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 institution of higher learning founded in 1941.

 

In addition to the university operations, the Company 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 the sale of all condominium units during fiscal year ended May 31, 2019.

 

The university’s enrollment declined from 5,648 students as of May 31, 2018 to 3,313 students as of May 31, 2019, representing a decrease of 41.3% from 2018 to 2019. We believe the decline in student enrollment and revenue is partially the result of the regulatory scrutiny of the industry and the current environment in higher education. Similar to our peers, many working adults have chosen not to attend school. The decline is also partially the result of the 2019 strategic shift that was implemented during fiscal year 2019. See the “University History” section below for more information.

 

During the same periods, total revenue declined from $77.2 million for fiscal year ended May 31, 2018 to $53.1 million for the fiscal year ended May 31, 2019, representing an annual decrease of 31.2%. Income before income taxes for the fiscal year ended May 31, 2018 was a loss of $12.3 million, compared to a loss of $25.1 million for the fiscal year ended May 31, 2019.

 

Revenue for the NAU segment declined from $74.8 million in fiscal year 2018 to $50.9 million in fiscal year 2019, representing a decrease of 32% from 2018 to 2019. Loss before income taxes for the NAU segment was $12.1 million in fiscal year 2018, increasing to a loss of $22.2 million in fiscal year 2019. Total assets for the NAU segment decreased from $35.4 million in fiscal year 2018 to $26.6 million in fiscal year 2019.

 

Revenue for the Other segment (primarily Fairway Hills), decreased from $2.4 million in fiscal year 2018 to $2.2 million in fiscal year 2019, representing a decrease of 7.4% from 2018 to 2019. Income before taxes for this segment went from a loss of $0.2 million in fiscal year 2018 to a loss of $1.1 million in fiscal year 2019. Total assets for the Other segment decreased from $13.4 million in fiscal year 2018 to $11.4 million in fiscal year 2019.

 

 

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.

 

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.

 

In 2009, the Higher Learning Commission (“HLC”) approved the change of control request in which Dlorah, Inc. (“Dlorah”), a South Dakota corporation doing business as National American University, became a wholly owned subsidiary of NAUH, a publicly traded Delaware corporation. Following this transaction, NAU added 23 educational locations in growing communities with expanding workforce development needs, reaching approximately 35 locations at its peak. The largest expansion occurred from 2010 to 2012.

 

 

 

The university also developed 24 new undergraduate academic programs in health care, information technology, business, and management, as well as a certificate and Doctor of Education in Community College Leadership. In order to support this growth, the number of university faculty and staff more than doubled from 855 in 2007 to 1,766 by fall 2013. The financial data from this time-period reflected that the university had experienced an 86% growth in total assets from FY2010 to FY2013. At the time of the re-accreditation site visit in September 2014, National American University’s development was characterized by consistent, planned growth in enrollment through the timely addition of educational locations; an enhanced distance delivery operation; new programming offerings; a strong and stable financial position; an action-oriented assessment program; the adoption and implementation of performance-based curricula; and the overall maturation and development of faculty, staff, administration, and governing board.

 

In the ensuing five years, a variety of external factors disrupted higher education in the United States, including declining enrollments across higher education, significant numbers of new regulations, increased scrutiny and regulation targeting for-profit institutions, and a steady shift of working adult students from ground to online learning. At NAU, student enrollments declined from a high of 11,683 students in fall quarter 2012 to 4,797 students in fall quarter 2018. During the same time-period, the percentage of students registered in fully online courses increased from 59% to 78% and surpassed 83% in the winter quarter 2018-19. By summer 2019, only 15% of the student body was enrolled in location-based nursing and allied health programs while 75% of the budget was being spent to support these programs. As of May 31, 2019, in addition to its central administration location in Rapid City, South Dakota, NAU operated five instructional locations across the states of Colorado, Indiana, Kansas, and Texas. NAU also continued to conduct educational programs at Ellsworth Air Force Base, South Dakota, and Kings Bay Naval Base, Georgia.

 

The university responded to the shift in demand from ground to online learning by preparing a strategic shift to an online university, although it intends to continue on-ground instruction at military installations. To support its strategic shift to an online university, the board and senior leaders identified, and continues to execute, on three carefully planned and coordinated strategies, which also address declining enrollments and escalating costs at NAU’s ground locations:

 

1. The creation of the One Stop student service center in July 2018;

 

2. Investment in distinctive and mission-brand online graduate and undergraduate programs with an orderly exit of ground-based programs and locations launched November 1, 2018; and

 

3. Reorganization of the academic structure to better align the educational enterprise and governance structures, while protecting students through the teach-out.

 

The One Stop effectively integrates all marketing, admissions, student advising and mentoring, academic support, and instructional quality services into a single working group responsible for enrollment, retention, and student success. We believe that centralizing these functions promotes a student-focused entry into the university and a sustained focus on and collective commitment to retention and student success. Further, the strategy allows NAU to reduce duplicative admissions and financial services staff at different locations and respond to increasing student expectations for online services. Kansas City is the hub for the One Stop as the city has scalability of resources for the future, whereas these resources and scalability are limited in Rapid City, SD, the main campus and administrative hub for NAU. Rapid City remains the location of the main campus and location of central and online administration. Two additional locations exist on military bases in South Dakota and Georgia. On-base locations continue in the current strategic plan and comprise the only locations with ground courses and programs.

 

In October of 2018, the board approved the decision to teach out all remaining ground programs and exit physical locations, focusing the future on the distinctive online strategic security offerings and on long-standing online “mission brand” offerings in business, accounting, and health management in which enrollment has remained strong. On November 1, 2018, NAU announced the suspension of new enrollments in 34 of its 128 programs, including seven allied health, nursing, and other ground programs across the system.

 

To ensure that NAU could focus simultaneously on investing and growing the distinctive and mission-brand programs while also effectively teaching out ground locations, the university created a separate division and operational plan focused on teach-out programs and discontinued operations. With goals for sustained quality and academic support, this division serves students through the completion of the suspended programs or through transfer to other institutions if transfer proves to provide a superior teaching and learning environment than what NAU can provide. In many cases, the students remaining in programs numbered five or fewer. Larger institutions providing more peer-to-peer learning and degree flexibility, particularly for students recently enrolled, have had the potential to serve the students more effectively.

 

The strategies detailed above required organizational restructuring. Thus, NAU began the academic reorganization and staffing changes in October 2018. These changes (a) aligned the ongoing educational enterprise with the One Stop and (b) established the separate division dedicated to overseeing and supporting the teaching out of suspended programs and the phasing out of discontinued ground operations. NAU also continues to conduct educational programs at Ellsworth Air Force Base, South Dakota, and at Kings Bay Naval Base, Georgia.

 

 

The financial plan supporting the strategies included (a) financial and personnel investment in core business and new strategic security programs; (b) consolidation of admissions, marketing, and student success staff (all student-facing services, retention, and support); (c) reduction or realignment of central and location operations personnel; and (d) process and other expenditure reductions as a result of the elimination of duplication at locations.

 

The decision to complete a strategic shift while also maintaining marginal student enrollments in suspended programs at closing locations had a negative effect on NAU’s financial position during fiscal years 2018 and 2019. The decision to maintain locations with limited enrollments was specifically intended to ensure minimal impact on students in the suspended programs, while NAU also worked proactively to arrange suitable and seamless transfer or teach-out opportunities for students. NAU leadership chose this approach, which stands in stark contrast to the abrupt campus closures and displaced students that have occurred too often in the postsecondary sector in recent years (an approach NAU does not endorse because of the impact on displaced students). NAU anticipates completing the location closures and program teach-outs in 2019. The complex plan addresses each program, location, and student individually. While this strategic shift has had some negative financial impacts in the short term, it is expected to have substantial benefits to the university’s financial position as early as fall 2019.

 

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 in the education industry. On November 23, 2009, as a result of the merger transaction with Dlorah, 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 95.8% of our revenue in fiscal year 2019. We also have Fairway Hills, a multi-family residential real estate operation in Rapid City, South Dakota, which generated 4.2% of our revenue in fiscal year 2019. 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 to, the Securities and Exchange Commission (SEC).

 

The Company’s common stock was listed as NAUH on Nasdaq Global Market through January 17, 2019, at which time the Company voluntarily delisted and transferred its listing to the Over the Counter Quotation Bureau (“OTCQB”) Market, effective January 22, 2019. The delisting and transfer was the result of the Company’s market value of publicly held shares no longer meeting the requirement to maintain a minimum Market Value of Publicly Held Shares of $5,000, as set forth in Nasdaq Listing Rule 5450(b)(1)(C), as well as consideration of the probability of regaining compliance, the common stock’s current trading volume and price, and the costs of maintaining eligibility to list the Company’s common stock on Nasdaq Global Market. As of June 5, 2019, the Company is no longer a reporting company under the Securities and Exchange Act of 1934, as amended.

 

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 have transitioned from a ground to an online university. 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.

 

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 newly-launched programs in strategic security offer a potential point of distinction, particularly in graduate programming. 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 our students. More than 90% of our faculty members hold graduate degrees, as well as the key professional positions to support the distinctive offerings in strategic security. 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 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. We also regularly review student survey data to identify opportunities for course modifications and enhancements. NAU has completed implementation and upgrade of Bright Space by D2L. Upgrades include live chat, texting, live tutoring, full mobile integration, and other new tools for faculty-student engagement. In addition, the D2L/Bright space course room prototype for all 450+ undergraduate and graduate courses has been developed 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 the end of 2019, all programs and courses should have the ability to be unbundled and offered on a pure competency-based or laddered credential model.

 

Effective student services. Through the establishment of the One Stop, NAU has established 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, all 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. In conjunction with the One Stop, the University seeks ongoing student, faculty, and external feedback to 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 program offerings, modality, the quality of instruction, placement rates, selectivity of admissions, recruiting, transfer credit and credit for prior learning, and tuition rates. We compete for enrollments by offering more frequent start dates, more flexible hours, better instructional resources, shorter program length and maximum transfer credit. We also compete with other institutions 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 because of the diversity of our program offerings, quality of instruction, strength of our brand, distinctive programs in strategic security, and success in awarding transfer credit and credit for prior learning.

 

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 because 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 diversified, technical, and professional program mix. Programs target in-demand associate, baccalaureate, and master’s programs in professional and technical areas, including business, accounting, education, strategic security, and information technology. 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 multiple accreditations and regulatory approvals. NAU is regionally accredited through the Higher Learning Commission. 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 students with transfer credit and training, as well as 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 to ensure that our programs are current and meet the changing demands of employers. In addition, our faculty are continually evaluated on nine specific behaviors focused on student engagement and instructional quality.

 

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 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 One Stop, academic and other leaders have developed and launched 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 and English have risen. Use of the math and writing support systems and tutoring have doubled in the past year. TEAMS 3, a cloud-based version of NAU’s signature data analytics system to improve persistence and completion 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 student advisors respond to at-risk student alerts within 24 hours and post a resolution within 48 if possible.

 

Our focus on improving faculty-student engagement. All new and continuing 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. The Faculty Quality Review system (FQR) now evaluates all faculty on nine behaviors and expectations for quality instruction and substantive and iterative engagement with students. The upgrade to BrightSpace, now completed, includes course designs that require enhanced faculty-student engagement and synchronous interaction.

 

Our focus on faculty development and scholarship. Both graduate and undergraduate faculty are required to participate in scholarship and development, whether through offerings provided by NAU, other institutions for which they teach, or documented attendance at professional conferences and trainings. Each year, NAU sponsors quarterly trainings, mentoring, and professional development webinars focused on quality teaching and learning for working adults. In addition, NAU hosts a January faculty development conference with requirements for attendance by all adjunct and full-time faculty.

 

Our focus on the military. With the asset purchase of Henley-Putnam University in 2018, the university expanded its options for quality education and premier student service to the needs and demands of service members, their dependents, and veterans. The Henley-Putnam School of Strategic Security, along with the continued focus on serving the military on base, has provided new programs and opportunities for serving active military, veterans, and their dependents.

 

 

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. Mr. Thomas Bickart joined the university in February of 2019. Mr. Bickart has over twenty years of financial and operational experience, the majority at dynamic educational organizations.  Most recently, he assisted Edison Learning, Inc. restructure its operations and position the organization for new market growth.  Mr. Bickart previously served as the Chief Financial Officer ("CFO") at TCI College of Technology from 2013 to 2016, where he executed a turnaround strategy.  From 2008 through 2013, he was CFO at Neumont University where he was integral in assisting the school to become a highly recognized institution. 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, the university has executed a strategy to become a predominantly online institution, reserving ground-based locations for military bases. 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, launching the One Stop, and integrating new mobile and online IT systems.

 

NAU has integrated the operations of the Rapid City, SD and Kansas City, MO online operations into the One Stop. 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 has completed the integration of programs, students, faculty, and staff into NAU. The acquisition of these assets has provided eight new degree areas and more than 40 undergraduate and graduate certificates in high demand areas of strategic security, protection management, terrorism and counterterrorism, nuclear enterprise studies, cybersecurity, and intelligence management. We continue to use traditional marketing and relationship networks to provide greater exposure to these programs. These programs are offered 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. Since 2016, students have been able to access all support services, tutoring, library, career services, courses, and program information via their smart phones. 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.

 

Growth Strategies

Increase enrollment in existing academic programs. We focus on increasing enrollment in our core academic programs, including strategic security, 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 security agencies, 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, technology infrastructure, and the One Stop student service center. Through the overhaul of the learning management, data analytics, and student support systems, NAU has developed an 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. 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 explore 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.

 

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 a Doctorate of Education, Community College Leadership, a Doctorate in Strategic Security, the Master of Business Administration, Master of Management, Master of Science, 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 multiple specialties, concentrations, or certifications. As of May 31, 2019, we offered the following degree, diploma and certificate programs:

 

NAU Academic Programs

Undergraduate

Accounting AAS

Accounting BS

Aviation Management BS

Business Administration AAS

Business Administration BS

Business Administration BS, Emphasis in Accounting

Business Administration BS, Emphasis in Entrepreneurship

Business Administration BS, Emphasis in Financial Management

Business Administration BS, Emphasis in Human Resource Management

Business Administration BS, Emphasis in Management

Business Administration BS, Emphasis in Management Information Systems

Business Administration BS, Emphasis in Marketing

Business Administration BS, Emphasis Supply Chain Management

Business Administration BS, Emphasis in Tourism and Hospitality Management

Business Logistics AAS

Construction Management BS

Health and Beauty Management AAS

Healthcare Coding Diploma

Healthcare Management BS

Health Information Technology AAS

Health Information Management BS

Human Resource Management

Information Technology AAS

Information Technology BS

Information Technology BS, Emphasis in Cybersecurity and Forensics

Management AAS

Management BS

Medical Administrative Assistant AAS

Medical Billing and Coding Diploma

Medical Office Management - Clinical Specialist AAS

Medical Staff Services Management AAS

Small Business Management AAS

Criminal Justice AAS

Criminal Justice BS

Intelligence Management BS

Nuclear Enterprise Security/Studies BS

Strategic Security and Protection Management BS

Terrorism and Counterterrorism Studies BS

 

CERTIFICATES

Applied Radiologic Response Techniques Certificate

Consequence Modeling Certificate

Consequence Assessment-GEOINT Certificate

 

Consequence Assessment-WMD Certificate

Counterterrorism Entry-Level Certificate

Executive Protection Entry-Level Certificate

Hazard Prediction and Assessment Certificate Capability (HPAC)-CBR

Hazard Prediction and Assessment Certificate Capability (HPAC)-Nuclear

Intelligence Analysis Entry-Level Certificate

Intelligence Collection Certificate

Intelligence Collection and Analysis Certificate

Integrated Munitions Effects Assessment-Conventional Certificate

Integrated Munitions Effects Assessment-Nuclear Certificate

Nuclear Emergency Team Operations Certificate

Nuclear Weapons Operations and Policy Certificate

Physical Security and Risk Assessment Certificate

Security Certificate

Security Management Certificate

 

FOREIGN LANGUAGE CERTIFICATES

Arabic Certificate

Dari Certificate

Farsi Certificate

French Certificate

Hindi Certificate

Mandarin Chinese Certificate

Portuguese Certificate

Russian Certificate

Spanish Certificate

Urdu Certificate

 

 

Master’s Degrees

Master of Business Administration emphasis in Accounting

Master of Business Administration emphasis in E-Marketing

Master of Business Administration emphasis in Health Care Administration

Master of Business Administration emphasis in Human Resource Management

Master of Business Administration emphasis in Information Technology Management

Master of Business Administration emphasis in International Business

Master of Business Administration emphasis in Management

Master of Business Administration emphasis in Operations and Configuration Management

Master of Business Administration emphasis in Project and Process Management

Master of Management

Master of Management emphasis in Criminal Justice Management

Master of Management emphasis in E-Marketing

Master of Management emphasis in Health Care Administration

Master of Management emphasis in Higher Education

Master of Management emphasis in Human Resource Management

Master of Management emphasis in Information Technology Management

Master of Management emphasis in Operations and Configuration Management

Master of Management emphasis in Project and Process Management

Master of Science in Intelligence Management

Master of Science in Strategic Security and Protection Management

Master of Science in Terrorism and Counterterrorism

 

Graduate Certificates

Certificate in Accounting

Certificate in E-Marketing

Certificate in Global Supply Chain Management

Certificate in Human Resources Management

Mid-Level Certificate in Counterterrorism

Senior-Level Certificate in Counterterrorism

Mid-Level Certificate in Intelligence Analysis

Senior-Level Certificate in Intelligence Analysis

Certificate in Advanced Intelligence Collection and Analysis

Certificate in Intelligence and Terrorism Profiling

Certificate in Strategic Intelligence

 

 

 

Doctoral Degrees

Doctor of Education, Community College Leadership

Doctorate in Strategic Security

 

Doctoral Certificates

Certificate in Community College Leadership

 

Third-Party Relationships

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.

 

 

NAU also continues to conduct educational programs at Ellsworth Air Force Base, South Dakota, and at Kings Bay Naval Base, Georgia.

 

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. As of May 31, 2019, the university employed approximately 19 full-time and 450 part-time faculty members; more than 267 faculty members are active each quarter. These numbers reflect NAU’s efforts to effectively manage redundant course offerings and maintain academically sound class sizes.

 

We follow a specific process for hiring faculty in accordance with published standards for faculty members based on state regulations, HLC requirements, the university’s faculty quality review system, and other specialized accreditation standards.

 

NAU recruits qualified faculty through national postings, 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. Finally, all faculty participate in the faculty quality review system which evaluates all online courses in all terms multiple times and provides ratings on nine expected instructional qualities. Deans and associate deans intervene based on ratings from the FQR system, providing corrective action, mentoring, and ongoing development. 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 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, 2019, we employed approximately 225 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. The One Stop and the academic team support students in advancing from matriculation through attainment of educational goals. The enrollment counselors and success coaches monitor a set of defined risk factors via data analytics provided through the student information, TEAMS 3, PowerBI, and other systems, intervening proactively with any student demonstrating signs of being at risk.

 

Student Support Services

Encouraging students to complete their degree programs is critical to our success. We invest 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. 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.

 

Administrative services. We provide students with access to a variety of administrative services via in person meeting as well as telephonically and over 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. NAU provides an extensive array of online library resources, services, and instruction to support the educational and research endeavors of our students, faculty and staff, as well as online libraries and online library resources available 24/7. In 2018, the university launched full cloud-based service points for library support and online course resources.

 

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.

 

 

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 areas of opportunity, which enables the university to best serve students by enrolling them in classes to build needed skills, thereby increasing their chances of success.

 

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 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 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 National Association of Credential Evaluation Services 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:

 

 

 

 

 

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 either (i) 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; (ii) an official Test of English for International Communication score report indicating a minimum score of 750 (not applicable to student enrolled in the nursing program); (iii) an official IELTS score report with an overall minimum score of 5; (iv) 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 (v) 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 5,648 students as of May 31, 2018 to 3,313 students as of May 31, 2019, representing an annual decrease of approximately 41.3% mainly because of a decrease in undergraduate and diploma students. As of May 31, 2019, we had 2,760 students enrolled in our online programs and 553 students enrolled on-campus.

 

  

The following is a summary of our student enrollment by degree type and by instructional delivery method:

 

 

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 number 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, 2019 and 2018, approximately 78.2% and 82.1%, 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, 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, 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 52 rental units, referred to as Doral Apartments, of which 94% were leased as of May 31, 2019. 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 91% leased as of May 31, 2019. Vista Park consists of 24 total condominium units of all 24 were sold as of May 31, 2019. 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. Arrowhead View is 92% leased as of May 31, 2019.

 

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 and conducts periodic audits 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 (the “2016 State Authorization Final Rule”). Among other provisions, the 2016 State Authorization Final Rule requires 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 a student resides, if such authorization is required by the state. The 2016 State Authorization Final Rule recognizes authorization through participation in a state authorization reciprocity agreement, if the agreement does not prevent a state from enforcing its own laws. The 2016 State Authorization Final Rule also requires 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 2016 State Authorization Final Rule also requires institutions to: (i) document the state process for resolving complaints from students enrolled in programs offered through distance education or correspondence courses; and (ii) make certain public and individualized disclosures to enrolled and prospective students about their distance education programs. The provisions of the 2016 State Authorization Final Rule relating to foreign locations of domestic institutions became effective July 1, 2018. On June 29, 2018, the Department of Education delayed the effective date of the 2016 State Authorization Final Rule in all other respects from July 1, 2018, to July 1, 2020. However, on April 26, 2019, the U.S. District Court for the Northern District of California issued a decision concluding that the above-described delay of the 2016 State Authorization Final Rule was improper, and further ordered that the 2016 State Authorization Rule would become effective on May 26, 2019. On July 23, 2019, the Department of Education released regulatory guidance to postsecondary institutions confirming that the 2016 State Authorization Final Rule became effective on May 26, 2019.

 

 

On June 12, 2019, the Department of Education published in the Federal Register proposed regulations (the “2018 State Authorization Proposed Rule”) to revise the 2016 State Authorization Final Rule. The 2018 State Authorization Proposed Rule, if adopted as a final regulation, would continue to recognize authorization through participation in a state authorization reciprocity agreement, but would revise the requirement for state authorization to be based on the location of a student rather than whether or not a student legally resides in a state. The 2018 State Authorization Proposed Rule also would revise requirements for institutional notifications to students concerning the eligibility of graduates for professional licensure in their states. See also “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 full approval effective from April 20, 2018 through April 19, 2019. On April 1, 2019, SDBOR informed NAU that, based on our most recent financial responsibility composite score as determined by the Department of Education and a review by SDBOR of additional f3inancial information provided by us, SDBOR extended NAU’s participation in SARA on a provisional basis effective April 1, 2019 through March 31, 2020. In connection with that provisional status, we must submit quarterly reports to SDBOR, including any updates to, and specifically noting deviations from, the financial information previously provided to SDBOR. The April 1, 2019 letter from SDBOR also informed NAU of the conditions under which its provisional participation in SARA may be extended beyond March 31, 2020. If NAU is unable to satisfy the conditions set forth in the April 1, 2019 letter for extension of its SARA participation beyond March 31, 2020, we may be required to obtain state licensure or authorization in states beyond those where we operate physical facilities.

 

We do not believe that any of the states in which we are currently licensed or authorized, other than, South Dakota, Colorado, Indiana, Kansas, 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 may, 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, a regional accrediting commission recognized by the Department of Education. Our accreditation by the HLC was most recently affirmed in January 2015; however, on May 23, 2019, HLC assigned its Financial Distress designation to NAU based on statements regarding our financial condition made by us in an April 2019 filing with the Securities and Exchange Commission. 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. HLC most recently conducted a site visit at NAU on June 27-28, 2019. On July 19, 2019, HLC informed NAU that the visiting team concluded that NAU is in compliance with the HLC Criteria for Accreditation and Assumed Practices that were the focus of the visit, including criteria related to institutional finances, integrity, academic and student support resources, and faculty; therefore, HLC removed its Financial Distress designation from NAU as of that date. HLC also required NAU to submit an interim report regarding its financial resources on or before December 31, 2019. A mid-cycle comprehensive evaluation visit by HLC is scheduled to occur in May 2020.

 

 

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 addition 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, 2019:

 

 

 

 

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. Per its strategy to shift the university to a predominantly online institution, NAU has succeed in teaching out most ground locations. In doing so, the university has sustained all of the programmatic accreditations above, working closely with each accreditor to ensure students complete their studies from an accredited program.

 

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. As of May 31, 2019, in addition to its central administration location in Rapid City, South Dakota, NAU operated five instructional locations across the states of Colorado, Indiana, Kansas, and Texas. NAU also continued to conduct educational programs at Ellsworth Air Force Base, South Dakota, and Kings Bay Naval Base, Georgia. An institution must also 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. During the current Congress, both the House Education and Labor Committee and the House Oversight and Reform Committee have conducted hearings regarding Department of Education regulatory oversight activities, particularly with respect to proprietary institutions.

 

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. 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 attorney 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 attorney generals 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 veteran’s 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 attorney 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. In a series of opinions and orders on September 17 and October 12, 2018, the Court reinstated the 2016 Borrower Defense Final Rule and it is now in effect. We cannot predict with any certainty the outcome or impact of that now-effective rule on our business and 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 (the “2016 State Authorization Final Rule”). Among other provisions, the 2016 State Authorization Final Rule requires 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 a student resides, if such authorization is required by the state. The 2016 State Authorization Final Rule recognizes authorization through participation in a state authorization reciprocity agreement, if the agreement does not prevent a state from enforcing its own laws. The 2016 State Authorization Final Rule also requires 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 2016 State Authorization Final Rule also requires 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 provisions of the 2016 State Authorization Final Rule relating to foreign locations of domestic institutions became effective July 1, 2018. On June 29, 2018, the Department of Education delayed the effective date of the 2016 State Authorization Final Rule in all other respects from July 1, 2018, to July 1, 2020. However, on April 26, 2019, the U.S. District Court for the Northern District of California issued a decision concluding that the above-described delay of the 2016 State Authorization Final Rule was improper, and further ordered that the 2016 State Authorization Rule would become effective on May 26, 2019. On July 23, 2019, the Department of Education released regulatory guidance to postsecondary institutions confirming that the 2016 State Authorization Final Rule became effective on May 26, 2019.

 

On June 12, 2019, the Department of Education published in the Federal Register proposed regulations (the “2018 State Authorization Proposed Rule”) to revise the 2016 State Authorization Final Rule. The 2018 State Authorization Proposed Rule, if adopted as a final regulation, would continue to recognize authorization through participation in a state authorization reciprocity agreement, but would revise the requirement for state authorization to be based on the location of a student rather than whether or not a student legally resides in a state. The 2018 State Authorization Proposed Rule also would revise requirements for institutional notifications to students concerning the eligibility of graduates for professional licensure in their states. We cannot predict with certainty the impact that such regulations might have on our business if finalized in their current form.

 

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

 

 

 

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 phased out the program in 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 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.

 

On August 14, 2018, the Department of Education published in the Federal Register a proposed rule (the “Gainful Employment Proposed Rule”) following a negotiated rulemaking process that occurred from December 2017 through March 2018 and that failed to achieve consensus. On July 1, 2019, following a public comment period on the Gainful Employment Proposed Rule, the Department of Education published final regulations (the “Gainful Employment Final Rule”) rescinding the current gainful employment regulations applicable to all of our educational programs. Among other things, the Gainful Employment Final Rule removes 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. Although the Gainful Employment Final Rule is not effective until July 1, 2020, the Department of Education announced on June 28, 2019 that it was exercising its discretion under the Higher Education Act to permit postsecondary institutions to implement the Gainful Employment Final Rule as early as July 1, 2019; however, institutions that do not early implement the Gainful Employment Final Rule are expected to maintain compliance with the current gainful employment regulations until July 1, 2020. NAU has taken the steps described by the Department of Education’s announcement of June 28, 2019 to implement the Gainful Employment Final Rule as of July 1, 2019.

 

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, the Company, and Dlorah, 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. The Company 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.

 

As of May 31, 2019, in addition to its central administration location in Rapid City, South Dakota, NAU operated five instructional locations across the states of Colorado, Indiana, Kansas, and Texas. NAU also continued to conduct educational programs at Ellsworth Air Force Base, South Dakota and Kings Bay Naval Base, Georgia. 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 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 Colorado, Indiana, Kansas, 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. 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 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 full approval effective April 20, 2018 through April 19, 2019. On April 1, 2019, SDBOR informed NAU that, based on our most recent financial responsibility composite score as determined by the Department of Education and a review by SDBOR of additional financial information provided by us, SDBOR extended NAU’s participation in SARA on a provisional basis effective April 1, 2019 through March 31, 2020. In connection with that provisional status, we must submit quarterly reports to SDBOR, including any updates to, and specifically noting deviations from, the financial information previously provided to SDBOR. The April 1, 2019 letter from SDBOR also informed NAU of the conditions under which its provisional participation in SARA may be extended beyond March 31, 2020. If NAU is unable to satisfy the conditions set forth in the April 1, 2019 letter for extension of its SARA participation beyond March 31, 2020, we may be required to obtain state licensure or authorization in states beyond those where we operate physical facilities.

 

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 most recent certification to participate in the Title IV programs, which was not provisional, was effective from June 2013 through March 31, 2019. Because NAU timely submitted an application for recertification to the Department of Education, its existing certification to participate in the Title IV programs continues on a month-to-month provisional basis until the Department of Education issues a decision on the application for recertification. 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.

 

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.

 

Also, 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. On March 8, 2019, NAU received a letter from the Department of Education which noted several financial matters described in the footnotes to our audited financial statements for the fiscal year ended May 31, 2018 and our Form 10-Q filed with the Securities and Exchange Commission on January 22, 2019, and the Company’s delisting from Nasdaq and transfer of shares to the OTCQB, and determined that NAU did not meet its financial responsibility standards for institutions that participate in Title IV programs. As a result, the Department of Education’s letter of March 8, 2019 imposed additional reporting requirements on NAU with respect to its financial condition including bi-weekly cash balance submissions and monthly submissions of actual and projected cash flow statements, and notification requirements regarding certain enumerated events should they occur in the future; required NAU to process Title IV program funds under the Heightened Cash Monitoring Type 1 method of payment; and informed NAU that it could continue to participate in Title IV programs by either (1) posting a letter of credit to the Department of Education in the amount of $36,653, representing 50% of the Title IV program funds awarded during the Company’s fiscal year ended May 31, 2018, or (2) posting a letter of credit to the Department of Education in the amount of $10,996, representing 15% of the Title IV program funds awarded during the Company’s fiscal year ended May 31, 2018, accompanied by the provisional form of certification to participate in the Title IV programs. On March 22, 2019, we submitted a request to the Department of Education for reconsideration of its imposition of the letter of credit, as well as the amount and timing for any required letter of credit. In response to our request, the Department of Education provided two additional options for a letter of credit accompanied by provisional certification: (1) posting of an irrevocable letter of credit in the amount of $7,331, representing 10% of Title IV program funds for its fiscal year ended May 31, 2018, or (2) placement on the Heightened Cash Monitoring Type 2 payment method, with a percentage of each payment withheld until an account equal to the required letter of credit amount can be funded. On April 30, 2019, the Company responded to the Department’s letter and selected the posting of an irrevocable letter of credit in the amount of $7,331 for the benefit of the Department. The letter of credit was issued on May 10, 2019.

 

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.”

 

  

Our audited financial statements for the fiscal year ended May 31, 2019 indicate our most recent composite score is 1.1. 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 2019 fiscal year. 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 continue operating under the requirements imposed by the March 8, 2019 letter, including the letter of credit issued to the Department of Education on May 10, 2019, 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.

 

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 2019 and 2018 fiscal years, we derived approximately 78.2% and 82.1%, 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.

 

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 2015 and 2014 are 23.7% and 24.1%, respectively. The draft cohort rate for federal fiscal year 2016 is 20.1%.

 

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. The Department of Education conducted an on-site review of NAU’s administration of Title IV programs from June 10, 2019 through June 14, 2019, for which no program review determination letter has been received to date. 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. In addition, various U.S. state legislatures have begun to enact data privacy statutes. Effective January 1, 2020, the California Consumer Privacy Act (“CCPA”) will apply to any for-profit entity doing business in California, that has a gross revenue greater than $25 million; annually buys, receives, sells, or shares the personal information of more than 50,000 consumers, households, or devices for commercial purpose; or derives 50 percent or more of its annual revenues from selling consumers’ personal information. The CCPA contains requirements that that are different from or exceed those in U.S. federal and other states’ privacy and data security laws. Additional data privacy regulation at the state level, which may differ from or conflict with other state, federal, or EU requirements, may have an effect on our business, revenues, and results of operations.

 

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. Our most recent certification to participate in the Title IV programs, which was not provisional, was effective from June 2013 through March 31, 2019. Because NAU timely submitted an application for recertification to the Department of Education, its existing certification to participate in the Title IV programs continues on a month-to-month provisional basis until the Department of Education issues a decision on the application for recertification. 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.

 

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 ("HPU"), 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 SEC 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.