA”) that establish standards for interstate
offering of post-secondary distance education courses and programs.
If an institution’s home state participates in SARA and
authorizes the institution to provide distance education in
accordance with SARA standards, then the institution need not
obtain additional authorizations for distance education from any
other SARA member state. The SARA participation requirements and
process are administered by the four regional higher education
compacts in the United States (the Midwestern Higher Education
Compact, the New England Board of Higher Education, the Southern
Regional Education Board and the Western Interstate Commission for
Higher Education) and are overseen by the National Council for
State Authorization Reciprocity Agreements. NAU is approved to
participate in SARA, through the SARA Coordinator of the South
Dakota Board of Regents as a state portal agency with its most
recent approval effective April 20, 2018 through April 19,
2019.
If we
fail to comply with state licensing or authorization requirements
for a state, or fail to obtain licenses or authorizations when
required, we could lose state licensure or authorization by that
state, which could prohibit us from recruiting prospective students
or offering services to current students in that state. We could
also be subject to other sanctions, including restrictions on
activities in that state, fines, and penalties. We review the
licensure requirements of other states when we believe that it is
appropriate to determine whether our activities in those states may
constitute a presence or otherwise may require licensure or
authorization by the respective state education agencies. New laws,
regulations or interpretations related to offering educational
programs online could increase our cost of doing business and
affect our ability to recruit students in particular states, which
could, in turn, adversely affect our enrollments and revenues and
have a material effect on our business.
Misrepresentation.
An institution participating in Title IV programs is prohibited
from making misrepresentations regarding the nature of its
educational programs, the nature of financial charges and
availability of financial assistance, or the employability of
graduates. A misrepresentation is defined in the regulations as any
false, erroneous, or misleading statement to any student or
prospective student, any member of the public, an accrediting
agency, a state agency or the Department of Education. If we
– or any entity, organization, or person with whom we have an
agreement to provide educational programs or to provide marketing,
advertising, recruiting, or admissions services – commit a
misrepresentation for which a person could reasonably be expected
to rely, or has reasonably relied, to that person’s
detriment, the Department of Education could initiate proceedings
to revoke our institutions’ Title IV eligibility, deny
applications made by our institutions, impose fines, or initiate a
limitation, suspension or termination proceeding against us.
Further, although the Department of Education claims not to have
created any private right of action, the misrepresentation
regulations could increase risk of qui tam actions under the False
Claims Act.
Clery
Act.
On October 20, 2014, the Department of Education
published final regulations implementing 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. The final regulations became effective July 1, 2015.
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.
Eligibility and
certification procedures.
Each institution must apply
periodically to the Department of Education for continued
certification to participate in Title IV programs. Such
recertification generally is required every six years, but may be
required earlier, including when an institution undergoes a change
in control. An institution may also come under the Department of
Education’s review when it expands its activities in certain
ways, such as opening an additional location, adding a new
educational program, or modifying the academic credentials it
offers. The Department of Education may place an institution on
provisional certification status if it finds that the institution
does not fully satisfy all eligibility and certification standards
and in certain other circumstances, such as when an institution is
certified for the first time or undergoes a change in control.
During the period of provisional certification, the institution
must comply with any additional conditions included in the
school’s program participation agreement with the Department
of Education. In addition, the Department of Education may more
closely review an institution that is provisionally certified if it
applies for recertification or approval to open a new location, add
an educational program, acquire another school, or make any other
significant change. If the Department of Education determines that
a provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, it may
seek to revoke the institution’s certification to participate
in Title IV programs without advance notice or opportunity for the
institution to challenge the action. Students attending
provisionally certified institutions remain eligible to receive
Title IV program funds. Our current certification to participate in
the Title IV programs, which is not provisional, became effective
in June 2013 and extends through March 31, 2019.
Administrative
capability.
Department of Education regulations specify
extensive criteria by which an institution must establish that it
has the requisite “administrative capability” to
participate in Title IV programs. To meet the administrative
capability standards, an institution must, among other
things:
●
comply with all
applicable Title IV program requirements;
●
have an adequate
number of qualified personnel to administer Title IV
programs;
●
have acceptable
standards for measuring the satisfactory academic progress of its
students;
●
not have student
loan cohort default rates above specified levels;
●
have various
procedures in place for awarding, disbursing and safeguarding Title
IV program funds and for maintaining required records;
●
administer Title IV
programs with adequate checks and balances in its system of
internal controls;
●
not be,
and not have any principal or affiliate who is, debarred or
suspended from federal contracting or engaging in activity that is
cause for debarment or suspension;
●
provide financial
aid counseling to its students;
●
refer to
the Department of Education’s Office of Inspector General any
credible information indicating that any student, parent, employee,
third- party servicer or other agent of the institution has engaged
in any fraud or other illegal conduct involving Title IV
programs;
●
submit all required
reports and financial statements in a timely manner;
and
●
not otherwise
appear to lack administrative capability.
If an
institution fails to satisfy any of these criteria, the Department
of Education may:
●
require the
institution to repay Title IV funds its students previously
received;
●
transfer the
institution from the advance method of payment of Title IV funds to
heightened cash monitoring status or the reimbursement method of
payment;
●
place the
institution on provisional certification status; or
●
commence a
proceeding to impose a fine or to limit, suspend or terminate the
institution’s participation in Title IV
programs.
If the
Department of Education determines that we failed to satisfy its
administrative capability requirements, then our students could
lose, or be limited in their access to, Title IV program
funding.
Financial
responsibility.
The Higher Education Act and Department of
Education regulations establish extensive standards of financial
responsibility that institutions such as us must satisfy to
participate in Title IV programs. The Department of Education
evaluates institutions for compliance with these standards on an
annual basis based on the institution’s annual audited
financial statements as well as when the institution applies to the
Department of Education to have its eligibility to participate in
Title IV programs recertified. The most significant financial
responsibility standard is the institution’s composite score,
which is derived from a formula established by the Department of
Education based on three financial ratios:
●
equity ratio, which
measures the institution’s capital resources, financial
viability and ability to borrow;
●
primary reserve
ratio, which measures the institution’s ability to support
current operations from expendable resources; and
●
net income ratio,
which measures the institution’s ability to operate at a
profit or within its means.
The
Department of Education assigns a strength factor to the results of
each of these ratios on a scale from negative 1.0 to positive 3.0,
with negative 1.0 reflecting financial weakness and positive 3.0
reflecting financial strength. The Department of Education then
assigns a weighting percentage to each ratio and adds the weighted
scores for the three ratios together to produce a composite score
for the institution. The composite score must be at least 1.5 for
the institution to be deemed financially responsible without the
need for further Department of Education oversight. In addition to
having an acceptable composite score, an institution must, among
other things, provide the administrative resources necessary to
comply with Title IV program requirements, meet all of its
financial obligations including required refunds to students and
any Title IV liabilities and debts, be current in its debt payments
and not receive an adverse, qualified or disclaimed opinion by its
accountants in its audited financial statements.
If an
institution’s composite score is less than 1.5 but is 1.0 or
higher, it is still considered financially responsible, and the
institution may continue to participate in the Title IV programs as
a financially responsible institution for up to three years under
the Department of Education’s “zone” alternative.
Under the zone alternative, the Department of Education may subject
the institution to various operating or other requirements, which
may include complying with additional Department of Education
monitoring requirements, agreeing to receive Title IV program funds
under an arrangement other than the Department of Education’s
standard advance funding arrangement, such as the reimbursement
method of payment or heightened cash monitoring, or complying with
or accepting other limitations on the institution’s ability
to increase the number of programs it offers or the number of
students it enrolls.
If an
institution does not achieve a composite score of at least 1.0, it
is subject to additional requirements in order to continue its
participation in the Title IV programs, including submitting to the
Department of Education a letter of credit in an amount equal to at
least ten percent, and at the Department of Education’s
discretion up to 50%, of the Title IV funds received by the
institution during its most recently completed fiscal year, and
being placed on provisional certification status, under which the
institution must receive Department of Education approval before
implementing new locations or educational programs and comply with
other restrictions, including reduced due process rights in
subsequent proceedings before the Department of
Education.
In
addition, under regulations that took effect on July 1, 2016,
institutions placed on either the heightened cash monitoring
payment method or the reimbursement payment method must pay Title
IV credit balances to students or parents before requesting Title
IV funds from the Department of Education and may not hold Title IV
credit balances on behalf of students or parents, even if such
balances are expected to be applied to future tuition
payments.
Our
audited financial statements for the fiscal year ended May 31, 2017
indicated our composite scores was 1.8, which is sufficient to be
deemed financially responsible under the Department of
Education’s requirements. Our audited financial statements
for the fiscal year ended May 31, 2018 indicate our composite score
is 1.3. This score is subject to a final determination by the
Department of Education once it receives and reviews our
consolidated audited financial statements for the 2018 fiscal year,
but we believe it is likely that the Department of Education will
determine that our institutions are “in the zone” and
that we will be required to operate under the “zone
alternative” requirements as well as any other requirements
that the Department of Education might impose in its discretion. If
we are unable to meet the minimum composite score or to comply with
the other standards of financial responsibility, and could not post
a required letter of credit or comply with the alternative bases
for establishing financial responsibility, then our students could
lose their access to Title IV program funding.
Additionally, as
part of the 2016 Borrower Defense Final Rule, the Department of
Education revised its general standards of financial responsibility
to include various actions and events that would require
institutions to provide the Department of Education with
irrevocable letters of credit. Similarly, the 2018 Borrower Defense
Proposed Rule includes various actions and events that would
require institutions to provide additional surety, including
irrevocable letters of credit. For additional information regarding
this proposed rule, see “Item 1 – Business –
Regulatory Matters –Changes in Department of Education
Regulations.”
Return of Title IV funds
for students who withdraw.
When a student who has received
Title IV funds withdraws from school, the institution must
determine the amount of Title IV program funds the student has
“earned.” If the student withdraws during the first 60%
of any period of enrollment or payment period, the amount of Title
IV program funds that the student has earned is equal to a pro rata
portion of the funds the student received or for which the student
would otherwise be eligible. If the student withdraws after the 60%
threshold, then the student is deemed to have earned 100% of the
Title IV program funds he or she received. The institution must
then return the unearned Title IV program funds to the appropriate
lender or the Department of Education in a timely manner, which is
generally no later than 45 days after the date the institution
determined that the student withdrew. If such payments are not
timely made, the institution will be required to submit a letter of
credit to the Department of Education equal to 25% of the Title IV
funds that the institution should have returned for withdrawn
students in its most recently completed fiscal year. Under
Department of Education regulations, late returns of Title IV
program funds for 5% or more of the withdrawn students in the audit
sample in the institution’s annual Title IV compliance audit
for either of the institution’s two most recent fiscal years
or in a Department of Education program review triggers this letter
of credit requirement. NAU did not exceed this 5% threshold in our
annual Title IV compliance audit for either of our two most recent
fiscal years.
The “90/10”
Rule.
A requirement of the Higher Education Act, commonly
referred to as the “90/10 Rule,” provides that an
institution will be placed on provisional certification and may be
subject to other conditions from the Department of Education if,
under a complex regulatory formula that requires cash basis
accounting and other adjustments to the calculation of revenue, the
institution derives more than 90% of its revenues for any fiscal
year from Title IV program funds, and, further, the institution is
subject to loss of eligibility to participate in Title IV programs
if it exceeds the 90% threshold for two consecutive fiscal years.
This rule applies only to for-profit postsecondary educational
institutions, including NAU.
Using
the Department of Education’s formula under the 90/10 Rule,
for the 2018, 2017 and 2016 fiscal years, we derived approximately
82.1%, 82.6% and 86.8%, respectively, of our revenues (calculated
on a cash basis) from Title IV program funds. Recent changes in
federal law that increased Title IV grant and loan limits, and any
additional increases in the future, may result in an increase in
the revenues NAU receives from Title IV programs, which could make
it more difficult for us to satisfy the 90/10 Rule. In addition,
economic downturns that adversely affect students’ employment
circumstances could also increase their reliance on Title IV
programs. Furthermore, from time to time, legislation is introduced
that would make a proprietary institution ineligible to participate
in Title IV programs if it derives more than 85% of its revenues
from federal funds, including Title IV programs, revenues from the
GI Bill and Department of Defense Tuition Assistance funds. We are
exploring the feasibility of various potential measures that would
be intended to reduce the percentage of NAU’s cash basis
revenue attributable under the 90/10 Rule to Title IV Program
funds. Among other things, we expect to expand our non-Title IV
education programming.
Student loan
defaults.
Under the Higher Education Act, an educational
institution may lose its eligibility to participate in some or all
Title IV programs if defaults by its students on the repayment of
loans received through either the Federal Family Education Loan
(“FFEL”) Program or the Federal Direct Loan programs
exceed certain levels. For each federal fiscal year, the Department
of Education calculates a rate of student defaults on such loans
for each institution, known as a “cohort default rate.”
An institution’s cohort default rate for a federal fiscal
year is calculated by determining the rate at which borrowers that
became subject to their repayment obligation in that federal fiscal
year defaulted by the end of the following federal fiscal year.
Before July 1, 2010, we participated in both the FFEL and Federal
Direct Loan programs. As of July 1, 2010, following the elimination
of the FFEL program under federal law, we participate only in the
Federal Direct Loan program. Defaults by students on the repayment
of loans received through the FFEL program still will be counted;
however, in the calculation to determine our eligibility to
participate in the Federal Direct Loan program.
If the
Department of Education notifies an institution that its cohort
default rates for each of the three most recent federal fiscal
years are 30% or greater, the institution’s participation in
the Federal Direct Loan and Pell Grant programs ends 30 days after
that notification, unless the institution appeals the determination
in a timely manner on specified grounds and according to specified
procedures. In addition, an institution’s participation in
the Federal Direct Loan programs ends 30 days after notification by
the Department of Education that the institution’s most
recent cohort default rate is greater than 40%, unless the
institution timely appeals that determination on specified grounds
and according to specified procedures. An institution whose
participation ends under either of these provisions may not
participate in the Federal Direct Loan and Pell Grant programs, as
applicable, for the remainder of the fiscal year in which the
institution receives the notification and for the next two federal
fiscal years.
If an
institution’s cohort default rate equals or exceeds 30% in
any single federal fiscal year or any subsequent fiscal year, the
institution may be placed on provisional certification status.
Provisional certification does not limit an institution’s
access to Title IV program funds, but it does subject an
institution to closer review by the Department of Education if the
institution applies for recertification or approval to open a new
location, add an educational program, acquire another school or
make any other significant change. Additionally, the Department of
Education may revoke the certification of a provisionally-certified
institution without advance notice if the Department of Education
determines that the institution is not fulfilling material Title IV
program requirements. We were approved to participate in the FFEL
program before its expiration on July 1, 2010, and we currently are
approved to participate in the Federal Direct Loan program. The
potential sanctions discussed in this section are based on the
combined cohort default rate for loans issued to students under
both the FFEL program and the Federal Direct Loan
program.
The
Department of Education generally publishes draft cohort default
rates in February of each year for the repayment period that ended
the prior September 30. Draft cohort default rates do not result in
sanctions, are subject to subsequent data corrections and appeals
by an institution, and can change between their issuance to
institutions and the Department of Education’s release of
official cohort default rates, which are typically issued annually
in September. Our official cohort default rates for federal fiscal
years 2014 and 2013 are 24.1% and 23.4%, respectively. The draft
cohort rate for federal fiscal year 2015 is 23.7%.
Compliance reviews.
We are subject to announced and unannounced compliance reviews and
audits by various external agencies, including the Department of
Education, its Office of Inspector General, institutional and
programmatic accreditors, state licensing agencies, agencies that
have previously guaranteed FFEL loans, various state approving
agencies for financial assistance to veterans and accrediting
commissions. As part of the Department of Education’s ongoing
monitoring of institutions’ administration of Title IV
programs, the Higher Education Act also requires institutions to
annually submit to the Department of Education a Title IV
compliance audit conducted by an independent certified public
accountant in accordance with applicable federal and Department of
Education audit standards. In addition, to enable the Department of
Education to make a determination of an institution’s
financial responsibility, each institution must annually submit
audited financial statements prepared in accordance with Department
of Education regulations.
Data privacy and protection
of personal information.
The Family Educational Rights and
Privacy Act of 1974, or FERPA, and the Department of
Education’s FERPA regulations require educational
institutions to protect the privacy of students’ educational
records by limiting an institution’s disclosure of a
student’s personally identifiable information without the
student’s prior written consent. FERPA also requires
institutions to allow students to review and request changes to
their educational records maintained by the institution, to notify
students at least annually of this inspection right and to maintain
records in each student’s file listing requests for access to
and disclosures of personally identifiable information and the
interest of such party in that information. If an institution fails
to comply with FERPA, the Department of Education may require
corrective actions by the institution or may terminate an
institution’s receipt of further federal funds. In addition,
educational institutions are obligated to safeguard student
information pursuant to the Gramm-Leach-Bliley Act, or GLBA, a
federal law designed to protect consumers’ personal financial
information held by financial institutions and other entities that
provide financial services to consumers. GLBA and the applicable
GLBA regulations require an institution to, among other things,
develop and maintain a comprehensive, written information security
program designed to protect against the unauthorized disclosure of
personally identifiable financial information of students, parents
or other individuals with whom such institution has a customer
relationship. If an institution fails to comply with the applicable
GLBA requirements, it may be required to take corrective actions,
be subject to monitoring and oversight by the Federal Trade
Commission, or FTC, and be subject to fines or penalties imposed by
the FTC. For-profit educational institutions are also subject to
the general deceptive practices jurisdiction of the FTC with
respect to their collection, use and disclosure of student
information. The institution must also comply with the FTC Red
Flags Rule, a section of the federal Fair Credit Reporting Act,
that requires the establishment of guidelines and policies
regarding identity theft related to student credit accounts.
Possession and use of personal information in our operations also
subjects us to various U.S. state regulatory requirements with
respect to such information. Moreover, certain of our operations
may involve the collection of personal information from individuals
outside the U.S., which may render us subject to global privacy and
data security laws. For example, the European Union General Data
Protection Regulation (“GDPR”), which became
enforceable May 25, 2018, contains a number of requirements that
are different from or exceed those in U.S. federal and state
privacy and data security laws. The GDPR may apply to certain of
our operations. Were it to apply and if we were out of compliance,
there is the potential for administrative, civil, or criminal
liability with significant monetary penalties as well as
reputational harm to us and our employees.
Potential effect of
regulatory violations.
If we fail to comply with the
regulatory standards governing Title IV programs, the Department of
Education could impose one or more sanctions, including
transferring NAU to the reimbursement or cash monitoring method of
payment, requiring us to repay Title IV program funds, requiring us
to post a letter of credit in favor of the Department of Education
as a condition for continued Title IV certification, taking
emergency action against us, initiating proceedings to impose a
fine or to limit, suspend or terminate our participation in Title
IV programs or referring the matter for civil or criminal
prosecution. If such sanctions or proceedings were imposed against
us and resulted in a substantial curtailment or termination of our
participation in Title IV programs, our enrollments, revenues and
results of operations could be materially affected.
In
addition to the actions that may be brought against us as a result
of our participation in Title IV programs, we are also subject to
complaints and lawsuits relating to regulatory compliance brought
not only by regulatory agencies, but also by other government
agencies and third parties, such as current or former students or
employees and other members of the public.
Regulatory
Standards that May Restrict Institutional Expansion or Other
Changes
Many
actions that we may wish to take in connection with expanding our
operations or other changes are subject to review or approval by
the applicable regulatory agencies.
Adding teaching locations,
implementing new educational programs and increasing
enrollment.
The requirements and standards of state
education agencies, accrediting commissions and the Department of
Education limit our ability in certain instances to establish
additional teaching locations, implement new educational programs
or increase enrollment in certain programs. Many states require
review and approval before institutions can add new locations or
programs. The state educational agencies, the HLC and the
specialized accrediting commissions that authorize or accredit us
and our programs generally require institutions to notify them in
advance of adding new locations or implementing new programs, and
upon notification may undertake a review of the quality of the
facility or the program and the financial, academic, and other
qualifications of the institution.
As a
condition for an institution to participate in Title IV programs on
a provisional basis, the Department of Education can require prior
approval of such programs or otherwise restrict the number of
programs an institution may add or the extent to which an
institution can modify existing educational programs. If an
institution that is required to obtain the Department of
Education’s advance approval for the addition of a new
program or new location fails to do so, the institution may be
liable for repayment of the Title IV program funds received by the
institution or students in connection with that program or enrolled
at that location. Additionally, any delay in obtaining a required
Department of Education approval could delay the introduction of
the program, which could negatively impact our enrollment
growth.
Provisional
certification.
Each institution must apply to the Department
of Education for continued certification to participate in Title IV
programs at least every six years and when it undergoes a change in
control. An institution may also come under the Department of
Education’s review when it expands its activities in certain
ways, such as opening an additional location, adding an educational
program or modifying the academic credentials that it
offers.
The
Department of Education may place an institution on provisional
certification status if it finds that the institution does not
fully satisfy all of the eligibility and certification standards.
In addition, if a company acquires a school from another entity,
the acquired school will automatically be placed on provisional
certification when the Department of Education approves the
transaction. During the period of provisional certification, the
institution must comply with any additional conditions or
restrictions included in its program participation agreement with
the Department of Education. Students attending provisionally
certified institutions remain eligible to receive Title IV program
funds, but if the Department of Education finds that a
provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, it may
seek to revoke the institution’s certification to participate
in Title IV programs without advance notice or advance opportunity
for the institution to challenge that action. In addition, the
Department of Education may more closely review an institution that
is provisionally certified if it applies for recertification or
approval to open a new location, add an educational program,
acquire another school or make any other significant
change.
Acquiring other
schools.
The Department of Education and virtually all state
education agencies and accrediting commissions require a company to
obtain their approval if it wishes to acquire another school. The
level of review varies by individual state and accrediting
commission, with some requiring approval of such an acquisition
before it occurs while others only consider approval after the
acquisition has occurred. The approval of the applicable state
education agencies and accrediting commissions is a necessary
prerequisite to the Department of Education certifying the acquired
school to participate in Title IV programs. The restrictions
imposed by any of the applicable regulatory agencies could delay or
prevent our acquisition of other schools in some
circumstances.
On July
21, 2017, we entered into an agreement to acquire substantially all
of the assets of Henley-Putnam University (“H-PU”), a
for profit, postsecondary educational institution that offers 100%
online programs focused in the field of strategic security. The
transaction, which closed on March 21, 2018, did not contemplate
the continued operation of HPU as a stand-alone postsecondary
institution following the closing of the transaction. Rather, upon
the closing of the transaction, HPU’s educational programs
became part of NAU’s degree and certificate program
offerings. Subsequent to the transaction closing date, we were
granted approval from the Department of Education in order to
disburse Title IV program funds to students in the acquired
programs.
Change in ownership
resulting in a change in control.
Many states and
accrediting commissions require institutions of higher education to
report or obtain approval of certain changes in control and changes
in other aspects of institutional organization or control. The
types of and thresholds for such reporting and approval vary among
the states and accrediting commissions. The HLC provides that an
institution must obtain its approval in advance of a change in
control, structure, or organization for the institution to retain
its accredited status. In addition, in the event of a change in
control, structure, or organization, the HLC requires a
post-transaction focused visit or other evaluation to review the
appropriateness of its approval of the change and whether the
institution has met the commitment it made to the HLC prior to the
approval. Other specialized accrediting commissions also require an
institution to obtain similar approval before or after the event
that constitutes a change in control under their
standards.
Many
states include the transfer of a controlling interest of common
stock in the definition of a change in control requiring approval,
but their thresholds for determining a change in control vary
widely. A change in control under the definition of one state
educational agency that regulates us might require us to obtain
approval of the change in control to maintain authorization to
operate in that state, and in some cases such states could require
us to obtain advance approval of the change in
control.
Under
Department of Education regulations, an institution that undergoes
a change in control loses its eligibility to participate in Title
IV programs and must apply to the Department of Education to
reestablish such eligibility. If an institution files the required
application and follows other procedures, the Department of
Education may temporarily certify the institution on a provisional
basis following the change in control, so that the
institution’s students retain access to Title IV program
funds until the Department of Education completes its full review.
In addition, the Department of Education will extend such temporary
provisional certification if the institution timely files other
required materials, including the approval of the change in control
by its state authorizing agency and accrediting commission and an
audited balance sheet showing the financial condition of the
institution or its parent corporation as of the date of the change
in control. If the institution fails to meet any of these
applications and other deadlines, its certification will expire and
its students will not be eligible to receive Title IV program funds
until the Department of Education completes its full review, which
commonly takes several months and may take longer. If the
Department of Education approves the application after a change in
control, it will certify the institution on a provisional basis for
a period of up to approximately three years.
Any
failure by us to comply with the requirements of the Department of
Education, the HLC or the state educational agencies from which we
have a license or authorization, or a failure to obtain their
approval of the change in control, could result in loss of
authorization, accreditation, or eligibility to participate in
Title IV programs and cause a significant decline in our student
enrollments.
A
change in control also could occur as a result of future
transactions in which we are involved. Some corporate
reorganizations and some changes in the board of directors are
examples of such transactions. In addition, Department of Education
regulations provide that a change in control occurs for a publicly
traded corporation if either: (a) there is an event that would
obligate the corporation to file a Current Report on Form 8-K with
the Securities and Exchange Commission disclosing a change in
control, or (b) the corporation has a stockholder that owns at
least 25% of the total outstanding voting stock of the corporation
and is the largest stockholder of the corporation, and that
stockholder ceases to own at least 25% of such stock or ceases to
be the largest stockholder. These standards are subject to
interpretation by the Department of Education. A significant
purchase or disposition of our voting stock in the future,
including a disposition of our voting stock by Robert
Buckingham’s partnership or living trust, could be determined
by the Department of Education to be a change in control under this
standard. The potential adverse effects of a change in control
could influence future decisions by us and our stockholders
regarding the sale, purchase, transfer, issuance or redemption of
stock. In addition, the adverse regulatory effect of a change in
control also could discourage bids for our common stock and could
have an adverse effect on the market price of our common
stock.
Item
1A. Risk Factors.
The following risk factors and other information included in this
Form 10-K should be carefully considered. The risks and
uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or
that we currently believe are not material may also adversely
affect our business, financial condition, operating results, cash
flows and prospects.
Risks
Related to the Extensive Regulation of our Business
If we fail to comply with the extensive regulatory requirements
governing our university, we could incur significant monetary
liabilities, fines and penalties, including loss of access to
federal student loans and grants for our students, on which we are
substantially dependent.
For our
fiscal year ended May 31, 2018, we derived approximately 82.1% of
our revenues (calculated on a cash basis) from federal student
financial aid programs, known as Title IV programs, administered by
the United States Department of Education, or the Department of
Education
.
A significant
percentage of our students rely on the availability of Title IV
program funds to finance their cost of attending NAU. To
participate in Title IV programs, a postsecondary institution must
be authorized by the appropriate state education agency or
agencies, be accredited by an accrediting commission recognized by
the Department of Education, and be certified as an eligible
institution by the Department of Education. In addition,
NAU’s operations and programs are regulated by other state
education agencies and additional accrediting commissions. We are
subject to extensive regulation by the education agencies of
multiple states, the HLC, which is our institutional accrediting
commission, various specialized accrediting commissions, and the
Department of Education. These regulatory requirements cover the
vast majority of our operations, including our educational
programs, instructional and administrative staff, administrative
procedures, marketing, student recruiting and admissions, and
financial operations. These regulatory requirements also affect our
ability to open additional schools and locations, add new
educational programs, change existing educational programs and
change our ownership structure.
The
agencies and commissions that regulate our operations periodically
revise their requirements and modify their interpretations of
existing requirements.
Regulatory
requirements are not always precise and clear, and regulatory
agencies may sometimes disagree with the way we interpret or apply
these requirements. Any misinterpretation by us of regulatory
requirements could adversely affect our business, financial
condition and results of operations. If we fail to comply with any
of these regulatory requirements, we could suffer financial
penalties, limitations on our operations, loss of accreditation,
termination of or limitations on our ability to grant degrees and
certificates, or limitations on or termination of our eligibility
to participate in Title IV programs, each of which could materially
affect our business, financial condition and results of operations.
In addition, if we are charged with regulatory violations, our
reputation could be damaged, which could have a negative impact on
our enrollments and materially affect our business, financial
condition and results of operations. We cannot predict with
certainty how all of these regulatory requirements will be applied,
or whether we will be able to comply with all of the applicable
requirements in the future.
If we
lose our eligibility to participate in Title IV programs for any
reason, we would experience a dramatic and adverse decline in
revenue, financial condition, results of operations and future
growth prospects. Furthermore, we would be unable to continue our
business as it currently is conducted, which would be expected to
have a material effect on our ability to continue as a going
concern.
Congress may revise the laws governing Title IV programs or reduce
funding for those programs which could reduce our enrollment and
revenue and increase costs of operations.
Political and
budgetary concerns significantly affect Title IV programs. The
Higher Education Act of 1965, as amended (the “HEA”),
which is a federal law that governs Title IV programs, must be
periodically reauthorized by Congress and was most recently
reauthorized in August 2008. Congress also must determine funding
levels for Title IV programs on an annual basis and can change the
laws governing Title IV programs at any time. Apart from Title IV
programs, eligible veterans and military personnel may receive
educational benefits for the pursuit of higher education. A
reduction in federal funding levels for Title IV programs, or for
programs providing educational benefits to veterans and military
personnel, could reduce the ability of some students to finance
their education. We cannot predict with certainty the nature of any
new regulatory requirements, other future revisions to the law or
funding levels for Title IV programs. Because a significant
percentage of our revenue is and is expected to be derived from
Title IV programs, any action by Congress that significantly
reduces Title IV program funding or the ability of us or our
students to participate in Title IV programs could have a material
effect on our enrollments, business, financial condition and
results of operations. Congressional action also may require us to
modify our practices in ways that could increase administrative
costs and reduce profit margins, which could have a material effect
on our business, financial condition, and results of
operations.
If
Congress significantly reduced the amount of available Title IV
program funding, we would attempt to arrange for alternative
sources of financial aid for our students, such as private sources.
We cannot provide assurance that one or more private organizations
would be willing or able to provide sufficient loans to students
attending one of our schools or programs, or that the interest rate
and other terms of such loans would be as favorable as Title IV
program loans or acceptable to our students or that such private
sources would be adequate to replace the full amount of the
reduction in Title IV program funding. Therefore, even if some form
of private financing sources becomes available, our enrollment
could be materially affected. In addition, private organizations
could require us to guarantee all or part of this assistance
resulting in additional costs to us. If we were to provide more
direct financial assistance to our students, we would assume
increased credit risks and incur additional costs, which could have
a material effect on our business, financial condition, and results
of operations.
On
December 13, 2017, the Committee on Education and the Workforce of
the U.S. House of Representatives approved legislation to
reauthorize the HEA. If enacted in its current form, this
legislation would substantially amend the HEA, including changes to
Title IV programs and provisions governing institutional
participation therein. We cannot predict when or whether the full
House of Representatives will vote on the legislation, nor when or
whether similar legislation will be considered by the U.S. Senate.
Furthermore, we cannot predict with any certainty the outcome of
the HEA reauthorization process nor the extent to which any
legislation, if adopted, could materially affect our business,
financial condition, and results of operations.
New rulemaking by the Department of Education could result in
regulatory changes that could reduce our enrollment and revenue,
increase costs of operations, and adversely affect our
business.
Negotiated
rulemaking is a process whereby the Department of Education
consults with members of the postsecondary education community to
identify issues of concern and attempts to agree on proposed
regulatory revisions to address those issues before the Department
of Education formally proposes any regulations. If the Department
of Education and negotiators cannot 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. In recent years, the
Department of Education has held negotiated rulemaking sessions and
published regulations on various topics, as described further in
“Item 1 – Business – Regulatory Matters –
Changes in Department of Education Regulations.”
We
cannot predict with certainty when or whether the Department of
Education will propose or finalize regulations on topics that may
impact us, or the impact of any regulations resulting from the
Department of Education’s current or future rulemaking
activities. In addition, Congress may promulgate legislation, and
the executive branch may issue executive orders which would impact
us. Any such actions could reduce our enrollments, increase our
cost of doing business, and have a material effect on our business.
In addition, 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.
The recently increased focus by Congress on the for-profit
education sector could result in legislation or further Department
of Education rulemaking restricting Title IV program participation
by proprietary schools in a manner that could materially affect our
business.
In
recent years, Congress has placed increased focus on the role that
for-profit educational institutions play in higher education, which
is described further in “Item 1 – Business –
Regulatory Matters – Changes in Department of Education
Regulations.” As described above, the HELP Committee and
other Congressional members and committees have scrutinized various
aspects of the education industry, including student debt, student
recruiting, student outcomes and accreditation matters. The HELP
Committee held a series of hearings on the proprietary education
sector and released a report in July 2012, which could lead to
further investigations of proprietary schools and additional
regulations promulgated by the Department of Education. The
executive branch and the Department of Defense have also increased
their focus on the provision of educational benefits for military
personnel and veterans.
We
cannot predict whether, or the extent to which, these hearings,
reports and review will result in legislation or further rulemaking
affecting our participation in Title IV programs. To the extent
that any laws or regulations are adopted that limit our
participation in Title IV programs or the amount of student
financial aid for which the students at our institutions are
eligible, our enrollments, revenues and results of operation could
be materially affected. Any actions that change the requirements
for our participation in Title IV Programs or the amount of student
financial aid for which our students are eligible would negatively
impact our business.
Recent statutory and regulatory changes substantially increased
reporting and other requirements that could impair our reputation
and adversely affect our enrollments. Our failure to comply with or
accurately interpret pertinent disclosure requirements may subject
us to penalties and other sanctions.
The
most recent reauthorization of the Higher Education Act, in August
2008, contains numerous revisions to the requirements governing
Title IV programs. Among other things, institutions participating
in Title IV programs are subject to extensive additional reporting
and disclosure requirements. Additionally, the Department of
Education’s gainful employment regulations require a number
of specific disclosures to students and prospective students
regarding our educational programs. Such disclosures include the
occupations that NAU’s educational programs prepare students
to enter upon completing their program, total program costs and
median student debt incurred for our programs, along with program
completion and placement rates for our programs. Any failure by us
to properly interpret these new requirements could subject us to
limitation, suspension or termination of our eligibility to
participate in Title IV programs, the imposition of conditions on
our participation in Title IV programs, monetary liabilities, fines
and penalties or other sanctions imposed by the Department of
Education, which could have a material effect on our business,
financial condition and results of operations. The prospect of such
sanctions may cause us to conservatively interpret the new
reporting requirements of Title IV programs by the Department of
Education, which may limit our flexibility in operating our
business.
If any of the education regulatory agencies or commissions that
regulate us do not approve or delay any required approvals of
transactions involving a change of control, our ability to operate
or participate in Title IV programs may be impaired.
If we
experience a change in control under the standards of the
Department of Education, the HLC, any applicable state educational
licensing agency, or any specialized accrediting agency commission,
we must notify or seek the approval of each such agency. These
agencies do not have uniform criteria for what constitutes a change
in control. Transactions or events that typically constitute a
change in control include significant acquisitions or dispositions
of the voting stock of an institution or its parent company, and
significant changes in the composition of the board of directors of
an institution or its parent company. Some of these transactions or
events may be beyond our control. Our failure to obtain, or a delay
in receiving, approval of any change in control from the Department
of Education, the HLC or applicable state educational licensing
agencies could impair our ability to operate or participate in
Title IV programs, which could have a material effect on our
business, financial condition and results of operations. Failure to
obtain, or a delay in receiving, approval of any change in control
from any state in which we are currently licensed or authorized, or
from any of our specialized accrediting commissions, could require
us to suspend our activities in that state or suspend offering the
applicable programs until we receive the required approval, or
could otherwise impair our operations. The potential adverse
effects of a change in control could influence future decisions by
us and our stockholders regarding the sale, purchase, transfer,
issuance or redemption of our stock, which could discourage bids
for outstanding shares of the stock and could have an adverse
effect on the market price of our shares.
We cannot offer new programs, expand our operations into certain
states or acquire additional schools if such actions are not
approved by the applicable regulatory and accrediting agencies, and
we may have to repay Title IV funds disbursed to students enrolled
in any such programs, schools or states if we do not obtain prior
approval.
Our
expansion plans include offering new educational programs,
expanding operations in additional states and potentially acquiring
existing schools from other companies. If we are unable to obtain
the necessary approvals for such new programs, operations or
acquisitions from the Department of Education, the HLC or any
applicable state educational licensing agency or accrediting
commission, or if we are unable to obtain such approvals in a
timely manner, our ability to consummate the planned actions and
provide Title IV program funds to any affected students would be
impaired, which could have a material effect on our expansion plans
and growth. If we were to determine erroneously that any such
action did not need approval or that we had obtained all required
approvals, including all required approvals for each of our current
programs and locations, we could be liable for repayment of Title
IV program funds provided to students in that program or at that
location.
If the Department of Education does not recertify us to continue
participating in Title IV programs, our students would lose their
access to Title IV program funds, or we could be recertified but
required to accept significant limitations as a condition of our
continued participation in Title IV programs.
The
Department of Education certification to participate in Title IV
programs lasts a maximum of six years, and institutions are
required to seek recertification from the Department of Education
on a regular basis to continue their participation in Title IV
programs. An institution must also apply for recertification by the
Department of Education if it undergoes a change in control, as
defined by Department of Education regulations, and may be subject
to similar review if it expands its operations or educational
programs in certain ways. Generally, the recertification process
includes a review by the Department of Education of the
institution’s educational programs and locations,
administrative capability, financial responsibility and other
oversight categories. The Department of Education could limit,
suspend or terminate an institution’s participation in Title
IV programs for violations of the Higher Education Act or Title IV
regulations. Our current certification to participate in the Title
IV programs became effective in June 2013 and extends through March
31, 2019. There can be no assurance that the Department of
Education will recertify us after our current period of
certification or that it would not impose restrictions in
connection with any such recertification. In addition, the
Department of Education may take emergency action to suspend our
certification without advance notice if it receives reliable
information that we are violating Title IV requirements and it
determines that immediate action is necessary to prevent misuse of
Title IV funds. If the Department of Education does not renew or
withdraws our certification to participate in Title IV programs at
any time, our students would no longer be able to receive Title IV
program funds. Similarly, the Department of Education could renew
our certification, but restrict or delay our students’
receipt of Title IV funds, limit the number of students to whom it
could disburse such funds or impose other restrictions. Any of
these outcomes could have a material effect on NAU’s
enrollments and our business, financial condition and results of
operations.
We would lose our ability to participate in Title IV programs if we
fail to maintain our institutional accreditation, and our student
enrollments could decline if we fail to maintain any of our
accreditations or approvals.
An
institution must be accredited by a postsecondary accrediting
commission recognized by the Department of Education to participate
in Title IV programs. We have been granted institutional
accreditation by the HLC, which is a regional accrediting agency
recognized by the Department of Education. To remain accredited, we
must continuously meet accreditation standards relating to, among
other things, performance, governance, institutional integrity,
educational quality, faculty, administrative capability, resources
and financial stability. Our accreditation by the HLC was most
recently continued in January 2015. In addition, many of our
individual educational programs are also accredited by specialized
accrediting commissions or approved by specialized state agencies.
If we fail to satisfy the standards of any of those specialized
accrediting commissions or state agencies, we could lose the
specialized accreditation or approval for the affected programs,
which could result in materially reduced student enrollments in
those programs and have a material effect on our business,
financial condition and results of operations.
If we fail to maintain any of our state authorizations, we would
lose our ability to operate in that state and for campuses in the
state to participate in Title IV programs.
We
operate physical facilities offering educational programs in South
Dakota, Colorado, Indiana, Kansas, Minnesota, Missouri, Nebraska,
New Mexico, Oklahoma and Texas. To maintain our state
authorizations, we must continuously meet standards relating to,
among other things, educational programs, facilities, instructional
and administrative staff, marketing and recruitment, financial
operations, addition of new locations and educational programs and
various operational and administrative procedures. We may need to
apply for additional authorization in these or other states in
which we are authorized in order to comply with the Department of
Education’s state authorization requirements, and the
authorization process could result in unexpected delays or other
setbacks that could jeopardize our Title IV eligibility. If we fail
to satisfy any of these standards, we could lose our authorization
from the applicable state educational agency to offer educational
programs and could be forced to cease operations in such state.
Such a loss of authorization would also cause our physical campus
in the state to lose eligibility to participate in Title IV
programs. Some states may also prescribe financial regulations that
are different from those of the Department of Education and many
require the posting of surety bonds. If we fail to comply with
state licensing requirements, we may lose our state licensure or
authorizations. If we lose state licensure in a state in which we
have a physical location, we would also lose Title IV eligibility
in that state. Any such event could have a material effect on our
business, financial condition and results of
operations.
On
December 19, 2016, the Department of Education published final
regulations regarding state authorization for programs offered
through distance education and state authorization for foreign
locations of institutions. Among other provisions, these final
regulations require that an institution participating in the Title
IV federal student aid programs and offering postsecondary
education through distance education be authorized by each state in
which the institution enrolls students, if such authorization is
required by the state. These final regulations, which became
effective July 1, 2018, are further described in See “Item 1
– Business – Regulation of Federal Financial Aid
Programs – State Authorization.” Independent of this
matter of federal regulation, several states have asserted
jurisdiction over educational institutions offering online programs
that have no physical location or other presence in the state, but
that have some activity in the state, such as enrolling or offering
educational services to students who reside in the state,
conducting practice or sponsoring internships in the state,
employing faculty who reside in the state or advertising to or
recruiting prospective students in the state. Thus, our activities
in certain states constitute a presence requiring licensure or
authorization under requirements of state law, regulation or policy
of the state educational agency, even though we do not have a
physical facility in such states. Therefore, in addition to the
states where we maintain physical facilities, we have either
obtained approvals or exemptions, or are currently in the process
of obtaining such approvals or exemptions, that we believe are
necessary in connection with our activities that may constitute a
presence in such states requiring licensure or authorization by the
state educational agency based on the laws, rules or regulations of
that state. Notwithstanding our efforts to obtain approvals or
exemptions, state regulatory requirements for online education vary
among the states, are not well developed in many states, are
imprecise or unclear in some states and can change frequently.
Because we enroll students in online programs in all 50 states and
the District of Columbia, we expect that regulatory authorities in
other states where we are not currently licensed or authorized may
request that we seek additional licenses or authorizations for
these institutions in their states in the future. In recent years
several states have voluntarily entered into State Authorization
Reciprocity Agreements (“SARA”) that establish
standards for interstate offering of post-secondary distance
education courses and programs. If an institution’s home
state participates in SARA and authorizes the institution to
provide distance education in accordance with SARA standards, then
the institution need not obtain additional authorizations for
distance education from any other SARA member state. The SARA
participation requirements and process are administered by the four
regional higher education compacts in the United States (the
Midwestern Higher Education Compact, the New England Board of
Higher Education, the Southern Regional Education Board and the
Western Interstate Commission for Higher Education) and are
overseen by the National Council for State Authorization
Reciprocity Agreements. NAU is approved to participate in SARA,
through the SARA Coordinator of the South Dakota Board of Regents
as a state portal agency with its most recent approval effective
from April 20, 2018 through April 19, 2019.
If we
fail to comply with state licensing or authorization requirements
for a state, or fail to obtain licenses or authorizations when
required, we could lose state licensure or authorization by that
state, which could prohibit us from recruiting prospective students
or offering services to current students in that state. We could
also be subject to other sanctions, including restrictions on
activities in that state, fines and penalties. We review the
licensure requirements of other states when we believe that it is
appropriate to determine whether our activities in those states may
constitute a presence or otherwise may require licensure or
authorization by the respective state education agencies. New laws,
regulations or interpretations related to offering educational
programs online could increase our cost of doing business and
affect our ability to recruit students in particular states, which
could, in turn, adversely affect our enrollments and revenues and
have a material effect on our business.
If we do not comply with the Department of Education’s
“administrative capability” standards, we could suffer
financial penalties, be required to accept other limitations to
continue participating in Title IV programs or lose our eligibility
to participate in Title IV programs.
Department of
Education regulations specify extensive criteria an institution
must satisfy to establish that it has the requisite
“administrative capability” to participate in Title IV
programs. These criteria require, among other things, that
we:
●
comply with all
applicable Title IV program regulations;
●
have capable and
sufficient personnel to administer the federal student financial
aid programs;
●
not have student
loan cohort default rates in excess of specified
levels;
●
have acceptable
methods of defining and measuring the satisfactory academic
progress of our students;
●
have various
procedures in place for safeguarding federal funds;
●
not be, and not
have any principal or affiliate who is, debarred or suspended from
federal contracting or engaging in activity that is cause for
debarment or suspension;
●
provide financial
aid counseling to our students;
●
refer to the
Department of Education’s Office of Inspector General any
credible information indicating that any applicant, student,
employee or agent of the institution has been engaged in any fraud
or other illegal conduct involving Title IV programs;
●
submit in a timely
manner all reports and financial statements required by Title IV
regulations; and
●
not otherwise
appear to lack administrative capability.
If an
institution fails to satisfy any of these criteria or comply with
any other Department of Education regulations, the Department of
Education may:
●
require the
institution to repay Title IV program funds;
●
transfer the
institution from the “advance” system of payment of
Title IV program funds to cash monitoring status or to the
“reimbursement” system of payment;
●
place the
institution on provisional certification status; or
●
commence a
proceeding to impose a fine or to limit, suspend or terminate the
participation of the institution in Title IV programs.
If we
were found not to have satisfied the Department of
Education’s “administrative capability”
requirements, we could be limited in our access to, or lose, Title
IV program funding, which could significantly reduce our
enrollments and have a material effect on our business, financial
condition and results of operations.
The Department of Education may adopt regulations governing federal
student loan debt forgiveness that could result in liability for
amounts based on borrower defenses or affect the Department of
Education’s assessment of our institutional
capability.
On
November 1, 2016, the Department of Education published final
regulations that among other provisions, establish new standards
and processes for determining whether a Direct Loan Program
borrower has a defense to repayment on a loan due to acts or
omissions by the institution at which the loan was used by the
borrower for educational expenses. These final regulations (the
“2016 Borrower Defense Final Rule”) were published with
an effective date of July 1, 2017. Among other topics, the 2016
Borrower Defense Final Rule establishes permissible borrower
defense claims for discharge, procedural rules under which claims
will be adjudicated, time limits for borrowers’ claims, and
guidelines for recoupment by the Department of Education of
discharged loan amounts from institutions of higher education. The
2016 Borrower Defense Final Rule also prohibits schools from using
any pre-dispute arbitration agreements, prohibits schools from
prohibiting relief in the form of class actions by student
borrowers, and invalidates clauses imposing requirements that
students pursue an internal dispute resolution process before
contacting authorities regarding concerns about an institution. For
proprietary institutions, the 2016 Borrower Defense Final Rule
describes the threshold for loan repayment rates that will require
specific disclosures to current and prospective students and the
applicable loan repayment rate methodology. The 2016 Borrower
Defense Final Rule also establishes important new financial
responsibility and administrative capacity requirements for both
not-for-profit and for-profit institutions participating in the
Title IV programs. For example, certain events would automatically
trigger the need for a school to obtain a letter of credit,
including for publicly traded institutions, if the SEC warns the
school that it may suspend trading on the school’s stock, the
school failed to timely file a required annual or quarterly report
with the SEC, or the exchange on which the stock is traded notifies
the school that it is not in compliance with exchange requirements
or the stock is delisted. Other events would will require a
recalculation of an institution’s composite score of
financial responsibility, including, for a proprietary institution
whose score is less than 1.5, any withdrawal of an owner's equity
by any means, including by declaring a dividend, unless the equity
is transferred within the affiliated entity group on whose basis
the composite score was calculated. The 2016 Borrower Defense Final
Rule also sets forth events that are discretionary triggers for
letters of credit, meaning that if any of them occur, the
Department of Education may choose to require a letter of credit,
increase an existing letter of credit requirement or demand some
other form of surety from the institution. The 2016 Borrower
Defense Final Rule provides that if an institution fails to meet
the composite score requirement for longer than three years under
provisional certification, the Department of Education may mandate
additional financial protection from the institution or any party
with “substantial control” over the institution. Such
parties with “substantial control” must agree to
jointly and severally guarantee the Title IV program liabilities of
the institution at the end of the three-year provisional
certification period. Under current regulations, a party may be
deemed to have "substantial control" over an institution if, among
other factors, the party directly or indirectly holds an ownership
interest of 25% or more of an institution, or is a member of the
board of directors, a general partner, the chief executive officer
or other executive officer of the institution.
On June
15, 2017, the Department of Education announced an indefinite delay
to its implementation of the 2016 Borrower Defense Final Rule, and
on June 16, 2017 published a notice of intent to establish a
negotiated rulemaking committee to develop proposed revisions to
the rule. On August 30, 2017, the Department of Education published
a Federal Register notice requesting nominations for individuals to
serve on this negotiated rulemaking committee, and on October 24,
2017, the Department of Education promulgated an interim final rule
under which the effective date of most substantive provisions of
the 2016 Borrower Defense Final Rule were delayed until July 1,
2019. The negotiated rulemaking committee sessions occurred in
November 2017, January 2018, and February 2018, during which the
Department of Education and negotiators failed to reach consensus
on a revised regulation. Additionally, on July 6, 2017, the
attorneys general of 18 states and the District of Columbia filed
suit against the Department of Education claiming that its delay of
the 2016 Borrower Defense Final Rule violated applicable law,
including the Administrative Procedure Act. On September 12, 2018,
the U.S. District Court for the District of Columbia issued a
decision concluding that the above-describeddelay of the 2016
Borrower Defense Final Rule was improper. The Court further ordered
additional oral argument on the matter of remedies, and thus has
not yet entered or finalized a remedial order in connection with
its decision. The Department of Education may appeal the
court’s decision and any subsequent remedial order. We
therefore cannot predict with any certainty the final outcome or
impact of this litigation.
On July
31, 2018, the Department of Education published in the Federal
Register a proposed rule (the “2018 Borrower Defense Proposed
Rule”) which would replace most substantive provisions of the
2016 Borrower Defense Final Rule. The 2018 Borrower Defense
Proposed Rule would establish a federal standard for individual
borrowers to raise as a defense to repaying loans disbursed on or
after July 1, 2019. This proposed regulation would permit borrowers
to challenge repayment of loans based on misrepresentation, defined
to include acts or omissions by an institution which are false,
misleading or deceptive, and which are made with knowledge of their
falsity, deception, or misleading nature, or with reckless
disregard for the truth. The 2018 Borrower Defense Proposed Rule
seeks comment as to whether such a defense may be raised
affirmatively or may only arise defensively, out of a collection
action. The proposed regulation also would establish a five-year
window following a final decision on borrower defense for the
Department of Education to seek recoupment from an institution. The
2018 Borrower Defense Proposed Rule would permit schools to use
class-action waivers and pre-dispute arbitration agreements, but
would require schools to provide additional disclosures and
borrower counseling when including such provisions in enrollment
agreements. The 2018 Borrower Defense Proposed rule also sets forth
automatic and discretionary triggers under which the Department of
Education may require the school to provide a letter of credit,
cash, or other form of surety, or may agree to provide surety
through an offset of future Title IV funds for a six-to-twelve
month period. For example, certain events would automatically
trigger the need for a school to obtain a letter of credit or other
surety, including for publicly traded institutions, if the SEC
warns the school that it may suspend trading on the school’s
stock, the school failed to timely file a required annual or
quarterly report with the SEC, or the exchange on which the stock
is traded notifies the school that it is not in compliance with
exchange requirements or the stock is delisted. Other events would
require a recalculation of an institution’s composite score
of financial responsibility including, for a proprietary
institution whose score is less than 1.5, any withdrawal of an
owner’s equity by any means, including by declaring a
dividend, unless the equity is transferred within the affiliated
group on whose basis the composite score was calculated; or for any
institution, the incursion of a borrower defense liability which
reduces the institution’s composite score to under 1.0. The
2018 Borrower Defense Proposed Rule also sets forth events that are
discretionary triggers for letters of credit or other forms of
surety, meaning that if any of them occur, the Department of
Education may choose to require a letter of credit, increase an
existing letter of credit requirement or demand some other form of
surety from the institution. The 2018 Borrower Defense Proposed
Rule also includes provisions regarding the treatment of operating
leases in the financial responsibility composite score methodology,
would more specifically define and require disclosures concerning
the composite score’s inclusion of debt obtained for
long-term purposes, and would revise limited aspects of the
composite score formula to account for changes in accounting
terminology. Following a 30-day public comment period, the
Department of Education is expected to issue a final rule by
November 1, 2018, taking effect July 1, 2019. We cannot predict the
extent to which that final rule may differ from the 2018 Borrower
Defense Proposed Rule, or may differ from the previously
promulgated 2016 Borrower Defense Final Rule, or the impact that
any such revised rule might have on our business. Any regulation
that increases potential borrower defense liabilities or affects
the Department of Education’s assessment of our institutional
capability could have a material effect on our business, financial
condition and results of operations.
If we do not meet specific financial responsibility standards
established by the Department of Education, we may be required to
post a letter of credit or accept other limitations to continue
participating in Title IV programs, or we could lose our
eligibility to participate in Title IV programs.
To
participate in Title IV programs, an eligible institution must
satisfy specific measures of financial responsibility prescribed by
the Department of Education, or post a letter of credit in favor of
the Department of Education and possibly accept other conditions on
its participation in Title IV programs. These financial
responsibility tests are applied to each institution on an annual
basis based on the institution’s audited financial
statements, and may be applied at other times, such as if the
institution undergoes a change in control. The Department of
Education may also apply such measures of financial responsibility
to the operating company and ownership entities of an eligible
institution and, if such measures are not satisfied by the
operating company or ownership entities, require the institution to
post a letter of credit in favor of the Department of Education and
possibly accept other conditions on its participation in Title IV
programs. The operating restrictions that may be placed on an
institution that does not meet the quantitative standards of
financial responsibility include being transferred from the
“advance payment” method of receiving Title IV program
funds to either the “reimbursement” or the
“heightened cash monitoring” system, which could result
in a significant delay in the institution’s receipt of those
funds. Limitations on, or termination of, our participation in
Title IV programs as a result of our failure to demonstrate
financial responsibility would limit our students’ access to
Title IV program funds, which could significantly reduce
enrollments and have a material effect on our business, financial
condition and results of operations.
As
described in more detail under “Item 1 – Business -
Regulatory Matters — Regulation of Federal Student Aid
Programs — Financial Responsibility,” the Department of
Education annually assesses our financial responsibility through a
composite score determination. Our audited financial statements for
the fiscal year ended May 31, 2017 indicated our composite score
was 1.8, respectively, which is sufficient to be deemed financially
responsible under the Department of Education’s requirements.
Our audited financial statements for the fiscal year ended May 31,
2018 indicate our composite score is 1.3. This score is subject to
a final determination by the Department of Education once it
receives and reviews our consolidated audited financial statements
for the 2018 fiscal year, but we believe it is likely that the
Department of Education will determine that we are “in the
zone” and that we will be required to operate under the
“zone alternative” requirements as well as any other
requirements that the Department of Education might impose in its
discretion. If we are unable to meet the minimum composite score or
to comply with the other standards of financial responsibility, and
could not post a required letter of credit or comply with the
alternative bases for establishing financial responsibility, then
our students could lose their access to Title IV program
funding.
On
November 1, 2016, as part of the 2016 Borrower Defense Final Rule,
the Department of Education adopted final regulations that revise
its general standards of financial responsibility to include
various actions and events that would require institutions to
provide the Department of Education with irrevocable letters of
credit. On June 15, 2017, the Department of Education announced an
indefinite delay to its implementation of the 2016 Borrower Defense
Final Rule, and on June 16, 2017 published a notice of intent to
establish a negotiated rulemaking committee to develop proposed
revisions to the rule. Additionally, on July 6, 2017, the attorneys
general of 18 states and the District of Columbia filed suit
against the Department of Education claiming that its delay of the
2016 Borrower Defense Final Rule violated applicable law, including
the Administrative Procedure Act. On September 12, 2018, the U.S.
District Court for the District of Columbia issued a decision
concluding that the above-described delay of the 2016 Borrower
Defense Final Rule was improper. The Court further ordered
additional oral argument on the matter of remedies, and thus has
not yet entered or finalized a remedial order in connection with
its decision. The Department of Education may appeal the
court’s decision and any subsequent remedial order. We
therefore cannot predict with any certainty the final outcome or
impact of this litigation. In addition, on August 30, 2017, the
Department of Education published a Federal Register notice
requesting nominations for individuals to serve on this negotiated
rulemaking committee, and on October 24, 2017, the Department of
Education promulgated an interim final rule under which the
effective date of most substantive provisions of the 2016 Borrower
Defense Final Rule were delayed until July 1, 2019. The rulemaking
committee sessions occurred in November 2017, January 2018, and
February 2018, during which the Department of Education and
negotiators failed to reach consensus on a revised
regulation.
On July
31, 2018, the Department of Education published in the Federal
Register the 2018 Borrower Defense Proposed Rule, which would
replace most substantive provisions of the 2016 Borrower Defense
Final Rule. For additional information regarding the 2016 Borrower
Defense Final Rule and the 2018 Borrower Defense Proposed Rule, see
“— The Department of Education may adopt regulations
governing federal student loan debt forgiveness that could result
in liability for amounts based on borrower defenses or affect the
Department of Education’s assessment of our institutional
capability.” We cannot predict with certainty the timing or
substance of any future regulations concerning financial
responsibility standards for Title IV program participation, nor
the impact that such regulations might have on our business. Any
Department of Education regulations that require NAU to post
letters of credit or accept other limitations to continue
participating in Title IV programs could materially affect our
business, financial condition and results of
operations.
We may lose our eligibility to participate in the federal student
financial aid programs if the percentage of our revenues derived
from Title IV programs is too high.
A
provision of the Higher Education Act commonly referred to as the
90/10 Rule, as amended in August 2008, provides that a for-profit
educational institution loses its eligibility to participate in
Title IV programs if, under a complex regulatory formula that
requires cash basis accounting and other adjustments to the
calculation of revenue, the institution derives more than 90% of
its revenues from Title IV program funds for any two consecutive
fiscal years. An institution that derives more than 90% of its
revenue (on a cash basis) from Title IV programs for any single
fiscal year will be placed on provisional certification for at
least two fiscal years and may be subject to additional conditions
or sanctions imposed by the Department of Education. During the
period of provisional certification, the institution must comply
with any additional conditions included in the institution’s
program participation agreement with the Department of Education.
In addition, the Department of Education may more closely review an
institution that is provisionally certified if it applies for
recertification or approval to open a new location, add an
educational program, acquire another school or make any other
significant change. If the Department of Education determines that
a provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, the
Department of Education may seek to revoke the institution’s
certification to participate in Title IV programs without advance
notice or opportunity for the institution to challenge the action.
If we were to violate the 90/10 Rule, we would become ineligible to
participate in Title IV programs as of the first day of the fiscal
year following the second consecutive fiscal year in which we
exceeded the 90% threshold and would be unable to regain
eligibility for two fiscal years thereafter. Under regulations that
were published by the Department of Education in October 2009, a
proprietary institution must disclose in a footnote to its annual
audited financial statements its 90/10 calculation and the amounts
of the federal and non-federal revenues, by source, included in its
90/10 calculation. The certified public accountant that prepares
the institution’s audited financial statements is required to
review that information and test the institution’s
calculation. For our 2018, 2017 and 2016 fiscal years, we derived
approximately 82.1%, 82.6% and 86.8%, respectively, of our revenues
(calculated on a cash basis) from Title IV program funds. If we
violate the 90/10 Rule and continue to disburse Title IV program
funds to students after the effective date of our loss of
eligibility to participate in Title IV programs, we would be
required to return those funds to the Department of Education. We
are exploring the feasibility of various potential measures that
would be intended to reduce the percentage of NAU’s cash
basis revenue attributable under the 90/10 Rule to Title IV Program
funds. Among other things, we expect to expand our non-Title IV
continuing education programming. If we were to violate the 90/10
Rule, we would become ineligible to participate in Title IV
programs as of the first day of the fiscal year following the
second consecutive fiscal year in which we exceeded the 90% Title
IV program funds threshold and would be unable to regain
eligibility for two fiscal years thereafter.
Increases in Title
IV grant and loan limits currently or in the future may result in
an increase in the revenues we receive from Title IV programs.
Further, a significant number of states in which we operate have
faced budget constraints, which have caused or may cause them to
reduce state appropriations in a number of areas, including with
respect to the amount of financial assistance provided to
postsecondary students, which could further increase our percentage
of revenues derived from Title IV program funds. Also, the
employment circumstances of our students or their parents could
also increase reliance on Title IV program funds. Furthermore, from
time to time, legislation is introduced that would make a
proprietary institution ineligible to participate in Title IV
programs if it derives more than 85% of its revenues from federal
funds, including Title IV programs, revenues from the GI Bill and
Department of Defense Tuition Assistance funds. We are exploring
the feasibility of various potential measures that would be
intended to reduce the percentage of NAU’s cash basis revenue
attributable under the 90/10 Rule to Title IV Program funds.
Certain measures that could be taken to maintain compliance with
the 90/10 Rule may reduce our revenues, increase our operating
expenses, or both, perhaps significantly. If we become ineligible
to participate in Title IV programs as a result of noncompliance
with the 90/10 Rule, it can be expected to have a material effect
on our business, financial condition and results of
operations.
We may lose our eligibility to participate in Title IV programs if
our student loan default rates are too high.
An
educational institution may lose its eligibility to participate in
Title IV programs if, for three consecutive years, 30% or more of
its students who were required to begin repayment on their student
loans in the relevant fiscal year default on their payment by the
end of the next federal fiscal year or the subsequent fiscal year.
In addition, an institution may lose its eligibility to participate
in Title IV programs if the default rate of its students exceeds
40% for any single year.
The
Department of Education generally publishes draft cohort default
rates in February of each year for the prepayment period that ended
the prior September. Draft cohort default rates do not result in
sanctions, are subject to subsequent data corrections and appeals
by an institution, and can change between their issuance to
institutions and the Department of Education’s release of
official cohort default rates, which are typically issued annually
in September. Our official cohort default rates for federal fiscal
years 2014 and 2013 are 24.1% and 23.4%, respectively. The draft
cohort rate for federal fiscal year 2015 is 23.7%. Any increase in
interest rates or reliance on “self-pay” students, as
well as declines in income or job losses for our students, could
contribute to higher default rates on student loans. Exceeding the
student loan default rate thresholds and losing eligibility to
participate in Title IV programs would have a material effect on
our business, financial condition and results of operations. Any
future changes in the formula for calculating student loan default
rates, economic conditions or other factors that cause our default
rates to increase, could place us in danger of losing our
eligibility to participate in Title IV programs, which would have a
material effect on our business, financial condition and results of
operations.
We would be subject to sanctions if we were to pay impermissible
commissions, bonuses or other incentive payments to individuals
involved in certain recruiting, admission or financial aid
activities.
The
Higher Education Act prohibits an educational institution that
participates in Title IV programs from making any commission, bonus
or other incentive payments based directly or indirectly on
securing enrollments or financial aid to any persons or entities
involved in student recruiting or admissions activities, or in
making decisions about the award of student financial assistance.
The statutory prohibition against incentive compensation applies to
any person engaged in student recruitment or admissions activities
or in making financial aid award decisions, and any higher level
employees with responsibility for such activities. Since July 1,
2011, the Department of Education’s implementing regulations
have effectively deemed any commission, bonus or other incentive
compensation based in any part, directly or indirectly, on securing
enrollment or awarding financial aid to be inconsistent with the
statutory prohibition against incentive compensation payments. The
Department of Education also issued a “Dear Colleague”
letter in March 2011, providing additional guidance regarding the
scope of the prohibition on incentive compensation and to what
employees and types of activities the prohibition applies. The July
1, 2011 revisions to the Department of Education’s
regulations required us to change our compensation practices and
has had and will continue to have a significant impact on the rate
at which students enroll in our programs and on our business,
financial condition and results of operations.
In
addition, in recent years, other postsecondary educational
institutions have been named as defendants to whistleblower
lawsuits, known as “qui tam” cases, brought by current
or former employees pursuant to the Federal False Claims Act,
alleging that their institution’s compensation practices did
not comply with the incentive compensation rule. A qui tam case is
a civil lawsuit brought by one or more individuals, referred to as
a relator, on behalf of the federal government for an alleged
submission to the government of a false claim for payment. The
relator, often a current or former employee, is entitled to a share
of the government’s recovery in the case, including the
possibility of treble damages. A qui tam action is always filed
under seal and remains under seal until the government decides
whether to intervene in the case. If the government intervenes, it
takes over primary control of the litigation. If the government
declines to intervene in the case, the relator may nonetheless
elect to continue to pursue the litigation at his or her own
expense on behalf of the government. Any such litigation could be
costly and could divert management’s time and attention away
from the business, regardless of whether a claim has
merit.
We are subject to sanctions if we fail to correctly calculate and
timely return Title IV program funds for students who withdraw
before completing their educational program.
An
institution participating in Title IV programs must calculate the
amount of unearned Title IV program funds that it has disbursed to
students who withdraw from their educational programs before
completing such programs and must return those unearned funds to
the appropriate lender or the Department of Education in a timely
manner, generally within 45 days of the date the institution
determines that the student has withdrawn. If the unearned funds
are not properly calculated and timely returned for a sufficient
percentage of students, we may have to post a letter of credit in
favor of the Department of Education equal to 25% of Title IV
program funds that should have been returned for such students in
the prior fiscal year, and we could be fined or otherwise
sanctioned by the Department of Education. If we do not correctly
calculate and timely return unearned Title IV program funds, we may
have to post letters of credit in favor of the Department of
Education, may be liable for repayment of Title IV funds and
related interest and may otherwise be subject to adverse actions by
the Department of Education, including termination of our
participation in Title IV programs, any of which could increase our
cost of regulatory compliance and have a material effect on our
business, financial condition and results of
operations.
If any of our educational programs fail to qualify as programs that
lead to gainful employment in a recognized occupation, it could
reduce our enrollment and revenue, increase costs of operations,
and adversely affect our business.
Under
the Higher Education Act, proprietary schools generally are
eligible to participate in Title IV programs in respect of
educational programs that lead to “gainful employment in a
recognized occupation.” Historically, the concept of
“gainful employment” has not been defined in detail. On
October 31, 2014, the Department of Education published final
regulations to define “gainful employment” which became
effective on July 1, 2015. The gainful employment regulations
define this concept using ratios, one based on annual DTE and
another based on DTI ratio. Under the gainful employment
regulations, an educational program with a DTE ratio at or below 8%
or a DTI ratio at or below 20% is considered “passing.”
An educational program with a DTE ratio greater than 8% but less
than or equal to 12% or a DTI ratio greater than 20% but less than
or equal to 30% is considered to be “in the zone.” An
educational program with a DTE ratio greater than 12% and a DTI
ratio greater than 30% is considered “failing.” An
educational program will cease to be eligible for students to
receive Title IV program funds if its DTE and DTI ratios are
failing in to out of any three consecutive award years or if both
of these rates are failing or in the zone for four consecutive
award years. On January 9, 2017, the Department of Education issued
final debt-to-earnings rates to institutions for the first gainful
employment debt measurement year. For a discussion of the
performance of our current educational programs against the
required debt measures, see “Item 1. Business –
Regulatory Matters – Regulation of Federal Student Financial
Aid Programs.”
Additionally, the
gainful employment regulations require an institution to certify to
the Department of Education that its educational programs subject
to the regulations, which include all programs offered by us, meet
the applicable requirements for graduates to be professionally or
occupationally licensed or certified in the state in which the
institution is located. If we are unable to certify that our
programs meet the applicable state requirements for graduates to be
professionally or occupationally certified in that state, then we
may need to cease offering certain programs in certain states or to
students who are residents in certain states. The gainful
employment regulations further include requirements for the
reporting of student and program data by institutions to the
Department of Education and expand the disclosure requirements that
have been in effect since July 1, 2011.
On June
16, 2017, the Department of Education published a notice of intent
to establish a negotiated rulemaking committee to develop proposed
revisions to the gainful employment regulations. On August 30,
2017, the Department of Education published a Federal Register
notice requesting nominations for individuals to serve on this
negotiated rulemaking committee, and announced that this committee
would meet for three sessions. The sessions occurred in December
2017, February 2018, and March 2018. The Department of Education
and negotiators failed to reach consensus on a revised rule, and on
August 14, 2018, the Department of Education published in the
Federal Register a proposed rule (the “Gainful Employment
Proposed Rule”) which, if enacted as a final rule, would
rescind the current gainful employment regulations applicable to
all of our educational programs. Among other things, the Gainful
Employment Proposed Rule would remove from the Department of
Education’s regulations the debt-to-earnings metric
calculations for our programs, and sanctions and alternate earnings
appeals related to those calculations, and related reporting,
disclosure, and certification requirements. In the Gainful
Employment Proposed Rule, the Department of Education also seeks
comment on whether all institutions participating in the federal
student financial aid programs should be required to disclose net
price, completion rates, withdrawal rates, program size, graduate
eligibility for state licensure, or any other items currently
required under the gainful employment regulations. Following a
30-day public comment period, the Department of Education is
expected to issue a final rule by November 1, 2018, taking effect
July 1, 2019. We cannot predict the extent to which that final rule
may differ from the Gainful Employment Proposed Rule, or may differ
from the current gainful employment regulations, or the impact that
any such revised rule might have on our business.
On July
5, 2017, the Department of Education announced that it would allow
additional time, until July 1, 2018, for institutions to comply
with certain disclosure requirements in the gainful employment
regulations. On June 15, 2018, the Department of Education further
announced that it would allow more additional time, until July 1,
2019, for institutions to comply with those disclosure
requirements. Continued compliance with the gainful employment
regulations could increase our cost of doing business, reduce our
enrollments and have a material adverse effect on our business,
financial condition, results of operations and cash
flows.
The
failure of any program or programs offered by NAU to satisfy any
gainful employment regulations could render that program or
programs ineligible for Title IV program funds. Additionally, any
gainful employment data released by the Department of Education
about our programs or warnings provided to students under the
regulations could influence current students not to continue their
studies, discourage prospective students from enrolling in our
programs or negatively impact our reputation. If a particular
educational program ceased to become eligible for Title IV program
funds, either because it fails to prepare students for gainful
employment in a recognized occupation or due to other factors, we
may choose to cease offering the program. We could also be required
to make changes to certain programs in the future in order to
comply with the regulations or to avoid the uncertainty associated
with such compliance. Any of these factors could materially affect
our business, financial condition and results of
operations.
We could be held liable for any misrepresentation regarding the
nature of our educational programs, financial charges and financial
assistance or the employability of our graduates.
An
institution participating in Title IV programs is prohibited from
making misrepresentations regarding the nature of its educational
programs, the nature of financial charges and availability of
financial assistance, or the employability of graduates. A
misrepresentation is defined in the regulations as any false,
erroneous or misleading statement to any student or prospective
student, any member of the public, an accrediting agency, a state
agency or the Department of Education. If we – or any entity,
organization, or person with whom we have an agreement to provide
educational programs or to provide marketing, advertising,
recruiting, or admissions services – commit a
misrepresentation for which a person could reasonably be expected
to rely, or has reasonably relied, to that person’s
detriment, the Department of Education could initiate proceedings
to revoke our Title IV eligibility, deny applications made by us,
impose fines, or initiate a limitation, suspension or termination
proceeding against us. Further, although the Department of
Education claims not to have created any private right of action,
the Department of Education’s recent modifications to its
misrepresentation regulations could increase risk of qui tam
actions under the False Claims Act.
If we fail to maintain adequate systems and processes to detect and
prevent fraudulent activity in student enrollment and financial
aid, our business could be materially adversely
affected.
Institutions of
higher education are susceptible to an increased risk of fraudulent
activity by outside parties with respect to student enrollment and
student financial aid programs. The Department of Education’s
regulations require institutions that participate in Title IV
programs to refer to the Office of Inspector General credible
information indicating that any applicant, employee, third-party
servicer or agent of the institution that acts in a capacity that
involves administration of the Title IV programs has been engaged
in any fraud or other illegal conduct involving Title IV programs.
We cannot be certain that our systems and processes will always be
adequate in the face of increasingly sophisticated and
ever-changing fraud schemes. The potential for outside parties to
perpetrate fraud in connection with the award and disbursement of
Title IV program funds, including as a result of identity theft,
may be heightened due to our offering various educational programs
via distance education. Any significant failure by NAU to
adequately detect fraudulent activity related to student enrollment
and financial aid could result in loss of accreditation, which
would result in the institution losing eligibility for Title IV
programs, or in direct action by the Department of Education to
limit or terminate NAU's Title IV program participation. Any of
these outcomes could have a material adverse effect on our
business, financial condition and results of
operations.
If our students experience a loss or reduction of state financial
aid, we could be materially affected.
Some of
our students rely on state financial aid to fund a portion of their
education. Many states in which we operate have faced budget
constraints, which have caused or may cause them to reduce or
eliminate state appropriations, including with respect to the
amount of financial assistance provided to postsecondary students,
and additional states may reduce or eliminate such appropriations
in the future. In addition, state financial aid programs generally
are subject to annual appropriation by the state legislatures,
which may eliminate or significantly decrease the amount of state
financial aid available to students. We cannot predict whether
future reductions in state financial aid programs will occur or how
long such reductions will persist. For fiscal year ended May 31,
2018, we derived less than 1% of our total revenue from state
financial aid programs, although the percentage derived by each of
our campus locations may vary on an individual basis. The loss or
reduction of state financial aid could decrease our student
enrollment and could have a material effect on our
business.
A substantial decrease in private student financing options or a
significant increase in financing costs for our students could have
a material effect on us.
Some of
our eligible students have used private (i.e., non-Title IV) loan
programs to fund a portion of their education costs not covered by
Title IV program funds or state financial aid sources. Recent
adverse market conditions for consumer and federally guaranteed
student loans (including lenders’ increasing difficulties in
reselling or syndicating student loan portfolios) have resulted,
and could continue to result, in providers of private loans
reducing the availability of or increasing the costs associated
with providing private loans to postsecondary students. In
particular, loans to students with low credit scores who would not
otherwise be eligible for credit-based private loans have become
increasingly difficult to obtain. Prospective students may find
that these increased financing costs make borrowing prohibitively
expensive and abandon or delay enrollment in postsecondary
education programs. If our students are unable to finance their
education our student population could decrease, which would have a
material effect on our business, financial condition and results of
operations.
Government and regulatory agencies and third parties may conduct
compliance reviews, bring claims or initiate litigation against
us.
Because
we operate in a highly regulated industry, we may be subject to
compliance reviews and claims of non-compliance and lawsuits by
government agencies, regulatory agencies and third parties,
including claims brought by third parties on behalf of the federal
government. If the results of these reviews or proceedings are
unfavorable to us, or if we are unable to defend successfully
against lawsuits or claims, we may be required to pay money damages
or be subject to fines, limitations, loss of eligibility for Title
IV funding, injunctions or other penalties. Even if we adequately
address issues raised by an agency review or successfully defend a
lawsuit or claim, we may have to divert significant financial and
management resources from our ongoing business operations to
address issues raised by those reviews or to defend against those
lawsuits or claims. Additionally, we may experience adverse
collateral consequences as a result of any negative publicity
associated with such claims, including declines in student
enrollments and lessened willingness of third parties to do
business with us. Claims and lawsuits brought against us may damage
our reputation or cost us to incur expenses, even if such claims
and lawsuits are without merit.
Our regulatory environment and our reputation may be negatively
influenced by the actions of other postsecondary
institutions.
In
recent years, regulatory investigations and civil litigation have
been commenced against several postsecondary educational
institutions. These investigations and lawsuits have alleged, among
other things, deceptive trade practices and non-compliance with
Department of Education regulations. These allegations have
attracted adverse media coverage and have been the subject of
federal and state legislative hearings. Although the media,
regulatory and legislative focus has been primarily on the
allegations made against these specific companies, broader
allegations against the overall postsecondary sector may negatively
impact public perceptions of postsecondary educational
institutions, including us. Such allegations could result in
increased scrutiny and regulation by the Department of Education,
U.S. Congress, accrediting bodies, state legislatures or other
governmental authorities on all postsecondary
institutions.
Risks
Related to Our Business
If we continue to decline in revenue and profitability, we may not
have adequate liquidity and capital resources to
execute our business plan.
The
Company has experienced a decrease in revenue since 2013 due to
enrollment declines at National American University, and this
long-term decline in revenue has resulted in increasing net losses
and decreases in our liquidity and capital resources. To counter
the decrease in net losses, the Company consolidated students at
thirteen locations into locations in the same market since the
third quarter of 2017. Ten locations were consolidated in the third
quarter of fiscal year 2018. The reduction of overhead as the
result of these campus consolidations, while maintaining student
services, has positively impacted operating cash flow and cash
balances. The recent formation of the College of Military Studies
and the acquisition of academic programs in strategic security and
related fields from Henley Putnam University also have positive
impact on our enrollment.
For the
year ended May 31, 2018, our cash used in operating activities was
$3.7 million. As of May 31, 2018, the Company had $5.3 million
of unrestricted cash and cash equivalents and negative working
capital of $652 thousand, which may not be sufficient to fund our
forecasted operating and cash requirements without additional
financing or other actions by management. The following management
actions occurred after May 31, 2018, the results of which
management believes are probable of occurring and will be
sufficient to meet its forecasted liquidity needs for the next
twelve months from the issuance of the Company’s financial
statements:
●
The Company has
identified certain, non-revenue producing assets, specifically two
aircraft that it will divest in order to further reduce operating
expenses and support its liquidity needs. The estimated proceeds
from the sale of the assets as well as the savings from the related
maintenance and operating costs are approximately $2.3
million.
●
The Company estimates a
$3 million decrease in payroll expenses by eliminating positions
through the reorganization of our enrollment function, which is now
under one leadership team to provide transparency and
accountability
.
We operate in a highly competitive industry, and competitors with
greater resources could harm our business, decrease market share
and put downward pressure on our tuition rates.
The
postsecondary education market is highly fragmented and
competitive. We compete for students with traditional public and
private two-year and four- year colleges and universities, and
other for-profit schools, including those that offer online
learning programs, and alternatives to higher education, such as
employment and military service. Many public and private schools,
colleges and universities, including most major colleges and
universities, offer online programs. We expect to experience
additional competition in the future as more colleges, universities
and for-profit schools offer an increasing number of online
programs. Public institutions receive substantial government
subsidies, and public and private non-profit institutions have
access to government and foundation grants, tax-deductible
contributions and other financial resources generally not available
to for-profit schools. Accordingly, public and private nonprofit
institutions may have instructional and support resources superior
to those in the for-profit sector, and public institutions can
offer substantially lower tuition prices. Some of our competitors
in both the public and private sectors also have substantially
greater financial and other resources than us. We may not be able
to compete successfully against current or future competitors and
may face competitive pressures that could have a material effect on
our business, financial condition and results of
operations.
Our online and distance learning programs operate in a highly
competitive market with rapid technological changes.
Online
education is a highly fragmented and competitive market subject to
rapid technological change. Competitors vary in size and
organization from traditional colleges and universities, many of
which offer some form of online education programs, to for-profit
schools and software companies providing online education and
training software. We expect the online education and training
market to be subject to rapid changes in delivery, interaction and
other future innovation and advancement. Our success will depend,
in part, on our ability to adapt to changing technologies in online
and distance learning and offer an attractive online/distance
education option while maintaining competitive pricing.
Furthermore, the expansion of our online programs and the
development of new programs may not be accepted by the online
education market. In addition, a general decline in Internet use
for any reason, including due to security or privacy concerns, the
cost of Internet service or changes in government regulation of
Internet use, may result in less demand for online educational
services, in which case we may not be able to recruit and retain
students and grow our online programs as planned. Accordingly, if
we are unable to keep pace with changes in technology or maintain
technological relevance, or if the use of the Internet changes, our
business, financial condition and results of operations may be
adversely affected.
If our graduates are unable to obtain professional licenses or
certifications in their chosen field of study, we may face
declining enrollments and revenues or be subject to student
litigation.
Certain
students, particularly in the healthcare programs, require or
desire professional licenses or certifications after graduation to
obtain employment in their chosen fields. Their success in
obtaining such licensure depends on several factors, including the
individual merits of the student, whether the institution and the
program were approved by the state or by a professional
association, whether the program from which the student graduated
meets all state requirements and whether the institution is
accredited. If one or more states refuses to recognize our
graduates for professional licensure in the future based on factors
relating to us or our programs, the potential growth of our
programs would be negatively impacted, which could have a material
effect on our business, financial condition and results of
operations. In addition, we could be exposed to litigation that
would force us to incur legal and other expenses that could have a
material effect on our business, financial condition and results of
operations.
The payment and amount of future dividends is subject to Board of
Director discretion and to various risks and
uncertainties.
The
payment and amount of future quarterly dividends is within the
discretion of the Board of Directors and will depend on factors the
Board deems relevant at the time declaration of a dividend is
considered. These factors include, but are not limited to:
available cash; management’s expectations regarding future
performance and free cash flow; and the effect of various risks and
uncertainties described in this “Risk Factors”
section.
Our financial performance depends on our ability to continue to
develop awareness among, and attract and retain, new
students.
Building awareness
of NAU and the programs and services we offer is critical to our
ability to attract prospective students. If we are unable to
successfully market and advertise our educational programs, our
ability to attract and enroll students could be adversely affected,
and, consequently, our ability to increase revenue or generate
profitability could be impaired. It is also critical to our success
that we convert prospective students to enrolled students in a
cost-effective manner and that these enrolled students remain
active in our programs. Some of the factors that could prevent us
from successfully enrolling and retaining students
include:
●
the reduced
availability of, or higher interest rates and other costs
associated with, Title IV loan funds or other sources of financial
aid;
●
the emergence of
more successful competitors;
●
factors related to
our marketing, including the costs and effectiveness of Internet
advertising and broad-based branding campaigns and recruiting
efforts;
●
performance
problems with our online systems;
●
failure to maintain
institutional and specialized accreditations;
●
failure to obtain
and maintain required state authorizations;
●
the requirements of
the education agencies that regulate us that restrict the
initiation of new locations, new programs and modification of
existing programs;
●
the requirements of
the education agencies that regulate us that restrict the ways
schools can compensate their recruitment personnel;
●
increased
regulation of online education, including in states in which we do
not have a physical presence;
●
restrictions that
may be imposed on graduates of online programs that seek
certification or licensure in certain states;
●
student
dissatisfaction with our services and programs;
●
adverse publicity
regarding us, our competitors, or online or for-profit education
generally;
●
price reductions by
competitors that we are unwilling or unable to match;
●
a decline in the
acceptance of online education;
●
an adverse economic
or other development that affects job prospects in our core
disciplines;
●
a decrease in the
perceived or actual economic benefits that students derive from our
programs;
●
litigation or
regulatory investigations that may damage our reputation;
and
●
changes in the
general economy, including employment.
If, for
any reason or reasons, including those presented above, we are
unable to maintain and increase our awareness among prospective
students, recruit students and convert prospective students into
enrolled students, our business, financial condition and results of
operations could be adversely affected.
Our growth may place a strain on our resources that could adversely
affect our systems, controls and operating efficiency.
We
believe that future growth will be based upon an expansion of our
current programs, the addition of new programs, an increase in our
online presence, affiliation agreements and increasing enrollments.
The growth and expansion of our domestic and international
operations may place a significant strain on our resources and
increase demands on our management information and reporting
systems, financial management controls and personnel. Any failure
to effectively manage or maintain growth could have a material
effect on our business, financial condition and results of
operations.
If we cannot maintain student enrollments, our results of
operations may be adversely affected.
Our
strategy for growth and profitability depends, in part, upon the
retention of our students. While we provide certain services to our
students (e.g., tutoring) in an effort to retain students and lower
attrition rates, many of our students face financial, personal or
family constraints that require them to withdraw within a term or
at the end of a given term. Additionally, some students may decide
to continue their education at a different institution. If for any
reason, we are unable to predict and manage student attrition, our
overall enrollment levels would likely decline, which could have a
material effect on our business, financial condition and results of
operations.
If the proportion of students who are enrolled in our Associate
degree programs increases, we may experience increased costs and
reduced margins.
If
increases in Associate degree programs take effect, we may
experience additional consequences, such as higher costs per start,
lower retention rates, higher student services costs, an increase
in the percentage of our revenue derived from Title IV programs
under the 90/10 Rule, more limited ability to implement tuition
price increases and other effects that could have a material effect
on our business, financial condition and results of
operations.
An increase in interest rates could adversely affect our ability to
attract and retain students.
For the
fiscal years ended May 31, 2018, 2017, and 2016, NAU derived cash
receipts equal to approximately 82.1%, 82.6%, and 86.8%,
respectively, of its net revenue from tuition financed under Title
IV programs, which include student loans with interest rates
subsidized by the federal government. Additionally, some students
finance their education through private loans that are not
subsidized. If our students’ employment circumstances are
adversely affected by regional or national economic downturns, they
may be more heavily dependent on student loans. Interest rates have
reached relatively low levels in recent years, creating a favorable
borrowing environment for students. However, if interest rates
increase or Congress decreases the amount available for Title IV
funding, our students may have to pay higher interest rates on
their loans. Any future increase in interest rates will result in a
corresponding increase in educational costs to our existing and
prospective students, which could result in a significant reduction
in our student population and revenues. Higher interest rates could
also contribute to higher default rates with respect to our
students’ repayment of their education loans. Higher default
rates may in turn adversely impact our eligibility to participate
in some or all of the Title IV programs, which could result in a
material effect on our enrollments and future growth prospects and
our business, financial condition and results of
operations.
Our reputation and the value of our stock may be negatively
affected by the actions of other postsecondary educational
institutions.
In
recent years, regulatory proceedings and litigation have been
commenced against various postsecondary educational institutions
relating to, among other things, deceptive trade practices, false
claims against the government and non-compliance with Department of
Education requirements, state education laws and state consumer
protection laws. These proceedings have been brought by students,
the Department of Education, the United States Department of
Justice, the United States Securities and Exchange Commission and
state governmental agencies, among others. These allegations have
attracted adverse media coverage and have been the subject of
legislative hearings and regulatory actions at both the federal and
state levels, focusing not only on the individual schools but in
some cases on the larger for-profit postsecondary education sector
as a whole. Adverse media coverage regarding other for-profit
education companies or other educational institutions could damage
our reputation, result in lower enrollments, revenues and results
of operations and have a negative impact on the value of our stock.
Such coverage could also result in increased scrutiny and
regulation by the Department of Education, Congress, accrediting
commissions, state legislatures, state attorneys general, state
education agencies or other governmental authorities of all
educational institutions, including us.
Our expansion into new markets outside the United States will
subject us to risks inherent in international operations, are
subject to significant start- up costs and will place strain on our
management.
As part
of our growth strategy, we intend to continue to establish markets
outside the United States, subject to approvals from the HLC and
other appropriate accrediting or regulatory agencies. Our
operations in each of the foreign jurisdictions may subject us to
additional educational and other regulations of foreign
jurisdictions, which may differ materially from the regulations
applicable to our domestic operations. Such international expansion
is expected to require a significant amount of start-up costs.
Additionally, our management does not have significant experience
in operating a business at the international level. As a result, we
may be unsuccessful in carrying out our plans for international
expansion, obtaining the necessary licensing, permits or market
saturation, or in successfully navigating other challenges posed by
operating an international business.
If we do not maintain existing and develop additional relationships
with employers, our future growth may be impaired.
Currently, we have
relationships with certain employers to provide their employees
with an opportunity to enroll in classes and obtain degrees through
us while maintaining their employment. These relationships are an
important part of our strategy because they provide us with a
steady source of potential working adult students for particular
programs and increase our reputation among employers. If we are
unable to develop new relationships or maintain our existing
relationships, this source of potential students may be impaired
and enrollments and revenue may decrease, any of which could have a
material effect on our business, financial condition and results of
operations.
If students fail to pay their outstanding balances, our business
may be harmed.
From
time to time, students may carry balances on portions of their
education expense not covered by financial aid programs. These
balances are unsecured and not guaranteed. Furthermore, disruptive
economic events could adversely affect the ability or willingness
of our former students to repay student loans, which may increase
our student loan cohort default rate and require the devotion of
increased time, attention and resources to manage these defaults.
As a result, losses related to unpaid student balances in excess of
the amounts we have reserved for bad debts, or the failure of
students to repay their debt obligations, could have a material
effect on our business, financial condition and results of
operations.
Government regulations relating to the Internet could increase our
cost of doing business and affect our ability to grow.
The
increasing popularity and use of the Internet and other online
services has led and may lead to the adoption of new laws and
regulatory practices in the United States or foreign countries and
to new interpretations of existing laws and regulations. These new
laws and interpretations may relate to issues such as online
privacy, copyrights, trademarks and service marks, sales taxes,
fair business practices and the requirement that online education
institutions qualify to do business as foreign corporations or be
licensed in one or more jurisdictions where they have no physical
location. As the proportion of our students who take online courses
increases, new laws, regulations or interpretations related to
doing business over the Internet could increase our costs of
compliance or doing business and materially affect our ability to
offer online courses, which would have a material effect on our
business, financial condition and results of
operations.
Our financial performance depends, in part, on our ability to keep
pace with changing market needs.
Increasingly,
prospective employers of NAU students require their new employees
to possess appropriate technological skills and interpersonal
skills, such as communication, critical thinking and teamwork
skills. These skills evolve rapidly in a changing economic and
technological environment. Accordingly, it is important for our
programs to evolve in response to those economic and technological
changes. The expansion of existing programs and the development of
new programs may not be accepted by current or prospective students
or the employers of our graduates. Even if NAU is able to develop
acceptable new programs, we may not be able to begin offering those
new programs as quickly as required by prospective employers or as
quickly as our competitors offer similar programs. In addition, we
may be unable to obtain specialized accreditations or licensures
that may make certain programs desirable to students. To offer a
new academic program, NAU may be required to obtain appropriate
federal, state and accrediting agency approvals that may be
conditioned or delayed in a manner that could significantly affect
our growth plans. In addition, to be eligible for Title IV
programs, a new academic program may need to be approved by the
Department of Education, the HLC and state educational agencies. If
we are unable to adequately respond to changes in market
requirements due to regulatory or financial constraints, unusually
rapid technological changes or other factors, our ability to
attract and retain students could be impaired, the rates at which
our graduates obtain jobs involving their fields of study could
suffer and our reputation among students, prospective students and
employers may be impaired, which could have a material effect on
our business, financial condition and results of
operations.
Establishing new
academic programs or modifying existing programs requires us to
invest in management and business development, incur marketing
expenses and reallocate other resources. We may have limited
experience with any courses in new academic areas and may need to
modify our systems, strategy and delivery platform or enter into
arrangements with other educational institutions to provide such
programs effectively and profitably. If we are unable to offer new
courses and programs in a cost-effective manner, or are otherwise
unable to effectively manage the operations of newly established
academic programs, it could have a material effect on our business,
financial condition and results of operations.
Capacity constraints of our computer networks and changes to the
acceptance and regulation of online programs could have a material
effect on student retention and growth.
If we
are successful in increasing student enrollments, additional
resources in the forms of human, intellectual and financial
capital, as well as information technology resources, will be
necessary. We have invested and continue to invest significant
resources in information technology when such technology systems
and tools have become impaired or obsolete. In an attempt to
utilize recent technology, we could install new information
technology systems without accurately assessing its costs or
benefits or experience delayed or ineffective implementation of new
information technology systems. Similarly, we could fail to respond
in a timely or sufficiently competitive way to future technological
developments in our industry. As a result, this growth may place a
significant strain on our operational resources, including our
computer networks and information technology infrastructure,
thereby restricting our ability to enroll and retain students and
grow our online programs.
System disruptions and security threats to our computer networks
could have a material effect on our ability to attract and retain
students.
The
performance and reliability of our computer network infrastructure
is critical to our reputation and ability to attract and retain
students. Any computer system error or failure, or a sudden and
significant increase in traffic on our computer networks, including
those that host our online programs, may cause network outages and
disrupt our online and on-ground operations that may damage our
reputation.
Additionally, we
face a number of threats to our computer systems, including
unauthorized access, computer hackers, computer viruses and other
security problems and system disruptions. We have devoted and will
continue to devote significant resources to the security of our
computer systems, but they are still vulnerable to security
threats. A user or hacker who circumvents security measures could
misappropriate proprietary information or cause interruptions or
malfunctions in operations. As a result, we expend significant
resources to protect against the threat of these system disruptions
and security breaches and may have to spend more to alleviate
problems caused by these disruptions and breaches, which could have
a material effect on our reputation, ability to retain and store
data and our business, financial condition and results of
operations.
A failure of our information systems to store, process and report
relevant data may reduce management’s effectiveness,
interfere with regulatory compliance and increase operating
expenses.
We are
heavily dependent on the integrity of our data management systems.
If these systems do not effectively collect, store, process and
report relevant data for the operation of our business, whether due
to equipment malfunction or constraints, software deficiencies or
human error, our ability to plan, forecast and execute our business
plan and comply with applicable laws and regulations, including the
Higher Education Act, will be impaired. Any such impairment of our
information systems could materially affect our reputation and our
ability to provide student services or accurately budget or
forecast operating activity, thereby adversely affecting our
financial condition and results of operations.
The personal information that we collect may be vulnerable to
breach, theft or loss, and could subject us to liability or
adversely affect our reputation and operations.
Possession and use
of personal information in our operations subjects us to risks and
costs that could harm our business and reputation. We collect, use
and retain large amounts of personal information regarding our
students and their families, including social security numbers, tax
return information, personal and family financial data and credit
card numbers. We also collect and maintain personal information of
our employees in the ordinary course of business. Some of this
personal information is held and managed by certain of our vendors.
Although we use security and business controls to limit access and
use of personal information, a third party may be able to
circumvent those security and business controls, which could result
in a breach of student or employee privacy. In addition, errors in
the storage, use or transmission of personal information could
result in a breach of student or employee privacy. Possession and
use of personal information in our operations also subjects us to
U.S. federal and state legislative and regulatory burdens that
could require us to implement certain policies and procedures, such
as the procedures we adopted to comply with the Red Flags Rule that
was promulgated by the Federal Trade Commission under the federal
Fair Credit Reporting Act, which requires the establishment of
guidelines and policies regarding identity theft related to student
credit accounts, and could require us to make certain notifications
of data breaches and restrict our use of personal information. The
risk of hacking and cyber-attacks has increased, as has the
sophistication of such attacks, including email phishing schemes
targeting employees to give up their credentials. We cannot provide
any assurances that a breach, loss, or theft of personal
information will not occur. A breach, theft, or loss of personal
information regarding our students and their families or our
employees that is held by us or our vendors could have a material
adverse effect on our reputation and results of operations and
result in liability under U.S. federal and state privacy statutes
and legal actions by state authorities and private litigants, any
of which could have a material adverse effect on our business.
Moreover, certain of our operations may involve the collection of
personal information from individuals outside the U.S., which may
render us subject to global privacy and data security laws. For
example, the European Union General Data Protection Regulation
(“GDPR”), which became enforceable May 25, 2018,
contains a number of requirements that are different from or exceed
those in U.S. federal and state privacy and data security laws. The
GDPR may apply to certain of our operations. Were it to apply and
if we were out of compliance, there is the potential for
administrative, civil, or criminal liability with significant
monetary penalties as well as reputational harm to us and our
employees.
We may incur liability for the unauthorized duplication or
distribution of class materials posted online for class
discussions.
In some
instances, our faculty members or students may distribute to
students in class or post various articles or other third-party
content on class discussion boards. We may incur liability for the
unauthorized duplication or distribution of this material
distributed in class or posted online for class discussions. As a
for-profit organization, we may be subject to a greater risk of
liability for the unauthorized duplication of materials under the
Copyright Act than a non-profit institution of higher education.
Third parties may raise claims against us for the unauthorized
duplication of this material. Any such claims could subject us to
costly litigation and impose a significant strain on financial
resources and management personnel, regardless of whether the
claims have merit. Our general liability insurance may not cover
potential claims of this type adequately or at all, and we may be
required to alter the content of our courses or pay monetary
damages, which could have a material effect on our business,
financial condition and results of operations.
We rely on exclusive proprietary rights and intellectual property
that may not be adequately protected under current
laws.
Our
success depends, in part, on our ability to protect our proprietary
rights and intellectual property. We rely on a combination of
copyrights, trademarks, trade secrets, domain names and contractual
agreements to protect our proprietary rights. We rely on trademark
protection in both the United States and certain foreign
jurisdictions to protect our rights to various marks, as well as
distinctive logos and other marks associated with them. We also
rely on agreements under which we obtain intellectual property or
license rights to own or use content developed by faculty members,
content experts and other third-parties. We cannot assure that
these measures are adequate, that we have secured, or will be able
to secure, appropriate protections for all of our proprietary
rights in the United States or any foreign jurisdictions, or that
third parties will not terminate license rights or infringe upon or
otherwise violate our proprietary rights. Despite our efforts to
protect these rights, unauthorized third parties may attempt to
infringe our trademarks, use, duplicate or copy the proprietary
aspects of our student recruitment and educational delivery
methods, curricula, online resource material and other content. Our
management’s attention may be diverted by these attempts and
we have in the past, and may in the future, need to use funds in
litigation to protect our proprietary rights against any
infringement or violation, which could have a material effect on
our business, financial condition and results of
operations.
We may be involved in disputes from time to time relating to our
intellectual property and the intellectual property of third
parties.
We have
in the past, and may in the future, become parties to disputes from
time to time over rights and obligations concerning intellectual
property, and we may not always prevail in these disputes. Third
parties may allege that we have not obtained sufficient rights in
the content of a course or other intellectual property. Third
parties may also raise claims against us alleging infringement or
violation of the intellectual property of that third party. Some
third party intellectual property rights may be extremely broad,
and it may not be possible for us to conduct our operations in such
a way as to avoid violating those intellectual property rights. Any
such intellectual property claim could subject us to costly
litigation and impose a significant strain on our financial
resources and management personnel regardless of whether such claim
has merit. Our general liability and cyber liability insurance, if
any, may not cover potential claims of this type adequately or at
all, and we may be required to alter the content of our courses or
pay monetary damages or license fees to third parties, which could
have a material effect on our business, financial condition and
results of operations.
We may not be able to retain key personnel or hire and retain the
personnel we need to sustain and grow our business.
Our
success depends largely on the skills, efforts and motivations of
our executive officers, who have significant experience with our
business and within the education industry. Due to the nature of
the education industry, we face significant competition in
attracting and retaining personnel who possess the skills necessary
to sustain and grow our business. The loss of the services of any
of our key personnel, or failure to attract and retain other
qualified and experienced faculty members and staff members on
acceptable terms, could impair our ability to sustain and grow our
business.
Our business may be affected by changing economic
conditions.
The
United States economy and the economies of other key industrialized
countries currently have recessionary characteristics, including
reduced economic activity, increased unemployment and substantial
uncertainty about the financial markets. In addition, homeowners in
the United States have experienced an unprecedented reduction in
wealth due to the decline in residential real estate values across
much of the country. The reduction in wealth, unavailability of
credit and unwillingness of employers to sponsor non-traditional
educational opportunities for their employees could have a material
effect on our business, financial condition and results of
operations.
Terrorist attacks and other acts of violence or war, natural
disasters or breaches of security could have an adverse effect on
our operations.
Terrorist attacks
and other acts of violence or war, hurricanes, earthquakes, floods,
tornadoes and other natural disasters or breaches of security at
our educational sites could disrupt our operations. Terrorist
attacks and other acts of violence or war, natural disasters or
breaches of security that directly impact our physical facilities,
online offerings or ability to recruit and retain students and
employees could adversely affect our ability to deliver our
programs to our students and, thereby, adversely affect our
business, financial condition and results of operations.
Furthermore, terrorist attacks and other acts of violence or war,
natural disasters or breaches of security could adversely affect
the economy and demographics of the affected region, which could
cause significant declines in the number of our students in that
region and could have a material effect on our business, financial
condition and results of operations.