FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from Not Applicable to __________________
Commission File Number 0-17840
NEW HORIZONS WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 22-2941704 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1900 S. State College Boulevard, Suite 200, Anaheim, California 92806
(Address of principal executive offices)
(714) 940-8000
(Registrant's telephone number, including area code)
_____________________________________________________________
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 X No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Number of shares of common stock outstanding at June 30, 2002: 10,323,157
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PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
New Horizons Worldwide, Inc. and Subsidiaries
September 30, 2002 and December 31, 2001
(unaudited)
(Dollars in thousands)
September 30, December 31,
2002 2001
Assets
Current assets:
Cash and cash equivalents $ 4,828 $ 6,077
Restricted Cash 3,500 --
Accounts receivable, less allowance for doubtful
accounts of $1,044 in 2002 and $829 in 2001 22,663 20,814
Inventories 1,477 1,517
Prepaid expenses 7,453 2,847
Refundable income taxes 3,548 2,057
Deferred income tax assets 2,906 2,906
Other current assets 694 1,680
Total current assets 47,069 37,898
Property, plant and equipment, net 17,358 20,046
Land held for disposition 5,099 5,099
Goodwill 67,068 93,626
Cash surrender value of life insurance 1,131 1,131
Deferred income tax assets, net 7,005 --
Other assets 2,743 3,029
Total Assets $147,473 $160,829
======== ========
See accompanying notes to condensed consolidated financial statements
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CONDENSED CONSOLIDATED BALANCE SHEETS
New Horizons Worldwide, Inc. and Subsidiaries
September 30, 2002 and December 31, 2001
(unaudited)
(Dollars in thousands)
September 30, December 31,
2002 2001
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term
obligations $ 4,004 $ 1,665
Accounts payable 4,109 3,277
Deferred revenue 17,401 9,895
Accounts payable to franchises 6,992 5,921
Other current liabilities 12,891 12,825
Total current liabilities 45,397 33,583
Long-term debt, excluding current portion 17,563 24,067
Deferred income tax liability -- 2,195
Deferred rent 1,266 1,080
Total liabilities 64,226 60,925
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock without par value, 2,000,000 shares
authorized, no shares issued -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; issued and outstanding 10,566,407
shares in 2002 and 10,397,257 shares in 2001 106 104
Additional paid-in capital 48,154 46,895
Retained earnings 36,285 54,203
Treasury stock at cost - 185,000 shares in 2002
and 2001 (1,298) (1,298)
Total stockholders' equity 83,247 99,904
Total Liabilities & Stockholders' Equity $ 147,473 $ 160,829
========= =========
See accompanying notes to condensed consolidated financial statements
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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
New Horizons Worldwide, Inc. and Subsidiaries
Nine and Three Months ended September 30, 2002 and September30, 2001
(unaudited)
(Dollars in thousands except Earnings Per Share)
Nine Months Ended Three Months Ended
September September September September
30, 2002 30, 2001 30, 2002 30, 2001
Revenues
Franchising
Franchise fees $ 546 $ 943 $ 110 $ 249
Royalties 14,622 17,545 4,844 5,228
Courseware sales and other 15,596 12,037 5,396 3,565
Total franchising revenues 30,764 30,525 10,350 9,042
Company-owned training centers 75,180 94,356 24,828 29,986
Total revenues 105,944 124,881 35,178 39,028
Cost of revenues 60,947 63,752 20,750 20,524
Selling, general and
administrative expenses 43,930 51,165 14,941 17,018
Operating income (loss) 1,067 9,964 (513) 1,486
Interest expense, net (1,263) (706) (427) (422)
Non-recurring gains -- 1,203 -- 1,203
Income (loss) before income taxes and cumulative
effect of change in accounting principle (196) 10,461 (940) 2,267
Provision (benefit) for income taxes (78) 3,703 (376) 426
Income (loss) before cumulative effect of
change in accounting principle (118) 6,758 (564) 1,841
Cumulative effect of change in
accounting principle, net of tax of $9,200 (17,800) -- -- --
Net income (loss) $ (17,918)$ 6,758 $ (564)$ 1,841
========== ========== ========== ==========
Basic Earnings Per Share
Income (loss) per share before cumulative
effect of change in accounting principle $ (0.01)$ 0.67 $ (0.05)$ 0.18
Cumulative per share effect of change
in accounting principle, net of tax (1.73) -- -- --
Net income (loss) per share $ (1.74)$ 0.67 $ (0.05)$ 0.18
========== ========== ========== ==========
Diluted Earnings Per Share
Income per share before cumulative
effect of change in accounting principle $ (0.01)$ 0.64 $ (0.05)$ 0.17
Cumulative per share effect of change
in accounting principle, net of tax (1.73) -- -- --
Net income (loss) per share $ (1.74)$ 0.64 $ (0.05)$ 0.17
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
New Horizons Worldwide, Inc. and Subsidiaries
Nine Months ended September 30, 2002 and September 30, 2001
(unaudited)
(Dollars in thousands)
Nine Months Ended
September 30, September 30,
2002 2001
Cash flows from operating activities
Net income (loss) $ (17,918) $ 6,758
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,581 5,529
Goodwill amortization -- 2,639
Stock-based compensation -- 94
Cumulative effect of change in accounting principle 27,000 --
Deferred income taxes (9,200) --
Cash provided (used) from the change in
(net of effects of acquisitions):
Accounts receivable, net (1,849) (1,313)
Inventories 40 (173)
Prepaid expenses and other current assets (3,334) (1,494)
Accounts payable 832 (255)
Deferred revenue 7,506 (2,835)
Accounts payable to franchises 1,071 1,149
Other current liabilities 66 (963)
Income taxes receivable/payable (1,290) (2,115)
Deferred rent 186 (323)
Net cash provided by operating activities 8,691 6,698
Cash flows from investing activities
Additions to property, plant and equipment (2,893) (11,960)
Cash paid for acquired companies, net of cash acquired -- (20,629)
Cash paid for previous acquisitions (442) (3,615)
Net cash used in investing activities (3,335) (36,204)
Cash flows from financing activities
Principal payments on debt obligations (4,165) 26,224
Increase in restricted cash (3,500)
Proceeds from issuance of common stock 1,060 --
Net cash provided (used)by financing activities ( 6,605) 26,224
Net increase (decrease) in cash and cash equivalents (1,249) (3,282)
Cash and cash equivalents at beginning of period 6,077 5,515
Cash and cash equivalents at end of period $ 4,828 $ 2,233
============= =============
Supplemental disclosure of cash flow information
Cash was paid for:
Interest $ 1,299 $ 749
============= =============
Income taxes $ 618 $ 5,314
============= =============
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
New Horizons Worldwide, Inc. and Subsidiaries
Nine Months ended September 30, 2002 and September 30, 2001
(unaudited)
(Dollars in thousands)
Supplemental Disclosure of Noncash Transactions
Nine Months Ended
September 30, September 30,
2002 2001
Noncash investing and financing activities:
Income tax benefit from exercise of stock
options and warrants $ 201 $ 526
============= =============
During the nine months ended September 30, 2001, the Company issued 161,803 shares of common stock with a value of $2,666 at the date of issuance as additional consideration for previous acquisitions.
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Notes to Condensed Consolidated Financial Statements
New Horizons Worldwide, Inc. and Subsidiaries
For the Nine Months ended September 30, 2002 and September 30, 2001
(unaudited)
(Dollars in thousands except Earnings Per Share)
| Note 1 | In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (all of which are normal and recurring) necessary to present fairly the financial position of the Company at September 30, 2002 and the results of operations for the nine month periods ended September 30, 2002 and September 30, 2001. The statements and notes should be read in conjunction with the financial statements and notes thereto included in the Company's annual report for the year ended December 31, 2001. |
| Note 2 | Certain items on the 2001 financial statements have been reclassified to conform to the 2002 presentation. |
| Note 3 | The Company operates in two business segments - company-owned training centers and franchising operations. The company-owned training centers segment operates wholly-owned computer training centers in the United States and derives its revenues from the operating revenues of those centers. The franchising segment franchises computer training centers domestically and internationally and supplies systems of instruction and sales and management concepts concerning computer training to independent franchisees. The franchising segment revenues are from the initial franchise fees and royalties from the franchise operations and other revenue primarily related to product sales through Nova Vista, a company established for the purpose of product procurement and sales to the franchisees. |
| The two segments are managed separately because of the differences in the source of revenues and the services offered. Information on the Company's segments is as follows: |
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Company-owned Executive
Centers Franchising Office Consolidated
For the nine months ended September 30, 2002
Revenues $ 75,180 $ 30,764 $ -- $ 105,944
Depreciation expense 3,609 1,972 -- 5,581
Provision (benefit) for
income taxes (2,610) 2,532 -- (78)
Cumulative effect of change in
accounting principle, net (17,800) -- -- (17,800)
Net income (loss) (22,182) 4,264 -- (17,918)
Total assets 106,521 30,307 10,645 147,473
Additions to property, plant
and equipment 1,493 1,400 -- 2,893
For the three months ended September 30, 2002
Revenues $ 24,828 $ 10,350 $ -- $ 35,178
Depreciation expense 1,137 666 -- 1,803
Provision (benefit) for income taxes (1,193) 817 -- (376)
Net income (loss) (1,939) 1,375 -- (564)
Total assets 106,521 30,307 10,645 147,473
Additions to property, plant
and equipment 780 507 -- 1,287
For the nine months ended September 30, 2001
Revenues $ 94,356 $ 30,525 $ -- $ 124,881
Depreciation expense 3,981 1,548 -- 5,529
Goodwill amortization expense 2,607 32 -- 2,639
Provision for income taxes 1,240 2,463 -- 3,703
Net income 1,505 4,050 1,203 6,758
Total assets 126,691 24,648 7,431 158,770
Additions to property, plant
and equipment 6,873 5,087 -- 11,960
For the three months ended September 30, 2001
Revenues $ 29,986 $ 9,042 $ -- $ 39,028
Depreciation expense 1,518 579 -- 2,097
Goodwill amortization expense 978 10 -- 988
Provision for income taxes 43 383 -- 426
Net income (82) 720 1,203 1,841
Total assets 126,691 24,648 7,431 158,770
Additions to property, plant
and equipment 1,459 1,245 -- 2,704
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| Note 4 | The Company has a credit facility with a bank group that was executed on April 25, 2001 and amended January 31, 2002 and August 2, 2002. For the quarter ended September 30, 2002 the Company had earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.3 million and was, therefore, not in compliance with a covenant contained in its credit agreement which required minimum adjusted EBITDA of $2.6 million. The Company also was not in compliance with the requirement for monthly EBITDA for the month of September 2002. Additionally, the Company had a fixed charge coverage ratio of 1.27, which was below the required ratio of 1.40. On November 12, 2002, the Company’s senior lenders waived the monthly and quarterly EBITDA and the fixed charge coverage ratio covenants. As a condition to receiving the waiver, the Company agreed to the following terms and conditions: (1) the Company agreed to amend its credit facility by January 15, 2003 to implement a revised structure to the satisfaction of the banks, (2) the Company made a $1.0 million prepayment on November 12, 2002 against the term loan, (3) the interest rate increased by 50 basis points to 2.00% over the bank’s prime rate, (4) the Company paid a fee of $63, (5) the Company agreed to maintain minimum cash balances of $3.5 million, and (6) the targeted EBITDA for October and November 2002 were reduced The amended credit agreement, which expires on January 31, 2004 has the following terms and conditions: (1) a $24.75 million term loan with a maturity of January 31, 2004 with principal payments of $5.25 million in 2002 (including the $3.0 million prepayment resulting from the August 2, 2002 amendment and the $1.0 million prepayment resulting from the November 12, 2002 waiver) and $3.5 million in 2003, (2) a revolving line of credit of up to $5.0 million limited to 15% of outstanding accounts receivable, (3) an interest rate equal to the bank’s prime rate of interest plus 2.0% until the Company has sustained $4.0 million in EBITDA for two consecutive quarters at which time the interest rate will be at the Company’s option between LIBOR plus an applicable margin or the bank’s prime rate plus an applicable margin, with the applicable margin, ranging from 2.50% to 3.75% for LIBOR and 0.75% to 2.125% for the bank’s prime rate, dependent upon the leverage ratio of the Company, (4) the mandatory repayment against the term loan of the proceeds, if any, from the sale of the Company’s property in Santa Ana, California, (5) a prohibition from engaging in any acquisitions unless the acquisition is funded exclusively with the proceeds of equity or subordinated debt, and (6) a requirement for the Company to meet various financial covenants, including minimum monthly and quarterly EBITDA, maximum leverage ratio, minimum fixed charge coverage ratio, maximum capital expenditures, and maximum earn out payment ratio. The common stock of the Company’s subsidiaries has been pledged as collateral to secure borrowings under the credit agreement. Amounts borrowed under the credit agreement totaled $21,550 as of September 30, 2002. With the new amendment the availability under the credit facility was $3.1 million as of September 30, 2002. |
| Note 5 | The Company computes earnings per share based on Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share” (EPS). SFAS No. 128 requires the Company to report Basic EPS, as defined therein, which assumes no dilution from outstanding stock options, and Diluted EPS, as defined therein, which assumes dilution from the outstanding stock options. Earnings per share amounts for all periods presented have been calculated to conform to the requirements of SFAS No. 128. The computation of Basic EPS is based on the weighted average number of shares actually outstanding during each year. The computation of Diluted EPS is based upon the weighted average number of shares actually outstanding, plus the shares that would be outstanding assuming the exercise of all outstanding options and warrants, computed using the treasury stock method. |
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| Nine Months Ended | Three Months Ended | ||||||
| September 30, 2002 | September 30, 2001 | September 30, 2002 | September 30, 2001 |
||||
| Basic EPS | 10,284,295 | 10,078,900 | 10,357,812 | 10,181,700 |
|||
| Diluted EPS | 10,460,833 | 10,544,701 | 10,458,416 | 10,561,751 | |||
|
The difference between the shares used for calculating Basic EPS and Diluted EPS relates to common stock equivalents consisting of stock options and warrants outstanding during the respective periods. |
| Note 6 | Adoption of SFAS No. 141 and SFAS No. 142 |
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets that have indefinite useful lives will not be amortized into results of operations, but instead will be tested at least annually for impairment and written down when impaired. The Company adopted the provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001 effective January 1, 2002. However, SFAS No. 141 was immediately applicable to any goodwill and intangible assets the Company acquired after June 30, 2001. Goodwill and intangible assets with indefinite lives are no longer being amortized but are being tested for impairment annually or in the event of an impairment indicator. The Company adopted SFAS No. 142 as of January 1, 2002 and accordingly has ceased amortizing goodwill. The adoption of SFAS No. 142 will increase operating income through the reduction of amortization expense by approximately $3.7 million on an annual basis, prior to impairment. The Company, in accordance with SFAS No. 142, has tested its goodwill for impairment, applying a fair-value-based test as of January 1, 2002. The fair value of the reporting units, consisting of the franchising unit and the Company-owned center unit, was determined by management with the assistance of an independent third-party appraiser using an average of: (1) the imputed market price for each reporting unit determined using an appropriate EBITDA multiple based upon the average closing price for the Company’s stock for the two days prior and two days after January 1, 2002, and (2) the expected present value of future cash flows for each of the reporting units using a period of five years and a discount rate of 14.3%. The current economic conditions, which have resulted in lower training revenues, adversely affected the market value for the Company’s stock and the expected future cash flows for the company-owned training centers and resulted in a $27.0 million impairment. The impact of the charge on the Company’s consolidated statement of earnings was $17.8 million, net of a tax benefit totaling $9.2 million. The net impairment loss has been reflected as a cumulative change in accounting principle during the nine months ended September 30, 2002. The changes in the carrying amount of goodwill for the nine months ended September 30, 2002, by segment, are as follows: |
Page 10
Company-owned
Centers Franchising Total
Balance as of January 1, 2002 $ 92,218 $ 1,408 $ 93,626
Goodwill acquired 442 -- 442
Impairment loss (27,000) -- (27,000)
Balance as of September 30, 2002 $ 65,660 $ 1,408 $ 67,068
======== ======== ========
The 2001 results do not reflect the provisions of SFAS No. 142. Had the Company adopted SFAS No. 142 on January 1, 2001, the net income and per share data for the nine and three months ended September 30, 2001 would have been adjusted as follows: |
Nine Months Ended Three Months Ended
September 30, 2001 September 30, 2001
Reported net income $ 6,758 $ 1,841
Add back: Goodwill amortization,
net of tax 1,636 613
Adjusted net income $ 8,394 $ 2,454
======== ========
Basic earnings per share
Reported net income $ 0.67 $ 0.18
Goodwill amortization, net of tax 0.16 0.06
Adjusted net income $ 0.83 $ 0.24
======== ========
Diluted earnings per share
Reported net income $ 0.67 $ 0.17
Goodwill amortization, net of tax 0.16 0.06
Adjusted net income $ 0.80 $ 0.23
======== ========
| Note 7 | New Accounting Pronouncements |
SFAS No. 143, “Accounting for Asset Retirement Obligations,” addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company believes the adoption of SFAS No. 143 will not have a material impact on its results of operations or financial position and will adopt such standards on January 1, 2003, as required. SFAS No. 144 establishes a single accounting model for the impairment or disposal of long-lived assets and new standards for reporting discontinued operations. SFAS No. 144 superseded SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and Accounting Principles Board (APB) Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. The provisions of SFAS No. 144 are effective in fiscal years beginning after December 15, 2001 and, in general, are to be applied prospectively. The adoption of SFAS No. 144 did not have a material impact on the Company’s consolidated results of operations and financial position. |
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|
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Isues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The provisions of SFAS No. 146 will be adopted for exit or disposal activities that are initiated after December 31, 2002. |
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
CRITICAL ACCOUNTING POLICIES
Revenue Recognition - Instructor-led Classes
The Company offers a wide range of instructor-led learning programs to public and private corporations, service organizations, government agencies and municipalities, as well as to individual students. The instructor-led learning programs allow the students to choose from several learning options as described below:
Club memberships – The club allows the club members to attend as many classes as they choose over a finite period of time for a fixed price.
Training vouchers – Training vouchers allow the customer the right to send one attendee per voucher to a New Horizons class over a period of one year for a fixed price.
Technical certification programs–The Company offers technical certification programs whereby its customers can attend the classes necessary to allow them to pass the required tests to reach a specific certification.
Other–The Company offers a variety of other training classes to individual students at a fixed price per class.
The Company recognizes revenues from these programs on a ratable basis over the duration of the respective programs based upon the estimated number of classes the students will attend. The Company’s estimates of student attendance have been derived from historical experience over a period of several years in which the learning programs have been in place. Where the Company has less than a minimum of two years of historical experience, revenues are recognized on a straight line basis over the duration of the programs. The Company adjusts its revenue recognition rates upon changes in historical experience. Although such adjustments have not been significant in the past, there can be no assurances they will continue to be insignificant in the future.
Revenue Recognition - eLearning Training
In 2001, the Company introduced its eLearning products, Online LIVE and Online ANYTIME. Online LIVE is synchronous, interactive “virtual classrooms” featuring instructor-facilitated classes delivered over the Internet. If a student is not satisfied with an Online LIVE class, the student has the option of retaking the Online LIVE classes, led by a different instructor, at no charge, or may choose to attend an instructor-led class at no charge. Revenue is recognized for Online LIVE as the classes are delivered. Student retakes from Online LIVE classes have not been significant.
Online ANYTIME is asynchronous instruction, identical in content to the classroom instruction, but self-paced training delivered over the Internet for one year. Revenue is recognized for Online ANYTIME on a straight-line basis over one year. There is, as yet, no historical experience for Online ANYTIME to provide a revenue recognition policy that more closely matches the delivery of the training.
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Revenue Recognition - Franchise Fees
A unit franchisee is charged an initial franchise fee upon execution of the Franchise Agreement which is not refundable under any circumstances. This fee is recognized upon the franchisee’s completion of two weeks of initial franchise training at the Company’s operating headquarters in Anaheim, California. The information, assistance, and materials provided during this training session represent the substantial obligations of the Company to the franchisee.
A master franchise fee provides international franchisees with the right to award subfranchises to other parties within a particular region. It is payable upon execution of the Franchise Agreement and is not refundable under any circumstances. This fee is based upon the expected number of subfranchises to be sold. The master franchise fee is earned ratably as the subfranchises are sold.
Revenue Recognition - Franchise Royalties
The Company receives monthly continuing royalties from unit franchisees, a percentage of royalties from master franchisees that they receive from their subfranchisees, and a course materials and proprietary computer-based training products surcharge. These royalties are recognized in the month in which the franchisee generates the related revenue.
Revenue Recognition – Corporate Education Solutions (CES) Program Fees
The Company facilitates training within its franchise network for large organizations that have locations and training needs throughout the world. The Company earns revenue, derived as a percentage of the training business, as the training is delivered.
Accounts Receivable
The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that are identified. While such credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.
Impairment of Long-Lived Assets
Long-lived assets, including fixed assets and goodwill, are continually monitored and are reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The Company makes judgements regarding the existence of impairment indicators and future cash flows related to intangible assets which are based upon operational performance of its acquired businesses, market conditions and other factors. Future events could cause the Company to conclude that impairment indicators exist and that goodwill associated with its acquired businesses is impaired. Any resulting impairment could have an adverse impact on the results of operations.
Accounting for Income Taxes
As part of the process of preparing the consolidated financial statements the Company is required to estimate its income taxes for federal and state purposes. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, must establish a valuation allowance. To the extent a
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valuation allowance is established or this allowance is increased in a period, an expense must be included within the tax provision in the consolidated statements of operations.
Based upon the projected financial results, the Company has determined that no valuation allowance is necessary.
General
The Company operates computer training centers in the United States and franchises computer training centers in the United States and abroad.
Corporate revenues are defined as revenues from company-owned training centers, initial franchise fees, royalties, and other revenues from franchised operations. System-wide revenues are defined as total revenues from all centers, both company-owned and franchised. System-wide revenues are used to gauge the growth rate of the entire New Horizons training network.
Revenues from company-owned training centers operated by New Horizons consist primarily of training fees. Cost of revenues consists primarily of instructor costs, rent, utilities, classroom equipment, courseware costs, and computer hardware, software and peripheral expenses. Included in selling, general and administrative expenses are personnel costs associated with technical and facilities support, scheduling, training, accounting and finance, and sales.
Revenues from franchising consist primarily of initial franchise fees paid by franchisees for the purchase of specific franchise territories and franchise rights, training royalty and advertising fees based on a percentage of gross training revenues realized by the franchisees, percentage royalty fees received on the sale of courseware, revenue earned from the sale of third-party courseware to the franchisees through Nova Vista, a company established for the purpose of product procurement and sales to the franchisees, and revenue earned from the Corporte Education Solutions (CES), a program to service large corporate customers. Cost of revenues consists primarily of costs associated with courseware procurement and franchise support personnel who provide system guidelines and advice on daily operating issues including sales, marketing, instructor training, and general business problems. Included in selling, general and administrative expenses are technical support, accounting and finance support, CES support, advertising expenses, and franchise sales expenses.
Revenues
Revenues decreased $3,850, or 9.9%, to $35,178 for the third quarter of 2002 and decreased $18,937, or 15.2%, for the first nine months of 2002 compared to the same periods in 2001. This was primarily due to reduced revenues at company-owned locations and at franchisees that were open more than twelve months due to the effect of the downturn in the domestic economy. Revenues from the sale of courseware to the franchisees increased $85 for the third quarter of 2002 and increased $3,908 for the first nine months of 2002, compared to the same periods in 2001, due mainly to higher revenues from the sale of Microsoft official curriculum and student learning guides by Nova Vista.
System-wide revenues for the third quarter were $109,229, down 12.8% from $125,280 for the same period in 2001. For the first nine months of 2002, system-wide revenues decreased 17.3% to $332,458 from $402,156 for the first nine months of 2001. System-wide revenues include revenues from both franchised locations and company-owned training centers. Revenues from locations open more than twelve months, both franchised and company-owned, decreased 7.5% in the third quarter of 2002 and decreased 14.7% in the first nine months of 2002, compared to the same periods in 2001. The Company anticipates that future revenues will fluctuate with changes in economic conditions.
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Cost of Revenues
Cost of revenues increased $226, or 1.1%, for the third quarter of 2002 and decreased $2,805, or 4.4%, for the first nine months of 2002 compared to the same periods in 2001. As a percentage of revenues, cost of revenues increased to 59.0% in the third quarter of 2002 from 52.6% in the third quarter of 2001 and increased to 57.5% for the first nine months of 2002 from 51.1% for the first nine months of 2001.
The increase in the cost of revenues for the quarter in absolute dollars compared to the same period last year was the result of the increased cost of the courseware sold to the franchises of $1,273 and the increased cost of eLearning training of $621 due to increased sales of the eLearning products, partially offset by decreased courseware costs of $1,105 at the company-owned locations resulting from lower sales, and reduced salaries of $714 resulting from the expense reduction measures taken in 2001. The decrease in the cost of revenues for the first nine months of 2002 in absolute dollars compared to the same period last year was the result of lower salaries and contract instructor costs of $3,900 resulting from the expense reduction measures taken in 2001, reduced courseware costs of $1,509 due to lower sales for the period, partially offset by the increased cost of the courseware sold to the franchises of $1,673 and the increased cost of the eLearning training of $1,655 due to increased sales of the eLearning products.
The increase as a percentage of revenues was due to the reduction in revenue at the company-owned centers and the increase in eLearning sales and the sale of courseware, both of which are at a lower gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $2,077, or 12.2%, for the third quarter of 2002 and decreased $7,235, or 14.1%, for the first nine months of 2002, compared to the same periods in 2001. As a percentage of revenues, selling, general and administrative expenses decreased to 42.5% for the third quarter of 2002 from 43.6% for the third quarter of 2001 and increased to 41.5% for the first nine months of 2002 from 41.0% for the first half of 2001.
The decrease in selling, general and administrative expenses in absolute dollars was due to the discontinuation of recording goodwill amortization of $978 for the third quarter of 2002 and $2,607 for the first nine months of 2002 compared to the same periods in 2001, a decrease in sales commissions of $548 for the third quarter of 2002 and $2,227 for the first nine months of 2002 compared to the same periods in 2001, and the continued effect of expense reduction measures taken in 2001.
The increase in selling, general and administrative expenses as a percentage of revenues was primarily due to lower revenue in the company-owned centers.
Interest Expense, Net
Interest income decreased $15, or 25.4%, for the third quarter of 2002 and decreased $158, or 51.6%, in the first nine months of the year compared to the same periods in 2001. The decrease in interest income is due principally to lower outstanding notes receivable.
Interest expense decreased $10, or 2.1%, for the third quarter of 2002 and increased $399, or 39.4%, for the first nine months of the year compared to the same periods in 2001. The decrease in interest expense was due mainly to lower outstanding debt in 2002 compared to 2001.
Income Taxes
The Company’s effective tax rate was 40.0% for the third quarter of 2002 before the cumulative effect of the change in accounting principle and for the same period in 2001.
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Liquidity and Capital Resources
As of September 30, 2002, the Company's working capital was $1,672 and its cash and cash equivalents totaled $4,828, excluding restricted cash of $3,500. Working capital as of September 30, 2002 reflected a decrease of $2,643, or 61.3%, from $4,315 as of December 31, 2001.
Cash provided by operating activities was $8,691 for the nine months ended September 30, 2002, an increase of $1,993 compared to 2001. The increase was primarily due to the cash flow effect of an increase in deferred revenue of $10,341, partially offset by a decrease in net income before the cumulative effect of a change in accounting principle of $6,876 and the cash flow effect of a decrease in prepaid expenses and other current assets of $1,840.
In 2002 cash used by investing activities decreased by $32,869 to $3,335. This was due to a $23,802 decrease in cash paid for companies acquired in 2001 and previously acquired companies that met certain operating performance targets and a decrease in additions to property, plant and equipment of $9,067.
For the quarter ended September 30, 2002, the Company had earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.3 million and was, therefore, not in compliance with a covenant contained in its credit agreement which required minimum adjusted EBITDA of $2.6 million. The Company also was not in compliance with the requirement for monthly EBITDA for the month of September. Additionally the Company had a fixed charge coverage ratio of 1.27, which was below the required ratio of 1.40. On November 12, 2002, the Company’s senior lenders waived the monthly and quarterly EBITDA and the fixed charge coverage ratio covenants. As a condition to receiving the waiver, the Company agreed to the following terms and conditions: (1) the Company agreed to amend its credit facility by January 15, 2003 to implement a revised structure to the satisfaction of the banks, (2) the Company made a $1.0 million prepayment on November 12, 2002 against the term loan, (3) the interest rate increased by 50 basis points to 2.00% over the bank’s prime rate, (4) the Company paid a fee of $63, (5) the Company agreed to maintain minimum cash balances of $3.5 million, and (6) the targeted EBITDA for October and November 2002 were reduced.
The amended credit agreement, which expires on January 31, 2004 has the following terms and conditions: (1) a $24.75 million term loan with a maturity of January 31, 2004 with principal payments of $5.25 million in 2002 (including the $3.0 million prepayment resulting from the August 2, 2002 amendment and the $1 million prepayment resulting from the November 12, 2002 waiver) and $3.5 million in 2003, (2) a revolving line of credit of up to $5.0 million limited to 15% of outstanding accounts receivable, (3) an interest rate equal to the bank’s prime rate of interest plus 2.0% until the Company has sustained $4.0 million in EBITDA for two consecutive quarters at which time the interest rate will be at the Company’s option between LIBOR plus an applicable margin or the bank’s prime rate plus an applicable margin, with the applicable margin, ranging from 2.50% to 3.75% for LIBOR and 0.75% to 2.125% for the bank’s prime rate, dependent upon the leverage ratio of the Company, (4) the mandatory repayment against the term loan of the proceeds, if any, from the sale of the Company’s property in Santa Ana, California, (5) a prohibition from engaging in any acquisitions unless the acquisition is funded exclusively with the proceeds of equity or subordinated debt, and (6) a requirement for the Company to meet various financial covenants, including minimum monthly and quarterly EBITDA, maximum leverage ratio, minimum fixed charge coverage ratio, maximum capital expenditures, and maximum earn out payment ratio. The common stock of the Company’s subsidiaries has been pledged as collateral to secure borrowings under the credit agreement. Amounts borrowed under the credit agreement totaled $21,550 as of September 30, 2002. With the new amendment the availability under the credit facility was $3.1 million as of September 30, 2002.
The nature of the information technology and training industry requires substantial cash commitments for the purchase of computer equipment, software, and training facilities. During the first nine months of 2002 the Company spent approximately $2.9 million on capital items. Capital expenditures for 2002 are expected to total approximately $5.0 million.
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On October 2, 1998, the Company purchased 8.3 acres of undeveloped land in Santa Ana, California for approximately $5.1 million. In October 2002, a contract was signed to sell the land at an amount in excess of its carrying value and is currently in escrow. The sale, which is subject to a number of contingencies, is scheduled to close on December 20, 2002. Any proceeds from the eventual sale of the property is required to be used to repay a portion of outstanding bank debt.
The Company’s contractual obligations and commercial cash commitments as of September 30, 2002 are shown below. Commercial commitments include lines of credit that could result in potential cash outflows from a contingent event that requires performance by us or our subsidiaries pursuant to a funding commitment.
(Dollars in millions)
Contractual Obligations Fourth Fiscal Fiscal Fiscal Fiscal Fiscal
Total Qtr. 2002 2003 2004 2005 2006 2007 Thereafter
Long-term debt $ 21.6 $ 1.5 $ 3.5 $ 16.6 $ -- $ -- $ -- $ --
Operating leases 71.2 2.7 10.2 9.9 8.9 7.6 7.0 24.9
Total $ 92.8 $ 4.2 $ 13.7 $ 26.5 $ 8.9 $ 7.6 $ 7.0 $ 24.9
====== ====== ====== ====== ====== ====== ====== ======
Commercial Commitments
Letters of Credit $ 0.8 $ 0.8
====== ======
The Company believes that the cash flow from operations, which provides funds for operations, planned capital expenditures, scheduled payments, and the refinancing of its indebtedness, depends on the Company’s future operating performance, which in turn, is subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond the Company’s control.
Management believes that its current working capital position and cash flows from operations, along with its credit facility, will be adequate to support its current and anticipated capital and operating expenditures and its strategies to grow its computer education and training business for the foreseeable future.
Information About Forward-Looking Statements
The statements made in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements. Such statements are based on current expectations but involve risks, uncertainties, and other factors which may cause actual results to differ materially from those contemplated by such forward-looking statements. All statements that address operating performance, events or developments that management anticipates will occur in the future, including statements relating to future revenue, profits, expenses, income and earnings per share or statements expressing general optimism about future results, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). In addition, words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” variations of such words, and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to safe harbors created in the Exchange Act.
Important factors which may result in variations from results contemplated by such forward-looking statements include, but are by no means limited to: (1) the Company’s ability to respond effectively to potential changes in the manner in which computer training is delivered, including the increasing acceptance of technology-based training which could have more favorable economics with respect to timing and delivery costs; (2) the Company’s ability to attract and retain qualified instructors; (3) the rate at which new software applications are introduced by manufacturers and the Company’s ability to keep up with new applications and enhancements to existing applications; (4) the level of expenditures devoted to upgrading information systems and computer software by customers; (5) the Company’s ability to compete effectively with low cost training providers who may not be authorized by software manufacturers; and (6) the Company’s ability to manage the growth of its business.
The Company’s strategy focuses on enhancing revenues and profits at current locations, and also includes the possible opening of new company-owned locations, the sale of additional franchises, the selective acquisition of existing franchises in the United States which have demonstrated the ability to achieve above average profitability while increasing market share, and the acquisition of companies in similar or complementary businesses. The Company’s growth strategy is premised on a number of assumptions concerning trends in the information technology training industry. These include the continuation of growth in the market for information technology training and the trend toward outsourcing. To the extent that the Company’s assumptions with respect to any of these matters are inaccurate, its results of operations and financial condition could be adversely affected.
Page 18
PART I. FINANCIAL INFORMATION
(Dollars in thousands)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates. It monitors the risks associated with interest rates and financial instrument positions.
The Company’s primary interest rate risk exposure results from floating rate debt on its line of credit. As of September 30, 2002, the Company’s total bank debt consisted of floating rate debt. If interest rates were to increase 100 basis points (1.0%) from September 30, 2002 rates, and assuming no changes in bank debt from the September 30, 2002 levels, the additional annual expense would be approximately $261 on a pre-tax basis. The Company currently does not hedge its exposure to floating interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-14) as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”), have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
Changes in Internal Controls
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date.
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PART II. FINANCIAL INFORMATION
(Dollars in thousands)
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
c) Recent Sale of Unregistered Securities
No securities of the
Company that were not registered under the Securities Act of 1933 have been
issued or sold by the Company for the period covered by this Quarterly Report on
Form 10-Q.
Page 20
PART II: Other Information
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit
Number Description of Documents
4.1* Waiver and amendment dated as of November 12, 2002 to Credit Agreement
dated as of April 25, 2001
10.1+ Stock Option agreement dated August 16, 2002, between the Registrant and
David A. Goldfinger*
10.2+ Stock Option agreement dated August 16, 2002, between the Registrant and
William H. Heller*
10.3+ Stock Option agreement dated August 16, 2002, between the Registrant and
Richard L. Osborne*
10.4+ Stock Option agreement dated August 16, 2002, between the Registrant and
Scott R. Wilson*
* Filed herewith
+ Compensatory plan or arrangement
Page 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
| NEW HORIZONS WORLDWIDE, INC. (Registrant) |
||
| Date: November 14, 2002 | By: | /s/Robert S. McMillan Robert S. McMillan NEW HORIZONS WORLDWIDE, INC. Chief Financial Officer |
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CERTIFICATIONS
I, Thomas J. Bresnan certify that:
I have reviewed this quarterly report on Form 10-Q of New Horizons Worldwide, Inc.;
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
The registrant’s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a). designed such disclosure controls and procedures to ensure that material
information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those
entities, particularly during the
period in which this quarterly report is being prepared;
b). evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90
days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c). presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and
procedures based on our evaluation as of the Evaluation Date;
The registrant’s other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the
equivalent functions):
a). all significant deficiencies in the design or operation of internal controls
which could adversely affect
the registrant’s ability to record, process,
summarize and report financial data and have identified
for the
registrant’s auditors any material weakness in internal controls; and
b). any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| NEW HORIZONS WORLDWIDE, INC. | ||
| By: | /s/Thomas J. Bresnan Thomas J. Bresnan NEW HORIZONS WORLDWIDE, INC. Chief Executive Officer |
|
Date: November 14, 2002
Page 23
CERTIFICATIONS
I, Robert S. McMillan certify that:
I have reviewed this quarterly report on Form 10-Q of New Horizons Worldwide, Inc.;
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
The registrant’s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a). designed such disclosure controls and procedures to ensure that material
information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those
entities, particularly during the
period in which this quarterly report is being prepared;
b). evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90
days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c). presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and
procedures based on our evaluation as of the Evaluation Date;
The registrant’s other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the
equivalent functions):
a). all significant deficiencies in the design or operation of internal controls
which could adversely affect
the registrant’s ability to record, process,
summarize and report financial data and have identified
for the
registrant’s auditors any material weakness in internal controls; and
b). any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| NEW HORIZONS WORLDWIDE, INC. | ||
| By: | /s/Robert S. McMillan Robert S. McMillan NEW HORIZONS WORLDWIDE, INC. Chief Financial Officer |
|
Date: November 14, 2002
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