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EX-32.2 - EX-32.2 - CAREER EDUCATION CORPceco-ex322_11.htm
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EX-31.2 - EX-31.2 - CAREER EDUCATION CORPceco-ex312_9.htm
EX-31.1 - EX-31.1 - CAREER EDUCATION CORPceco-ex311_8.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM          TO             

Commission File Number: 0-23245

 

CAREER EDUCATION CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

36-3932190

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

231 N. Martingale Road

Schaumburg, Illinois

60173

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (847) 781-3600

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

Emerging growth company

 

  

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.    Yes      No  

Number of shares of registrant’s common stock, par value $0.01, outstanding as of July 31, 2017: 69,076,820

 

 


CAREER EDUCATION CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I—FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets

1

 

 

 

 

Unaudited Condensed Consolidated Statements of Income and Comprehensive Income

2

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows

3

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34

 

 

 

Item 4.

Controls and Procedures

35

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 6.

Exhibits

36

 

 

SIGNATURES

37

 

 

 


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

(unaudited)

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents, unrestricted

 

$

38,898

 

 

$

49,507

 

Restricted cash

 

 

1,375

 

 

 

1,375

 

Restricted short-term investments

 

 

7,097

 

 

 

8,597

 

Short-term investments

 

 

124,702

 

 

 

147,681

 

Total cash and cash equivalents, restricted cash and short-term investments

 

 

172,072

 

 

 

207,160

 

Student receivables, net of allowance for doubtful accounts of $22,542 and $21,376

   as of June 30, 2017 and December 31, 2016, respectively

 

 

21,389

 

 

 

22,825

 

Receivables, other, net

 

 

1,163

 

 

 

929

 

Prepaid expenses

 

 

13,335

 

 

 

14,446

 

Inventories

 

 

877

 

 

 

1,868

 

Other current assets

 

 

791

 

 

 

817

 

Assets of discontinued operations

 

 

100

 

 

 

148

 

Total current assets

 

 

209,727

 

 

 

248,193

 

 

 

 

 

 

 

 

 

 

NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $368,933 and $381,415

   as of June 30, 2017 and December 31, 2016, respectively

 

 

35,434

 

 

 

40,512

 

Goodwill

 

 

87,356

 

 

 

87,356

 

Intangible assets, net of amortization of $1,200 and $800

   as of June 30, 2017 and December 31, 2016, respectively

 

 

8,100

 

 

 

8,500

 

Student receivables, net of allowance for doubtful accounts of $2,032

   and $1,766 as of June 30, 2017 and December 31, 2016, respectively

 

 

2,780

 

 

 

3,055

 

Deferred income tax assets, net

 

 

149,528

 

 

 

158,272

 

Other assets

 

 

7,563

 

 

 

7,608

 

Assets of discontinued operations

 

 

5,987

 

 

 

6,105

 

TOTAL ASSETS

 

$

506,475

 

 

$

559,601

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,414

 

 

$

10,099

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll and related benefits

 

 

31,485

 

 

 

41,203

 

Advertising and marketing costs

 

 

10,196

 

 

 

10,253

 

Income taxes

 

 

2,098

 

 

 

1,830

 

Other

 

 

32,923

 

 

 

69,244

 

Deferred tuition revenue

 

 

27,230

 

 

 

28,364

 

Liabilities of discontinued operations

 

 

6,667

 

 

 

8,219

 

Total current liabilities

 

 

121,013

 

 

 

169,212

 

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Deferred rent obligations

 

 

23,879

 

 

 

30,713

 

Other liabilities

 

 

23,421

 

 

 

31,751

 

Liabilities of discontinued operations

 

 

3,214

 

 

 

6,422

 

Total non-current liabilities

 

 

50,514

 

 

 

68,886

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued or outstanding

 

 

-

 

 

 

-

 

Common stock, $0.01 par value; 300,000,000 shares authorized; 84,230,258

   and 83,538,033 shares issued, 69,076,820 and 68,519,005 shares

   outstanding as of June 30, 2017 and December 31, 2016, respectively

 

 

842

 

 

 

835

 

Additional paid-in capital

 

 

618,105

 

 

 

613,325

 

Accumulated other comprehensive income (loss)

 

 

39

 

 

 

(258

)

Accumulated deficit

 

 

(66,767

)

 

 

(76,230

)

Cost of 15,153,438 and 15,019,028 shares in treasury as of June 30, 2017

   and December 31, 2016, respectively

 

 

(217,271

)

 

 

(216,169

)

Total stockholders' equity

 

 

334,948

 

 

 

321,503

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

506,475

 

 

$

559,601

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In thousands, except per share amounts)

 

 

 

For the Quarter Ended June 30,

 

 

For the Year to Date Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tuition and fees

 

$

145,507

 

 

$

181,432

 

 

$

306,884

 

 

$

379,217

 

Other

 

 

715

 

 

 

1,194

 

 

 

1,447

 

 

 

2,295

 

Total revenue

 

 

146,222

 

 

 

182,626

 

 

 

308,331

 

 

 

381,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Educational services and facilities

 

 

36,406

 

 

 

58,062

 

 

 

76,579

 

 

 

119,600

 

General and administrative

 

 

96,836

 

 

 

102,072

 

 

 

205,081

 

 

 

225,635

 

Depreciation and amortization

 

 

3,876

 

 

 

5,202

 

 

 

7,786

 

 

 

11,771

 

Asset impairment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

237

 

Total operating expenses

 

 

137,118

 

 

 

165,336

 

 

 

289,446

 

 

 

357,243

 

Operating income

 

 

9,104

 

 

 

17,290

 

 

 

18,885

 

 

 

24,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

464

 

 

 

301

 

 

 

854

 

 

 

566

 

Interest expense

 

 

(113

)

 

 

(116

)

 

 

(226

)

 

 

(352

)

Miscellaneous income (expense)

 

 

253

 

 

 

(231

)

 

 

293

 

 

 

(14

)

Total other income (expense)

 

 

604

 

 

 

(46

)

 

 

921

 

 

 

200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRETAX INCOME

 

 

9,708

 

 

 

17,244

 

 

 

19,806

 

 

 

24,469

 

Provision for income taxes

 

 

5,045

 

 

 

4,620

 

 

 

9,546

 

 

 

8,755

 

INCOME FROM CONTINUING OPERATIONS

 

 

4,663

 

 

 

12,624

 

 

 

10,260

 

 

 

15,714

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM DISCONTINUED OPERATIONS, net of tax

 

 

(377

)

 

 

(785

)

 

 

(797

)

 

 

(864

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

4,286

 

 

 

11,839

 

 

 

9,463

 

 

 

14,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

222

 

 

 

(97

)

 

 

263

 

 

 

96

 

Unrealized gains on investments

 

 

11

 

 

 

131

 

 

 

34

 

 

 

454

 

     Total other comprehensive income

 

 

233

 

 

 

34

 

 

 

297

 

 

 

550

 

COMPREHENSIVE INCOME

 

$

4,519

 

 

$

11,873

 

 

$

9,760

 

 

$

15,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER SHARE - BASIC:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.07

 

 

$

0.18

 

 

$

0.15

 

 

$

0.23

 

Loss from discontinued operations

 

 

(0.01

)

 

 

(0.01

)

 

 

(0.01

)

 

 

(0.01

)

Net income per share

 

$

0.06

 

 

$

0.17

 

 

$

0.14

 

 

$

0.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS) PER SHARE - DILUTED:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.07

 

 

$

0.18

 

 

$

0.14

 

 

$

0.23

 

Loss from discontinued operations

 

 

(0.01

)

 

 

(0.01

)

 

 

(0.01

)

 

 

(0.01

)

Net income per share

 

$

0.06

 

 

$

0.17

 

 

$

0.13

 

 

$

0.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

69,025

 

 

 

68,368

 

 

 

68,803

 

 

 

68,261

 

Diluted

 

 

70,884

 

 

 

69,015

 

 

 

70,590

 

 

 

68,627

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

For the Year to Date Ended June 30,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

9,463

 

 

$

14,850

 

Adjustments to reconcile net income to net

 

 

 

 

 

 

 

 

cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Asset impairment

 

 

-

 

 

 

237

 

Depreciation and amortization expense

 

 

7,786

 

 

 

11,771

 

Bad debt expense

 

 

15,112

 

 

 

14,769

 

Compensation expense related to share-based awards

 

 

2,326

 

 

 

1,391

 

Gain on disposition of property and equipment

 

 

-

 

 

 

(238

)

Deferred income taxes

 

 

8,744

 

 

 

-

 

Changes in operating assets and liabilities

 

 

(77,677

)

 

 

(36,213

)

Net cash (used in) provided by operating activities

 

 

(34,246

)

 

 

6,567

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of available-for-sale investments

 

 

(145,088

)

 

 

(93,689

)

Sales of available-for-sale investments

 

 

169,480

 

 

 

58,330

 

Purchases of property and equipment

 

 

(2,146

)

 

 

(1,970

)

Proceeds on the sale of assets

 

 

-

 

 

 

3,400

 

Payments of cash upon sale of businesses

 

 

-

 

 

 

(62

)

Net cash provided by (used in) investing activities

 

 

22,246

 

 

 

(33,991

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

2,459

 

 

 

278

 

Payment on borrowings

 

 

-

 

 

 

(38,000

)

Payments of employee tax associated with stock compensation

 

 

(1,101

)

 

 

(520

)

Net cash provided by (used in) financing activities

 

 

1,358

 

 

 

(38,242

)

 

 

 

 

 

 

 

 

 

EFFECT OF FOREIGN CURRENCY EXCHANGE RATE

   CHANGES ON CASH AND CASH EQUIVALENTS:

 

 

33

 

 

 

(36

)

 

 

 

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(10,609

)

 

 

(65,702

)

CASH AND CASH EQUIVALENTS, beginning of the period

 

 

50,882

 

 

 

116,740

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

40,273

 

 

$

51,038

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

3


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. DESCRIPTION OF THE COMPANY

Career Education’s academic institutions offer a quality education to a diverse student population in a variety of disciplines through online, campus-based and blended learning programs. Our two universities – American InterContinental University (“AIU”) and Colorado Technical University (“CTU”) – provide degree programs through the master’s or doctoral level as well as associate and bachelor’s levels. Both universities predominantly serve students online with career-focused degree programs that are designed to meet the educational demands of today’s busy adults. AIU and CTU continue to show innovation in higher education, advancing new personalized learning technologies like their intellipath™ adaptive learning platform. Career Education is committed to providing quality education that closes the gap between learners who seek to advance their careers and employers needing a qualified workforce.

Additionally, CEC is in the process of teaching out campuses within our Transitional Group and Culinary Arts segments. Students enrolled at these campuses have been afforded the reasonable opportunity to complete their program of study prior to the final teach-out date.

A listing of individual campus locations and web links to Career Education’s colleges, institutions and universities can be found at www.careered.com.

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “the Company” and “CEC” refer to Career Education Corporation and our wholly-owned subsidiaries. The terms “college,” “institution” and “university” refer to an individual, branded, for-profit educational institution, owned by us and includes its campus locations. The term “campus” refers to an individual main or branch campus operated by one of our colleges, institutions or universities.

2. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the quarter and year to date ended June 30, 2017 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2017.

The unaudited condensed consolidated financial statements presented herein include the accounts of Career Education Corporation and our wholly-owned subsidiaries (collectively “CEC”). All intercompany transactions and balances have been eliminated.

         Our reporting segments are determined in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 – Segment Reporting and are based upon how the Company analyzes performance and makes decisions. We organize our business across four reporting segments: CTU, AIU (comprises University Group); Culinary Arts and Transitional Group (comprises Career Schools Group). Campuses included in our Transitional Group and Culinary Arts segments are currently being taught out and no longer enroll new students. These campuses employ a gradual teach-out process, enabling them to continue to operate while current students have a reasonable opportunity to complete their course of study.

During the second quarter of 2017, the Company completed the teach-out of three Transitional Group campuses: Sanford-Brown Brooklyn Center, Sanford-Brown Chicago and Sanford-Brown Orlando, which continue to be reported within the Transitional Group as of June 30, 2017 in accordance with ASC Topic 360 – Property, Plant and Equipment, which limits discontinued operations reporting.

Effective January 2017, the Company now accounts for cash flows related to cash payments for employee taxes made by the Company on the employees’ behalf for withheld shares related to stock settlements as a financing activity within the statement of cash flows. This change was a result of updated guidance issued by the FASB under Accounting Standards Update (“ASU”) No 2016-09, Compensation – Stock Compensation (Topic 718). Prior period amounts were recast to cash flows from financing activities from cash flows from operating activities to be comparable to current year reporting. See Note 3 “Recent Accounting Pronouncements” for further discussion.

Effective January 2017, the Company now accounts for cash flows related to changes in restricted cash and restricted cash equivalents within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This change was a result of updated guidance issued by the FASB under ASU No 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. Prior period amounts are now included in cash and cash equivalents, beginning and end of the period, which were previously presented within cash flows from financing activities for changes in balances, to be comparable to current year reporting. See Note 3 “Recent Accounting Pronouncements” for further discussion.

4


3. RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting guidance adopted in 2017

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this ASU provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. Stakeholders observed that the definition of the term modification is broad and that its interpretation results in diversity in practice. The amendments in this update provide further guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. For all public entities, ASU 2017-09 is effective for annual periods and interim periods beginning after December 15, 2017; early adoption is permitted. We have evaluated and early adopted this guidance. The adoption did not impact the presentation of our financial condition, results of operations and disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning fair value of a reporting unit to all its assets and liabilities as if that reporting unit had been acquired in a business combination, eliminating Step 2 from the goodwill impairment tests. For all public entities, ASU 2017-04 is effective for annual periods and interim periods beginning after December 15, 2019; early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. We have evaluated and adopted this guidance beginning 2017. The adoption did not significantly impact the presentation of our financial condition, results of operations and disclosures.

In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. The amendments in this ASU announced disclosure of the impact that recently issued accounting standards will have on the financial statements of a registrant when such standards are adopted in a future period. The announcement applies to ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), ASU No. 2016-02 Leases (Topic 842); and ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). The amendment provides SEC staff views that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosures and the potential material effects of those ASUs on the financial statements when adopted. The changes and corrections within this guidance did not significantly impact the presentation of our financial condition, results of operations and disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. This ASU simplified several aspects of accounting for share-based payment award transactions including the accounting for income taxes, classification of excess tax benefits on the statement of cash flows, classification of employee taxes paid on the statement of cash flows when the employer withholds shares, forfeiture policy election and payroll minimum statutory withholding. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital. We have evaluated each component of this guidance listed below and adopted the new standard beginning 2017.

 

 

Accounting for Income Taxes: The primary impact of adoption is the recognition of excess tax benefits and tax deficiencies recorded in the statement of income and comprehensive income when stock awards vest or are settled, rather than paid-in capital for all periods beginning in 2017. The provision for income taxes for the quarter and year to date ended June 30, 2017 includes a $1.5 million and $1.2 million, respectively, unfavorable adjustment associated with the adoption of ASU 2016-09, which increased our quarterly and year to date effective tax rate by 15.6% and 5.9%, respectively. The Company evaluated the unrecognized excess tax benefits as of December 31, 2016 on a cumulative retrospective basis and determined it did not have any impact to retained earnings and deferred tax assets as of the January 1, 2017 adoption date.

 

 

Classification of Cash Flow: The adoption of this ASU has no material impact on our presentation of the statement of cash flows for the year to date ended June 30, 2017. We have elected to apply the presentation requirements for cash flows related to cash payments for employee taxes made by the Company on the employees’ behalf for withheld shares to be reported as financing activities for all periods presented. The presentation requirements for cash flows related to excess tax benefits have no impact to any of the periods presented on our consolidated cash flow statements.

 

 

Accounting for Forfeitures: The Company accounted for estimated forfeitures in the amount of compensation cost recognized in each period, and has continued to do so under the new guidance; therefore, the adoption has had no impact related to forfeitures.

 

 

Minimum Statutory Tax Withholding: The new guidance contains an option which allows employees to withhold tax amounts up to the employees’ maximum individual tax rate, which provides the Company an ability to repurchase more

5


 

of its employees’ shares without triggering liability accounting. This change has not impacted the presentation of our financial statements or disclosures.

 

 

Earnings per Share (“EPS”): The primary impact of adoption is the elimination of the calculation of assumed proceeds from windfalls and shortfalls under the treasury stock method, which results in fewer hypothetical repurchases of shares and higher incremental shares being issued, having a dilutive effect on EPS. The impact of this change on our EPS is immaterial for the second quarter and year to date of 2017 and we expect it to continue to be immaterial for future periods.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. For all public entities, ASU 2016-18 is effective for annual periods and interim periods beginning after December 15, 2017; early adoption is permitted for all organizations for annual periods and interim periods. We have evaluated and adopted this guidance beginning 2017 for all periods presented. The adoption did not significantly impact the presentation of our financial condition, results of operations and disclosures.

In March 2016, the FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investments, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method was in effect during all previous periods. The amendment requires an equity method investor to add the cost of acquisition and requires available-for-sale equity securities that qualify for the equity method of accounting to recognize earnings as unrealized holding gains or losses in accumulated other comprehensive income. For all entities, ASU 2016-07 is effective for annual periods and interim periods beginning after December 15, 2016. We have evaluated and adopted this guidance beginning 2017. The adoption did not materially impact the presentation of our financial condition, results of operations and disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this ASU require an entity to measure inventory at the lower of cost and net realizable value, further clarifying consideration for net realizable value as estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. This ASU more closely aligns the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (“IFRS”). For public business entities, ASU 2015-11 is effective for annual periods and interim periods beginning after December 15, 2016. The amendment in this ASU is prospectively applied. We have evaluated and adopted this guidance beginning 2017. The adoption did not significantly impact the presentation of our financial condition, results of operations and disclosures.

Recent accounting guidance not yet adopted

In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The amendments in this ASU clarify and provide guidance for partial sales of nonfinancial assets and recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. For all public entities, ASU 2017-05 is effective for annual reporting periods and interim periods beginning after December 15, 2017; early adoption is permitted for all organizations for annual periods and interim periods. We are currently evaluating this guidance and believe the adoption will not significantly impact the presentation of our financial condition, results of operations and disclosures.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments in this ASU improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by reducing complexity in accounting standards. The amendments eliminate the exception prohibiting the recognition of current and deferred income taxes for an intra-entity transfer of an asset other than inventory until the asset has been sold to an outside party. For all public entities, ASU 2016-16 is effective for annual periods and interim periods beginning after December 15, 2017; early adoption is permitted for all organizations for annual periods and interim periods. We are currently evaluating this guidance and believe the adoption will not significantly impact the presentation of our financial condition, results of operations and disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU address eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. The eight topics include debt prepayment or extinguishments costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from settlement of insurance claims, proceeds from settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in

6


securitization transactions and separately identifiable cash flows and application of the predominance principle. For all public business entities, ASU 2016-15 is effective for annual periods and interim periods beginning after December 15, 2017; early adoption is permitted for all organizations for annual periods and interim periods. We are currently evaluating this guidance and believe the adoption will not significantly impact the presentation of our financial condition, results of operations and disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected and credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. For all public business entities, ASU 2016-13 is effective for annual periods and interim periods beginning after December 15, 2019; early adoption is permitted for all organizations for annual periods and interim periods beginning after December 15, 2018. We are currently evaluating this guidance and believe the adoption will not significantly impact the presentation of our financial condition, results of operations and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The objective of Topic 842 is to establish transparency and comparability that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The core principle of Topic 842 is that lessees should recognize the assets and liabilities that arise from leases. All leases create an asset and liability for the lessee in accordance with FASB Concept Statements No. 6 Elements of Financial Statements, and, therefore, recognition of those lease assets and liabilities represents an improvement over previous GAAP. The accounting applied for lessors largely remained unchanged. The amendment in this ASU requires recognition of a lease liability and a right to use asset at the lease inception date. For all public business entities, ASU 2016-02 is effective for annual periods and interim periods beginning after December 15, 2018; early adoption is permitted. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact primarily relates to our accounting for real estate leases and real estate subleases. The Company expects to have a material amount now reported as a right of use asset and lease liability related to these leases as well as expects to separate lease components from the non-lease components for recognition. We will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach starting fiscal year 2017. We are currently evaluating this guidance and believe the adoption will significantly impact the presentation of our financial condition, results of operations and disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), a new accounting standard intended to improve and converge the financial reporting requirements between U.S. GAAP and International Accounting Standards, which will supersede virtually all existing revenue recognition guidance under generally accepted accounting principles in the United States. The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided. The new guidance establishes a five step approach for the recognition of revenue.

Implementation Update

We have assigned internal resources and are in the assessment stage of our evaluation of the impact of the new standard on our accounting policies, processes and system requirements. While we continue to assess all potential impacts under the new standard, the Company has made progress as outlined in the below discussion and remains on schedule to implement the new revenue guidelines. This standard will be effective for us beginning in January 2018. We intend to adopt the new standard based on the modified retrospective transition method and accordingly the Company expects to complete the analysis of the cumulative effect adjustment to retained earnings, if applicable, as of the start of the first period for which it applies the new standard. While the Company continues to make progress to assess all potential impacts under the new revenue standard, including the areas described below, and have reached preliminary conclusions on key accounting assessments related to the standard, we do not know or cannot reasonably estimate quantitative information related to the impact of the new revenue standard on the Company’s financial statements and disclosures at this time.

Technical Analysis Update

The Company’s revenue is derived primarily from academic programs taught to its students. Tuition and other tuition-related fees are recognized as revenue on a straight-line basis over either the academic term or the program period based on number of days within such period. Non-tuition related revenue is recognized as services are performed or goods are delivered. See Note 2 “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission on February 23, 2017. The Company is in the process of identifying and evaluating each source of revenue stream that will remain as of the implementation date to evaluate the five step approach from the principles-based guidance (Topic 606) and develop a preliminary assessment to determine any impact to existing practices for revenue recognition. The key revenue component considerations the Company is evaluating are as follows:

 

Tuition and tuition-related fees

 

Other revenue (‘non-tuition’), primarily ancillary sales of program related materials or supplies

7


 

Types of funding a student receives, i.e. Title IV Program funds, Veterans’ Administration funds, employer reimbursement, personal loans, etc. See Item 1, “Business – Student Financial Aid and Related Federal Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2016 for further discussion on various types of funding.

 

Student status, i.e. in-school or out-of-school

 

Length of program or term

The Company is currently evaluating the assessment of various contractual arrangements and performance obligations for each type of revenue stream and it reasonably expects the core contractual or performance obligations to remain similar in substance and not differ materially from considering each contract or performance obligation separate. We expect to elect and utilize the ‘portfolio’ approach when analyzing our student contracts, policies, processes and controls for revenue recognition. We reasonably expect that the impact of applying the portfolio approach will not differ materially from considering each contract individually.

Our evaluation covered the collectability criteria under the new guidance. The Company believes it can apply the portfolio approach when assessing collectability due to the significant amount of historical data that the Company retains related to collection by types of funding.

The Company is currently assessing the impacts related to the accounting for contract assets separate from accounts receivable and are evaluating the point at which a student’s contract asset becomes a receivable. Currently, a student’s entire accounts receivable balance is evaluated along with their entire deferred revenue balance to determine the net position of the two. Once the Company determines the point at which a contract asset becomes a receivable, this amount will no longer be offset with a student’s deferred revenue balance. This change in presentation is expected to have an immaterial impact to the statement of financial position as well as an immaterial impact to bad debt expense associated with the accounts receivable balance. The bad debt expense impact would be a shift in the timing of recognition as the portion of a student’s receivable balance that will no longer be offset with deferred revenue will now be reflected sooner as a receivable on our consolidated balance sheet.

Based on our ongoing assessment, we do not anticipate the adoption of ASU 2014-09 will have a significant material impact on the presentation of our results of operations; however, we expect additional modifications on the presentation of our financial condition and disclosures around certain policies, practices and systems, but we are still finalizing our assessment.

4. FINANCIAL INSTRUMENTS

Investments consist of the following as of June 30, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

June 30, 2017

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gain

 

 

(Loss)

 

 

Fair Value

 

Short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

1,350

 

 

$

-

 

 

$

-

 

 

$

1,350

 

Non-governmental debt securities

 

 

88,800

 

 

 

12

 

 

 

(58

)

 

 

88,754

 

Treasury and federal agencies

 

 

34,671

 

 

 

5

 

 

 

(78

)

 

 

34,598

 

Total short-term investments

 

 

124,821

 

 

 

17

 

 

 

(136

)

 

 

124,702

 

Restricted short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-governmental debt securities

 

 

7,097

 

 

 

-

 

 

 

-

 

 

 

7,097

 

Total investments (available for sale)

 

$

131,918

 

 

$

17

 

 

$

(136

)

 

$

131,799

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gain

 

 

(Loss)

 

 

Fair Value

 

Short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

4,050

 

 

$

-

 

 

$

-

 

 

$

4,050

 

Non-governmental debt securities

 

 

107,305

 

 

 

22

 

 

 

(113

)

 

 

107,214

 

Treasury and federal agencies

 

 

36,480

 

 

 

10

 

 

 

(73

)

 

 

36,417

 

Total short-term investments

 

 

147,835

 

 

 

32

 

 

 

(186

)

 

 

147,681

 

Restricted short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-governmental debt securities

 

 

8,597

 

 

 

-

 

 

 

-

 

 

 

8,597

 

Total investments (available for sale)

 

$

156,432

 

 

$

32

 

 

$

(186

)

 

$

156,278

 

 

In the table above, unrealized holding gains (losses) as of June 30, 2017 relate to short-term investments that have been in a continuous unrealized gain (loss) position for less than one year.

8


Our unrestricted non-governmental debt securities primarily consist of corporate bonds and commercial paper. Our treasury and federal agencies primarily consist of U.S. Treasury bills and federal home loan debt securities. We do not intend to sell our investments in these securities prior to maturity and it is not likely that we will be required to sell these investments before recovery of the amortized cost basis. Our restricted short-term investments are comprised entirely of certificates of deposit, which secure our letters of credit.

Fair Value Measurements

FASB ASC Topic 820 – Fair Value Measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of June 30, 2017, we held investments that are required to be measured at fair value on a recurring basis. These investments (available-for-sale) consist of municipal bonds, non-governmental debt securities, and treasury and federal agencies securities. Available for sale securities included in Level 1 are valued at quoted prices in active markets for identical assets and liabilities. Available for sale securities included in Level 2 are estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for identical or similar assets or liabilities in inactive markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Investments measured at fair value on a recurring basis subject to the disclosure requirements of FASB ASC Topic 820 – Fair Value Measurements at June 30, 2017 and December 31, 2016 were as follows (dollars in thousands):

 

 

 

As of  June 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Municipal bonds

 

$

-

 

 

$

1,350

 

 

$

-

 

 

$

1,350

 

Non-governmental debt securities

 

 

27,097

 

 

 

68,754

 

 

 

-

 

 

 

95,851

 

Treasury and federal agencies

 

 

-

 

 

 

34,598

 

 

 

-

 

 

 

34,598

 

Totals

 

$

27,097

 

 

$

104,702

 

 

$

-

 

 

$

131,799

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Municipal bonds

 

$

-

 

 

$

4,050

 

 

$

-

 

 

$

4,050

 

Non-governmental debt securities

 

 

33,597

 

 

 

82,214

 

 

 

-

 

 

 

115,811

 

Treasury and federal agencies

 

 

-

 

 

 

36,417

 

 

 

-

 

 

 

36,417

 

Totals

 

$

33,597

 

 

$

122,681

 

 

$

-

 

 

$

156,278

 

 

 

Equity Method Investment

Our investment in an equity affiliate, which is recorded within other noncurrent assets on our condensed consolidated balance sheets, is an international investment in a private company. As of June 30, 2017, our investment in an equity affiliate equated to a 30.7%, or $3.3 million, non-controlling interest in CCKF, a Dublin-based educational technology company providing intelligent adaptive systems to power the delivery of individualized and personalized learning.

During the quarters ended June 30, 2017 and 2016, we recorded approximately $0.1 million of gain and $0.7 million of loss, respectively, and during the years to date ended June 30, 2017 and June 30, 2016, we recorded $0.1 million and $0.8 million of loss, respectively, related to our proportionate investment in CCKF within miscellaneous income (expense) on our unaudited condensed consolidated statements of income and comprehensive income.

We make periodic operating maintenance payments related to proprietary rights that we use in our intellipathTM adaptive learning technology. The total fees paid to CCKF for the quarters and years to date ended June 30, 2017 and 2016 were as follows (dollars in thousands):

 

Maintenance Fee Payments

 

For the quarter ended June 30, 2017

$

332

 

For the quarter ended June 30, 2016

$

345

 

For the year to date ended June 30, 2017

$

657

 

For the year to date ended June 30, 2016

$

687

 

9


 

Credit Agreement

During the fourth quarter of 2015, the Company; its wholly-owned subsidiary, CEC Educational Services, LLC (“CEC-ES”); and the subsidiary guarantors thereunder entered into a Fourth Amendment to its Amended and Restated Credit Agreement dated as of December 30, 2013 (as amended, the “Credit Agreement”) with BMO Harris Bank N.A., in its capacities as the initial lender and letter of credit issuer thereunder and the administrative agent for the lenders which from time to time may be parties to the Credit Agreement, to among other things, decrease the revolving credit facility to $95.0 million and require pre-approval by the lenders for each credit extension (other than letter of credit extensions) occurring after December 31, 2015. The revolving credit facility under the Credit Agreement is scheduled to mature on December 31, 2018. The loans and letter of credit obligations under the Credit Agreement are required to be secured by 100% cash collateral. As of June 30, 2017 and December 31, 2016, there were no outstanding borrowings under the revolving credit facility.

5. STUDENT RECEIVABLES

Student receivables represent funds owed to us in exchange for the educational services provided to a student. Student receivables are reflected net of an allowance for doubtful accounts and net of deferred tuition revenue as determined on a student-by-student basis at the end of the reporting period. Student receivables, net are reflected on our condensed consolidated balance sheets as components of both current and non-current assets. We do not accrue interest on past due student receivables; interest is recorded only upon collection.

Generally, a student receivable balance is written off once it reaches greater than 90 days past due. Although we analyze past due receivables, it is not practical to provide an aging of our non-current student receivable balances as a result of the methodology utilized in determining our earned student receivable balances. Student receivables are recognized on our condensed consolidated balance sheets as they are deemed earned over the course of a student’s program and/or term, and therefore cash collections are not applied against specifically dated transactions.

Our standard student receivable allowance estimation methodology considers a number of factors that, based on our collection experience, we believe have an impact on our repayment risk and ability to collect student receivables. Changes in the trends in any of these factors may impact our estimate of the allowance for doubtful accounts. These factors include, but are not limited to: internal repayment history, repayment practices of previous extended payment programs, changes in the current economic, legislative or regulatory environments and the ability to complete the federal financial aid process with the student. These factors are monitored and assessed on a regular basis. Overall, our allowance estimation process for student receivables is validated by trending analysis and comparing estimated and actual performance. 

Student Receivables Under Extended Payment Plans and Recourse Loan Agreements

To assist students in completing their educational programs, we had previously provided extended payment plans to certain students and also had loan agreements with Sallie Mae and Stillwater National Bank and Trust Company (“Stillwater”) which required us to repurchase loans originated by them to our students after a certain period of time. We discontinued providing extended payment plans to students during the first quarter of 2011 and the recourse loan agreements with Sallie Mae and Stillwater ended in March 2008 and April 2007, respectively.

As of June 30, 2017 and December 31, 2016, the amount of non-current student receivables under these programs, net of allowance for doubtful accounts, was $2.8 million and $3.1 million, respectively.

Student Receivables Valuation Allowance

Changes in our current and non-current receivables allowance for the quarters and years to date ended June 30, 2017 and 2016 were as follows (dollars in thousands):

 

 

 

Balance,

Beginning

of Period

 

 

Charges to

Expense (1)

 

 

Amounts

Written-off

 

 

Balance,

End

of Period

 

For the quarter ended June 30, 2017

 

$

24,153

 

 

$

6,918

 

 

$

(6,497

)

 

$

24,574

 

For the quarter ended June 30, 2016

 

$

22,768

 

 

$

5,268

 

 

$

(7,028

)

 

$

21,008

 

For the year to date ended June 30, 2017

 

$

23,142

 

 

$

15,210

 

 

$

(13,778

)

 

$

24,574

 

For the year to date ended June 30, 2016

 

$

20,229

 

 

$

14,875

 

 

$

(14,096

)

 

$

21,008

 

 

(1)

Charges to expense include an offset for recoveries of amounts previously written off of $1.2 million and $1.6 million for the quarters ended June 30, 2017 and 2016, respectively, and $2.7 million and $3.6 million for the years to date ended June 30, 2017 and 2016, respectively.

10


Fair Value Measurements

The carrying amount reported in our condensed consolidated balance sheets for the current portion of student receivables approximates fair value because of the nature of these financial instruments as they generally have short maturity periods. It is not practicable to estimate the fair value of the non-current portion of student receivables, since observable market data is not readily available, and no reasonable estimation methodology exists.

6. RESTRUCTURING CHARGES

During the past several years, we have carried out reductions in force related to the continued reorganization of our corporate and campus functions to better align with current total enrollments and made decisions to teach out a number of campuses, meaning gradually close the campuses through an orderly process. As part of the process to wind down these teach-out campuses, the Company also announced that it will align its corporate overhead to support a more streamlined and focused operating entity. Most notably, we have recorded charges within our Transitional Group and Culinary Arts segments and our corporate functions as we continue to align our overall management structure. Each of our teach-out campuses offer current students the reasonable opportunity to complete their course of study. The majority of these teach-out campuses are expected to cease operations by the end of 2017 with the remainder expected to cease operations in 2018.

The following table details the changes in our accrual for severance and related costs associated with all restructuring events for our continuing operations during the quarters and years to date ended June 30, 2017 and 2016 (dollars in thousands):

 

 

 

Balance,

Beginning of

Period

 

 

Severance &

Related

Charges (1) (2)

 

 

Payments

 

 

Non-cash

Adjustments (3)

 

 

Balance,

End of

Period

 

For the quarter ended June