10-Q 1 ceco-10q_20160930.htm CECO-10Q-20160930 ceco-10q_20160930.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 SEPTEMBER 30, 2016

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 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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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

 

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 October 31, 2016: 68,492,085

 

 


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 (Loss) Income and Comprehensive (Loss) 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

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

39

 

 

 

Item 4.

Controls and Procedures

39

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

41

 

 

 

Item 1A.

Risk Factors

41

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 6.

Exhibits

43

 

 

SIGNATURES

44

 

 

 


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

ASSETS

 

(unaudited)

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents, unrestricted

 

$

55,659

 

 

$

66,919

 

Restricted cash

 

 

1,375

 

 

 

49,821

 

Restricted short-term investments

 

 

9,597

 

 

 

-

 

Short-term investments

 

 

151,153

 

 

 

114,901

 

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

 

 

217,784

 

 

 

231,641

 

Student receivables, net of allowance for doubtful accounts of $19,304 and $18,013

   as of September 30, 2016 and December 31, 2015, respectively

 

 

25,457

 

 

 

31,618

 

Receivables, other, net

 

 

876

 

 

 

5,194

 

Prepaid expenses

 

 

12,695

 

 

 

14,380

 

Inventories

 

 

1,829

 

 

 

3,353

 

Other current assets

 

 

954

 

 

 

2,523

 

Assets of discontinued operations

 

 

176

 

 

 

254

 

Total current assets

 

 

259,771

 

 

 

288,963

 

 

 

 

 

 

 

 

 

 

NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

45,213

 

 

 

58,249

 

Goodwill

 

 

87,356

 

 

 

87,356

 

Intangible assets, net

 

 

8,700

 

 

 

9,300

 

Student receivables, net of allowance for doubtful accounts of $1,754

   and $2,216 as of September 30, 2016 and December 31, 2015, respectively

 

 

3,128

 

 

 

3,958

 

Deferred income tax assets, net

 

 

130,343

 

 

 

137,716

 

Other assets

 

 

8,328

 

 

 

16,562

 

Assets of discontinued operations

 

 

8,634

 

 

 

8,811

 

TOTAL ASSETS

 

$

551,473

 

 

$

610,915

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

-

 

 

$

38,000

 

Accounts payable

 

 

16,000

 

 

 

25,906

 

Accrued expenses:

 

 

 

 

 

 

 

 

Payroll and related benefits

 

 

33,075

 

 

 

38,789

 

Advertising and marketing costs

 

 

17,041

 

 

 

11,788

 

Income taxes

 

 

1,730

 

 

 

1,061

 

Other

 

 

25,599

 

 

 

24,082

 

Deferred tuition revenue

 

 

30,342

 

 

 

40,112

 

Liabilities of discontinued operations

 

 

7,004

 

 

 

13,067

 

Total current liabilities

 

 

130,791

 

 

 

192,805

 

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Deferred rent obligations

 

 

35,664

 

 

 

45,927

 

Other liabilities

 

 

24,133

 

 

 

25,197

 

Liabilities of discontinued operations

 

 

5,862

 

 

 

9,376

 

Total non-current liabilities

 

 

65,659

 

 

 

80,500

 

 

 

 

 

 

 

 

 

 

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; 83,509,840

   and 82,996,585 shares issued, 68,492,083 and 68,098,654 shares

   outstanding as of September 30, 2016 and December 31, 2015, respectively

 

 

835

 

 

 

830

 

Additional paid-in capital

 

 

613,611

 

 

 

610,784

 

Accumulated other comprehensive income (loss)

 

 

87

 

 

 

(880

)

Accumulated deficit

 

 

(43,354

)

 

 

(57,518

)

Cost of 15,017,757 and 14,897,931 shares in treasury as of September 30, 2016

   and December 31, 2015, respectively

 

 

(216,156

)

 

 

(215,606

)

Total stockholders' equity

 

 

355,023

 

 

 

337,610

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

551,473

 

 

$

610,915

 

 

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

 

1


CAREER EDUCATION CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME

(In thousands, except per share amounts)

 

 

 

For the Quarter Ended September 30,

 

 

For the Year to Date Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tuition and registration fees

 

$

166,819

 

 

$

202,179

 

 

$

546,036

 

 

$

643,617

 

Other

 

 

806

 

 

 

1,305

 

 

 

3,101

 

 

 

3,709

 

Total revenue

 

 

167,625

 

 

 

203,484

 

 

 

549,137

 

 

 

647,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Educational services and facilities

 

 

51,393

 

 

 

74,888

 

 

 

170,993

 

 

 

222,846

 

General and administrative

 

 

111,723

 

 

 

133,177

 

 

 

337,358

 

 

 

442,021

 

Depreciation and amortization

 

 

5,215

 

 

 

5,962

 

 

 

16,986

 

 

 

19,861

 

Asset impairment

 

 

-

 

 

 

33,446

 

 

 

237

 

 

 

50,837

 

Total operating expenses

 

 

168,331

 

 

 

247,473

 

 

 

525,574

 

 

 

735,565

 

Operating (loss) income

 

 

(706

)

 

 

(43,989

)

 

 

23,563

 

 

 

(88,239

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

334

 

 

 

164

 

 

 

900

 

 

 

548

 

Interest expense

 

 

(117

)

 

 

(170

)

 

 

(469

)

 

 

(502

)

Loss on sale of business

 

 

-

 

 

 

(715

)

 

 

-

 

 

 

(1,632

)

Miscellaneous income (expense)

 

 

10

 

 

 

54

 

 

 

(4

)

 

 

(321

)

Total other income (expense)

 

 

227

 

 

 

(667

)

 

 

427

 

 

 

(1,907

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRETAX (LOSS) INCOME

 

 

(479

)

 

 

(44,656

)

 

 

23,990

 

 

 

(90,146

)

Provision for (benefit from) income taxes

 

 

21

 

 

 

35

 

 

 

8,776

 

 

 

(923

)

(LOSS) INCOME FROM CONTINUING OPERATIONS

 

 

(500

)

 

 

(44,691

)

 

 

15,214

 

 

 

(89,223

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM DISCONTINUED OPERATIONS, net of tax

 

 

(186

)

 

 

(544

)

 

 

(1,050

)

 

 

(1,616

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET (LOSS) INCOME

 

 

(686

)

 

 

(45,235

)

 

 

14,164

 

 

 

(90,839

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

47

 

 

 

-

 

 

 

143

 

 

 

-

 

Unrealized gains on investments

 

 

370

 

 

 

81

 

 

 

824

 

 

 

233

 

     Total other comprehensive income

 

 

417

 

 

 

81

 

 

 

967

 

 

 

233

 

COMPREHENSIVE (LOSS) INCOME

 

$

(269

)

 

$

(45,154

)

 

$

15,131

 

 

$

(90,606

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET (LOSS) INCOME PER SHARE - BASIC and DILUTED:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.01

)

 

$

(0.66

)

 

$

0.22

 

 

$

(1.32

)

Loss from discontinued operations

 

 

-

 

 

 

(0.01

)

 

 

(0.01

)

 

 

(0.02

)

Net (loss) income per share

 

$

(0.01

)

 

$

(0.67

)

 

$

0.21

 

 

$

(1.34

)

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

68,460

 

 

 

67,961

 

 

 

68,328

 

 

 

67,798

 

Diluted

 

 

68,460

 

 

 

67,961

 

 

 

68,889

 

 

 

67,798

 

 

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 September 30,

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

14,164

 

 

$

(90,839

)

Adjustments to reconcile net income (loss) to net

 

 

 

 

 

 

 

 

cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Asset impairment

 

 

237

 

 

 

50,837

 

Depreciation and amortization expense

 

 

16,986

 

 

 

19,861

 

Bad debt expense

 

 

23,201

 

 

 

15,526

 

Compensation expense related to share-based awards

 

 

2,251

 

 

 

2,453

 

Loss on sale of businesses, net

 

 

-

 

 

 

1,632

 

Gain on disposition of property and equipment

 

 

(438

)

 

 

(10

)

Deferred income taxes

 

 

7,373

 

 

 

-

 

Changes in operating assets and liabilities

 

 

(48,060

)

 

 

(20,463

)

Net cash provided by (used in) operating activities

 

 

15,714

 

 

 

(21,003

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of available-for-sale investments

 

 

(137,755

)

 

 

(64,056

)

Sales of available-for-sale investments

 

 

99,718

 

 

 

69,436

 

Purchases of property and equipment

 

 

(3,352

)

 

 

(7,926

)

Proceeds on the sale of assets

 

 

3,600

 

 

 

2,272

 

Payments of cash upon sale of businesses

 

 

(62

)

 

 

(4,125

)

Net cash used in investing activities

 

 

(37,851

)

 

 

(4,399

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

581

 

 

 

1,082

 

Payment on borrowings

 

 

(38,000

)

 

 

(10,000

)

Change in restricted cash

 

 

48,446

 

 

 

9,250

 

Net cash provided by financing activities

 

 

11,027

 

 

 

332

 

 

 

 

 

 

 

 

 

 

EFFECT OF FOREIGN CURRENCY EXCHANGE RATE

   CHANGES ON CASH AND CASH EQUIVALENTS:

 

 

(150

)

 

 

178

 

 

 

 

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(11,260

)

 

 

(24,892

)

CASH AND CASH EQUIVALENTS, beginning of the period

 

 

66,919

 

 

 

93,832

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

55,659

 

 

$

68,940

 

 

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 hybrid 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 are 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 September 30, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016.

The unaudited condensed consolidated financial statements presented herein include the accounts of Career Education Corporation and our wholly-owned subsidiaries. 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. All prior periods have been recast to reflect our segments on a comparable basis.

During the third quarter of 2016, the Company completed the teach-out of five Transitional Group campuses: Sanford-Brown Atlanta, Sanford-Brown Dallas, Sanford-Brown Ft. Lauderdale, Sanford-Brown Iselin and International Academy of Design & Technology Detroit, which continue to be reported within the Transitional Group as of September 30, 2016 in accordance with ASC Topic 360 – Property, Plant and Equipment, which limits discontinued operations reporting.

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

In August 2016, the FASB issued Accounting Standards Update (“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 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.  

4


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 March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplified several aspects of accounting for share-based payment award transactions including income tax consequences, 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 tax withholding. For all public business entities, ASU 2016-09 is effective for annual periods and interim periods beginning after December 15, 2016. We are currently evaluating this guidance and believe the adoption will materially impact our results of operations, particularly related to the provision for (benefit from) income taxes, as well as the presentation of our financial condition 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 amendments require 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 gain or loss 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 are currently evaluating this guidance and do not believe the adoption will 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 the principles 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 commencement 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. 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 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 in-scope 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 with earlier adoption permitted. We are currently evaluating this guidance and do not believe the adoption will significantly impact the presentation of our financial condition, results of operations and disclosures.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU provides guidance to an organization’s management, intended to define management’s responsibility to evaluate whether there is a substantial doubt about an organization’s ability to continue as a going concern and to provide guidance regarding related footnote disclosure. In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. For all entities, ASU 2014-15 is effective for annual periods and interim periods beginning after December 15, 2016; early adoption is permitted. We are currently evaluating this guidance and do not 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). ASU 2014-09 is principles based guidance that can be applied to all contracts with customers, enhancing comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The core principle of the guidance is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to

5


which the entity expects to be entitled in exchange for those goods and services. The guidance details the steps entities should apply to achieve the core principle. Subsequently, FASB issued four additional Updates to the guidance as follows: In August 2015, the FASB issued ASU 2015-14 approving a one-year deferral of the effective date for its new revenue standard for public and nonpublic entities reporting under US GAAP. In March 2016, the FASB issued ASU 2016-08, providing clarity to improve operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, to add further guidance on identifying performance obligations and the licensing implementation while retaining the related core principles for those areas. In May 2016, the FASB issued ASU 2016-12, amendments to provide clarity on the objective of the collectability criterion, permit an entity to exclude amounts collected from customers for all sales taxes from the transaction price, specify a measurement date for non-cash consideration, provide a practical expedient permitting an entity to reflect the aggregate effect of all modifications, clarify a completed contract during transition and clarify disclosure requirements for retrospectively applied guidance in Topic 606. The standard will be effective for public business entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. Nonpublic entities would be required to adopt the new standard for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. Additionally, the FASB approved the option to early adopt prior to the original effective date (fiscal years beginning after December 15, 2016). We are currently evaluating the impact that the adoption of ASU 2014-09 will have on the presentation of our financial condition, results of operations and disclosures.

 

4. DISCONTINUED OPERATIONS

As of September 30, 2016, the results of operations for campuses that have ceased operations prior to 2015 are presented within discontinued operations. Prior to January 1, 2015, our Transitional Group campuses met the criteria for discontinued operations upon completion of their teach-out. Commencing January 1, 2015, in accordance with new guidance under ASC Topic 360, only campuses that meet the criteria of a strategic shift upon disposal will be classified within discontinued operations, among other criteria. Since the January 2015 effective date of the updated guidance within ASC Topic 360, we have not had any campuses that met the criteria to be considered a discontinued operation.  

Results of Discontinued Operations

The summary of unaudited results of operations for our discontinued operations for the quarters and years to date ended September 30, 2016 and 2015 were as follows (dollars in thousands):

 

 

 

For the Quarter Ended September 30,

 

 

For the Year to Date Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

$

-

 

 

$

3

 

 

$

-

 

 

$

6

 

Total operating expenses

 

$

295

 

 

$

547

 

 

$

1,676

 

 

$

1,636

 

Loss before income tax

 

$

(295

)

 

$

(544

)

 

$

(1,676

)

 

$

(1,616

)

Benefit from income tax

 

 

(109

)

 

 

-

 

 

 

(626

)

 

 

-

 

Loss from discontinued operations, net of tax

 

$

(186

)

 

$

(544

)

 

$

(1,050

)

 

$

(1,616

)

Net loss per share - Basic and Diluted

 

$

-

 

 

$

(0.01

)

 

$

(0.01

)

 

$

(0.02

)

 

 

Assets and Liabilities of Discontinued Operations

Assets and liabilities of discontinued operations on our condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015 include the following (dollars in thousands):

6


 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets:

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Receivables, net

 

$

176

 

 

$

254

 

Total current assets

 

 

176

 

 

 

254

 

Non-current assets:

 

 

 

 

 

 

 

 

Other assets, net

 

 

543

 

 

 

720

 

Deferred income tax assets, net

 

 

8,091

 

 

 

8,091

 

Total assets of discontinued operations

 

$

8,810

 

 

$

9,065

 

Liabilities:

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

81

 

 

$

528

 

Remaining lease obligations

 

 

6,923

 

 

 

12,539

 

Total current liabilities

 

 

7,004

 

 

 

13,067

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Remaining lease obligations

 

 

5,698

 

 

 

9,212

 

Other

 

 

164

 

 

 

164

 

Total liabilities of discontinued operations

 

$

12,866

 

 

$

22,443

 

 

Remaining Lease Obligations of Discontinued Operations

A number of the campuses that ceased operations prior to January 1, 2015 have remaining lease obligations that expire over time with the latest expiration in 2020. A liability is recorded representing the fair value of the remaining lease obligation at the time the space is no longer being utilized. Changes in our future remaining lease obligations, which are reflected within current and non-current liabilities of discontinued operations on our condensed consolidated balance sheets, for the quarters and years to date ended September 30, 2016 and 2015 were as follows (dollars in thousands):

 

 

 

Balance,

Beginning

of Period

 

 

Charges

Incurred (1)

 

 

Net Cash

Payments

 

 

Other

 

 

Balance,

End of

Period

 

For the quarter ended September 30, 2016

 

$

16,149

 

 

$

(479

)

 

$

(3,049

)

 

$

-

 

 

$

12,621

 

For the quarter ended September 30, 2015

 

$

27,993

 

 

$

(151

)

 

$

(3,275

)

 

$

50

 

 

$

24,617

 

For the year to date ended September 30, 2016

 

$

21,751

 

 

$

(78

)

 

$

(9,052

)

 

$

-

 

 

$

12,621

 

For the year to date ended September 30, 2015

 

$

37,616

 

 

$

(564

)

 

$

(12,485

)

 

$

50

 

 

$

24,617

 

 

 

(1)

Includes charges for vacated spaces and subsequent adjustments for accretion, revised estimates and variances between estimated and actual charges, net of any reversals for terminated lease obligations.

 

5. FINANCIAL INSTRUMENTS

Investments consist of the following as of September 30, 2016 and December 31, 2015 (dollars in thousands):

 

 

 

September 30, 2016

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gain

 

 

(Loss)

 

 

Fair Value

 

Short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

2,250

 

 

$

-

 

 

$

-

 

 

$

2,250

 

Non-governmental debt securities

 

 

108,987

 

 

 

37

 

 

 

(67

)

 

 

108,957

 

Treasury and federal agencies

 

 

39,946

 

 

 

23

 

 

 

(23

)

 

 

39,946

 

Total short-term investments

 

 

151,183

 

 

 

60

 

 

 

(90

)

 

 

151,153

 

Restricted short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-governmental debt securities

 

 

9,597

 

 

 

-

 

 

 

-

 

 

 

9,597

 

Total investments (available for sale)

 

$

160,780

 

 

$

60

 

 

$

(90

)

 

$

160,750

 

7


 

 

 

December 31, 2015

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gain

 

 

(Loss)

 

 

Fair Value

 

Short-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

1,500

 

 

$

-

 

 

$

(11

)

 

$

1,489

 

Non-governmental debt securities

 

 

76,999

 

 

 

-

 

 

 

(242

)

 

 

76,757

 

Treasury and federal agencies

 

 

36,779

 

 

 

3

 

 

 

(127

)

 

 

36,655

 

Total short-term investments

 

 

115,278

 

 

 

3

 

 

 

(380

)

 

 

114,901

 

Long-term investments (available for sale):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bond

 

 

7,850

 

 

 

-

 

 

 

(476

)

 

 

7,374

 

Total investments (available for sale)

 

$

123,128

 

 

$

3

 

 

$

(856

)

 

$

122,275

 

 

In the table above, unrealized holding gains (losses) as of September 30, 2016 relate to short-term investments that have been in a continuous unrealized gain (loss) position for less than one year.

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 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. Prior to the second quarter of 2016, these funds were held as cash by the letter of credit issuer and reported by the Company as restricted cash on our condensed consolidated balance sheets.

During the third quarter of 2016, our long-term municipal bond investment was called by the issuer at face value. The cumulative unrealized loss of $0.5 million was subsequently reversed out of accumulated other comprehensive loss, a component of stockholders’ equity during the current year quarter.

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 September 30, 2016, 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 September 30, 2016 and December 31, 2015 were as follows (dollars in thousands):

 

 

 

As of  September 30, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Municipal bonds

 

$

-

 

 

$

2,250

 

 

$

-

 

 

$

2,250

 

Non-governmental debt securities

 

 

35,368

 

 

 

83,186

 

 

 

-

 

 

 

118,554

 

Treasury and federal agencies

 

 

-

 

 

 

39,946

 

 

 

-

 

 

 

39,946

 

Totals

 

$

35,368

 

 

$

125,382

 

 

$

-

 

 

$

160,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Municipal bonds

 

$

-

 

 

$

1,489

 

 

$

7,374

 

 

$

8,863

 

Non-governmental debt securities

 

 

-

 

 

 

76,757

 

 

 

-

 

 

 

76,757

 

Treasury and federal agencies

 

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