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 June 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
Page 1
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
New Horizons Worldwide, Inc. and Subsidiaries
June 30, 2002 and December 31, 2001
(unaudited)
(Dollars in thousands)
June 30, December 31,
2002 2001
Assets
Current assets:
Cash and cash equivalents $ 11,755 $ 6,077
Accounts receivable, less allowance for doubtful
accounts of $979 in 2002 and $829 in 2001 20,197 20,814
Inventories 1,434 1,517
Prepaid expenses 6,435 2,847
Refundable income taxes 2,894 2,057
Deferred income tax assets 2,906 2,906
Other current assets 663 1,680
Total current assets 46,284 37,898
Property, plant and equipment, net 17,874 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 2,914 3,029
Total Assets $147,375 $160,829
======== ========
See accompanying notes to condensed consolidated financial statements
Page 2
CONDENSED CONSOLIDATED BALANCE SHEETS
New Horizons Worldwide, Inc. and Subsidiaries
June 30, 2002 and December 31, 2001
(unaudited)
(Dollars in thousands)
June 30, December 31,
2002 2001
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current portion of long-term
obligations $ 5,411 $ 1,665
Accounts payable 2,841 3,277
Deferred revenue 14,294 9,895
Accounts payable to franchises 5,166 5,921
Other current liabilities 14,885 12,825
Total current liabilities 42,597 33,583
Long-term debt, excluding current portion 20,064 24,067
Deferred income tax liability -- 2,195
Deferred rent 1,272 1,080
Total liabilities 63,933 60,925
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 10,508,157
shares in 2002 and 10,397,257 shares in 2001 105 104
Additional paid-in capital 47,786 46,895
Retained earnings 36,849 54,203
Treasury stock at cost - 185,000 shares in 2002
and 2001 (1,298) (1,298)
Total stockholders' equity 83,442 99,904
Total Liabilities & Stockholders' Equity $ 147,375 $ 160,829
========= =========
See accompanying notes to condensed consolidated financial statements
Page 3
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
New Horizons Worldwide, Inc. and Subsidiaries
Six Months ended June 30, 2002 and June 30, 2001
(unaudited)
(Dollars in thousands except Earnings Per Share)
Six Months Ended Three Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
Revenues
Franchising
Franchise fees $ 436 $ 694 $ 278 $ 389
Royalties 9,778 12,317 4,987 6,205
Courseware sales and other 10,200 8,472 5,541 4,573
Total franchising revenues 20,414 21,483 10,806 11,167
Company-owned training centers 50,352 64,370 25,419 33,554
Total revenues 70,766 85,853 36,225 44,721
Cost of revenues 40,197 43,228 20,566 23,387
Selling, general and
administrative expenses 28,989 34,147 14,585 17,542
Operating income 1,580 8,478 1,074 3,792
Interest expense, net 836 284 453 283
Income before income taxes and cumulative
effect of change in accounting principle 744 8,194 621 3,509
Provision for income taxes 298 3,277 249 1,403
Income before cumulative effect of
change in accounting principle 446 4,917 372 2,106
Cumulative effect of change in
accounting principle, net of tax of $9,200 (17,800) -- -- --
Net income (loss) $(17,354) $ 4,917 $ 372 $ 2,106
======== ======== ======== ========
Basic Earnings Per Share
Income per share before cumulative
effect of change in accounting principle $ 0.04 $ 0.49 $ 0.04 $ 0.21
Cumulative per share effect of change
in accounting principle, net of tax (1.73) -- -- --
Net income (loss) per share $ (1.69) $ 0.49 $ 0.04 $ 0.21
======== ======== ======== ========
Diluted Earnings Per Share
Income per share before cumulative
effect of change in accounting principle $ 0.04 $ 0.47 $ 0.04 $ 0.20
Cumulative per share effect of change
in accounting principle, net of tax (1.70) -- -- --
Net income (loss) per share $ (1.66) $ 0.47 $ 0.04 $ 0.20
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements
Page 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
New Horizons Worldwide, Inc. and Subsidiaries
Six Months ended June 30, 2002 and June 30, 2001
(unaudited)
(Dollars in thousands)
Six Months Ended
June 30, June 30,
2002 2001
Cash flows from operating activities
Net income (loss) $ (17,354) $ 4,917
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,778 3,432
Goodwill amortization -- 1,651
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 617 (1,495)
Inventories 83 (235)
Prepaid expenses and other current assets (2,456) (2,275)
Accounts payable (436) 441
Deferred revenue 4,399 (1,296)
Accounts payable to franchises (755) 18
Other current liabilities 2,060 (140)
Income taxes receivable/payable (639) (2,261)
Deferred rent 192 (322)
Net cash provided by operating activities 7,289 2,529
Cash flows from investing activities
Additions to property, plant and equipment (1,606) (9,256)
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 (2,048) (33,500)
Cash flows from financing activities
Proceeds from debt obligations -- 27,297
Principal payments on debt obligations (257) (3)
Proceeds from issuance of common stock 694 --
Net cash provided by financing activities 437 27,294
Net increase in cash and cash equivalents 5,678 (3,677)
Cash and cash equivalents at beginning of period 6,077 5,515
Cash and cash equivalents at end of period $ 11,755 $ 1,838
======== ========
Supplemental disclosure of cash flow information
Cash was paid for:
Interest $ 917 $ 305
======== ========
Income taxes $ 588 $ 5,186
======== ========
Page 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
New Horizons Worldwide, Inc. and Subsidiaries
Six Months ended June 30, 2002 and June 30, 2001
(unaudited)
(Dollars in thousands)
Supplemental Disclosure of Noncash Transactions
Six Months Ended
June 30, June 30,
2002 2001
Noncash investing and financing activities:
Income tax benefit from exercise of stock
options and warrants $ 198 $ 10
======== ========
Page 6
Notes to Condensed Consolidated Financial Statements
New Horizons Worldwide, Inc. and Subsidiaries
For the Six Months ended June 30, 2002 and June 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 June 30, 2002 and the results of operations for the six month periods ended June 30, 2002 and June 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: |
Page 7
Company-owned Executive
Centers Franchising Office Consolidated
For the six months ended June 30, 2002
Revenues $ 50,352 $ 20,414 $ -- $ 70,766
Depreciation expense 2,472 1,306 -- 3,778
Provision (benefit) for
income taxes (1,417) 1,715 -- 298
Cumulative effect of change in
accounting principle (17,800) -- -- (17,800)
Net income (loss) (20,243) 2,889 -- (17,354)
Total assets 105,747 28,429 13,199 147,375
Additions to property, plant
and equipment 713 893 -- 1,606
For the three months ended June 30, 2002
Revenues $ 25,419 $ 10,806 $ -- $ 36,225
Depreciation expense 1,174 659 -- 1,833
Provision (benefit) for income taxes (697) 946 -- 249
Net income (loss) (1,229) 1,601 -- 372
Total assets 105,747 28,429 13,199 147,375
Additions to property, plant
and equipment 291 202 -- 493
For the six months ended June 30, 2001
Revenues $ 64,370 $ 21,483 $ -- $ 85,853
Depreciation expense 2,463 969 -- 3,432
Goodwill amortization expense 1,629 22 -- 1,651
Provision for income taxes 1,197 2,080 -- 3,277
Net income 1,587 3,330 -- 4,917
Total assets 129,916 25,945 6,192 162,053
Additions to property, plant
and equipment 5,414 3,842 -- 9,256
For the three months ended June 30, 2001
Revenues $ 33,554 $ 11,167 $ -- $ 44,721
Depreciation expense 1,136 565 -- 1,701
Goodwill amortization expense 927 11 -- 938
Provision for income taxes 454 949 -- 1,403
Net income 603 1,503 -- 2,106
Total assets 129,916 25,945 6,192 162,053
Additions to property, plant
and equipment 1,003 1,170 -- 2,173
Page 8
| Note 4 | The Company has a credit facility with a bank group that was executed on April 25, 2001 and amended January 31, 2002. For the quarter ended June 30, 2002 the Company had earnings before interest, taxes, depreciation, and amortization (EBITDA) of $2.9 million and was, therefore, not in compliance with a covenant contained in its credit agreement which required minimum adjusted EBITDA of $3.3 million. On August 2, 2002 the Company and the bank group executed an amendment to the credit agreement that had the following terms and conditions: (1) the targeted monthly and quarterly EBITDA covenants were reduced through the term of the agreement, (2) the Company made a prepayment of $3.0 million against the term loan, and (3) the bank group waived the June 30, 2002 non-compliance with the quarterly EBITDA covenant. 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 $4.0 million in 2002 (including the $3.0 million prepayment resulting from the August 2, 2002 amendment) 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 1.5% 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, (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 earnout 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 $25,050 as of June 30, 2002. With the new amendment the availability under the credit facility was $2.3 million as of June 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. |
| Six Months Ended | Three Months Ended | ||||||
| June 30, 2002 | June 30, 2001 | June 30, 2002 | June 30, 2001 |
||||
| Basic EPS | 10,246,928 | 10,026,648 | 10,270,426 | 10,097,543 |
|||
| Diluted EPS | 10,461,933 | 10,545,528 | 10,450,745 | 10635,543 | |||
|
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. |
Page 9
| 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 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 tax benefit totaling $9.2 million. The net impairment loss has been reflected as a cumulative change in accounting principle during the six months ended June 30, 2002. Had the impairment loss been recorded on January 31, 2002, the net income and per share data for the three months ended March 31, 2002 would have been as follows: |
Three Months ended
March 31, 2002
Reported net income $ 74
Cumulative effect of change in accounting
principle, net of tax of $9,200 (17,800)
Adjusted net loss $ (17,726)
==============
Basic earnings per share
Reported net income $ 0.01
Cumulative change in accounting
principle, net of tax (1.74)
Adjusted net loss $ (1.73)
==============
Diluted earnings per share
Reported net income $ 0.01
Cumulative change in accounting
principle, net of tax (1.69)
Adjusted net loss $ (1.68)
==============
|
The changes in the carrying amount of goodwill for the six months ended June 30, 2002, by segment, are as follows: |
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 June 30, 2002 $ 65,660 $ 1,408 $ 67,068
======== ======== ========
Page 10
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 six and three months ended June 30, 2001 would have been adjusted as follows: |
Six Months Ended Three Months Ended
June 30, 2001 June 30, 2001
Reported net income $ 4,917 $ 2,106
Add back: Goodwill amortization,
net of tax 1,023 582
Adjusted net income $ 5,940 $ 2,688
======== ========
Basic earnings per share
Reported net income $ 0.49 $ 0.21
Goodwill amortization, net of tax 0.10 0.06
Adjusted net income $ 0.59 $ 0.27
======== ========
Diluted earnings per share
Reported net income $ 0.47 $ 0.20
Goodwill amortization, net of tax 0.09 0.05
Adjusted net income $ 0.56 $ 0.25
======== ========
| 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. 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. |
Page 11
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
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 $8,496, or 19.0%, to $36,225 for the second quarter of 2002 and decreased $15,087, or 17.6%, for the first half of 2002 compared to the same periods in 2001. This was primarily due to reduced revenues at company-owned locations and at franchisee 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 $1,361 for the second quarter of 2002, and increased $3,823 for the first half 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 second quarter were $113,451, down 18.8% from $139,778 for the same period in 2001. For the first half of 2002, system-wide revenues decreased 19.4% to $223,229 from $276,876 for the first half 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 15.4% in the second quarter of 2002 and decreased 17.9% in the first half of 2002, compared to the same periods in 2001. The Company anticipates that future revenues will fluctuate with changes in economic conditions.
Page 12
Cost of Revenues
Cost of revenues decreased $2,821, or 12.1%, for the second quarter of 2002 and decreased $3,031, or 7.0%, for the first half of 2002 compared to the same periods in 2001. As a percentage of revenues, cost of revenues increased to 56.8% in the second quarter of 2002 from 52.3% in the second quarter of 2001 and increased to 56.8% for the first half of 2002 from 50.4% for the first half of 2001. The decrease in the cost of revenues in absolute dollars was a result of the decrease in the revenues for the quarter as discussed above. The increase as a percentage of revenues was due to the reduction in revenue at the company-owned centers and the increase in the sale of courseware, at a lower gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $2,957, or 16.9%, for the second quarter of 2002 and decreased $5,158, or 15.1%, for the first half of 2002, compared to the same periods in 2001. As a percentage of revenues, selling, general and administrative expenses increased to 40.3% for the second quarter of 2002 from 39.2% for the second quarter of 2001 and increased to 41.0% for the first half of 2002 from 39.8% for the first half of 2001. The decrease in selling, general and administrative expenses in absolute dollars was due to a decrease in sales commissions of $968 for the second quarter of 2002 and $1,671 for the first half of 2002 compared to the same periods in 2001, the continued effect of expense reduction measures taken in 2001, and the discontinuation of recording goodwill amortization (see Note 5 to the Condensed Consolidated Financial Statements). 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 $139, or 77.2%, for the first quarter of 2002 and decreased $143, or 57.9%, in the first half of the year compared to the same periods in 2001. The decrease in interest income was due principally to lower outstanding notes receivable.
Interest expense increased $31, or 6.7%, for the second quarter of 2002 and increased $409, or 77.0%, for the first half of the year compared to the same periods in 2001. The higher interest expense was due mainly to higher bank fees in 2002 compared to 2001.
Income Taxes
The Company’s effective tax rate was 40.0% for the second quarter of 2002 before the cumulative effect of the change in accounting principle and for the same period in 2001.
Liquidity and Capital Resources
As of June 30, 2002, the Company’s working capital was $3,687 and its cash and cash equivalents totaled $11,755. Working capital as of June 30, 2002 reflected a decrease of $628, or 14.6%, from $4,315 as of December 31, 2001.
Cash provided by operating activities was $7,289 for the six months ended June 30, 2002, an increase of $4,760 compared to 2001. The increase was primarily due to the cash flow effect of an increase in deferred revenue of $5,695, other current liabilities of $2,200, and accounts receivable of $2,112, partially offset by a decrease in net income before the accumulated effect of a change in accounting principle of $4,471.
In 2002 cash used by investing activities decreased by $31,452 to $2,048. 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 $7,650.
For the quarter ended June 30, 2002, the Company had earnings before interest, taxes, depreciation, and amortization (EBITDA) of $2.9 million and was, therefore, not in compliance with a covenant contained in its credit agreement which required minimum adjusted EBITDA of $3.3 million. On August 2, 2002, the Company and the bank group executed an amendment to the credit agreement that had the following terms and conditions: (1) the targeted monthly and quarterly EBITDA covenants were reduced through the term of the agreement, (2) the Company made a prepayment of $3.0 million against the term loan, and (3) the bank group waived the June 30, 2002 non-compliance with the quarterly EBITDA covenant.
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 six months of 2002 the Company spent approximately $1.6 million on capital items. Capital expenditures for 2002 are expected to total approximately $5.0 million.
Page 13
On October 2, 1998, the Company purchased 8.3 acres of undeveloped land in Santa Ana, California for approximately $5.1 million. At June 30, 2002, a purchase contract for the land was in escrow for a selling price that is in excess of its carrying value. As of August 2002, that contract is no longer in escrow and the land is again being marketed. Any proceeds from the eventual sale of the property is required to be used to repay a portion of outstanding bank debt.
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.
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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 June 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 June 30, 2002 rates, and assuming no changes in bank debt from the June 30, 2002 levels, the additional annual expense would be approximately $251 on a pre-tax basis. The Company currently does not hedge its exposure to floating interest rate risk.
The Company’s revenue derived from international operations is paid by its franchisees in United States dollars and, accordingly, the foreign currency exchange rate fluctuation has no impact on the Company's business.
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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.
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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 Amendment No. 3, dated August 2, 2002, to the Credit Agreement between the
Registrant and Bank of America, N.A., as Agent *
10.1+ Amendment No. 1 dated March 15, 2002 to the Omnibus Equity Plan of the Registrant *
10.2+ Amended Promissory Note, dated July 29, 2002 the Registrant and
Thomas J. Bresnan *
* Filed herewith
+ Compensatory plan or arrangement
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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: August 14,2002 | By: | /s/Robert S. McMillan Robert S. McMillan NEW HORIZONS WORLDWIDE, INC. Chief Financial Officer |
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