FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] |
ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 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 of other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1900 S. State College Blvd., Suite 200, Anaheim, CA |
92806 |
||
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (714) 940-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class |
Name of each exchange on which registered |
|
Not Applicable |
Not Applicable |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
Title of Class
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark
whether the Registrant is an accelerated filer (as defined in Exchange Rule Act 12b–2).
Yes x No
The Company was incorporated in Delaware on December 15, 1988, and its principal executive offices are located 1900 S. State College Blvd, Suite 200, Anaheim, California 92806. The Company maintains a website at http://www.newhorizons.com. On this website, or through links on the information for investors portion of this website, the Company makes available free of charge its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Such material is made available through the Company's website as soon as reasonably practicable after the Company electronically files or furnishes the material with the SEC.
The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of June 28, 2002 was approximately $78,114 computed on the basis of the last reported sales price per share ($10.19) of such stock on The Nasdaq Stock Market.
The number of shares of the Registrant’s Common Stock outstanding as of March 21, 2003 was 10,387,657.
DOCUMENTS OR PARTS THEREOF INCORPORATED BY REFERENCE
| Part of Form 10-K | Documents Incorporated | ||
| Part III (Items 10, 11, 12 and 13) | by Reference | ||
| Portions of the Registrant's definitive Proxy Statement to be used in connection with its Annual Meeting of Stockholders to be held on May 6, 2003 |
NEW HORIZONS WORLDWIDE, INC.
INDEX TO ANNUAL REPORT
ON FORM 10K
| PART I | ||
| Item 1. | Business | 1 |
| General | 1 | |
| Information Technology Education and Training Market | 2 | |
| New Horizons Business Model | 2 | |
| Company-Owned Training Centers | 3 | |
| Franchising Operations | 3 | |
| Customers | 6 | |
| Sales and Marketing | 6 | |
| Training Authorizations | 7 | |
| Competition | 7 | |
| Courseware Sales and Other | 8 | |
| Information About Forward-Looking Statements | 8 | |
| Regulations | 9 | |
| Insurance | 9 | |
| Trademarks | 9 | |
| Employees | 9 | |
| Item 2. | Properties | 10 |
| Item 3. | Legal Proceedings | 10 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 10 |
| PART II | ||
| Item 5. | Market for Registrant’s Common Equity and Related Shareholder Matters | 11 |
| Item 6. | Selected Consolidated Financial Data | 12 |
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13 |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 21 |
| Item 8. | Financial Statements and Supplementary Data | 21 |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 21 |
| PART III | ||
| Item 10. | Directors and Executive Officers of the Registrant | 22 |
| Item 11. | Executive Compensation | 22 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management | 22 |
| Item 13. | Certain Relationships and Related Transactions | 23 |
| Item 14. | Controls and Procedures | 23 |
| PART IV | ||
| Item 15. | Exhibits and Reports on Form 8-K | 24 |
| SIGNATURES | 25 | |
This Annual Report on Form 10-K contains forward–looking statements which involve risks and uncertainties. The forward looking statements in this report are based upon beliefs, assumptions and expectations of the Company’s management as to the Company’s future operations and economic performance, taking into account the information currently available. These statements are not statements of historical fact. The Company’s actual results may differ significantly from the results discussed in the forward–looking statements. Factors that may cause such a difference include, but are not limited to, those discussed throughout this document and under the caption “Information About Forward-Looking Statements.”
New Horizons Worldwide, Inc., (the “Company” or “New Horizons”) formerly Handex Corporation, through various subsidiaries, both owns and franchises computer training centers. The Company sold its environmental business segment and changed its name to New Horizons in late 1996, in order to concentrate its resources on the technology training market. The Company’s common stock trades on The Nasdaq Stock Market under the symbol “NEWH”.
New Horizons’ 2002 system–wide revenues of $429 million make it the largest independent provider in the fragmented PC software applications and technical certification training industry. Through various subsidiaries, the Company both owns and franchises computer training centers. Through these training centers the Company offers a variety of flexible training choices including instructor–led training, Internet–based training, often referred to as eLearning, computer–based training via CD–ROM, computer labs, certification exam preparation tools, courseware, and 24–hours, seven–days–a–week, free help desk support. The goal of the training is to deliver to the student information and skills which have immediate and practical value in the workplace.
The New Horizons worldwide network delivered over 2.5 million student-days of information technology (IT) training in 2002, generating system-wide revenues, which include both the results of company–owned and franchised operations, of $429 million, down 16.2% from $512 million in 2002. The network has approximately 1,900 classrooms, 2,000 instructors and 1,700 account executives.
New Horizons specializes in instructor-led training which is the industry’s dominant delivery method for IT training. The Company has become a leader in the industry by developing the processes for delivering quality training for the largest technology training segments: technical certification, software applications and business training. The network’s training centers offer a broad range of courses for several of the major software vendors, including Microsoft, Novell, Lotus, Cisco, Linux, Adobe, Corel, and Symantec. New Horizons has the largest network of Microsoft Certified Technical Education Centers. Furthermore, New Horizons is the world’s largest provider of vendor-neutral CompTia certification training. In 2001, New Horizons introduced a suite of Information Security (network security) courses, which are designed to improve the IT professional’s knowledge regarding network security. Additionally, with certification testing becoming increasingly important, New Horizons also has established the largest number of Authorized Prometric Testing Centers and VUE Testing Centers in the world. Classes can be held at New Horizons locations or on-site at the client’s facility. Curriculum can be tailored to the client’s specific needs. The Company can also provide training and courseware for the customer’s proprietary software.
Realizing the impact of the Internet and growing customer demand for flexibility with regard to how training is delivered, New Horizons in 2001 introduced its Integrated Learning program consisting of three learning components: the traditional instructor-led Classroom Learning, Online LIVE Learning and Online ANYTIME Learning. Online LIVE is synchronous, interactive “virtual classrooms” featuring instructor-facilitated classes delivered over the Internet. Online ANYTIME is asynchronous instruction, similar in content to the classroom instruction, but self-paced and available to those students who prefer a more independent learning method.
New Horizons owns and operates 25 computer training facilities located in Anaheim, Burbank, Los Angeles, Sacramento, Stockton, and Modesto, California; Albuquerque, New Mexico; Atlanta and Marietta, Georgia; Indianapolis, Indiana; Charlotte, North Carolina; San Antonio, Texas; and Denver, Englewood, Broomfield, Loveland and Colorado Springs, Colorado; Chicago and Rosemont, Illinois; Cleveland, Ohio; two in New York City, New York; Memphis, and Nashville, Tennessee; and Hartford, Connecticut.
As of December 31, 2002, the Company’s franchisees operated 130 locations in the United States and Canada and 112 locations in 49 other countries around the world. An additional 17 franchises had been sold as of that date and are scheduled for future openings.
1
The Company was
incorporated in Delaware on December 15, 1988, and its principal executive
offices are located 1900 S. State College Blvd, Suite 200, Anaheim, California
92806. The Company maintains a website at http://www.newhorizons.com. The rapidly growing role of
IT in business organizations and the emergence of the Internet are creating
significant and increasing demand for IT training. A March 2003 IDC study
estimated the worldwide market for IT education and training in 2002 was about
$18.9 billion and is expected to grow approximately 4.7% per year to over $23.6
billion in the year 2007. The growing need for
technology training is driven by several developments including: (i) increased
use of computers in the workplace requiring employees to acquire and apply IT
skills; (ii) rapid and complex technological changes in operating systems, new
software development, and technical training; (iii) continuing emphasis by
industry on productivity, increasing the number of functions being automated
throughout organizations; (iv) greater focus by organizations on core
competencies with a shifting emphasis to outsourcing of non-core activities; (v)
corporate downsizing requiring remaining personnel to develop a greater variety
of skills; (vi) increasing interest in IT certification from both a
company’s and an employee’s perspective; and (vii) development of the
Internet. Although a significant
portion of technology training is provided by in–house training departments,
IDC, in its study, identified a decided shift towards outsourcing to external
training professionals. This outsourcing is motivated by several factors,
including: (i) the lack of internal trainers experienced in the latest software;
(ii) the cost of maintaining an in-house staff of trainers; and (iii) the cost
of developing and maintaining internal courseware. Organizations are searching
out and selecting outside technology training services that can provide the
following: (i) cost effective delivery of high quality instruction; (ii)
qualified, technically expert instructors; (iii) flexibility to deliver a
consistent training product at geographically dispersed facilities; (iv) ability
to tailor the training products to specific customers’ needs; (v)
definitive, current courseware; (vi) testing and certification of technical
competency; (vii) effective training methods delivering knowledge and skills
with immediate practical value in the workplace; (viii) a depth and breadth of
curriculum; and (ix) flexible and convenient scheduling of classes. Instructor-led classroom
training is the dominant delivery method for technology training in the United
States with 66% of the IT education market in 2001 according to the March 2003
IDC report. IDC projects that instructor-led training will continue to maintain
a significant share of the market because trainees value the personalized
attention, interaction with classmates and instructors, and insulation from
workplace interruptions. While IDC projects instructor-led training will
continue to be a significant delivery method in the market, the role of
technology-based training, primarily consisting of eLearning and computer-based
training, is gaining greater acceptance. IDC estimates that technology-based
training will have 45% of the IT education market by 2007 while instructor-led
classroom training will continue to have a larger share at 49%. IDC also states
in its March 2001 report entitled “eLearning in Practice: Blended Solutions
in Action” that many eLearning buyers are using the eLearning methodology
in addition to classroom learning. New Horizons’ Integrated Learning
strategy allows students to combine eLearning and classroom learning while
utilizing the same course content. New Horizons’
company-owned and franchised operations both provide an instructor-led training
delivery system to customers that is executed by certified employee instructors
primarily in fully equipped classrooms maintained by New Horizons or its
franchises. Approximately 10% of classes are given on site at the
customer’s location. New Horizons often supplies the computer hardware for
these on-site classes. Additionally, as part of New Horizons’ Integrated
Learning strategy, both synchronous and asynchronous, eLearning alternatives are
offered to the students. Lastly, courseware is offered to the Company’s
franchises by its Nova Vista product procurement company. Curriculum is centered on
technical certification programs (approximately 61%) and software applications
(approximately 39%). Classes are concise, generally ranging from one to five
days, and are designed to be intensive skill-building experiences. The Company
offers a broad array of IT courses covering the most popular software
applications and technical certification programs. The Company also provides
customized training for customers’ proprietary software applications. The
Company believes it offers more classes more often than any other company in the
industry. 2
In addition to certified
instructors and broad curriculum, the New Horizons business model is designed to
provide its customers significant training value by featuring: (i) guaranteed
training through the Company’s free, six-month repeat privileges; (ii)
skills assessment for both standard or proprietary software; (iii) professional
certification training; (iv) the largest network of authorized training centers
in the industry; (v) free, 24 hours-a-day, seven-days-a-week help desk service
for a full sixty-day period after a class has been completed; (vi) on-site
training at customers’ facilities; (vii) club memberships providing a
series of classes for one platform at one low price; (viii) flexible scheduling
including evening and weekend classes; (ix) the Corporate Education Solutions
(CES) program which coordinates a national/international referral system and
delivery network of training for major clients which have training requirements
in multiple locations; and (x) its Integrated Learning program which allows
customers to integrate the delivery methodology between instructor-led classroom
training and technology-based training. The Company has
historically grown through the sale of franchises, the opening of new
company-owned facilities, the buyback of franchises in certain markets, and
revenue growth from the existing training centers. Revenues at locations open
more than twelve months had a reduction in revenue of approximately 13%, a
larger decrease than the decrease of 5% in 2001, due primarily to the effect of
the continued softness in the domestic economy. The Company believes a mix of franchised
and company-owned centers will enable it to combine the accelerated expansion
opportunities provided by franchising while maintaining ownership of a
significant number of training centers. The Company plans to continue to grow
through (i) improvement of revenues and profits at both current company-owned
and franchised locations; (ii) the sale of additional franchises; (iii) the
selective buyback of existing franchises in the United States which have
demonstrated the ability to achieve above average profitability while increasing
market share, and (iv) the potential acquisition of companies in similar or
complementary businesses. The Company’s ability to achieve growth from the
buyback of existing franchises and acquisitions in the future will be dependent,
in part, on its borrowing capacity under its credit agreement, as amended. As of
February 28, 2003, the Company had a cash balance of $5.8 million and the
availability under the credit agreement was $0.8 million. At the end of 2002, the
Company owned and operated 25 training centers that generated $95 million in
revenue compared to $118.3 million in 2001. The locations operating at the end of 2002
were as follows: Since 1998, the Company has acquired 11 franchise
locations: none in 2002, two in 2001, none in 2000, six in 1999, and three in 1998. The acquisitions were a
result of the Company’s strategy to acquire well performing franchises in
select United States markets. As part of all of
the purchase contracts, other than those for Sacramento and Stockton, the
selling shareholders agreed to continue to manage the acquired training centers
for two or three years, and could receive additional consideration if certain
operating performance criteria are met. The acquisitions have been recorded
using the purchase method of accounting and the operating results have been
included in the Company’s financial statements from the date of
acquisition. At the end of 2002, the
Company supported a worldwide network of independent franchises which provides
IT training at 242 locations in 51 countries. There are an additional six
franchise locations which have been sold and which are scheduled to open at
various times during 2003. The franchisee is given a non-exclusive license and
franchise to participate in and use the business model and sales system
developed and refined by the Company. The Company initially offered franchises
for sale in 1991 and sold its first franchise in 1992. The Company had 254
franchised locations operating at the end of 2000; 257 at the end of 2001; and
242 at the end of 2002, of which 130 were in the United States and Canada and
112 were abroad. 3
The offer and sale of
franchises and business opportunities are subject to regulation by the United
States Federal Trade Commission, as well as many states and foreign
jurisdictions. Numerous state laws also regulate the offer and
sale of franchises and business opportunities, as well as the ongoing
relationship between franchisors and franchisees, including the termination,
transfer, and renewal of franchise rights. The failure to comply with these laws
could adversely affect the Company’s operations. New Horizons estimates the
initial investment required to acquire and start a franchise operation,
including the initial franchise fee, ranges from approximately $350,000 to
$550,000. United States and Canada Franchise Fees A franchisee in the United
States and Canada is charged an initial franchise fee and ongoing monthly
royalties, which become effective a specified period of time after the center
begins operation. The initial franchise fee is based on the size of the
territory granted as defined in the Franchise Agreement relating to that
particular franchise. In the United States and Canada, the size of a territory
is measured by the number of personal computers (“PCs”) in the
territory. The initial franchise fee for a start-up center for a Type 1
territory (500,000 or more PCs) is $75,000; for a Type 2 territory (250,000 to
499,999 PCs) is $60,000; a Type 3 territory (100,000 to 249,999 PCs) is $40,000;
and a Type 4 territory (under 100,000 PC’s) is $20,000. Entrepreneurs
converting an existing training center to a New Horizons center receive a 25%
reduction in the initial fee as a conversion allowance. Based on information
furnished by IDC concerning the number of PCs in various geographic areas, as of
December 31, 2002, the Company has identified 5 Type 1 territories, 15 Type 2
territories, 32 Type 3 territories, and 22 Type 4 territories as the remaining
territories currently available for sale as franchises in the United States and
Canada. The initial franchise fee
is payable upon execution of the Franchise Agreement and is not refundable under
any circumstances. The territory is a “limited exclusive” territory in
that New Horizons agrees not to own or franchise any other New Horizons Computer
Learning Center provided the franchisee operates in compliance with the terms of
its franchise agreement. The geographic boundaries of a territory are typically
determined by United States Postal Service zip codes. Unless the Franchise
Agreement terminates or is amended by mutual agreement, a territory will not be
altered. Franchises are expected to market their business to customers located
within the defined territory and not to customers within territories of other
New Horizons franchises or affiliates. Franchisees generally have six months
from the date of the execution of the Franchise Agreement to open a center. Royalties In addition to the initial
franchise fee, franchisees pay the following fees to New Horizons: (i) a monthly
continuing royalty fee, consisting of the greater of 3% to 6% of monthly gross
revenues or a minimum flat fee of $1,500 for a Type 1 or Type 2 territory of
$1,000 for a Type 3 or Type 4 territory; and (ii) a monthly marketing and
advertising fee of 1% of gross revenues. The 6% royalty fee rate was effective
for franchises sold or renewed during September 1996 or later. Franchise Agreement Each Franchise Agreement
runs for an initial term of ten years and is renewable for additional five-year
terms. During 2002, the franchise locations in Dallas, Texas, and Portland,
Oregon renewed their franchise agreements for additional five–year terms. In
2003, thirteen franchise agreements come up for renewal. The franchise is
exclusive for instructor–led training within the specific defined territory and
is subject to a number of limitations and conditions. These limitations and
conditions include, but are not limited to: (i) staffing requirements, including
a General Manager plus a minimum number of account executives based on the
territory type; (ii) a minimum number of classrooms depending on the territory
type; (iii) full–time and continuous operations; (iv) a pre–defined minimum
required curriculum; (v) computer equipment and system requirements; (vi)
signage and display material requirements; (vii) minimum insurance requirements;
and (viii) record keeping requirements. New Horizons reserves to itself the
exclusive right to offer and deliver New Horizons branded eLearning within all territories. New
Horizons and its franchisees have profit sharing arrangements for sales of New
Horizons’ eLearning offerings sold in a franchisee’s territory. The
agreement also contains non-competition restrictions which bar: (i) competing
with New Horizons during the term of the Franchise Agreement and for one year
after termination of the franchise within a 25 mile radius of any New Horizons
center; (ii) diverting or attempting to divert any customer or business of
the franchise business to any competitor; (iii) performing any act that is
injurious or prejudicial to the goodwill associated with the New Horizons
service marks or operating system; and (iv) soliciting any person who is at that
time employed by the franchisor or any of its affiliated corporations to leave
his or her employment. In addition, there are certain restrictions on the
franchisees’ rights to transfer the franchise license. New Horizons also
maintains a “right of first refusal” if a transfer effects a change of
control. The agreement also contains default and termination remedies. 4
International Franchise Fees Initial franchisee fees and
territories for international franchises are market/country specific. While the
Company does have some unit franchises internationally, the Company has
predominantly entered into Master Franchise Agreements providing franchisees
with the right to award subfranchises to other parties within a particular
region. The Master Franchisee pays an initial master franchise fee that is based
upon the expected number of subfranchises to be sold. The master franchise fee
is then earned ratably over the sale of the subfranchises. Under the terms of
these Master Franchise Agreements, the franchisee commits to open or cause to be
opened a specified number of locations within a specified time frame. The Master
Franchisee is responsible for the pre-opening and ongoing support of the
sub-franchises. The Company shares with the Master Franchisee in the proceeds of
subsequent sales of individual franchises and also receives a percentage of the
royalties received by the Master Franchisee. In 2002, the Company entered into
Master Franchise Agreements for the development of India, East Africa, and
Nepal. Approximately 23% of the Company’s system-wide revenues were
generated by international locations in 2002. In addition to those markets
currently served by its franchisees, the Company has identified over 160
additional international markets that may support a training center. The initial franchise fee
is payable upon execution of the Franchise Agreement and is not refundable under
any circumstances. The territory is a “limited exclusive” territory in
that New Horizons agrees not to own or franchise any other New Horizons Computer
Learning Center provided the franchisee operates in compliance with the terms of
its Franchise Agreement. Unless the Franchise Agreement terminates or is amended
by mutual agreement, a territory will not be altered. Franchises are expected to
market their business to customers located within the defined territory and not
to customers within territories of other New Horizons franchises or affiliates.
Franchisees generally have six months from the date of the execution of the
Franchise Agreement to open a center. Royalties In addition to the initial
franchise fee, franchisees pay the following fees to New Horizons: (i) Unit
Franchisees: a monthly continuing royalty fee, ranging from 3% to 6% of monthly
gross revenues with minimum royalties ranging from $250 to $1,500, depending on
the marketplace; and (ii) Master Franchisees: 40% of the royalties received from
their Subfanchisees with those royalties ranging from 3% to 6% with the
aforementioned minimums. The 6% royalty fee rate was effective for franchises
sold or renewed during September 1996 or later. Master Franchise Agreement A Master Franchisee
receives a territory, which is typically a country or a region encompassing
multiple countries. Under the Master Franchise Agreement the Master Franchisee
shall: (i) license and service third party Unit Subfranchises operated by
persons other than the Master Franchisee and (ii) own and operate at least one
New Horizons location under a separate Unit Franchise Agreement. Each Master
Franchise Agreement runs for an initial term of ten years and is renewable for
one additional ten-year term. The Master Franchisee is expected to: (i) grant
unit subfranchises in a form of Subfranchise Agreement as approved by New
Horizons; (ii) perform and enforce against each Unit Subfranchise the terms of
any Unit Subfranchise Agreement it enters into; (iii) provide the initial
training in the New Horizons system to each Unit Subfranchise; and (iv) provide
ongoing support, consulting and assistance to each Unit Subfranchise after the
initial training. For these obligations the Master Franchisee retains 60% of the
initial franchise fees and the ongoing royalties received from the Unit
Subfranchises. 5
Unit Franchise Agreement Each Unit Franchise
Agreement runs for an initial term of ten years and is renewable for additional
five–year terms. During 2002, the franchise locations in Tijuana, Monterrey,
Chihuahua, and Ciudad Juarez, Mexico renewed their
franchise relationships for
additional five-year terms. In 2003 the Saudi Arabia franchise was renewed for
an additional fifteen-year term. There are no other franchise agreements that
come up for renewal in 2003. The franchise is exclusive for instructor–led
training within the specific defined territory, typically a city, and is subject
to a number of limitations and conditions. These limitations and conditions
include, but are not limited to: (i) staffing requirements, including a General
Manager plus a minimum number of account executives based on the territory; (ii)
a minimum number of classrooms depending on the territory; (iii) full–time and
continuous operations; (iv) a pre–defined minimum required curriculum; (v)
computer equipment and system requirements; (vi) signage and display material
requirements; (vii) minimum insurance requirements; and (viii) record keeping
requirements. The agreement also contains non–competition restrictions which
bar: (i) competing with New Horizons during the term of the Franchise Agreement;
(ii) diverting or attempting to divert any customer or business of the franchise
business to any competitor; (iii) performing any act that is injurious or
prejudicial to the goodwill associated with the New Horizons service marks or
operating system; and (iv) soliciting any person who is at that time employed by
the franchisor or any of its affiliated corporations to leave his or her
employment. In addition, there are certain restrictions on the franchisees’
rights to transfer the franchise license. New Horizons also maintains a
“right of first refusal” if a transfer effects a change of control.
The agreement also contains default and termination remedies. Franchise Support In return for the initial
franchise fee and the other monthly fees, the Company provides franchisees with
the following services, products, and managerial support: (i) two weeks of
initial franchise training at the Company’s operating headquarters in
Anaheim, California, and one week of field training at the franchisee’s
location; (ii) franchise and sales system information contained in the
Company’s Confidential Operations Manual and other training manuals; (iii)
ongoing operating support via on-site visits from Regional Franchise Support
Managers, access to troubleshooting and business planning assistance; (iv)
access to the CES program which coordinates a national/international referral
system and delivery network of training for major clients which have training
requirements in multiple locations; (v) periodic regional and international
meetings and conferences; (vi) advisory councils and monthly communications,
(vii) periodic training sessions delivered over the Internet for franchise
staff, (viii) periodic classroom training events for franchise staff delivered
at the corporate headquarters in Anaheim, and (ix) product, program or
operational support via telephone from New Horizons personnel. Customers for the training
provided by New Horizons company-owned and franchised training centers are
predominantly employer-sponsored individuals from a wide range of public and
private corporations, service organizations, government agencies and
municipalities and consumers looking to gain information technology
certifications to enable them to enter into the field. No single customer
accounted for more than 10% of New Horizons revenues in 2002. The New Horizons system
delivered over 2.5 million student-days of technology training in 2002. New Horizons markets its
services primarily through account executives that utilize telesales to target
and contact potential customers. The New Horizons sales system is organized and
disciplined. After undergoing a formal initial training program, account
executives are expected to generate their own database of customers through
telephone sales, make a minimum number of calls per day, and invoice and collect
a minimum amount of revenue each month. These minimums escalate over the first
eight months an account executive is selling and are designed to move the
account executive from being compensated with a non-recoverable draw against
commission to a full commission compensation program. Account executives’
target sales areas are local and regional. Sales opportunities that involve
national and international accounts and involve delivery of training at multiple
locations are turned over to the Company’s CES program. The CES program is designed
to market computer training services to large organizations, which have
facilities and training needs over a broad geographic area within and outside
the United States. This program provides New Horizons’ national and
international customers with a single point of contact to the entire New
Horizons network of training and support services. During 2002, New Horizons
competed for and won national and international contracts with Pearson
Publishing, Kia Motors, and Intuit,
amongst others. In addition to these contracts, New Horizons was awarded large
project–based contracts with the FBI, U.S. Department of State, U.S. Army,
Bureau of Land Management, and USDA-Aphis. 6
The Company maintains a web
site for marketing its products over the Internet (http://www.newhorizons.com).
The Company believes that the Internet will become an increasingly important
tool in its marketing program. New Horizons is authorized
to provide certified training by many of the major software publishers,
including Microsoft, Novell, Lotus, and Corel. Many of the industry’s major
software vendors do not offer training, but support their products through
independent training companies using a system of standards and performance
criteria. In support of these vendors, the Company has 174 Microsoft (CTEC), 89
Novell (NAEC), 58 Corel (CTP), and 10 Lotus (LAEC) authorized centers worldwide.
The authorization agreements are typically annual in length and are renewable at
the option of the publishers. While New Horizons believes that its relationships
with software publishers are good, the loss of any one of these agreements could
have a material adverse impact on its business. Additionally, with certification
testing becoming increasingly important, New Horizons has grown its number of
Authorized Prometric Testing Centers to 188 and VUE Testing Centers to 84. The
company also offers more vendor-neutral CompTia certification training than any
other company in the world. Lastly, in 2001, the Company introduced a suite of
courses for instruction on Information Security (network security). As of
December 31, 2002, 51 centers have become Ascendant Learning’s Security
Certified Professional Authorized Training Partners (SCP ATP). The IT training market is
highly competitive, highly fragmented, has low barriers to entry, and has no
single competitor which accounts for a dominant share of the market. The
Company’s competitors are primarily in-house training departments and
independent education and training organizations. Computer retailers, computer
resellers, and others also compete with the Company. Periodically, some of these
competitors offer instruction and course titles similar to those offered by New
Horizons at lower prices. In addition, some of these competitors may have
greater financial strength and resources than New Horizons. New Horizons believes that
competition in the industry is based on a combination of pricing, breadth of
offering, quality of training, and flexibility and convenience of service. The Company recognizes that
the emergence of technology-based training, primarily consisting of eLearning
and computer-based training, are important and growing competitive developments
in the industry. In-House Training
Departments In-house training
departments provide companies with the highest degree of control over the
delivery and content of IT training, allowing for customized instruction
tailored to specific needs. However, according to IDC, the demand for outsourced
training is expected to grow as more companies switch to outside training
organizations. By outsourcing, companies can choose to spend based on real-time
training needs while alleviating the overhead costs for in-house
instructors’ salaries and benefits. Independent Education and
Training Organizations Although the majority of
independent training organizations is relatively small and focuses on local or
regional markets, the Company competes directly on a national level with several
firms providing similar curriculum. Learning Tree, Global Knowledge Network,
Executrain, and Productivity Point target the same customer base and operate in
some of the same markets as New Horizons. The Company believes that the
combination of its market presence, the depth and breadth of its course
offerings, its flexible customer service approach, its centralized control of
delivery to national customers, its status as the world’s largest network
of Microsoft Certified Technical Education Centers and Novell Authorized
Education Centers, and its organized and disciplined sales system distinguishes
it from these competitors. Instructor-led Training The Company competes with
Learning Tree, Global Knowledge, Executrain, Productivity Point, Azlan, NIIT,
Aptech, and Informatics in addition to in-house training departments, community
colleges, and independent training organizations. 7
Technology-Based Training Instructor–led training has
historically been the dominant delivery method for IT training. Technology–based training,
consisting of eLearning,
CDROMs, videotape, and satellite video broadcast, has become a significant
delivery modality. According to a March 2003 IDC report, technology–based
training is expected to have a 45% share of the United States IT training market
in 2007 while instructor–led training will have a 49% share. While growth in the
instructor–led category is expected to remain flat, the technology–based
training, specifically eLearning, will continue to grow, but at a slower rate
than predicted by IDC in the past. The March 2003 IDC report estimates
eLearning to have an increase in market share from 14% in 2001 to 26% in 2007. The Company recognizes that
its future success depends on, among other factors, the market’s continued
acceptance of instructor-led training as a delivery method for IT training, the
Company’s ability to continue to market competitive instructor-led course
offerings, and the Company’s ability to successfully capitalize on the
potential of technology-based training delivery methods, in particular,
eLearning. In 2001, the Company introduced its eLearning product offering with
Online LIVE Learning, its synchronous virtual classroom product, and Online
ANYTIME Learning, its asynchronous self-paced product. The Company’s
competitors in the eLearning environment include Skillsoft, DigitalThink,
Knowledgenet, NETg, ElementK, Mindleaders and others. IT training can be broken
into three segments: Segment 1 includes the most sophisticated levels of
training for programmers and software developers; Segment 2 includes
certification for engineers (Microsoft, Novell); and Segment 3 includes the end
users of standard application software. While the Company does very little
training of programmers and software developers, it does compete in Segments 2
and 3, with an estimated 61% of revenues from Segment 2 and 39% from Segment 3. New Horizons derives
revenue from the sale of courseware to its franchises, from an administrative
fee for managing its CES program and from fees earned on its Center Management
System (CMS) software program. The revenues earned from this category increased
$2,676 or 14.9% over the $17,981 realized in 2001, primarily as a result of
increased sales of Microsoft official curriculum and Online ANYTIME courseware. The new courseware products
that were added in 2002 included project management, business skills, and
Health Insurance Portability and Accountability Act (HIPAA) training. As of December 31, 2002, New
Horizons had deployed CMS in 78 of its franchise locations. The system
integrates the customer contact, registration, resource management, scheduling
and invoicing functions of a training center. The franchises can choose to host
the software locally, in which case they acquire the software license rights
from New Horizons, or alternatively, they can choose to have New Horizons be the
application service provider (ASP) for a monthly fee of $995 to $3,995. In 2002,
the Company earned over $975,000 in fees for the CMS product. The statements made in this
Annual Report on Form 10–K 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. Important
factors which may result in variations from results contemplated by such
forward–looking statements include, but are by no means limited to: (i) 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, including through the Internet, which could have more
favorable economics with respect to timing and delivery costs and the emergence
of just–in–time interactive training; (ii) the Company’s ability to attract
and retain qualified instructors and management employees; (iii) 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; (iv) the level of expenditures devoted to upgrading
information systems and computer software by customers; (v) the Company’s
ability to compete effectively with low cost training providers who may not be
authorized by software manufacturers; and (vi) the Company’s ability to
manage the growth of its business. 8
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 IT training
industry. These include the continuation of growth in the market for IT training
and the trends toward outsourcing and eLearning. 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. The offer and sale of
franchises and business opportunities are subject to regulation by the United
States Federal Trade Commission, as well as many states and foreign
jurisdictions. There also exist numerous laws that regulate the ongoing
relationship between franchisors and franchisees, including the termination,
transfer and renewal of franchise rights. The failure to comply with any such
laws could have an adverse effect on the Company. The Company maintains
liability insurance in amounts it believes to be adequate based on the nature of
its business. While the Company believes that it operates its business safely
and prudently, there can be no assurance that liabilities incurred with respect
to a particular claim will be covered by insurance or, if covered, that the
dollar amount of such liabilities will not exceed coverage limits. The Company has issued
trademark registrations and pending trademark applications for the word mark
“NEW HORIZONS” and for other trademarks incorporating the words
“NEW HORIZONS”, including New Horizons Classroom Learning, New
Horizons Online Live Learning, New Horizons Online Anytime Learning, and New
Horizons Integrated Learning. Additionally, the Company has pending trademark
registrations for ” WHAT DO YOU WANT TO LEARN & HOW DO YOU WANT TO
LEARN IT?” and “THE INTEGRATED LEARNING COMPANY” while the mark
“CHOOSE. LEARN. SUCCEED” has matured to registration. The Company
believes that the New Horizons name and trademarks are important to its
business. The Company is not aware of any pending or threatened claims of
infringement or challenges to the Company’s right to use the New Horizons
name and trademarks in its business. However, the Company has been previously
advised that it cannot register the word mark “NEW HORIZONS” in
certain foreign countries and that it cannot register or use any of the New
Horizons trademarks in Australia or the Dominican Republic. Accordingly, the
Company has applications filed with the Australian trademark office to protect
Skill Master as its trademark in Australia, and its franchises there are using
that name and trademark. Additionally, the Company has applications filed with
the Dominican Republic trademark office to protect Skill Master as its trademark
in the Dominican Republic. Due to abandonment of the trademark by a prior owner
in Australia the Company reapplied for the trademark “New Horizons”
and that application is in the final stages pending registration in the
Australian trademark office. The Company believes that the inability to register
certain of its trademarks in certain foreign countries will have a material
adverse effect on its financial condition or results of operations. As of February 28, 2003,
the Company employed a total of 1,023 individuals in its corporate operations
and company–owned facilities. Of these employees, 272 are instructors,
304 are account executives, and 447 are administrative and executive
personnel. New Horizons also utilizes the services of outside contract
instructors to teach some of its curriculum, primarily technical certification
programs which require instructors who are certified by Microsoft, Novell, and
Lotus. None of New Horizons’
employees is represented by a labor organization. New Horizons considers
relations with its employees to be good. 9
The Company’s
corporate headquarters and its flagship-training center are located in Anaheim,
California, pursuant to a lease, which expires in 2012. The Company relocated to
the Anaheim facility in October 2001. As of December 31, 2002,
New Horizons operated training centers at 24 other leased facilities in
California, Connecticut, Georgia, Illinois, Indiana, New Mexico, New York, North
Carolina, Ohio, Tennessee and Texas, with leases that expire from 2003 to 2014. In December 2002, the
Company sold its 8.3 acres of undeveloped land in Santa Ana, California and
realized a pretax gain of approximately $0.5 million dollars. The net
proceeds of approximately $5.6 million were used to reduce its debt with its
lenders. The Company believes that
its facilities are well maintained and are adequate to meet current requirements
and that suitable additional or substitute space will be available as needed to
accommodate any expansion of operations and for additional offices, if
necessary. The Company has accrued
approximately $1 million related to residual environmental liabilities retained from the sale of
its environmental remediation business in 1996. The Company is also
involved in various other claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company’s
consolidated financial position or results of operations. No matters were submitted
to a vote of security holders during the fourth quarter of the year ended
December 31, 2002. 10 The common stock is traded
on The NASDAQ Stock Market under the symbol NEWH. The following table sets forth
the range of high and low closing quotations per share of common stock from
January 1, 2001, through December 31, 2002, as reported by The NASDAQ Stock
Market. As of March 21, 2003, the
Company’s common stock was held by 421 holders of record. The Company has
never paid cash dividends on its common stock and has no present intention to
pay cash dividends in the foreseeable future. The Company currently intends to
retain any future earnings to finance the growth of the Company. Equity Compensation Plan Information The following table sets out
summary stock option plan information as of December 31, 2002, all of which
relates to stock option plans that were previously approved by stockholders of
the company. ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA 11 12 ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS The following discussion
should be read in conjunction with the Consolidated Financial Statements and
related notes and “SELECTED CONSOLIDATED FINANCIAL DATA” included
elsewhere in this report. Effective January 1, 2002,
the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Intangible Assets”,
which revises the accounting for purchased goodwill and intangible assets. Under
SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are tested for impairment annually and also in the event of an
impairment indicator. The Company completed the required transitional impairment
test and recorded a pretax transitional impairment charge of $27.0 million
against goodwill related to the company-owned centers reporting unit. The
impairment charge has been reflected as the cumulative effect of a change in
accounting principle in the amount of $17.8 million, net of tax. Additionally,
as a result of annual impairment testing, the Company recorded a pretax goodwill
impairment charge of $48.7 million during the fourth quarter of 2002. Both the
transitional and fourth quarter impairment charges were related to the
company-owned centers reporting unit and were generally a result of the negative
impact of the continued soft economy on the Company’s operations. The fair
value of each reporting unit was determined through the use of an outside
independent valuation consultant. The consultant considered both the income
approach and market approach in determining fair value. Accounts receivable are
shown net of allowances for uncollectible accounts. The Company’s
management makes estimates of the collectibility of trade receivables based on
historical bad debts, customer concentrations, customer credit-worthiness,
current economic trends, and geographic location. The Company records an
allowance for bad debt separately for its franchising and company-owned centers
segments. The franchising segment records an allowance for bad debt each period
based upon a percentage of revenues. The applicable percentage is dependent upon
revenue classification and the geographic location of the customer and is
estimated based upon historical experience of bad debts. On a periodic basis,
management specifically identifies uncollectible receivables and adjusts the
allowance for bad debt appropriately. The company-owned centers
segment records an allowance for bad debt based upon a percentage of outstanding
receivables. The percentage applied differs by each of the individual centers
within the company-owned centers segment and is estimated based on each
center’s historical experience. At December 31, 2002, the
Company’s accounts receivable balance was $19.6 million, net of allowance
for doubtful accounts of $1.2 million. The Company earns revenue
through its franchising operations and from the delivery of instructor-led and
eLearning training courses by its company-owned training centers. Franchising
Operations Franchising revenues are
earned from initial franchise fees, royalties from franchisees, courseware
sales, delivery fees for eLearning courses, and administration fees for courses
delivered pursuant to the Company’s Corporate Education Solutions (CES)
initiative, a program to service large corporate customers. Initial franchise fees are
charged to unit and master franchisees. Unit franchises receive the exclusive
right to own and operate franchises within a certain territory. Master
franchises receive a territory in which the master franchisee is able to award
unit sub-franchises. Initial fees under unit and master franchise agreements are
not refundable under any circumstance. Initial franchise fees for unit
franchises are recognized upon the completion of the franchisee’s two-week
initial franchise training, after which the Company’s obligations to the
franchisee are perfunctory. Initial fees for master franchises are based upon
the expected number of sub-franchises to be sold in the licensed territory and
are recognized ratably as unit sub-franchises are sold. Unit franchisees and master
franchisees are obliged to remit certain percentages of their gross revenue to
the Company for continuing royalties, advertising fees, and marketing and
distribution fees. These fees are recognized as the underlying unit and master
franchisee recognize revenue. 13 The Company sells licensed
and internally developed courseware materials and curriculum to the franchisees.
Courseware sales are recognized upon shipment. The Company utilizes a third
party for the production of courseware items and fulfillment of orders placed by
the franchisees. The franchisees may order courseware products through the
Company or directly through the fulfillment house. In cases where the Company
acts as a principal in the transaction, takes title to the products, and has the
risks and rewards of ownership, such as the risk of loss for collection,
delivery and returns, revenue is recognized on a gross basis. In cases where the
Company acts as an agent or broker and is compensated on a commission or fee
basis, revenue is recognized on a net basis. Per-student fees are
charged to the franchisees for eLearning courses delivered through the Online
LIVE and Online ANYTIME formats. Online LIVE courses are synchronous,
interactive virtual classrooms that feature instructor-facilitated classes
delivered over the Internet. Student fees related to the sale of Online LIVE
courses are recognized upon the delivery of the course. Online ANYTIME courses
are asynchronous, self-paced training courses which are similar in content to
classroom instruction. Online ANYTIME courses are delivered over the Internet
over a period of one year. Student fees related to the sale of Online ANYTIME
courses are recognized on a straight-line basis over one year. The Company’s
CES program facilitates training for large organizations that
have locations and training needs throughout the world. The Company recognizes
revenue, derived as a percentage of the training business, as the training is
delivered. Company-Owned Training
Centers Company-owned locations
earn revenue from the delivery of instructor-led and eLearning computer training
courses to public and private corporations, service organizations, government
agencies and municipalities and individual students. Instructor-led learning
programs allow students to choose from several options, including training
vouchers, club memberships, technical certification programs, and individual
classes. Training vouchers allow the
customer to send one attendee per voucher to an instructor-led class over a
finite period of time for a fixed price. Revenue associated with training
vouchers are recognized over the period of time the voucher is valid using rates
that represent the historical utilization of the training vouchers. Club memberships allow the
club member to attend as many classes as they choose over a finite period of
time for a fixed price. Revenue associated with club memberships is recognized
over the membership period using rates that historically approximate the manner
in which courses are taken by club members. Technical certification
programs are a number of courses designed to allow the customers to attend the
classes necessary to prepare them to pass the required tests to reach a certain
technical certification. Revenue associated with technical certification
programs are recognized over a period of time based on rates that historically
approximate the manner in which the technical certification programs are
delivered. Individual classes allow
students to take single classes at a fixed price. Revenue for individual classes
is recognized upon delivery. eLearning programs are
delivered through the Company’s Online LIVE and Online ANYTIME products. Online LIVE courses are
synchronous, interactive virtual classrooms delivered over the Internet. Online
LIVE course revenue is recognized upon delivery. Online ANYTIME courses are
asynchronous, self-paced classes that are delivered over the Internet over a
period of one year. Online ANYTIME course revenue is recognized on a
straight-line basis over one year. The revenue recognition
rates utilized for training vouchers, club memberships, and technical
certification programs are based on the results of student attendance analyses
performed by the Company. The Company’s student attendance analyses 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 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. As a result of
an update to its historical studies of student attendance patterns in the fourth
quarter of 2002, the Company determined that in certain programs, primarily
training vouchers and technical certification programs, students were taking
longer to complete classes compared to past
historical experience. As a result, the Company adjusted its revenue recognition
rates and recorded an increase in deferred revenue of $4.4 million, resulting in
a charge, net of adjustments to related deferred costs and income taxes, of $1.9
million, or $0.18 per share. Although the Company believes its current revenue
recognition rates are consistent with current student attendance patterns, no
assurance can be given that such rates will not change in the future. 14 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
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. The Company does not have
any off-balance sheet financings. The Company has no majority-owned subsidiaries
that are not included in the financial statements, nor does it have any
interests in or relationships with any special purpose entities. The Company operates
computer training centers in the United States and franchises computer training
centers in the United States and abroad. Prior to 1997, the Company also
operated an environmental remediation business. As a result of the completion of
the sale of Handex Environmental, Inc. to ECB, Inc. in December 1996, the
results of operations for the Company’s environmental business segment have
been classified as discontinued operations for all periods presented in the
accompanying consolidated financial statements. The Company operates in two
business segments: one operates wholly-owned computer training centers and the
other supplies systems of instruction, sales, and management concepts concerning
computer training and sells courseware to independent franchisees. 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 CES program. 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. 15 Total revenues decreased
$24,196, or 15.1%, from $159,899 for the year ended December 31, 2001 to
$135,703 for the year ended December 31, 2002. The company-owned and franchising
operating segments experienced decreases of $23,297 and $899, respectively. Company-Owned Training Centers Company-owned revenues
decreased $23,297, or 19.7%, from $118,336 for the year ended December 31, 2001
to $95,039 for the year ended December 31, 2002. During the same time period,
same-center revenues decreased in excess of 22% as a result of the continued
softness of the domestic economy and adjusted revenue recognition rates. Due to the lagging domestic
economy, corporations, organizations, government, and municipalities decreased
their levels of spending on technology and technology-related products,
including information technology (IT) training. Reduced demand caused a
significant decrease in the number of student training days delivered, and a
corresponding decrease in applications and technical course revenue of $25.2
million, as well as decreases in other sources of revenue of $1.8 million. These
decreases were partially offset by increased revenue from the Company’s
eLearning courses of $3.7 million. As a result of an update to
its historical studies of student attendance patterns in the fourth quarter of
2002, the Company determined that in certain programs, primarily training
vouchers and technical certification programs, students were taking longer to
complete classes compared to past historical experience. As a result, the
Company adjusted its revenue recognition rates for each of the programs
affected. The change in revenue recognition rates resulted in a decrease of $4.4
million in revenue as compared to 2001. The decrease in revenue
within the company-owned segment is partially offset by a full year of revenue
for the Indianapolis and Atlanta centers, which were acquired in early 2001. Franchising Operations Franchising revenue
decreased $899, or 2.2%, from $41,563 for the year ended December 31, 2001 to
$40,664 for the year ended December 31 2002. The decrease in franchising revenue
is due to lower amounts of initial fees and royalties earned in 2002, partially
offset by increases in courseware sales to franchisees. Initial franchise fees
decreased $258, or 22.1%, from $1,167 for the year ended December 31, 2001 to
$909 for the year ended December 31, 2002. The continued softness in the
domestic and global economies resulted in decreased demand for new franchises
and the execution of fewer new franchise agreements during the year as compared
to 2001. Royalty fees decreased
$3,317, or 14.8%, from $22,415 for the year ended December 31, 2001 to $19,098
for the year ended December 31, 2002. The decrease in royalty fees is due to
decreases in same-center revenue at franchise locations and a net reduction of
15 franchise centers during 2002. Same center revenue decreased approximately
10% at franchise centers. At December 31, 2002, there were 242 franchise
locations in operation, a decrease of 15 from the 257 franchise locations in
operation at December 31, 2001. Other franchising revenues
increased $2,676, or 14.9%, from $17,981 for the year ended December 31, 2001 to
$20,657 for the year ended December 31, 2002. The increase in other franchising
revenues is due to a full year of sales of Microsoft official curriculum,
eLearning courseware, and student learning guides. The Company began offering
each of these products during 2001. System-wide System-wide revenues,
defined as revenues from all centers, both company-owned and franchised,
decreased $83,046, or 16.2%, from $511,814 for the year ended December 31, 2001
to $428,768 for the year ended December 31, 2002. 16 Cost of revenues decreased
$2,795, or 3.3%, from $85,102 for the year ended December 31, 2001 to $82,307
for the year ending December 31, 2002. As a percentage of
revenues, cost of revenues increased from 53.2% in 2001 to 60.7% in 2002. The
increase, as a percentage of revenues, is due to increased sales of lower margin
items, including courseware and eLearning products, and the effect of
under-utilized fixed costs. Facility costs, instructor wages, and other fixed
costs comprise a significant portion of the Company’s cost of revenue.
Although the Company, on an on-going basis, attempts to minimize under-utilized
fixed costs through cost management initiatives, these initiatives have been
unable to reduce fixed costs at the same rate as the reduction in revenue. Cost
management initiatives include managing employee headcount, class schedule
consolidation, and the sublease of under-utilized facilities. The decrease in cost of
revenues, in dollar terms, is attributable to a decrease in variable costs and
the effects of cost management initiatives executed throughout the year,
partially offset by losses on sub-leases of under-utilized facilities of $539. Selling, general and administrative
expenses decreased $8,316, or 12.6%, from $65,999 for the year ended December
31, 2001 to $57,683 for the year ending December 31, 2002. Upon adopting SFAS
No. 142 in January 2002, the Company ceased amortizing goodwill. In 2001, $3,624
of goodwill amortization expense was classified within selling, general, and
administrative expenses. The remaining decrease in selling, general and
administrative expenses is attributable to decreases in sales commissions of
$3,916 and the effect of cost management initiatives executed throughout the
year. Effective January 1, 2002,
the Company adopted SFAS No. 142, "Goodwill and Intangible Assets." Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are tested for impairment annually and also in the event of an
impairment indicator. Pursuant to SFAS No. 142, the
Company completed a transitional impairment test based on the fair values of the
Company’s company-owned centers and franchising reporting units as of
January 1, 2002. The transitional impairment test resulted in a pretax
impairment charge of $27.0 million against goodwill related to the company-owned
centers reporting unit. The transitional impairment charge was recorded as a
cumulative effect of a change in accounting principle in the amount of $17.8
million, net of tax. The transitional impairment charge was the result of a
fundamental change in the measurement of impairment losses resulting from the
Company’s adoption of SFAS No. 142. The Company performed its
annual impairment test during the fourth quarter of 2002. As a result of the
annual impairment test, the Company recorded a pretax impairment charge of $48.7
million. The fourth quarter impairment charge was the result of a significant
decrease in the fair value of the Company’s company-owned centers reporting
unit. The company utilized an
independent valuation consultant to assist it in determining the fair value of
the Company’s reporting units as part of the impairment testing. These
consultants determined the fair value of the Company’s reporting units
utilized in impairment testing. These consultants considered both the income
approach and market approach in determining fair value. Under the income
approach and market approach, management’s estimates of future
profitability and market capitalization were used in determining fair value. The
decrease in fair value of the company-owned center reporting unit was
attributable to the continued softness of the domestic economy and downward
revisions in management’s estimates of the future profitability of
company-owned centers. During the year ended
December 31, 2002, the domestic economy was characterized by decreases in
capital and technology related expenditures by corporations and organizations.
The decrease in technology-related expenditures significantly affected the
capital markets and resulted in decreases in the stock prices and market
capitalization of publicly traded entities within the technology sector. Prior to the fourth quarter
of 2002, management believed the domestic economy and, more specifically,
technology-related spending would rebound in early 2003 and improve operating
performance. The variance between the Company’s estimated and actual
operating results in the latter half of 2002, in addition to the lack of
positive indicators that the technology sector will return as quickly as
previously thought, has caused management to revise its estimates as to the
future profitability of the company-owned centers downward. 17 Interest income for 2002
decreased $180 or 48.8% to $189 compared with $369 in 2001. As a percentage of
revenues, interest income decreased to 0.1% for 2002 from 0.2% for 2001. Interest expense increased
$875 to $2,325 for 2002 or 60.3% compared to $1,450 in 2001. As a percentage of
revenues, interest expense was 1.7% in 2002 and 0.9% in 2001. The increase in
interest expense in absolute dollars was due to higher outstanding debt in 2002
as compared to 2001, and the write-off of $435 unamortized bank fees related to
the previous credit agreement that was replaced with a new credit agreement in
February 2003. The provision for income
taxes as a percentage of loss before taxes was 34% for 2002. The decreased
benefit was primarily related to foreign taxes which were not offset by federal
credits and a reduction in tax benefit due to the tax treatment of the
impairment of non-deductible goodwill. The provision for tax expense in 2001 was
reduced to 33.8% primarily due to the tax treatment of a non-recurring gain. Revenues for 2001 increased
$17,201 to $159,899 or 12.1% over the $142,698 realized in 2000. The increase in
revenues was attributable to higher revenues from the sale of Microsoft official
curriculum and student learning guides by Nova Vista and the acquisition of the
Indianapolis, Indiana and Atlanta, Georgia franchises in 2001. Revenues at company-owned
centers increased 6.3% to $118,336 from $111,319 in 2000. The increase was
primarily attributable to the acquisition of the Indianapolis and Atlanta
franchises. In the Company’s
franchising segment, royalty fees for 2001 were $22,415, down 5.1% from the 2000
total of $23,609. The decrease was principally due to revenue reduction at
locations open more than one year, resulting primarily from the effect of the
downturn in the domestic economy, the acquisition of the Atlanta and
Indianapolis franchises, and franchise closures in 2001. The reduction was
partially offset by new centers opened in 2001. Franchise fees for 2001 were
$1,167, down 46.7% from the 2000 total of $2,191. At the end of 2001, there were
257 franchise locations in operation, up 1.2% over the 254 in operation at the
end of 2000. One hundred forty locations operate in the United States and Canada
while 117 operate in 44 other countries around the world. Other franchising
revenues for 2001 increased $12,402, up 222% from the 2000 total of $5,579. The
increase was due mainly to higher revenues from the sale of Microsoft official
curriculum and student learning guides by Nova Vista. System-wide revenues, which
are defined as revenues from all centers, both company-owned and franchised,
decreased to $511,814 in 2001, down 3.5% from $530,272 in 2000. Cost of revenues increased
$19,252 or 29.2% for 2001 compared to 2000. As a percentage of revenues, cost of
revenues increased to 53.2% for 2001 from 46.1% in 2000. The increase in cost of
revenues in absolute dollars was primarily due to the acquisition of the
Indianapolis and Atlanta franchises in 2001 and the significant increase in the
sale of courseware to the franchisees. The increase as a percentage of revenue
resulted from a reduction in revenue in the company-owned centers owned at the
beginning of the year and the increase in the sale of courseware, which is at a
lower gross margin. New Horizons derives
revenue from the sales of courseware to its franchisees through Nova Vista, its
product procurement company. The revenues earned from this category increased
substantially in 2001 as a result of new products being offered to the
Company’s franchises in 2001. The new courseware products in 2001 included
Microsoft Official Curriculum, used in technical training classes, learning
guides, used primarily in applications classes, and Online LIVE and Online
ANYTIME products. These products added approximately $9.7 million in revenue in
2001. Selling, general and administrative
expenses increased $7,247 or 12.3% for 2001 compared to 2000. As a percentage of
revenues, selling, general and administrative expenses rose to 41.3% for 2001
from 41.2% for 2000. The increase in absolute dollars for selling, general and
administrative expenses was due primarily to the acquisition of the Indianapolis
and Atlanta franchises in 2001. Selling, general and administrative expense as a
percentage of revenues remained relatively the same. 18 Interest income for 2001
decreased $134 or 26.6% to $369 compared with $503 in 2000. As a percentage of
revenues, interest income decreased to 0.2% for 2001 from 0.4% for 2000. Interest expense increased
$1,132 to $1,450 for 2001 or 356% compared to $318 in 2000. As a percentage of
revenues, interest expense was 0.9% in 2001 and 0.2% in 2000. The increase in
interest expense in absolute dollars was due to higher outstanding debt in 2001
as compared to 2000. The provision for income
taxes as a percentage of income before income taxes was 33.8% for 2001 compared
to 40.0% for 2000. The decrease in the effective tax rate was due principally to
the tax treatment of certain non-recurring gains recorded in 2001. (See Note 6) As of December 31, 2002,
the Company’s current ratio was 0.9 to 1 and the Company had unrestricted cash and cash
equivalents of $5,085 and negative working capital of $4,685. Working capital as
of December 31, 2002 reflected a decrease of $9 million from $4,315 at December
31, 2001. The decrease in working capital was due primarily to the significant
increase in the Company’s deferred revenue balance resulting primarily from
the increase in sales of its Online ANYTIME product and the adjustment of the
Company’s revenue recognition rates associated with certain of the
Company’s other computer training products. During the year ended
December 31, 2002, cash provided by operating activities was $12,540 as compared
to $13,338 for the year ended December 31, 2001. The Company’s operations,
prior to working capital adjustments and non-cash gains and charges for
depreciation, goodwill impairment, change in accounting principle, disposal of
land and fixed assets, and deferred income taxes, provided cash of $4.5 million.
Adjustments to working capital classified within operating cash flows provided
additional cash of $8.0 million, due to increases in deferred revenue and
accounts payable and decreases in accounts receivable, offset by an increase in
prepaid expenses and other assets and a decrease in current income tax
liabilities. As a result, cash provided from operating activities during the
year ended December 31, 2002 remained relatively constant with cash provided by
operating activities during the year ended December 31, 2001. 19 Cash provided by investing
activities was $166 for the year ended December 31, 2002. The Company’s
primary investing activities included capital expenditures of $5,035 and the
sale of land and fixed assets for cash proceeds of $5,666. The expenditures in
property, plant and equipment represent continued investments in the
Company’s company-owned centers and franchising segments. The Company
believes capital expenditures in 2003 will be funded by cash flows from
operations. During the year ended
December 31, 2002, cash used by financing activities was $10,183. Cash used by
financing activities was primarily related to $11,275 of principal payments on
the Company’s bank debt facility. These uses of cash were partially offset
by the proceeds from the exercise of stock options totaling $1,092. On February 27, 2003, the
Company executed a new credit agreement with a commercial bank, with an
expiration date of February 15, 2005, which has the following terms and
conditions: (1) a $10,639 term loan with quarterly principal payments of $750
commencing March 31, 2003, (2) a revolving line of credit of $1,500, (3) an
interest rate of, at the Company’s option, either prime plus 1.5% or LIBOR
plus 3.75% (the interest rate will decrease to prime plus 0% or LIBOR plus 2.25%
should the Company achieve a rolling four quarter EBITDA in excess of $11,200),
(4) a requirement to meet various financial covenants, including minimum
quarterly EBITDA, maximum leverage ratio, minimum debt service coverage ratio,
maximum capital expenditures, and a minimum quarterly cash level, and (5) a
prohibition from engaging in any acquisitions without the consent of the bank.
At closing the Company made a principal payment of $3,500 to the former bank
group and the current bank assumed the remaining balance of the term loan of
$10,639, the amount outstanding under the revolving line of credit of $300, and
responsibility for the outstanding standby letters of credit. With this new
amendment the availability under the credit facility was $800 as of February 28,
2003. Barring any unanticipated decline in operating results, the Company
expects to remain in compliance with the covenants of its credit agreement
through 2003. The nature of the IT
training industry requires substantial cash commitments for the purchase of
computer equipment, software, and training facilities. During 2002, New Horizons
spent approximately $5 million on capital items. Capital expenditures for 2003
are expected to total approximately $5 million. The Company’s
contractual obligations and commercial cash commitments as of December 31, 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. The Company believes that
the cash flow from operations, which provides funds for operations, planned
capital expenditures, scheduled payments, and the repayment 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
existing capital, anticipated cash flows from operations, and current and
anticipated borrowings under its credit facility, will be adequate to support
its current and anticipated capital and operating expenditures for the
foreseeable future. Information regarding recent
accounting pronouncements is contained in Note 1 to the Consolidated Financial
Statements for the year ended December 31, 2002, which note is incorporated
herein by this reference, and is included as part of Item 8 of Form 10 K. 20 The Company is exposed to
market risk related to changes in interest rates. A discussion of the
Company’s accounting policies for financial instruments and further
disclosures relating to financial instruments are included in the Notes to
Consolidated Financial Statements. The Company 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 bank line of
credit. At December 31, 2002, the Company’s bank debt consisted of floating
rate debt. If interest rates were to increase 100 basis points (1.0%) from
December 31, 2002 rates, and assuming no changes in bank debt from the December
31, 2002 levels, the additional annual expense would be approximately $144 on a
pre-tax basis. The Company currently does not hedge its exposure to floating
interest rate risk. The Company's risk related
to foreign currency exchange rates is not material. Pages F-1 to F-21 contain
the Financial Statements and supplementary data specified for Item 8 of Part II
of Form 10-K. None 21 The Board of Directors and Stockholders We have audited the accompanying consolidated balance sheets of New Horizons Worldwide, Inc. and
subsidiaries (the Company) as of December 31, 2002 and 2001 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the
financial position of New Horizons Worldwide, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, in 2002 the Company changed its method of
accounting for goodwill and intangible assets. DELOITTE & TOUCHE LLP F-1 CONSOLIDATED BALANCE SHEETS See accompanying notes to consolidated financial statements F-2 CONSOLIDATED STATEMENTS OF OPERATIONS See accompanying notes to consolidated financial statements F-3 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Balance at January 1, 2000 9,789 $ 97 $ 37,098 $ 36,780 $ (1,298) $ 72,677 Issuance of common stock from exercise of stock options 149 2 1,577 — — 1,579 Income tax benefit from the exercise of stock options — — 544 — — 544 Issuance of common stock for acquisitions 145 2 2,850 — — 2,852 Net income — — — 10,969 — 10,969 Balance at December 31, 2000 10,083 101 42,069 47,749 (1,298) 88,621 Issuance of common stock from exercise of stock options 8 — 94 — — 94 Income tax benefit from the exercise of stock options — — 10 — — 10 Issuance of common stock for acquisitions 306 3 4,722 — — 4,725 Net income — — — 6,454 — 6,454 Balance at December 31, 2001 10,397 104 46,895 54,203 (1,298) 99,904 Issuance of common stock from exercise of stock options 176 2 1,090 — — 1,092 Income tax benefit from the exercise of stock options — — 219 — — 219 Net Loss — — — (53,845) — (53,845) Balance at December 31, 2002 10,573 $ 106 $ 48,204 $ 358 $ (1,298) $ 47,370 See accompanying notes to consolidated financial statements F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS See accompanying notes to consolidated financial statements F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS F-6 NEW HORIZONS
WORLDWIDE, INC. AND SUBSIDIARIES Notes to
Consolidated Financial Statements December 31,
2002, December 31, 2001, and December 31, 2000 New Horizons Worldwide,
Inc. ("New Horizons," or the "Company") owns and franchises computer training
centers. The Company's training centers provide
application software and technical certification training to a wide range of
individuals and employer–sponsored individuals from national and international
public and private corporations, service organizations and government agencies.
Additionally, the Company supplies internally developed and externally licensed
curriculum and courseware materials to its franchisees. As of December 31, 2002,
the Company and its franchisees delivered training in 25 company-owned and 242
franchised locations in 51 countries around the world. The consolidated financial
statements include the accounts of New Horizons Worldwide, Inc. and its
subsidiaries, all of which are wholly owned. All significant inter-company
balances and transactions have been eliminated in consolidation. The accompanying
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates. Cash and cash equivalents consist
of short-term investments with an original maturity of less than 90 days.
The carrying amounts of cash and cash equivalents approximate their fair values
due to their short maturities. Accounts receivable are
shown net of an allowance for uncollectible accounts. The valuation of the
allowance is based on historical collection trends and management’s
judgment on the collectibility of these accounts. Historical collection trends,
as well as prevailing and anticipated economic conditions, are routinely
monitored by management, and any adjustments required are reflected in current
operations. The allowance for doubtful accounts as of December 31, 2002 and 2001
was $1,233 and $829, respectively. Financial instruments that
subject the Company to credit risk consist primarily of cash, cash equivalents,
and accounts receivable. The Company invests its cash and cash equivalents in a
money market account with high quality financial institutions. The Company issues credit
to a significant number of customers that are diversified over a wide geographic
area. The Company performs ongoing credit evaluations of its customers and
maintains an allowance for potential losses. The Company does not require
collateral from its customers. F-7 For the years ended
December 31, 2002, 2001, and 2000, no single customer accounted for greater than
10% of consolidated revenues. The Company earns revenue
through its franchising operations and from the delivery of instructor-led and
eLearning training courses by its company-owned training centers. Franchising Operations Franchising revenues are
earned from initial franchise fees, royalties from franchisees, courseware
sales, delivery fees for eLearning courses, and administration fees for courses
delivered pursuant to the Company’s Corporate Education Solutions (CES)
initiative, a program to service large corporate customers. Initial franchise fees are
charged to unit and master franchisees. Unit franchises receive the exclusive
right to own and operate franchises within a certain territory. Master
franchises receive a territory in which the master franchisee is able to award
unit sub-franchises. Initial fees under unit and master franchise agreements are
not refundable under any circumstance. Initial franchise fees for unit
franchises are recognized upon the completion of the franchisee’s two-week
initial franchise training, after which the Company’s obligations to the
franchisee are perfunctory. Initial fees for master franchises are based upon
the expected number of sub-franchises to be sold in the licensed territory and
are recognized ratably as unit sub-franchises are sold. Unit franchisees and master
franchisees are obliged to remit certain percentages of their gross revenue to
the Company for continuing royalties, advertising fees, and marketing and
distribution fees. These fees are recognized as the underlying unit and master
franchisee recognize revenue. The Company sells licensed
and internally developed courseware materials and curriculum to the franchisees.
Courseware sales are recognized upon shipment. The Company utilizes a third
party for the production of courseware items and fulfillment of orders placed by
the franchisees. The franchisees may order courseware products through the
Company or directly through the fulfillment house. In cases where the Company
acts as a principal in the transaction, takes title to the products, and has the
risks and rewards of ownership, such as the risk of loss for collection,
delivery and returns, revenue is recognized on a gross basis. In cases where the
Company acts as an agent or broker and is compensated on a commission or fee
basis, revenue is recognized on a net basis. Per-student fees are
charged to the franchisees for eLearning courses delivered through the Online
LIVE and Online ANYTIME formats. Online LIVE courses are synchronous,
interactive virtual classrooms that feature instructor-facilitated classes
delivered over the Internet. Student fees related to the sale of Online LIVE
courses are recognized upon the delivery of the course. Online ANYTIME courses
are asynchronous, self-paced training courses which are similar in content to
classroom instruction. Online ANYTIME courses are delivered over the Internet
over a period of one year. Student fees related to the sale of Online ANYTIME
courses are recognized on a straight-line basis over one year. The Company’s
CES program facilitates training for large organizations that
have locations and training needs throughout the world. The Company recognizes
revenue, derived as a percentage of the training business, as the training is
delivered. Company-Owned Training Centers Company-owned locations
earn revenue from the delivery of instructor-led and eLearning computer training
courses to public and private corporations, service organizations, government
agencies and municipalities and individual students. Instructor-led learning
programs allow students to choose from several options, including training
vouchers, club memberships, technical certification programs, and individual
classes. Training vouchers allow the
customer to send one attendee per voucher to an instructor-led class over a
finite period of time for a fixed price. Revenue associated with training
vouchers are recognized over the period of time the voucher is valid using rates
that represent the historical utilization of the training vouchers. Club memberships allow the
club member to attend as many classes as they choose over a finite period of
time for a fixed price. Revenue associated with club memberships is recognized
over the membership period using rates that historically approximate the manner
in which courses are taken by club members. F-8 Technical certification
programs are a number of courses designed to allow the customers to attend the
classes necessary to prepare them to pass the required tests to reach a certain
technical certification. Revenue associated with technical certification
programs are recognized over a period of time based on rates that historically
approximate the manner in which the technical certification programs are
delivered. Individual classes allow
students to take single classes at a fixed price. Revenue for individual classes
is recognized upon delivery. eLearning programs are
delivered through the Company’s Online LIVE and Online ANYTIME products. Online LIVE courses are
synchronous, interactive virtual classrooms delivered over the Internet. Online
LIVE course revenue is recognized upon delivery. Online ANYTIME courses are
asynchronous, self-paced classes that are delivered over the Internet over a
period of one year. Online ANYTIME course revenue is recognized on a
straight-line basis over one year. The revenue recognition
rates utilized for training vouchers, club memberships, and technical
certification programs are based on the results of student attendance analyses
performed by the Company. The Company’s student attendance analyses 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 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. As a result of
an update to its historical studies of student attendance patterns in the fourth
quarter of 2002, the Company determined that in certain programs, primarily
training vouchers and technical certification programs, students were taking
longer to complete classes compared to past historical experience. As a result,
the Company adjusted its revenue recognition rates and recorded an increase in
deferred revenue of $4.4 million, resulting in a charge, net of adjustments to
related deferred costs and income taxes, of $1.9 million. Although the Company
believes its current revenue recognition rates are consistent with current
student attendance patterns, no assurance can be given that such rates will not
change in the future. Property and equipment are
stated at cost less accumulated depreciation and amortization. Depreciation is
computed on a straight-line basis, based upon the estimated useful lives of the
various classes of assets. The estimated useful lives of the assets are as
follows: Costs incurred related to
repairs and maintenance that do not improve or extend the life of the assets are
expensed as incurred. The cost and accumulated depreciation on property and
equipment sold, retired, or otherwise disposed of is removed from the respective
accounts and the resulting gains and losses are reflected in income. Inventories are stated at
the lower of cost or market. Inventory costs are determined using the first-in,
first-out (FIFO) method. In August 2001, the Financial
Accounting Standards Board (FASB)
issued SFAS No. 144, which establishes a single accounting model for the
impairment or disposal of long-term assets, including discontinued operations.
SFAS No. 144 superseded SFAS No. 121 and Accounting Priciples Board (APB) Opinion No. 30, “Reporting the
Results of Operations – Reporting the Effects of the 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, with early adoption permitted, and in
general, are to be applied prospectively. The Company’s adoption of SFAS
No. 144, effective January 1, 2002, did not have a material impact on its
results of operations and financial position. F-9 The Company performs
impairment tests for the long-lived assets if an event or circumstance indicates
that the carrying amount of the long-lived assets may not be recoverable. In
response to changes in industry and market conditions, the Company may also
strategically realign resources and consider restructuring, disposing of, or
otherwise exiting businesses. Such activities could result in impairment of
long-lived assets or other intangible assets. The Company is also subject to the
possibility of impairment of long-lived assets arising in the ordinary course of
business. The likelihood of impairment is considered if the carrying amount of a
long-lived asset or intangible asset is not recoverable from its undiscounted
cash flows in accordance with SFAS 144. Impairment is measured as the difference
between the carrying amount and fair value of the asset or asset group. Effective January 1, 2002,
the Company adopted SFAS No. 142, “Goodwill and Intangible Assets”,
which revises the accounting for purchased goodwill and intangible assets. Under
SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are tested for impairment annually and also in the event of an
impairment indicator. The Company completed the required transitional impairment
test and the Company recorded a pretax transitional impairment charge of $27.0
million against goodwill related to the company-owned centers reporting unit.
The impairment charge has been reflected as the cumulative effect of a change in
accounting principle in the amount of $17.8 million, net of tax. Additionally,
as a result of annual impairment testing, the Company recorded a pretax goodwill
impairment charge of $48.7 million during the fourth quarter of 2002. Both the
transitional and fourth quarter impairment charges were related to the
company-owned centers reporting unit and were generally a result of the negative
impact of the continued soft economy on the Company’s operations. The fair
value of each reporting unit was determined through the use of an outside
independent valuation consultant. The consultant considered both the income
approach and market approach in determining fair value. The Company accounts for
income taxes under SFAS No. 109,
“Accounting for Income Taxes”. Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is recorded against deferred tax assets to the
extent the Company does not expect to realize those assets through future
taxable income. The Company accounts for
stock-based awards to employees using the intrinsic value method in accordance
with APB Opinion No. 25 “Accounting for Stock
Issued to Employees”, including related interpretations, and follows the
disclosure only provision of SFAS No. 123, “Accounting for Stock Based
Compensation”. At December 31, 2002, the
Company has two stock-based employee compensation plans, which are described
more fully in Note 11. No stock-based employee compensation cost is reflected in
the results of operations, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net (loss) income
and earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, to stock-based employee compensation. F-10 The fair value of each
option grant was estimated as of the grant date using the Black-Scholes
option-pricing model assuming a risk-free interest rate of 4.2% volatility of
66.52%, and zero dividend yield for 2002, a risk-free interest rate of 4.0%,
volatility of 55%, and zero dividend yield for 2001, and a risk-free interest
rate of 6.6%, volatility of 74%, and zero dividend yield for 2000, with expected
lives of four to ten years. Comprehensive income
includes all changes in shareholders’ equity, except those arising from
transactions with shareholders, and includes net income and net unrealized gains
(losses) on securities. For the three years in the period ended December 31,
2002, there was no difference between the Company’s net income (loss) and
comprehensive income (loss). The Company’s credit
agreement, requires the Company to maintain minimum cash balances of at least
$3.5 million. This amount is classified as restricted cash at December 31, 2002.
No cash balances were restricted at December 31, 2001. The Company calculates earnings
per share (EPS) pursuant to SFAS No. 128, "Earnings Per Share". Certain reclassifications
have been made to the prior years’ consolidated financial statements to
conform to the current year’s presentation. The Company’s
consolidated balance sheets include the following financial instruments: trade
accounts receivable, trade accounts payable, notes receivable, and long-term
debt. The Company considers the carrying amounts in the financial statements to
approximate fair value of these financial instruments due to the relatively
short period of time between the origination of the instruments and their
expected realization. The interest rates on notes receivable and long-term debt
approximate current market rates. In April 2002, the FASB
issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145
rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt
to be aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. Upon adoption of SFAS No. 145, we will be required to
apply the criteria in 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”,
in determining the classification of gains and losses
resulting from the extinguishment of debt. Additionally, SFAS No. 145 amends SFAS No. 13
to require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS No. 145 will be effective for fiscal years
beginning after May 15, 2002 with early adoption of the provisions related to
the rescission of SFAS No. 4 encouraged. Upon adoption, companies must reclassify
prior period items that do not meet the extraordinary item classification
criteria in APB Opinion No. 30. The adoption of SFAS No. 145 is not expected to have a
material impact on the Company. In June 2002, the FASB
issued SFAS No. 146, “Accounting for Costs Associated with Exit and
Disposal Activities”. SFAS No. 146 nullifies Emerging Issues 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)". Under EITF
Issue 94-3, a liability for an exit cost is recognized at the date of an
entity’s commitment to an exit plan. Under SFAS No.146, the liabilities
associated with an exit or disposal activity will be measured at fair value and
recognized when the liability is incurred and meets the definition of a
liability in the conceptual framework of the FASB. This statement is effective
for exit or disposal activities initiated after December 31, 2002. The adoption
of SFAS No. 146 is not expected to have a material impact on the Company. F-11 In December 2002, the FASB
issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition
and Disclosure”, an amendment of SFAS No. 123, “Accounting for
Stock-Based Compensation”. SFAS No. 148 amends the disclosure requirements for
stock-based compensation for annual periods ending after December 15, 2002 and
for interim periods beginning after December 15, 2002. The disclosure
requirements apply to all companies, including those that continue to recognize
stock-based compensation under the intrinsic value provisions of APB Opinion 25. SFAS
No. 148 also provides three alternative transition methods for companies that choose
to adopt the fair value measurement provisions of SFAS No. 123. The Company has
adopted the pro forma disclosure requirements of SFAS No. 148 for the year ended
December 31, 2002. In November 2002, the FASB
issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others”, which
addresses the disclosure to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees. The disclosure
requirements are effective for interim and annual financial statements ending
after December 15, 2002. FIN 45 also requires the recognition of a liability by
a guarantor at the inception of certain guarantees. FIN 45 requires the
guarantor to recognize at the inception of the guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions are effective for all guarantees within
the scope of FIN 45 issued or modified after December 31, 2002. The Company has
adopted the disclosure requirements of FIN 45 and will apply the recognition and
measurement provisions for all guarantees entered into or modified after
December 31, 2002. In February 2003, the FASB
issued FIN 46, “Consolidation of Variable Interest Entities”, which
addresses the consolidation by business enterprises of variable interest
entities, which have one or both of the following characteristics: (1) the
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional financial support from other parties, or (2) the
equity investors lack one or more of the following essential characteristics of
a controlling financial interest: (a) the direct or indirect ability to make
decisions about the entity’s activities through voting or similar rights,
(b) the obligation to absorb the expected losses of the entity if they occur, or
(c) the right to receive the expected residual returns of the entity if they
occur. FIN 46 will have a significant effect on existing practice because it
requires existing variable interest entities to be consolidated if those
entities do not effectively disburse risks among parties involved. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
FIN 46 may be applied prospectively with a cumulative-effect adjustment as of
the date on which it is first applied or by restating previously issued
financial statements for one or more years with a cumulative-effect adjustment
as of the beginning of the first year restated. The adoption of FIN 46 is not
expected to have a material impact on the Company. In November 2002, the FASB
issued EITF Issue 00-21, “Revenue Arrangements with Multiple
Deliverables”. EITF 00-21 addresses certain aspects of the accounting by a
vendor for arrangements under which it will perform multiple revenue-generating
activities. Specifically, EITF 00-21 addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting. In applying EITF 00-21, separate contracts with the same entity or
related parties that are entered into at or near the same time are presumed to
have been negotiated as a package and should, therefore, be evaluated as a
single arrangement in considering whether there are one or more units of
accounting. That presumption may be overcome if there is sufficient evidence to
the contrary. EITF 00-21 also addresses how arrangement consideration should be
measured and allocated to the separate units of accounting in the arrangement.
Issue 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF Issue 00-21 is not expected
to have a material impact on the Company. F-12 Allowance for doubtful
accounts includes the following: The Company's debt and
capital lease obligations are as follows: On February 27, 2003, the
Company executed a new credit agreement with a commercial bank, with an
expiration date of February 15, 2005, which has the following terms and
conditions: (1) a $10,639 term loan with quarterly principal payments of $750,
commencing March 31, 2003, (2) a revolving line of credit of $1,500, (3) an
interest rate of, at the Company’s option, either prime plus 1.5% or LIBOR
plus 3.75% (the interest rate will decrease to prime plus 0% or LIBOR plus 2.25%
should the Company achieve a rolling four quarter EBITDA in excess of $11,200),
(4) a requirement to meet various financial covenants, including minimum
quarterly EBITDA, maximum leverage ratio, minimum debt service coverage ratio,
maximum capital expenditures, and a minimum quarterly cash level, and (5) a
prohibition from engaging in any acquisitions without the consent of the bank.
At closing the Company made a principal payment of $3,500 to the former bank
group and the current bank assumed the remaining balance of the term loan of
$10,639, the amount outstanding under the revolving line of credit of $300, and
responsibility for the outstanding standby letters of credit. With this new
amendment the availability under the credit facility was $800 as of February 27,
2003. The following is a summary
of future payments required under the above obligations: F-13 The components of property,
plant and equipment are summarized below: In December 2002, the
Company sold 8.3 acres of undeveloped land in Santa Ana, California and
realized a pretax gain of $503. The net proceeds of approximately $5.6 million
were used to reduce its debt with its lenders. In June 2001, the FASB
issued SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No.
142 addresses the financial accounting and reporting
for acquired goodwill and other intangible assets. Under the new rules, the
Company is no longer required to amortize goodwill and other intangible assets
with indefinite lives, but will be subject to periodic testing for impairment.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their residual values
and be reviewed for impairment. Effective January, 1, 2002,
the company adopted SFAS No. 142 and in accordance with its provisions, the
Company recorded a pre-tax transitional impairment charge of $27.0 million against
goodwill held at the company-owned location reporting unit. The charge has been
reflected as a cumulative effect of a change in accounting principle in the year
ending December 31, 2002. The fair value of each reporting unit was obtained
through an outside valuation consultant. The consultant considered both the
income approach and the market approach in determining fair value. As of December 31, 2001,
the Company’s goodwill totaled $93.6 million. The following table presents
the changes in goodwill allocated to the reportable segments during the year
ended December 31, 2002: The Company does not have
any identifiable intangible assets subject to amortization or identifiable
intangible assets with indefinite lives. The Company has ceased
amortizing goodwill as of the beginning of fiscal year 2002. The following table
presents the impact of SFAS No. 142 on income (loss) and income (loss) per share
had the standard been in effect for all periods presented: F-14 In December 1996, the
Company sold its environmental remediation business segment and received, as
partial consideration for such business, an interest in a joint venture in the
form of a right to a portion of the proceeds from a future sale of such venture.
In July 2001, the Company recorded a gain of $1,203, representing its portion of
the proceeds from the subsequent sale of the joint venture. For the year ended December
31, 2001, the Company recorded a non-recurring gain of $1,480 resulting from the
net increase in the carrying value of certain assets received as consideration
from the sale of its environmental remediation business in 1996. Such increase
was realized substantially in the form of cash received in November 2001. The Company recorded a net
loss from discontinued operations to increase its estimated costs to resolve
certain environmental liabilities retained from the sale of its environmental
remediation business in 1996. The aggregate liabilities of $1,030 and $1,055 are
included in other liabilities at December 31, 2002 and December 31, 2001,
respectively. Income tax expense for the
periods below differs from the amounts computed by applying the United States
federal income tax rate of 35% to the pretax income as a result of the
following: F-15 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at
December 31, 2002 and 2001, are presented below: Other assets consist of: Included in other assets
are long-term notes receivable from officers of the Company in the aggregate
amount of $1,204. The notes receivable are demand notes, $878 of which is
collateralized by the proceeds from certain life insurance policies and bear
interest at 7.3%. The remaining $326 relates primarily to non-interest bearing
loans in connection with officers’ relocation expenses. The Company does
not intend to demand repayment of these notes during 2003. F-16 Other current liabilities consist of: The Company has a 401(k) Profit
Sharing Trust and Plan in which employees not currently covered by a collective
bargaining agreement are eligible to participate. None of the Company’s
employees is currently covered by a collective bargaining agreement. The plan
was established in 1995 and through December 31, 1998, was non-contributory.
Effective January 1, 1999, the Board of Directors elected to match 25% of the
employees’ contributions. The Company contributed $576 for 2001. Effective
January 1, 2002, the Board of Directors elected to suspend the match. The Company maintains a Key
Employees Stock Option Plan and an Omnibus Equity Plan which provide for the
issuance of non-qualified options, incentive stock options, and stock
appreciation rights. The Key Employee Stock Option Plan, which expired in 1999,
had provided for the granting of options to purchase up to 1,500,000 shares of
common stock and the current Omnibus Equity Plan provides for the granting of
options to purchase up to 2,250,000 shares of common stock. Incentive stock
options are exercisable for up to ten years, at an option price of not less than
the fair market value on the date the option is granted or at a price of not
less than 110% of the fair market price in the case of an option granted to an
individual who, at the time of grant, owns more than 10% of the Company’s
common stock. Non-qualified stock options may be issued at such exercise price
and on such other terms and conditions as the Compensation Committee of the
Board of Directors may determine. Optionees may also be granted stock
appreciation rights under which they may, in lieu of exercising an option, elect
to receive cash or common stock, or a combination thereof, equal to the excess
of the fair market value of the common stock over the option price. All options
were granted at fair market value at dates of grant. Directors of the Company
who are not employees currently hold options to acquire a total of 337,250
shares pursuant to option plans and agreements, including 96,000 awarded in 2002
under the Company’s Omnibus Equity Plan. The exercise price under all of
such options was the fair market value as of the date of grant. Changes in shares, under
all current and former plans and other arrangements, for 2002, 2001 and 2000 are
summarized as follows: F-17 Outstanding stock options
at December 31, 2002 consist of the following: As of December 31, 2002, there were 618,700 shares of common stock under the Omnibus Equity Plan that were available for future
grant. The Company leases its
offices, training facilities and certain equipment under operating lease
obligations. Operating leases expire on various dates through 2014. The Company
recognizes rent expense on a straight-line basis and records deferred rent based
on the difference between cash paid and straight-line expense. Rent expense was
$11,384, $9,421 and $7,342, for 2002, 2001, and 2000 respectively. Under the terms of the
leases, future minimum commitments at December 31, 2002 are as follows: The Company has entered
into a contract with a provider to purchase $8,500 in courseware through June
30, 2004. That contract specifies minimum purchases of $5,500, and $3,000 in
2003, and 2004, respectively. The Company has accrued
approximately $1 million related to residual environmental liabilities retained
from the sale of its environmental remediation business in 1996 (Note 6). The Company is also
involved in various other claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company’s
consolidated financial position or results of operations. The Company has made
guarantees and indemnities, under which it may be required to make payments to a
guaranteed or indemnified party. In connection with the company-owned training
centers, the Company has obtained surety bonds totaling $763 to guarantee
performance in various states with respect to providing training to consumers.
In the event the Company was to abandon training in a state where there is a
surety bond, the state agency could draw against the bond to satisfy undelivered
training obligations. The Company agrees to indemnify its franchisees against
any trademark infringement claims that may arise out of their use of the New
Horizons’ trademark. The Company has also agreed to indemnify its directors
and officers to the maximum extent permitted under the laws of the State of
Delaware. The Company has not recorded any liability for these guarantees and
indemnities in the accompanying consolidated balance sheets. F-18 The
Company has outstanding letters of credit, under which it may be required to
make payments to a guaranteed or indemnified party. At December 31, 2002,
outstanding letters of credit totaled $710, of which $60 expire in 2003 and $650
expire in 2014. All outstanding letters of credit expire in 2003. The Company
has not recorded any liability for these guarantees and indemnities in the
consolidated financial statements. On January 31, 2001, the
Company purchased its franchise in Indianapolis, Indiana. The consideration paid
included $4,926 in cash, net of cash acquired. The selling shareholders will
receive additional cash consideration if certain operating performance targets
are achieved. The acquisition has been recorded using the purchase method of
accounting and the operating results have been included in the Company’s
financial statements from the date of acquisition. The acquisition resulted in
goodwill of $5,033 which was being amortized over 25 years. On April 2, 2001, the
Company purchased the assets of its franchise in Atlanta, Georgia. The
consideration paid included $15,703 in cash, net of cash acquired, and 113,984
shares of the Company’s common stock valued at $1,652 based on the average
price of the Company’s common stock for a reasonable period of time before
the terms of the transaction were finalized. The selling shareholders will
receive additional consideration, in cash and stock, if certain operating
performance targets are achieved. The acquisition has been recorded using the
purchase method of accounting and the operating results have been included in
the Company’s financial statements from the date of acquisition. The
acquisition resulted in goodwill of $18,005, which was being amortized over 25
years. During the twelve months
ended December 31, 2002, the Company provided additional consideration for
previous acquisitions consisting of $442 in cash due to the previously acquired
centers meeting certain operating performance targets. During the twelve months
ended December 31, 2001, the Company provided additional consideration for
previous acquisitions consisting of $4,651 in cash and 132,501 shares of the
Company’s stock valued at $2,074 due to the previously acquired centers
meeting certain operating performance targets. If the results from the
acquired locations had been included in the results of operations at the
beginning of each period presented below, the Company’s unaudited revenue,
net income, and earnings per share would have approximated the following: F-19 Under SFAS No. 128, basic EPS
is computed by dividing earnings available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
When dilutive, stock options are included as share equivalents in computing
diluted earnings per share using the treasury stock method. The weighted average number
of shares outstanding used in determining basic EPS was 10,309,937, 10,106,653,
and 9,778,672 in 2002, 2001, and 2000, respectively. The weighted average number
of shares outstanding used in determining diluted EPS was 10,309,937,
10,508,519, and 10,327,827 in 2002, 2001, and 2000, respectively. As a result of
losses, warrants and stock options that could potentially dilute basic EPS in
the future that were not included in the computation of diluted EPS because to
do so would be anti-dilutive totaled 163,767 at December 31, 2002. Summarized quarterly
financial data for continuing operations for 2002 and 2001 is as follows: During the fourth quarter of 2002, the Company recorded a pretax charge of $48.7 million related to the impairment of goodwill.
(See Notes 1 and 5) F-20 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. For segment reporting purposes, company-owned centers have been aggregated because of
their common economic characteristics. 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. 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: F-21 F-22 The information required by
this Item 10 as to the Directors of the Company is incorporated herein by
reference to the information set forth under the captions “Election of
Directors” and “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Company’s definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 6, 2003, since such Proxy Statement
will be filed with the Securities and Exchange Commission not later than 120
days after the end of the Company’s fiscal year pursuant to Regulation 14A. The following is a list of
the executive officers of the Company. The executive officers are elected each
year and serve at the pleasure of the Board of Directors. *The description of executive officers called for in this Item is included pursuant to Instruction 3 to Section (b) of Item 401
of Regulation S-K. Set forth below is a brief description of the background of those executive officers of the Company who are not Directors of the
Company. Information with respect to the background of those executive officers who are also Directors of the Company is
incorporated herein by reference as set forth under the caption "Election of Directors" in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 6, 2003. ROBERT S. MCMILLAN was named Vice President, Treasurer and Chief Financial Officer of the Company in August 1997. He served as
Chief Financial Officer of New Horizons Computer Learning Centers, Inc. beginning in 1995 and became a Senior Vice President in
January 1997. From 1992 to 1995, Mr. McMillan was Chief Financial Officer of ZNYX Corporation, Fremont California. From 1990
to 1992, he was Chairman, Chief Executive Officer and Chief Financial Officer of Omnivar, in Burbank, California. The information required by this Item 11 is incorporated by reference to the information set forth under the captions
"Compensation of Executive Officers", "Board of Directors and Committees", "Compensation Committee Report on
Executive Compensation", and "Stockholder Return Performance Presentation", in the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 6, 2003, since such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. (See Item 5
for the disclosure required by Item 201(d) of Regulation S-K.) The information required by this Item 12 is incorporated by reference to the information set forth under the caption "Share
Ownership of Principal Holders and Management" in the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 6, 2003, since such Proxy Statement will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. 22 The information required by this Item 13 is incorporated by reference to the information set forth under the caption "Certain
Transactions" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 6, 2003,
since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of
the Company's fiscal year pursuant to Regulation 14A. Within 90 days prior to the filing date of this Report (the "Evaluation Date"), the Company's principal executive officer
("CEO") and principal financial officer ("CFO") carried out an evaluation of the effectiveness of the Company's disclosure
controls and procedures. Based on those evaluations, as of the Evaluation Date, the Company's CEO and CFO believe: In connection with their audit of the Company’s financial statements as of and
for the year ended December 31, 2002, Deloitte &
Touche LLP (D&T) advised the Company that it had identified certain deficiencies in the Company's internal control procedures
that D&T considered to be a "material weakness" under standards established by the American Institute of Certified Public
Accountants. D&T advised the Audit Committee on March 6, 2003, that it identified certain deficiencies in the
Company's ability to timely and accurately produce data that supports its revenue recognition rates for certain of its learning
programs. These matters have been discussed by D&T with the Audit Committee of the Board of Directors of the Company. To
address the weakness, the Company has devoted additional resources and made certain additional procedural changes. 23 24 Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized at Anaheim, California this 31st day of March, 2003. Pursuant to the
requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated: 25 26 27 CERTIFICATIONS I, Thomas J. Bresnan certify that: Date: March 31, 2003 28 CERTIFICATIONS I, Robert S. McMillan certify that: Date: March 31, 2003 29THE
INFORMATION TECHNOLOGY EDUCATION AND TRAINING MARKET
THE NEW
HORIZONS BUSINESS MODEL
Company-Owned
Training Centers
California Colorado Georgia Illinois Indiana Tennessee
Anaheim Denver Atlanta Chicago Indianapolis Memphis
Los Angeles Englewood Marietta Rosemont Nashville
Burbank Broomfield
Sacramento Colorado Springs
Stockton Loveland
Modesto
New Mexico North Carolina Texas New York Connecticut Ohio
Albuquerque Charlotte San Antonio New York City(2) Hartford Cleveland
Franchising Operations
CUSTOMERS
SALES AND
MARKETING
TRAINING
AUTHORIZATIONS
COMPETITION
COURSEWARE
SALES AND OTHER
INFORMATION
ABOUT FORWARD–LOOKING STATEMENTS
REGULATIONS
INSURANCE
TRADEMARKS
EMPLOYEES
ITEM 2.
PROPERTIES
ITEM 3. LEGAL
PROCEEDINGS
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
2002 HIGH LOW
1st Quarter (January 1 - March 31) 13.70 10.52
2nd Quarter (April 1 - June 30) 11.80 9.05
3rd Quarter (July 1 - September 30) 9.68 6.12
4th Quarter (October 1 - December 31) 7.74 3.75
2001 HIGH LOW
1st Quarter (January 1 - March 31) 17.56 13.50
2nd Quarter (April 1 - June 30) 18.50 13.44
3rd Quarter (July 1 - September 30) 15.44 11.52
4th Quarter (October 1 - December 31) 12.20 8.45
Number of securities
remaining available for
future issuance under
Number of securities equity compensation
to be issued upon Weighted-average plans (excluding
exercise of exercise price of securities reflected in
outstanding options outstanding options column (a))
Plan category (a)
Equity compensation plans
approved by security holders 2,287,899 $ 9.76 618,700
Equity compensation plans not
approved by security holders (1) -- -- --
Total 2,287,899 $ 9.76 618,700
========= ========= =======
(1) The Company does not have any stock option plans that were not approved by stockholders.
(Dollars in thousands, except per share)
Selected Consolidated
Statements of Income Data 2002 2001 2000 1999 1998
Total revenues $135,703 $159,899 $142,698 $111,476 $ 72,629
Cost of revenues 82,307 85,102 65,850 50,301 32,749
Selling, general and administrative
expenses 57,683 65,999 58,752 46,407 31,354
Impairment of goodwill 48,700 -- -- -- --
Write-off of management system -- -- -- 3,338 --
Settlement of franchise arbitration -- -- -- 303 --
Operating (loss) income (52,987) 8,798 18,096 11,127 8,526
Interest income 189 369 503 643 1,424
Interest expense (2,325) (1,450) (318) (354) (255)
Other Income 503 2,683 -- -- --
(Loss) income from continuing
operations before income taxes
and cumulative effect of change
in accounting principle (benefit) (54,620) 10,400 18,281 11,416 9,695
(Benefit) provision for income taxes (18,575) 3,520 7,312 4,153 3,813
(Loss) income from continuing
operations before income taxes and
cumulative effect of change in
accounting principles (36,045) 6,880 10,969 7,263 5,882
Cumulative effect of change in
accounting principle, net of taxes
of $9,200 (17,800) -- -- -- --
Net (loss) income from continuing
operations (53,845) 6,880 10,969 7,236 5,882
Loss from discontinued operations -- (426) -- -- --
Net (loss) income $(53,845) $ 6,454 $ 10,969 $ 7,263 $ 5,882
========= ========= ========= ========== =========
Basic Earnings Per Share(1)
(Loss) income per share from
continuing operations before
cumulative effect of change
in accounting principle $ (3.49) $ 0.68 $ 1.12 $ 0.76 $ 0.64
Cumulative per share effect of
change in accounting principle,
net of tax (1.73) -- -- -- --
Loss per share from discontinued
operations -- (0.04) -- -- --
Net (loss) income per share $ (5.22) $ 0.64 $ 1.12 $ 0.76 $ 0.64
========= ======== ========= ========= =========
Diluted Earnings Per Share(1)
(Loss) income per share from
continuing operations before
cumulative effect of change
in accounting principle $ (3.49) $ 0.65 $ 1.06 $ 0.72 $ 0.61
Cumulative per share effect of change
in accounting principle, net of tax (1.73) -- -- -- --
Loss per share from discontinued
operations -- (0.04) -- -- --
Net (loss) income per share $ (5.22) $ 0.61 $ 1.06 $ 0.72 $ 0.61
========= ======== ========= ========= =========
December 31, December 31, December 31, December 31, December 31,
Selected Consolidated Balance 2002 2001 2000 1999 1998
Sheet Data
Working capital $ (4,685) $ 4,315 $ 983 $ 6,010 $ 20,951
Total assets 109,307 160,160 122,726 105,084 86,746
Long term debt less current
portion 7,952 24,067 -- 6,730 267
Total stockholders' equity 47,370 99,904 88,621 72,677 61,569
(1) Per share amounts for 1998 have been adjusted to reflect the five-for-four split of
the Company's common stock effected June 8, 1999.
(Dollars in thousands, except per share data)CRITICAL
ACCOUNTING POLICIES
Goodwill
Accounts
Receivable
Revenue
Recognition
Accounting for
Income Taxes
Off-balance
Sheet Financings
GENERAL
RESULTS OF
OPERATIONS 2002 VERSUS 2001
Revenues
Cost of
Revenues
Selling,
General and Administrative Expenses
Impairment of
Goodwill
Interest
Income (Expense)
Income Taxes
RESULTS OF
OPERATIONS 2001 VERSUS 2000
Revenues
Cost of
Revenues
Selling,
General and Administrative Expenses
Interest
Income (Expense)
Income Taxes
LIQUIDITY AND
CAPITAL RESOURCES
(Dollars in millions)
Contractual Obligations Fiscal Fiscal Fiscal Fiscal Fiscal
Total 2003 2004 2005 2006 2007 Thereafter
Long-term debt $ 14.5 $ 6.5 $ 8.0 $ -- $ -- $ -- $ --
Operating leases 67.9 10.2 10.2 9.3 8.1 7.4 22.7
Total $ 82.4 $ 16.7 $ 18.2 $ 9.3 $ 8.1 $ 7.4 $ 22.7
======= ======= ======= ======= ======= ======= =======
Commercial Commitments
Letters of Credit $ 0.7 $ 0.1 $ -- $ -- $ -- $ -- $ 0.6
======= ======= ======= ======= ======= ======= =======
IMPACT OF
ACCOUNTING PRONOUNCEMENTS
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Independent
Auditors’ Report
New Horizons Worldwide, Inc.
Costa Mesa, California
March 11, 2003
New Horizons Worldwide, Inc. and Subsidiaries
December 31, 2002 and December 31, 2001
(Dollars in thousands, except share data)
Assets 2002 2001
Current assets:
Cash and cash equivalents $ 5,085 $ 6,077
Restricted cash 3,500 --
Accounts receivable, less allowance for doubtful
accounts of $1,233 in 2002 and $829 in 2001
(Note 2) 19,627 20,814
Inventories 1,334 1,517
Prepaid expenses 8,886 2,178
Refundable income taxes 5,459 2,057
Deferred income tax assets (Note 7) 2,209 2,906
Other current assets (Note 8) 874 1,680
Total current assets 46,974 37,229
Property, plant and equipment, net (Note 4) 17,278 20,046
Land held for disposition (Note 4) -- 5,099
Goodwill (Notes 5 and 13) 18,368 93,626
Cash surrender value of life insurance 1,154 1,131
Deferred income tax assets, net (Note 7) 23,061 --
Other assets (Note 8) 2,472 3,029
Total Assets $ 109,307 $ 160,160
========= =========
Liabilities & Stockholders' Equity
Current liabilities:
Notes payable and current portion of
long-term debt (Note 3) $ 6,504 $ 1,665
Accounts payable 5,072 3,277
Deferred revenue 21,855 9,895
Other current liabilities (Note 9) 18,228 18,077
Total current liabilities 51,659 32,914
Long-term debt, excluding current portion (Note 3) 7,952 24,067
Deferred income tax liability (Note 7) -- 2,195
Deferred rent (Note 12) 1,952 1,080
Other long-term liabilities 374 --
Total liabilities 61,937 60,256
Commitments and contingencies (Note 12) -- --
Stockholders' equity (Note 11):
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 10,572,657
shares in 2002 and 10,397,257 shares in 2001 106 104
Additional paid-in capital 48,204 46,895
Retained earnings 358 54,203
Treasury stock at cost - 185,000 shares in 2002
and 2001 (1,298) (1,298)
Total stockholders' equity 47,370 99,904
Total Liabilities & Stockholders' Equity $ 109,307 $ 160,160
========= =========
New Horizons Worldwide, Inc. and Subsidiaries
Years ended December 31, 2002, December 31, 2001, and December 31, 2000
(Dollars in thousands, except per share)
2002 2001 2000
Revenues
Franchising
Franchise fees $ 909 $ 1,167 $ 2,191
Royalties 19,098 22,415 23,609
Courseware sales and other 20,657 17,981 5,579
Total franchising revenues 40,664 41,563 31,379
Company-owned training centers 95,039 118,336 111,319
Total revenues 135,703 159,899 142,698
Cost of revenues 82,307 85,102 65,850
Selling, general and administrative expenses 57,683 65,999 58,752
Impairment of goodwill 48,700 -- --
Operating (loss) income (52,987) 8,798 18,096
Interest income 189 369 503
Interest expense (2,325) (1,450) (318)
Other income (Note 5) 503 2,683 --
(Loss) income from continuing operations before
income taxes and cumulative effect of change
in accounting principle (54,620) 10,400 18,281
(Benefit) provision for income taxes (Note 6) (18,575) 3,520 7,312
(Loss) income from continuing operations
before cumulative effect of change in
accounting principle (36,045) 6,880 10,969
Cumulative effect of change in accounting principle,
net of tax of $9,200 (17,800) -- --
(Loss) income from continuing operations (53,845) 6,880 10,969
Loss from discontinued operations, net of applicable
taxes of $285 (Note 5) -- (426) --
Net (loss) income $ (53,845) $ 6,454 $ 10,969
========= ========= =========
Basic Earnings Per Share (Note 13)
(Loss) income per share from continuing operations
before cumulative effect of change in
accounting principle $ (3.49) $ 0.68 $ 1.12
Cumulative per share effect of change in accounting
principle, net of tax (1.73) -- --
Loss per share from discontinued operations -- (0.04) --
Net (loss) income per share $ (5.22) $ 0.64 $ 1.12
========= ========= =========
Diluted Earnings Per Share (Note 13)
(Loss) income per share from continuing operations
before cumulative effect of change in accounting
principle $ (3.49) $ 0.65 $ 1.06
Cumulative per share effect of change in accounting
principle, net of tax (1.73) -- --
Loss per share from discontinued operations -- (0.04) --
Net (loss) income per share $ (5.22) $ 0.61 $ 1.06
========= ========= =========
New Horizons Worldwide, Inc. and Subsidiaries
Years ended December 31, 2002, December 31, 2001, and December 31, 2000
(In thousands)
Add’l
Stock-
Common Stock
paid-in
Retained
Treasury
holders’
Shares
Amount
capital
earnings
stock
equity
New Horizons Worldwide, Inc. and Subsidiaries
Years ended December 31, 2002, December 31, 2001, and December 31, 2000
(Dollars in thousands)
2002 2001 2000
Cash flows from operating activities
Net (loss) income $(53,845) $ 6,454 $ 10,969
Adjustments to reconcile net (loss) income
to cash and cash equivalents provided by
operating activities:
Depreciation 7,738 7,432 5,301
Gain on sale of land and fixed assets (503) -- --
Amortization of goodwill -- 3,623 2,410
Cumulative effect of change in
accounting principle 17,800 -- --
Impairment of goodwill 48,700 -- --
Deferred income taxes (15,359) 1,236 (256)
Cash provided from (used in) the change in
(net of effects of acquisitions):
Accounts receivable 1,187 2,373 (338)
Inventories 183 32 (136)
Prepaid expenses and other assets (5,345) (1,633) 691
Accounts payable 1,795 (514) 1,060
Deferred revenue 11,960 (2,222) 1,802
Other current liabilities 151 (16) 5,132
Income taxes (3,183) (3,647) 1,226
Deferred rent 872 220 (52)
Other long-term liabilities 374 -- --
Net cash provided by operating activities 12,525 13,338 27,809
Cash flows from investing activities
Additions to property, plant and equipment (5,035) (13,814) (8,697)
Proceeds from sale of land and fixed assets 5,666 -- --
Cash surrender value of life insurance (23) (31) (30)
Cash paid for acquired companies,
net of cash acquired (Note 13) -- (20,629) --
Cash paid for previous acquisitions (Note 13) (442) (4,022) (11,074)
Net cash provided (used by) investing activities 166 (38,496) (19,801)
Cash flows from financing activities
Proceeds from issuance of common stock 1,092 94 1,579
Proceeds from debt obligations -- 61,734 4,480
Principal payments on debt obligations (11,275) (36,108) (11,420)
Net cash (used) provided
by financing activities (10,183) 25,720 (5,361)
Net increase in cash and cash equivalents 2,508 562 2,647
Cash and cash equivalents at beginning of year 6,077 5,515 2,868
Cash and cash equivalents at end of year $ 8,585 $ 6,077 $ 5,515
======== ======== ========
Supplemental disclosure of cash flow information
Cash was paid for:
Interest $ 1,622 $ 1,181 $ 282
======== ======== ========
Income taxes $ 672 $ 5,663 $ 5,589
======== ======== ========
New Horizons Worldwide, Inc. and Subsidiaries
Years ended December 31, 2002, December 31, 2001, and December 31, 2000
(Dollars in thousands)
Supplemental Disclosure of Non-Cash Transactions
2002 2001 2000
Non-cash investing and financing activities --
Income tax benefit from exercise of stock
options $ 219 $ 10 $ 544
========= ========= =========
The Company completed no acquisitions in 2002, two acquisitions in 2001, summarized as follows
(Note 13), and none in 2000 :
2001
Fair value of assets acquired $ 25,712 $ --
Value of stock issued (1,652)
Cash paid, net of cash acquired (20,629)
Liabilities assumed $ 3,431
=========
During the year ended December 31, 2001 the Company issued common stock with a value of $3,073 as additional
consideration for previous acquisitions.
(Dollars in thousands, except per share data)1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of
Operations
Principles of
Consolidation
Basis of
Presentation
Use of
Estimates
Cash and Cash
Equivalents
Accounts
Receivable
Concentration
of Risk
Revenue
Recognition
Property and
Equipment
Computers and equipment 3 to 5 years
Furniture and fixtures 5 to 10 years
Purchased software 3 years
Leasehold improvements Useful life or term of lease, if shorter
Inventories
Valuation of
Long-lived Assets
Goodwill
Income Taxes
Stock-Based
Compensation
2002 2001 2000
Net (loss) income, as reported $ (53,845) $ 6,454 $ 10,969
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (2,269) (1,191) (775)
Pro forma net (loss) income $ (56,114) $ 5,263 $ 10,194
======== ====== =======
Earnings per share:
Basic - as reported $ (5.22) $ 0.64 $ 1.12
Basic - pro forma $ (5.44) $ 0.52 $ 1.04
Diluted - as reported $ (5.22) $ 0.61 $ 1.06
Diluted - pro forma $ (5.44) $ 0.50 $ 0.99
Comprehensive
Income
Restricted Cash
Earnings Per
Share
Reclassifications
Fair Value of
Financial Instruments
New Accounting
Pronouncements
2. ALLOWANCE
FOR DOUBTFUL ACCOUNTS
2002 2001 2000
Balance, beginning of year $ 829 $ 717 $ 943
Provisions 886 419 203
Deductions (482) (307) (429)
Balance, end of year $ 1,233 $ 829 $ 717
======== ======== ========
3. DEBT
2002 2001
Term loan with bank $ 14,139 $ 25,000
Amount outstanding on revolving line of
credit with bank 300 300
Note payable to a former franchisee
pursuant to a franchise acquisition at
7% interest rate -- 407
Amounts due under capital leases with
effective interest rates ranging from
8.5% to 14.6% per annum (Note 11) 17 25
14,456 25,732
Less: Current portion of notes payable
and long-term debt (6,504) (1,665)
$ 7,952 $ 24,067
=========== ===========
2003 $ 6,504
2004 3,000
2005 4,952
$ 14,456
============
4. PROPERTY,
PLANT AND EQUIPMENT
2002 2001
Leasehold improvements $ 5,575 $ 5,362
Equipment and software 36,589 32,222
Furniture and fixtures 7,651 7,312
49,815 44,896
Less accumulated depreciation and amortization (32,537) (24,850)
$ 17,278 $ 20,046
============ ============
Land held for
disposition
5. GOODWILL
Company-owned
Locations Franchising Total
Balance as of December 31, 2001 $ 82,218 $ 11,408 $ 93,626
Transitional impairment charge (27,000) -- (27,000)
Additional impairment charge (48,700) -- (48,700)
Additions 442 -- 442
Balance as of December 31, 2002 $ 6,960 $ 11,408 $ 18,368
============ ============= ==============
Year ended Year ended Year ended
December 31, 2002 December 31, 2001 December 31, 2000
Reported net (loss) income $ (53,845) $ 6,454 $ 10,969
Amortization of goodwill -- 2,174 1,446
Adjusted net (loss) income $ (53,845) $ 8,628 $ 12,415
============ ============ ============
Basic Earnings Per Share:
Reported net (loss) income $ (5.22) $ 0.64 $ 1.12
Goodwill amortization -- 0.21 0.15
Adjusted basic earnings per share $ (5.22) $ 0.85 $ 1.27
============ ============ ============
Diluted Earnings Per Share:
Reported net (loss) income $ (5.22) $ 0.61 $ 1.06
Goodwill amortization -- 0.21 0.14
Adjusted diluted earnings per share $ (5.22) $ 0.82 $ 1.20
============ ============ ============
6. OTHER
INCOME (LOSS)
7. INCOME TAXES
2002 2001 2000
Computed "expected" tax expense $(19,117) $ 3,640 $ 6,398
Amortization of excess of cost over net
assets acquired 1,853 147 72
State and local tax expense, net of federal
income tax effect (2,370) 577 1,016
Foreign Taxes 969 -- --
Discontinued operations -- (841) --
Other 90 (3) (174)
Income tax (benefit) expense $(18,575) $ 3,520 $ 7,312
======= ======= =======
Effective rates 34.0% 33.8% 40.0%
Income tax expense consists of:
Federal:
Current $ (4,991) $ 693 $ 5,388
Deferred (11,189) 1,215 (256)
State and local:
Current 525 439 1,563
Deferred (4,170) 449 --
Foreign 1,250 724 617
Income tax (benefit) expense $(18,575) $ 3,520 $ 7,312
======= ======= =======
2002 2001
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts $ 780 $ 709
Reserve for uninsured losses and litigation 412 422
Accrued expenses 979 865
Property, plant and equipment, principally due to
differences in depreciation 1,078 1,095
Foreign Tax Credit carryforward 247 744
Deferred revenue 503 387
Net operating loss 876 --
Deferred rent 157 --
Other 261 166
Excess of net assets over cost of acquired companies 21,994 --
27,287 4,388
====== ======
Deferred tax liabilities:
Excess of cost over net assets of acquired companies -- 3,457
Prepaid expenses 466 --
State deferred taxes 1,412 --
Other 139 220
2,017 3,677
====== ======
Net deferred income taxes $25,270 $ 711
====== ======
8. OTHER ASSETS
2002 2001
Notes receivable from officers $ 1,204 $ 1,470
Notes receivable from ECB, Inc. -- 758
Bank credit agreement costs -- 689
Notes receivable from franchisees 1,015 654
Other 1,127 1,138
3,346 4,709
Less: Current portion of notes receivables (874) (1,680)
$ 2,472 $ 3,029
====== ======
9. OTHER
CURRENT LIABILITIES
2002 2001
Accounts payable to franchisees $ 6,028 $ 5,921
Salaries, wages and commissions payable 3,165 4,006
Royalties and fees payable to courseware partners 3,209 3,231
Accrued operating expenses and other liabilities 5,826 4,919
$ 18,228 $ 18,077
======= =======
10. EMPLOYEE
SAVINGS PLAN
11. STOCK
OPTION PLAN
2002 2001 2000
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
Outstanding, beginning of year 1,617,374 $ 10.90 1,378,874 $ 10.39 1,278,249 $ 9.97
Granted 1,160,300 8.59 276,250 13.79 277,750 12.41
Exercised (175,400) 6.23 (7,875) 11.97 (149,000) 10.14
Canceled (314,375) 13.29 (29,875) 13.91 (28,125) 11.43
Outstanding, end of year 2,287,899 9.76 1,617,374 10.90 1,378,874 10.39
========= ========= =========
Options exercisable, end of year 960,099 $ 10.05 1,073,724 $ 9.61 900,974 $ 8.88
========= ========= ========
Weighted average fair value of
options granted during the year $ 5.82 $ 7.65 $ 6.51
======= ======== =======
Options Outstanding Options Exercisable
Weighted
Range of Average Weighted Weighted
Exercise Remaining Average Average
Prices Shares Life Price Shares Price
(Years)
$ 5.43 - $ 9.28 1,086,550 5.5 $ 6.79 439,750 $6.55
10.15 - 15.90 1,121,849 4.0 12.10 471,049 12.57
16.90 - 23.19 79,500 2.4 17.30 49,300 17.21
$ 5.43 - $23.19 2,287,899 4.7 $ 9.76 960,099 $10.05
========= ==== ====== ======= ======
12.
COMMITMENTS AND CONTINGENCIES
Leases
Operating Leases
2003 $ 10,252
2004 10,228
2005 9,285
2006 8,121
2007 7,370
2008 & after 22,672
Total future minimum lease payments $ 67,928
==========
Purchase
Commitment
Litigation
Guarantees
Letters of Credit
13. ACQUISITIONS
A.
Indianapolis, Indiana franchise
B. Atlanta,
Georgia franchise
C. Additional
consideration for previous acquisitions
Twelve Months Ended Twelve Months Ended
December 31, 2001 December 31, 2000
Revenue $ 163,992 $ 162,321
Net Income $ 6,852 $ 12,647
Basic Earnings Per Share $ 0.67 $ 1.28
Diluted Earnings Per Share $ 0.64 $ 1.21
14. EARNINGS
PER SHARE
15. QUARTERLY
FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Year ended December 31, 2002
Revenues $ 34,541 $ 36,225 $ 35,178 $ 29,759
Operating income (loss) 506 1,074 (513) (54,054)
Net (loss) income (17,726) 372 (564) (35,927)
Basic earnings per share (1.73) 0.04 (0.05) (3.46)
Diluted earnings per share (1.68) 0.04 (0.05) (3.46)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Year ended December 31, 2001
Revenues $ 41,132 $ 44,721 $ 39,028 $ 35,018
Operating income (loss) 4,686 3,792 1,486 (1,166)
Net income (loss) 2,811 2,106 1,841 (304)
Basic earnings per share 0.28 0.21 0.18 (0.03)
Diluted earnings per share 0.27 0.20 0.17 (0.03)
16. SEGMENT REPORTING
Company-
owned Executive Discontinued
Centers Franchising Office Operations Consolidated
For the year ended December 31, 2002
Revenues $ 95,039 $ 40,664 $ -- $ -- $ 135,703
Goodwill impairment 48,700 -- -- -- 48,700
Interest income 97 92 -- -- 189
Interest expense (2,318) (7) -- -- (2,325)
Depreciation expense 4,781 2,957 -- -- 7,738
(Benefit) Provision for income taxes (21,595) 3,020 -- -- (18,575)
Cumulative effect of change in
accounting principle, net (17,800) -- -- -- (17,800)
Net (loss) income (59,146) 5,301 -- -- (53,845)
Net deferred tax asset 24,514 756 -- -- 25,270
Total assets 84,318 20,238 4,751 -- 109,307
Additions to property, plant and
equipment 2,208 2,827 -- -- 5,035
For the year ended December 31, 2001
Revenues $ 118,336 $ 41,563 $ -- $ -- $ 159,899
Other income -- -- 2,683 -- 2,683
Interest income 72 297 -- -- 369
Interest expense (1,450) -- -- -- (1,450)
Goodwill amortization 3,580 43 -- -- 3,623
Depreciation expense 5,302 2,130 -- -- 7,432
(Benefit) Provision for income taxes (26) 3,546 -- -- 3,520
Net (loss) income from continuing
operations (2,196) 9,076 -- -- 6,880
Loss from discontinued operations,
net of applicable income taxes -- -- -- (426) (426)
Net deferred tax asset (945) 1,656 -- -- 711
Total assets 124,963 29,014 6,183 -- 160,160
Additions to property, plant and
equipment 7,642 6,172 -- -- 13,814
For the year ended December 31, 2000
Revenues $ 111,319 $ 31,379 $ -- $ -- $ 142,698
Interest income 314 189 -- -- 503
Interest expense (259) (59) -- -- (318)
Goodwill amortization 2,367 43 -- -- 2,410
Depreciation expense 4,511 790 -- -- 5,301
Provision for income taxes 2,798 4,514 -- -- 7,312
Net income 4,124 6,845 -- -- 10,969
Net deferred tax asset 900 1,047 -- -- 1,947
Total assets 96,554 21,268 4,904 -- 122,726
Additions to property, plant and
equipment 4,798 3,899 -- -- 8,697
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
EXECUTIVE
OFFICERS OF THE REGISTRANT*
NAME AGE POSITION
Curtis Lee Smith, Jr 75 Chairman of the Board
Thomas J. Bresnan 50 President and Chief Executive Officer
Stuart O. Smith 70 Vice Chairman of the Board and Secretary
Martin G. Bean 38 Chief Operating Officer
Robert S. McMillan 51 Vice President, Treasurer and Chief Financial
Officer
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14.
CONTROLS AND PROCEDURES
(i)
that the Company's disclosure controls and procedures are designed to ensure that information required to be
disclosed by the Company in the reports it files under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and forms and that such information is
accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate to allow
timely decisions regarding required disclosure; and
(ii)
that the Company's disclosure controls and procedures are effective.
PART IV
ITEM 15.
EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following Consolidated Financial Statements of the Registrant and its
subsidiaries are included in Part II, Item 8:
Page
Reports of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-22
(a) (2) All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
(a) (3) Exhibits
Reference is made to the Exhibit Index at sequential page 26 hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ending
December 31, 2002.
SIGNATURES
NEW HORIZONS WORLDWIDE, INC.
By:
Thomas J. Bresnan
Chief Executive Officer
Signature Title
/s/ Thomas J. Bresnan Chief Executive Officer
Thomas J. Bresnan (Principal Executive Officer)
/s/ Robert S. McMillan Vice President, Treasurer and
Robert S. McMillan Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Curtis Lee Smith, Jr. Chairman
Curtis Lee Smith, Jr.
/s/ Stuart O. Smith Director
Stuart O. Smith
/s/ David A. Goldfinger Director
David A. Goldfinger
/s/ Richard L. Osborne Director
Richard L. Osborne
/s/ Scott R. Wilson Director
Scott R. Wilson
/s/ William H. Heller Director
William H. Heller
/s/ Martin G. Bean Director
Martin G. Bean
March 2003
EXHIBIT INDEX
Exhibit Exhibit
Number Description
3.1 Restated Certificate of Incorporation of the Registrant (9)
3.2 Amended and restated By-laws of the Registrant (9)
4.1 Specimen Certificate for Share of Common Stock, $.01 par value, of the Registrant (5)
4.2 Credit Agreement, dated April 25, 2001, between the Registrant and Bank of America,
N. A., as Agent (9)
4.3 Amendment No. 1, dated July 20, 2001, to the Credit Agreement between the Registrant
and Bank of America, N.A., as Agent (10)
4.4 Amendment No. 2, dated January 31, 2002, to the Credit Agreement between the Registrant
and Bank of America, N.A., as Agent (10)
4.5 Amendment No. 3, dated August 2, 2002, to the Credit Agreement between the Registrant
and Bank of America, N.A., as Agent (12)
4.6 Waiver and amendment, dated November 12, 2002, to the Credit Agreement between the
Registrant and Bank of America, N.A., as Agent (13)
4.7 Credit Agreement, dated February 27, 2003, between the Registrant and
Wells Fargo Bank, N.A. *
10.1+ Omnibus Equity Plan of the Registrant (2)
10.2+ Amendment No. 1 dated Mardh 15, 2002 to the Omnibus Equity Plan of the Registrant (12)
10.3+ Form of Stock Option Agreement executed by employee recipients of options under
Omnibus Equity Plan(7)
10.4+ Key Employees Stock Option Plan of the Registrant(1)
10.5+ Amendment No. 1 to the Key Employees Stock Option Plan of the Registrant (5)
10.6+ Stock Option Agreement dated August 6, 1992, between the Registrant and
Thomas J. Bresnan (5)
10.7+ Stock Option Agreement dated January 22, 1998, between the Registrant and
Robert S. McMillan based on performance criteria (4)
10.8+ Outside Directors Stock Option Plan of the Registrant (1)
10.9+ Amendment No. 1 to the Outside Directors Stock Option Plan of the Registrant(5)
10.10+ 1997 Outside Directors Elective Stock Option Plan of the Registrant (2)
10.11+ Form of Stock Option Agreement executed by recipients of options under 1997 Outside
Directors Elective Stock Option Plan (2)
10.12+ Stock Option Agreement dated September 19, 1996, between the Registrant and
David A. Goldfinger (2)
10.13+ Stock Option Agreement dated September 19, 1996, between the Registrant and
William Heller(2)
10.14+ Stock Option Agreement dated September 19, 1996, between the Registrant and
Scott R. Wilson (2)
10.15+ Form of Stock Option Agreement executed by non-employee Director recipients of
options under Omnibus Equity Plan*
10.16+ Form of Indemnity Agreement with Directors and Officers of the Registrant (5)
10.17+ New Horizons Worldwide 401(k) Profit Sharing Trust and Plan (11)
10.18+ Warrants for the purchase of 43,750 shares of Common Stock, $.01 par value per share,
of the Registrant issued to The Nassau Group, Inc. - December 31, 1997 (3)
10.19+ Relocation agreement dated July 27, 1999, between the Registrant and
Thomas J. Bresnan (6)
10.20+ Promissory note dated August 31, 1999, between the Registrant and Thomas J. Bresnan (7)
10.21+ Amendment dated January 4, 2000, to relocation agreement between the Registrant and
Thomas J. Bresnan (7)
10.22+ Amended Promissory Note, dated July 29, 2002, between the Registrant and
Thomas J. Bresnan (12)
10.23+ Promissory note dated October 14, 1999, between the Registrant and
Kenneth M. Hagerstrom (7)
10.24+ Promissory note dated June 1, 2000, between the Registrant and
Kenneth M. Hagerstrom (9)
10.25+ Severance agreement dated January 4, 2000, between the Registrant and
Kenneth M. Hagerstrom (7)
10.26+ Severance agreement dated January 4, 2000, between the Registrant and
Robert S. McMillan (7)
10.27+ Employment Agreement dated January 7, 2002, between the Registrant and
Martin G. Bean (11)
10.28+ Lease Agreement dated February 15, 2000, between New Horizons Worldwide, Inc. and
Stadium Gateway Associates, LLC, guaranteed by the Registrant (7)
10.29+ Lease Agreement dated April 27, 2000, between New Horizons Worldwide, Inc. and
1114 Trizechahn-Swig, guaranteed by the Registrant (8)
21.1 Subsidiaries to the Registrant *
23.1 Consent of Deloitte & Touche LLP *
(1) Incorporated herein by reference to the appropriate exhibits to the Registrant's
Registration Statement on Form S-1 (File No. 33-28798).
(2) Incorporated herein by reference to the appropriate exhibits to the Registrant's
Registration Statement on Form S-8 (Reg. No. 333-56585).
(3) Incorporated herein by reference to the appropriate exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
(4) Incorporated herein by reference to the appropriate exhibit to the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1998.
(5) Incorporated herein by reference to the appropriate exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998.
(6) Incorporated herein by reference to the appropriate exhibit to the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1999.
(7) Incorporated herein by reference to the appropriate exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999.
(8) Incorporated herein by reference to the appropriate exhibit to the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 2000.
(9) Incorporated herein by reference to the appropriate exhibit to the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 2001.
(10) Incorporated herein by reference to the appropriate exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001.
(11) Incorporated herein by reference to the appropriate exhibit to the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 2002.
(12) Incorporated herein by reference to the appropriate exhibit to the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 2002.
(13) Incorporated herein by reference to the appropriate exhibit to the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 2002.
* Filed herewith
+ Compensatory plan or arrangement
1.
I have reviewed this annual report on Form 10-K of
New Horizons Worldwide, Inc.;
2.
Based on my knowledge, this annual 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 annual report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this annual 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 annual report;
4.
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 annual 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 annual report (the "Evaluation Date"); and
c). presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5.
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
6.
The registrant’s other certifying officers and I have indicated in this
annual 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
1.
I have reviewed this annual report on Form 10-K of
New Horizons Worldwide, Inc.;
2.
Based on my knowledge, this annual 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 annual report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this annual 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 annual report;
4.
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 annual 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 annual report (the "Evaluation Date"); and
c). presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5.
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
6.
The registrant’s other certifying officers and I have indicated in this
annual 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