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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

  [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended                         September 30, 2003                         

OR

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

For the transition period from                                            to                                                

Commission File Number                      0-17840                     

NEW HORIZONS WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)

Delaware   22-2941704
  
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

1900 S. State College Boulevard, Anaheim, CA 92806
(Address of principal executive offices)

(714) 940-8000
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days.

Yes      X             No              

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes      X             No             

        APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Number of shares of common stock outstanding at September 30, 2003: 10,389,757

PART I: FINANCIAL INFORMATION
Item 1: Financial Statements

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2003 and December 31, 2002
(Dollars in thousands, except per share data)

  September 30,   December 31,  
  2003   2002  
  (unaudited)      
Assets                
Current assets:                
              Cash and cash equivalents     $ 6,880   $ 5,085  
              Restricted cash    3,500    3,500  
              Accounts receivable, net    21,205    19,627  
              Inventories    1,336    1,334  
              Prepaid expenses    8,887    8,886  
              Refundable income taxes    895    5,459  
              Deferred tax assets    2,209    2,209  
              Other current assets    972    874  
                                      Total current assets    45,884    46,974  
                 
Property, plant and equipment, net    14,966    17,278  
Goodwill    18,368    18,368  
Cash surrender value of life insurance    1,154    1,154  
Deferred tax assets, net    23,061    23,061  
Other assets       2,607     2,472  
Total Assets     $ 106,040   $ 109,307  
                 
Liabilities and Stockholders' Equity                
                 
Current Liabilities:                
              Current portion of long-term debt     $ 3,000   $ 6,504  
              Accounts payable    4,244    5,072  
              Deferred revenue    22,803    21,855  
              Other current liabilities    19,097    18,228  
                                      Total current liabilities    49,144    51,659  
                 
Long-term debt, excluding current portion    5,389    7,952  
Deferred rent    2,281    1,952  
Other long-term liabilities    613    374  
                                      Total liabilities    57,427    61,937  
                 
Commitments and contingencies       --     --  
                 
Stockholders' equity:                
              Preferred stock, no par value, 2,000,000 shares                
                          authorized, no shares issued or outstanding    --    --  
              Common stock, $.01 par value, 20,000,000 shares authorized;                
                          10,574,757 shares issued; 10,389,757 and 10,387,657                
                          shares issued at September 30, 2003 and December 31,                
                           2002, respectively    106    106  
              Additional paid-in capital    48,217    48,204  
              Retained earnings    1,588    358  
              Treasury stock at cost - 185,000 shares at September 30, 2003                
                          and December 31, 2002    (1,298 )  (1,298 )
                                      Total stockholders' equity    48,613    47,370  
Total Liabilities & Stockholders' Equity     $ 106,040   $ 109,307  

See accompanying condensed notes to consolidated financial statements

2

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three and nine months ended September 30, 2003 and 2002
(Dollars in thousands except per share data)

  Three months ended Nine months ended
  September 30, September 30,
  2003 2002 2003 2002
Revenues                            
     Franchising                            
         Franchise fees   $ 336   $ 110   $ 1,051   $ 546  
         Royalties    4,344    4,844    13,116    14,622  
         Courseware sales and other    5,104    5,396    15,114    15,596  
         Total franchising revenues    9,784    10,350    29,281    30,764  
       
     Company-owned training centers    25,246    24,828    77,534    75,180  
          Total revenues    35,030    35,178    106,815    105,944  
       
Cost of revenues    19,888    20,750    59,545    60,947  
       
Selling, general and administrative expenses    13,910    14,941    44,848    43,930  
Operating income (loss)    1,232    (513 )  2,422    1,067  
       
Interest expense    128    471    472    1,411  
       
Investment income    32    44    100    148  
Income (loss) before taxes    1,136    (940 )  2,050    (196 )
       
Income tax provision (benefit)    454    (376 )  820    (78 )
Income (loss) before cumulative effect of change                            
   in accounting principle       682     (564 )   1,230     (118 )
Cumulative effect of change in accounting principle,                            
   net of tax of $9,200    --    --    --    (17,800 )
Net income (loss)   $ 682   $ (564 ) $ 1,230   $ (17,918 )
       
Weighted average number of common                          
   shares outstanding - Basic    10,387,931    10,357,812    10,387,749    10,284,295  
       
Weighted average number of common                            
   shares outstanding - Diluted    10,411,694    10,458,416    10,392,653    10,460,833  
       
Basic Earnings Per Share                            
Income (loss) per share before cumulative effect                            
     of change in accounting principle   $ 0.07   $ (0.05 ) $ 0.12   $ (0.01 )
Cumulative per share effect of change in                          
     accounting principle, net of tax   $ --   $ --   $ --   $ (1.73 )
Net income (loss) per share   $ 0.07   $ (0.05 ) $ 0.12   $ (1.74 )
       
Diluted Earnings Per Share                            
Income (loss) per share before cumulative effect                            
     of change in accounting principle   $ 0.07   $ (0.05 ) $ 0.12   $ (0.01 )
Cumulative per share effect of change in                            
     accounting principle, net of tax   $ --   $ --   $ --   $ (1.73 )
Net income (loss) per share   $ 0.07   $ (0.05 ) $ 0.12   $ (1.74 )

See accompanying condensed notes to consolidated financial statements.

3

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2003 and 2002
(Dollars in thousands)

  Nine months ended September 30,
  2003   2002  
 
 
 
Cash flows from operating activities                
                          Net income (loss)   $ 1,230   $ (17,918 )
Adjustments to reconcile net income (loss) to net cash and cash                
              equivalents provided by operating activities:                
                          Cumulative effect of change in accounting principle    --    27,000  
                          Deferred tax benefit of change in accounting principle    --    (9,200 )
                          Depreciation and amortization    5,270    5,581  
                          Gain on disposal of property, plant and equipment    (4 )  --  
                          Cash provided (used) from the change in:                
                                      Accounts receivable    (1,733 )  (1,849 )
                                      Inventories    (2 )  40  
                                      Prepaid expenses and other assets    (80 )  (3,334 )
                                      Income taxes    4,566    (1,290 )
                                      Accounts payable    (828 )  1,903  
                                      Deferred revenue    948    7,506  
                                      Other liabilities    1,090    66  
                                      Deferred rent    330    186  
 
 
 
                                                   Net cash provided by operating activities       10,787     8,691  
 
 
 
Cash flows from investing activities                
                          Cash paid for acquisitions made in prior periods    --    (442 )
                          Additions to property, plant and equipment    (2,992 )  (2,893 )
                          Proceeds from sale of property, plant and equipment    38    --  
 
 
 
                                                   Net cash used in investing activities    (2,954 )  (3,335 )
 
 
 
Cash flows from financing activities              
                          Proceeds from exercise of stock options    12    1,060  
                          Proceeds from issuance of debt    10,939    --  
                          Principal payments on debt obligations    (16,989 )  (4,165 )
 
 
 
                                                   Net cash used in financing activities    (6,038 )  (3,105 )
 
 
 
Net increase in cash and cash equivalents    1,795    2,251  
         
Cash and cash equivalents at beginning of period    8,585    6,077  
 
 
 
Cash and cash equivalents at end of period   $ 10,380   $ 8,328  
 
 
 
Supplemental disclosure of cash flow information                
                          Cash paid for:                
                                      Interest   $ 389   $ 1,299  
 
 
 
                                      Income taxes   $ 579   $ 618  
 
 
 
Noncash investing and financing activities                
                          Income tax benefit from the exercise of stock options   $ 1   $ 201  
 
 
 

See accompanying notes to condensed consolidated financial statements

4

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)

      1.   Description of Business
     
    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 domestic and international public and private corporations, service organizations and government agencies worldwide. Additionally, the Company supplies externally licensed curriculum and courseware materials to its franchisees. As of September 30, 2003, the Company and its franchisees delivered training in 26 company-owned and 230 franchised locations in 50 countries around the world.
     
      2.   Basis of Presentation
     
    In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (all of which are normal and recurring) necessary to present fairly the financial position of the Company at September 30, 2003 and the results of operations for the three and nine month periods ended September 30, 2003 and 2002. The statements and notes should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report for the year ended December 31, 2002.
     
    Certain items have been reclassified to conform to 2003 presentation.
     
      3.   Stock-Based Compensation
     
    The Company accounts for stock-based employee compensation as prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and, effective December 31, 2002, adopted Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” that amends the disclosure and transition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 requires pro forma disclosures of net income and net income per share as if the fair value based method of accounting for stock-based awards had been applied for employee grants. It also requires the disclosure of option status on a more prominent and frequent basis. Such disclosure for the three and nine month periods ended September 30, 2003 and 2002 are presented below. The Company accounts for stock options and warrants issued to employees based on the intrinsic value method. Under the fair value based method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period. Under the intrinsic value method, compensation cost is recorded based on the difference between the exercise price of the stock option and the fair value of the underlying stock on date of grant.
     
    At September 30, 2003, the Company has two stock-based employee compensation plans. 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 or greater than the market value of the underlying common stock on the date of grant.
     
    If the Company accounted for stock options and warrants issued to employees based on the fair value method, results of operations for the three and nine month periods ending September 30, 2003 and 2002 would have been as follows:

5

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)

    Three months ended Nine months ended
    September 30, September 30,
    2003   2002   2003   2002  
 
  Income (loss) before cumulative effect of                            
    change in accounting principle, as reported   $ 682   $ (564 ) $ 1,230   $ (118 )
  Deduct: Total stock-based employee                            
    compensation expense determined under fair                            
    value based method for all awards, net of                            
    related tax effects       (277 )   (384 )   (1,144 )   (1,221 )
 
  Pro forma net income (loss) before cumulative                            
    effect of change in accounting principle    405    (948 )  86    (1,339 )
  Cumulative effect of change in accounting                            
    principle, net of tax effect       --     --     --     (17,800 )
 
  Pro forma net income (loss)     $ 405   $ (948 ) $ 86   $ (19,139 )
 
  Basic Earnings Per Share                            
  Pro forma net income (loss) per share before                            
  cumulative effect of change in accounting                            
  principle     $ 0.04   $ (0.09 ) $ 0.01   $ (0.13 )
   
 
 
 
 
  Cumulative effect of change in accounting                            
  principle     $ --   $ --   $ --   $ (1.73 )
   
 
 
 
 
  Pro forma net income (loss) per common share     $ 0.04   $ (0.09 ) $ 0.01   $ (1.86 )
 
 
 
 
 
  Diluted Earnings Per Share                            
  Pro forma net income (loss) per share before                            
  cumulative effect of change in accounting                            
  principle     $ 0.04   $ (0.09 ) $ 0.01   $ (0.13 )
 
 
 
 
 
  Cumulative effect of change in accounting                            
  principle     $ --   $ --   $ --   $ (1.73 )
 
 
 
 
 
  Pro forma net income (loss) per common share     $ 0.04   $ (0.09 ) $ 0.01   $ (1.86 )
 
 
 
 
 


    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 2.3%, volatility of 67%, and zero dividend yield for 2003 grants, a risk-free interest rate of 4.2%, volatility of 67%, and zero dividend yield for 2002 grants.
     
      4.   Business Segment Information
     
    The Company’s business units have been aggregated into two reportable segments, company-owned locations and franchising. The two segments are managed separately due to differences in their sources of revenues and services offered. The company-owned training centers segment operates wholly-owned computer training centers in the United States and earns revenues from the delivery of computer based training classes. The franchising segment franchises domestic and international computer training centers and provides computer training instruction, sales, and management concepts to franchisees. The franchising segment earns revenues from initial franchise fees, on-going royalties from franchise operations, and the sale of courseware and other products to franchisees.

6

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)


    Summarized financial information concerning the Company’s reportable segments is shown in the following tables:
     
    For the three months ended September 30, 2003:

  Company-owned   Executive  
  Centers Franchising Office Consolidated
 
  Revenues from external customers     $ 25,246   $ 11,837   $ --   $ 37,083  
  Inter-segment revenues      --    2,053    --    2,053  
  Depreciation and amortization    893    909    --    1,802  
  Net income before income taxes    372    764    --    1,136  
  Income tax provision    149    305    --    454  
  Interest expense    128    --    --    128  
  Interest income    18    14    --    32  
  Net income    223    459    --    682  
  Total assets    71,744    17,151    17,145    106,040  
  Capital expenditures    105    595    --    700  


    For the three months ended September 30, 2002:

  Company-owned   Executive  
  Centers Franchising Office Consolidated
 
  Revenues from external customers     $ 24,828   $ 12,222   $ --   $ 37,050  
  Inter-segment revenues    --    1,872    --    1,872  
  Depreciation and amortization    1,137    666    --    1,803  
  Net income (loss) before income taxes    (3,132 )  2,192    --    (940 )
  Income tax provision (benefit)    (1,193 )  817    --    (376 )
  Interest expense    471    --    --    471  
  Interest income    28    16    --    44  
  Net income (loss)    (1,939 )  1,375    --    (564 )
  Total assets    106,521    30,307    10,645    147,473  
  Capital expenditures    780    507    --    1,287  

7

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)


    For the nine months ended September 30, 2003:

  Company-owned   Executive    
  Centers Franchising Office Consolidated  
 
 
  Revenues from external customers     $ 77,534   $ 35,660   $ --   $ 113,194  
  Inter-segment revenues    --    6,379    --    6,379  
  Depreciation and amortization    2,857    2,413    --    5,270  
  Net income (loss) before income taxes    (511 )  2,561    --    2,050  
  Income tax provision (benefit)    (204 )  1,024    --    820  
  Interest expense    472    --    --    472  
  Interest income    52    48    --    100  
  Net income (loss)    (307 )  1,537    --    1,230  
  Total assets    71,744    17,151    17,145    106,040  
  Capital expenditures    1,692    1,300    --    2,992  


    For the nine months ended September 30, 2002:

  Company-owned   Executive    
  Centers Franchising Office Consolidated  
 
 
  Revenues from external customers     $ 75,180   $ 35,852   $ --   $ 111,032  
  Inter-segment revenues    --    5,088    --    5,088  
  Depreciation and amortization    3,609    1,972    --    5,581  
  Net income (loss) before income taxes                            
      and cumulative effect of change                            
      in accounting principle    (6,992 )  6,796    --    (196 )
  Income tax provision (benefit)    (2,609 )  2,531    --    (78 )
  Interest expense    1,404    7    --    1,411  
  Interest income    81    67    --    148  
  Cumulative effect of change in                            
      accounting principle    (17,800 )  --    --    (17,800 )
  Net income (loss)    (22,182 )  4,264    --    (17,918 )
  Total assets    106,521    30,307    10,645    147,473  
  Capital expenditures    1,493    1,400    --    2,893  

      5.   Earnings Per Share
     
    The Company computes earnings per share based on SFAS No. 128, “Earnings Per Share” (EPS). SFAS No. 128 requires the Company to report Basic EPS, as defined therein, which assumes no dilution from outstanding stock options, and Diluted EPS, as defined therein, which assumes dilution from outstanding stock options. Earnings per share amounts for all periods presented have been calculated to conform to the requirements of SFAS No. 128.
     
    The computation of Basic EPS is based on the weighted average number of shares outstanding during the period. The computation of Diluted EPS is based upon the weighted average number of shares outstanding, plus shares that would have been outstanding assuming the exercise of all “in-the-money” outstanding options and warrants, computed using the treasury stock method.

8

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)

    Securities that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the three and nine month periods ended September 30, 2003 totaled 2,233,394 and 2,252,254, respectively. Securities that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the three and nine month periods ended September 30, 2002 totaled 2,393,820 and 2,317,886, respectively.
     
      6.   Debt
     
    On February 27, 2003, the Company consummated a credit agreement with Wells Fargo Bank, National Association (the Wells Fargo Credit Agreement). Upon execution of the Wells Fargo Credit Agreement, the available funds under the facility totaled $12,139, consisting of a term loan of $10,639 and revolving loans of $1,500. As of September 30, 2003, the term loan has a total commitment equal to its outstanding balance of $8,389. Quarterly principal payments of $750 for the term loan commenced on March 31, 2003 and continue through the term loan’s maturity on February 15, 2005. The revolving loan has a total commitment of $1,500 under which loans are available through maturity and which $0 was outstanding as of September 30, 2003. Any unpaid principal and interest balances associated with the term and revolving loans are due upon maturity of the loans on February 15, 2005. The revolving loan also includes a $1,000 sub-limit for the issuance of standby and commercial letters of credit. One standby letter of credit is outstanding under the revolving loan as of September 30, 2003 for $650. At September 30, 2003, $850 was available under the Wells Fargo Credit Agreement.
     
    Interest related to the Wells Fargo Credit Agreement is paid monthly, bimonthly, or quarterly and is based on the “Base Rate” or “Eurodollar Base Rate,” whichever is applicable to the loan, plus margins based on Adjusted EBITDA, as defined in the agreement. The Base Rate is a daily fluctuating rate per annum equal to the higher of the Prime Rate or the Federal Funds Rate plus 1.50%. The Eurodollar Base Rate is the rate per annum for United States dollar deposits equal to the Inter-Bank Market Offered Rate, which approximates the London Inter-Bank Market rate plus 3.75%. Commitment fees of 0.5%, are paid quarterly for any unused portion of the revolving loan commitment. The effective rate of the term loan as of September 30, 2003 was 4.90%.
     
    The Wells Fargo Credit Agreement requires the maintenance of certain financial ratios and contains other restrictive covenants, including restrictions on the occurrence of additional indebtedness, acquisitions, and the maintenance of a minimum of $3,500 in cash at the end of each fiscal quarter. As of September 30, 2003 the Company was in compliance with all covenants per the agreement.
     
    The Wells Fargo Credit Agreement is secured by the Company’s cash and cash equivalents, accounts receivable, intangible assets, and investments, if any.
     
    Upon the closing of the Wells Fargo Credit Agreement, the Company drew $10,639 against the term loan and $300 against the revolving loan. The loan proceeds from the Wells Fargo Credit Agreement plus an additional $3,500 of cash on-hand were utilized to repay all outstanding principal and interest balances on the Company’s former credit facility, with Bank of America, N.A. as agent, dated April 25, 2001, and amended January 31, 2002.

9


NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)

      7.   Other Current Liabilities
     
    Other current liabilities consist of:
    September 30,   December 31,  
    2003   2002  
   
 
 
  Accounts payable to franchises     $ 6,152   $ 6,028  
  Accrued wages and commissions    5,478    3,165  
  Royalties and fees payable to courseware partners    3,305    3,209  
  Accrued operating expenses and other    4,162    5,826  
   
 
 
      $ 19,097   $ 18,228  
   
 
 
      8.   Refundable Income Taxes
     
    Refundable income taxes represent excess estimated federal and state income tax payments and income tax refunds due to the Company as a result of applying net operating loss carrybacks related to the net loss incurred during fiscal year 2002. The Company expects to receive $655 of refundable income taxes in the fourth quarter of 2003. The remainder, or $240, will be applied to the Company’s 2003 tax liability.
     
      9.   Cumulative Effect of Change in Accounting Principle
     
    In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets that have indefinite useful lives will not be amortized into results of operations, but instead will be tested at least annually for impairment and written down when impaired. The Company adopted the provisions of each statement that apply to goodwill and intangible assets acquired prior to June 30, 2001 effective January 1, 2002. However, SFAS No. 141 was immediately applicable to any goodwill and intangible assets the Company acquired after June 30, 2001. Goodwill and intangible assets with indefinite lives are no longer being amortized but are being tested for impairment annually or in the event of an impairment indicator. Pursuant to SFAS No. 142, the Company ceased amortizing goodwill as of January 1, 2002.
     
    The Company, in accordance with SFAS No. 142, tested its goodwill for impairment, applying a fair-value-based test as of January 1, 2002. The fair value of the reporting units, consisting of the franchising unit and the Company-owned center unit, was determined by an independent third-party appraiser using an average of: (1) the imputed market price for each reporting unit determined using an appropriate EBITDA multiple based upon the average closing price for the Company’s stock for the two days prior and two days after January 1, 2002, and (2) the expected present value of future cash flows for each of the reporting units using a period of five years and a discount rate of 14.3%. The current economic conditions, which have resulted in lower training revenues, adversely affected the market value for the Company’s stock and the expected future cash flows for the company-owned training centers and resulted in an impairment of the Company’s recorded goodwill. The impact of the charge on the Company’s consolidated statement of operations was $17.8 million, net of a tax benefit totaling $9.2 million. The net impairment loss has been reflected as a cumulative change in accounting principle during the nine months ended September 30, 2002.

10


NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)

      10.   Recent Accounting Pronouncements
     
    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, the Company 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 did not 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 did not have a material impact on the Company.
     
    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 adopted the pro forma disclosure requirements of SFAS No. 148 during the year ended December 31, 2002.
     
    In November 2002, the FASB issued Interpretation No. 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. Interpretation No. 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees. Interpretation No. 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 Interpretation No. 45 issued or modified after December 31, 2002. The adoption of Interpretation No. 45 did not have a material effect on the Company.

11

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)

    In February 2003, the FASB issued Interpretation No. 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. Interpretation No. 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. Interpretation No. 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 ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Interpretation No. 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 Interpretation No. 46 is not expected to have a material impact on the Company.
     
    In November 2002, the FASB issued EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Issue No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, Issue No. 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying Issue No. 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. Issue No. 00-211 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on the Company.
     
    In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 is effective for all financial instruments created or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company.

12



  Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

  The following discussion should be read in conjunction with the September 30, 2003 Consolidated Financial Statements and related notes and the December 31, 2002 Annual Report.

  (Dollars in thousands)

  GENERAL

  The Company owns and operates computer-training centers in the United States and franchises computer training centers in the United States and abroad.

  The Company earns revenues through its company-owned training centers and franchising business segments. Company-owned training center revenues are earned from the delivery of computer training at company-owned training centers and the sale of eLearning products. Franchising revenues are earned through initial franchise fees, on-going franchise royalties, the sale of courseware, eLearning products and services, and other revenues from franchised operations.

  In addition to company-owned training center and franchising revenues, management also analyzes system-wide revenues, which are defined as revenues from all New Horizons computer training centers, both company-owned and franchised. Management believes system-wide revenues gauge the growth rate of the entire New Horizons training network.

  Company-owned training centers revenues are earned through the delivery of computer related training to its customers. Training is delivered primarily through instructor-led classes and through the Company’s proprietary Online LIVE and Online ANYTIME products. Company-owned training centers’ cost of revenues consist 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 support, scheduling, training, accounting and finance, and sales.

  Franchising revenues are earned from initial franchise fees paid by franchisees for the purchase of specific franchise territories and franchise rights, franchise royalties and advertising fees based on a percentage of each franchise’s gross training revenues, and the sale of courseware and eLearning products. Revenues earned from the Company’s Enterprise Learning Solutions (ELS) initiative, a program designed to facilitate the delivery of information technology (IT) training to large corporate and government customers at company-owned and franchised training centers, are also included within franchising revenues. 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, ELS support, advertising expenses, and franchise sales expenses.

13



  CRITICAL ACCOUNTING POLICIES

  Goodwill

  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 last valuation of goodwill was performed as of December 31, 2002. The fair value of reporting segments was determined through the use of a third party valuation consultant. No impairment indicators were noted in the first three quarters of 2003.

  Accounts Receivable

  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 franchisee 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 September 30, 2003, the Company’s accounts receivable balance was $21,205, which is net of allowance for doubtful accounts of $1,275.

  Revenue Recognition

  The Company earns revenue from the delivery of instructor-led and eLearning training courses by its company-owned training centers and through its franchising operations.

  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 is 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.

14



  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.

  Generally, the student attendance analyses indicate a greater percentage of attendance in the earlier months and the last month of the time periods associated with training vouchers, club memberships, and technical certification programs. Thus, a greater percentage of revenues are recognized in these time periods than if the straight-line method were applied.

  Franchising
  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 ELS initiative, a program to service large corporate customers. Additionally, Franchising revenues are earned from providing hosting and support services to franchises for the Center Management System (CMS), the Company’s proprietary sales and enrollment software.

  Initial franchise fees are charged to unit and master franchises. Unit franchises receive a limited exclusive right to own and operate franchises within a certain territory. Master franchises receive a territory in which the master franchisee is required to operate at least one unit franchise and 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 or franchises are opened by the master franchise.

  Unit franchises and master franchises 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 franchise recognize revenue.

  The Company sells licensed courseware materials and curriculum to the franchises. 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 franchises. The franchises 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.

15

  Per-student fees are charged to the franchises for eLearning courses delivered to their customers through the Online LIVE and Online ANYTIME formats. Fees related to the sale of Online LIVE courses are recognized upon the delivery of the course. Online ANYTIME courses are delivered over the Internet over a period of one year. Fees related to the sale of Online ANYTIME courses are recognized on a straight-line basis over one year.

  The Company’s ELS 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.

  CMS revenues are comprised of hosting and support fees charged to the franchise network on a monthly basis. CMS revenues are recognized on a straight-line basis as hosting and support services are performed.

  Deferred Costs

  The Company defers those direct and incremental costs associated with the sale of products and services for which revenue is deferred. Direct and incremental costs associated with the sale of products and services for which revenue is deferred include commissions paid to sales persons and technology and hosting costs associated with the Company’s eLearning products. Deferred costs are recorded to earnings at the same rate that the associated product revenues are recorded to earnings.

  Accounting for Income Taxes

  As part of the process of preparing the consolidated financial statements, the Company is required to estimate its income taxes for federal and state purposes. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, must establish a valuation allowance. To the extent a 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 projected financial results, the Company has determined that no valuation allowance is necessary.

  Off-balance Sheet Financings

  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 or variable interest entities.

  RESULTS OF OPERATIONS

  THREE MONTHS ENDED SEPTEMBER 30, 2003

  Revenues

  Revenues totaled $35,030 during the third quarter of 2003, a decrease of $148 from $35,178 during the same period in 2002. The decrease in revenue is the result of the net effect of a revenue increase at company-owned training centers of $418 and a decrease in franchising revenue of $566.

16



  Company-Owned Training Centers
  Company-owned training centers earned revenue of $25,246 in the third quarter of 2003, an increase of $418, or 2%, from $24,828 during the same period in 2002. The increase in company-owned training center revenue is due to increased consumer and eLearning product sales, partially offset by weak demand in the business market. Increases in consumer sales are attributable to the success of the Company’s Consumer Segment initiative, which has focused on the creation of courses of study specifically designed to enable consumers to learn skills necessary to become employable as IT professionals, as well as the development and implementation of marketing strategies targeting consumers. Consumer sales comprised approximately 29% of company-owned training centers revenue in the three months ended September 30, 2003, an increase of 7% from the same period in 2002. Company-owned training centers also experienced increased sales of its eLearning products. Revenues associated with the Company’s eLearning products, including Online LIVE and Online ANYTIME, increased $607 during the three months ended September 30, 2003, as compared to the same period in 2002, due to further market penetration. These increases were partially offset by reduced demand for training in the business-to-business market resulting from the continued weakness in the domestic economy. The continued weakness in the domestic economy has manifested in reduced IT capital expenditures and reduced commercial spending on IT training for employees, and fewer available IT positions for which personnel require specialized training.

  Franchising
  Franchising revenues totaled $9,784 during the three months ended September 30, 2003, a decrease of $566 as compared to the same period in 2002. The decrease in franchising revenues resulted from increases in initial franchise fees and eLearning products, net against decreases in franchise royalties and other courseware sales not associated with eLearning products. Initial franchise fees increased $226, primarily due to the $165 in revenues earned when the Company’s Australia master franchise acquired certain assets of a competitor and converted certain of the competitor’s computer training locations into New Horizons unit franchises. Revenues associated with the sale of the Company’s eLearning products to franchisees, including Online LIVE and Online ANYTIME, increased $472, or 86%. Increases in eLearning product revenues are due to continued market penetration. Franchise royalties and sales of courseware unaffiliated with eLearning products decreased a combined $764, resulting from decreased system-wide revenues and lesser demand for IT training domestically.

  System-wide
  System-wide revenues are defined as the revenues from company-owned training centers and revenues reported to the Company by its domestic and international franchises. System-wide revenues totaled $98,362 during the third quarter of 2003, a decrease of 10%, or $10,867, from $109,229 during the third quarter of 2002. The decrease in system-wide revenues resulted primarily from revenue decreases at North American franchises and franchise closures. North American franchises have not yet replicated revenue increases in the business to consumer market in similar proportion to company-owned training centers, and, therefore have not mitigated revenue decreases associated with the weakness in the domestic economy and the IT industry in particular. As a result, North American franchises suffered revenue decreases of approximately 19%. Sixteen fewer franchise locations world-wide were in operation as of September 30, 2003, as compared to September 30, 2002. Many of the franchise locations that have closed since September 30, 2002 were satellite or delivery only locations that supported larger centers in the same franchise area.

  System-wide same center sales for the third quarter of 2003 totaled $95,536, a decrease of $7,524, or 7%, from $103,060 in the third quarter of 2002. The decrease is the result of decreased revenues in North American franchise locations, net against moderate same center revenue increases at international franchises of 3% and company-owned training centers of 2%.

17

  Cost of Revenues

  Cost of revenues totaled $19,888 during the third quarter of 2003, a decrease of $862, or 4%, from $20,750 during the same period in 2002. As a percentage of revenues, cost of revenues decreased to 57% from 59% in 2002. The decrease in cost of revenues as a percentage of revenues is attributable to decreased instructor costs resulting from continued class schedule consolidation and higher instructor utilization. The cost benefits, as a percentage of sales, associated with decreased instructor costs were partially offset by a loss of $401 recorded in connection with the sub-lease of excess training facilities.

  The Company has made a concerted effort to increase the number of students per training class and reduce instructor workforce in order to improve instructor utilization. As a result of these efforts, instructor headcount decreased while instructor utilization increased during the quarter ending September 30, 2003 as compared to the same period in 2002

  Selling, General and Administrative Expenses

  Selling, general and administrative expenses totaled $13,910 during the three months ended September 30, 2003, a decrease of $1,031, or 7%, from $14,941 in the same period of 2002. As a percentage of revenues, selling, general and administrative expenses decreased to 40%, down from 42% in 2002. The decrease in selling, general and administrative expenses in absolute dollars and as a percentage of revenues is the result of reductions in effective sales commission rates and advertising expenses, net against increases in expenses incurred in the ELS initiative.

  Sales personnel are compensated for consumer segment and ELS sales with a lesser commission rate than that for business segment sales. As consumer segment and ELS sales have increased, the Company’s effective commission rate has decreased and has resulted in lesser selling, general and administrative expenses as a percentage of revenues. In addition, significant reductions in salesperson headcount at company owned centers have resulted in a decrease in salesperson compensation.

  The Company’s ELS initiative is designed to facilitate the delivery of IT training to large corporate and government customers at company-owned and franchised training centers. During 2003, the ELS initiative was expanded to provide enhanced account strategy services and sales support to the franchise network. ELS initiative expenses increased $459 during the quarter ended September 30, 2003.

  Interest Expense

  Interest expense totaled $128 during the quarter ended September 30, 2003, a decrease of $343 from $471 recorded during the same period in 2002. The decrease is the result of a lesser amount of outstanding debt in 2003 and a decrease in the effective interest rate on the Company’s floating rate debt facilities.

  NINE MONTHS ENDED SEPTEMBER 30, 2003

  Revenues

  Revenues totaled $106,815 during the nine months ended September 30, 2003, an increase of $871 from $105,944 during the same period in 2002. The increase in revenue is the result of the net effect of a revenue increase at company-owned training centers of $2,354 and a decrease in franchising revenue of $1,483.

  Company-Owned Training Centers
  Company-owned training centers earned revenue of $77,534 in the nine months ended September 30, 2003, an increase of $2,354, or 3%, from $75,180 during the same period in 2002. The increase in company-owned training center revenue is due to increased consumer and eLearning product sales, partially offset by weak demand in the business market. Increases in consumer sales are attributable to the success of the Company’s Consumer Segment initiative, which has focused on the creation of courses of study specifically designed to enable consumers to learn skills necessary to become employable as IT professionals, as well as the development and implementation of marketing strategies targeting consumers. Consumer sales comprised approximately 28% of company-owned training centers revenue in the nine months ended September 30, 2003, an increase of 11% from the same period in 2002. Company-owned training centers also experienced increased sales of its eLearning products. Revenues associated with the Company’s eLearning products, including Online LIVE and Online ANYTIME, increased 60% during the nine months ended September 30, 2003, as compared to the same period in 2002, due to further market penetration. These increases were partially offset by reduced demand for training in the business-to-business market resulting from the continued weakness in the domestic economy. The continued weakness in the domestic economy has manifested in reduced IT capital expenditures and reduced commercial spending on IT training for employees, and fewer available IT positions for which personnel require specialized training.

18

  Franchising
  Franchising revenues totaled $29,281 during the nine months ended September 30, 2003, a decrease of $1,483 as compared to the same period in 2002. The decrease in franchising revenues resulted from increases in initial franchise fees and eLearning products, net against decreases in franchise royalties and other courseware sales not associated with eLearning products. Initial franchise fees increased $505, primarily due to revenues earned from the Australia, Taiwan, and Germany master franchises or sub-franchises during 2003. During 2002, revenues earned from the India master franchise comprised the only significant revenues earned from master franchises or sub-franchises. Revenues associated with the sale of the Company’s eLearning products to franchisees, including Online LIVE and Online ANYTIME, increased 138%. Increases in eLearning product revenues are due to continued market penetration. Franchise royalties and sales of courseware unaffiliated with eLearning products decreased a combined $2,414, resulting from decreased system-wide revenues and lesser demand for IT training domestically.

  System-wide
  System-wide revenues are defined as the revenues from company-owned training centers and revenues reported to the Company by its domestic and international franchises. System-wide revenues totaled $301,430 during the nine months ended September 30, 2003, a decrease of 9%, or $31,028, from $332,458 during the same period in 2002. The decrease in system-wide revenues resulted primarily from revenue decreases at North American franchises and franchise closures. North American franchises have not yet replicated revenue increases in the business to consumer market in similar proportion to company-owned training centers, and therefore have not mitigated revenue decreases associated with the weakness in the domestic economy and the IT industry in particular. As a result, North American franchises suffered revenue decreases in excess of 17%.

  System-wide same center sales for the nine months ended September 30, 2003 totaled $295,665, a decrease of 6%, from $315,647 during the same period in 2002. The decrease is the result of decreased revenues in North American franchise locations, net against moderate same center revenue increases at international franchises of 5% and company-owned training centers of 3%.

  Cost of Revenues

  Cost of revenues totaled $59,545 during the nine months ended September 30, 2003, a decrease of $1,402, or 2%, from $60,947 during the same period in 2002. As a percentage of revenues, cost of revenues decreased as a result of decreased instructor costs resulting from continued class schedule consolidation and higher instructor utilization. The cost benefits associated with the decreased instructor costs were partially offset by losses of $462 recorded in connection with the sub-lease of excess training facilities.

  The Company has made a concerted effort to increase the number of students per training class and reduce instructor workforce in order to improve instructor utilization. As a result of these efforts, instructor headcount decreased while instructor utilization increased during the nine months ended September 30, 2003 as compared to the same period in 2002.

19



  Selling, General and Administrative Expenses

  Selling, general and administrative expenses totaled $44,848 during the nine months ended September 30, 2003, an increase of $918, or 2%, from $43,930 in the same period of 2002. As a percentage of revenues, selling, general and administrative expenses increased to 42%, up from 41% in 2002. The increase in selling, general and administrative expenses in absolute dollars and as a percentage of revenues is the result of increases in expenses incurred in the ELS initiative, and various legal expenses, net against costs savings in sales and marketing expenses associated with company-owned training centers.

  The Company’s ELS initiative is designed to facilitate the delivery of IT training to large corporate and government customers at company-owned and franchised training centers. During 2003, the ELS initiative was expanded to provide enhanced account strategy services and sales support to the franchise network. ELS initiative expenses increased $1,523 during the nine months ended September 30, 2003.

  Sales and marketing expenses at company-owned training centers decreased approximately $2,054 during the nine months ended September 30, 2003, as compared to the same period in 2002, resulting from lower effective commission rates paid to sales personnel and reduced advertising costs.

  Interest Expense

  Interest expense totaled $472 for during the nine months ended September 30, 2003, a decrease of $939 from $1,411 recorded during the same period in 2002. The decrease is the result of a lesser amount of outstanding debt in 2003 and a decrease in the effective interest rate on the Company’s floating rate debt facilities.

  Cumulative Change in Accounting Principle

  In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and intangible assets that have indefinite useful lives will not be amortized into results of operations, but instead will be tested at least annually for impairment and written down when impaired. The Company adopted the provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001 effective January 1, 2002. However, SFAS No. 141 was immediately applicable to any goodwill and intangible assets the Company acquired after June 30, 2001. Goodwill and intangible assets with indefinite lives are no longer being amortized but are being tested for impairment annually or in the event of an impairment indicator. Pursuant to SFAS No. 142, the Company ceased amortizing goodwill as of January 1, 2002.

  The Company, in accordance with SFAS No. 142, tested its goodwill for impairment, applying a fair-value-based test as of January 1, 2002. The fair value of the reporting units, consisting of the franchising unit and the Company-owned center unit, was determined by an independent third-party appraiser using an average of: (1) the imputed market price for each reporting unit determined using an appropriate EBITDA multiple based upon the average closing price for the Company’s stock for the two days prior and two days after January 1, 2002, and (2) the expected present value of future cash flows for each of the reporting units using a period of five years and a discount rate of 14.3%. The current economic conditions, which have resulted in lower training revenues, adversely affected the market value for the Company’s stock and the expected future cash flows for the company-owned training centers and resulted in an impairment of the Company’s recorded goodwill. The impact of the charge on the Company’s consolidated statement of earnings was $17.8 million, net of a tax benefit totaling $9.2 million. The net impairment loss has been reflected as a cumulative change in accounting principle during the nine months ended September 30, 2002.

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  Liquidity and Capital Resources

  As of September 30, 2003, the Company’s working capital was negative $3,260 and its cash and cash equivalents, including restricted cash, totaled $10,380. Working capital as of September 30, 2003 reflected an increase of $1,425 from negative $4,685 as of December 31, 2002.

  Upon execution of the Wells Fargo Credit Agreement in the first quarter of 2003, the available funds under the facility totaled $12,139, consisting of a term loan of $10,639 and revolving loans of $1,500. As of September 30, 2003, the term loan had a total commitment equal to its outstanding balance of $8,389. Quarterly principal payments of $750 for the term loan commenced on March 31, 2003 and continue through the term loan’s maturity on February 15, 2005. The revolving loan has a total commitment of $1,500 under which loans are available through maturity. No amounts were outstanding on the revolving loan as of September 30, 2003. Any unpaid principal and interest balances associated with the term and revolving loans are due upon maturity of the loans on February 15, 2005. The revolving loan also includes a $1,000 sub-limit for the issuance of standby and commercial letters of credit. One standby letter of credit was outstanding under the revolving loan as of September 30, 2003 for $650. At September 30, 2003, $850 was available under the Wells Fargo Credit Agreement.

  The nature of the information technology and training industry requires substantial cash commitments for the purchase of computer equipment, software, and training facilities. During the first nine months of 2003 the Company made capital expenditures of approximately $2,992. Capital expenditures for 2003 are expected to total approximately $4,000.

  Management believes that its current working capital position and cash flows from operations, along with its credit facility, will be adequate to support its current and anticipated capital and operating expenditures and its strategies to grow its computer-based training business for the foreseeable future.

  Information About Forward-Looking Statements

  The statements made in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements. Such statements are based on current expectations but involve risks, uncertainties, and other factors which may cause actual results to differ materially from those contemplated by such forward-looking statements. All statements that address operating performance, events or developments that management anticipates will occur in the future, including statements relating to future revenue, profits, expenses, income and earnings per share or statements expressing general optimism about future results, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). In addition, words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” variations of such words, and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to safe harbors created in the Exchange Act.

  Important factors which may result in variations from results contemplated by such forward-looking statements include, but are by no means limited to: (1) the Company’s ability to respond effectively to potential changes in the manner in which computer training is delivered, including the increasing acceptance of technology-based training which could have more favorable economics with respect to timing and delivery costs; (2) the Company’s ability to attract and retain qualified instructors; (3) the rate at which new software applications are introduced by manufacturers and the Company’s ability to keep up with new applications and enhancements to existing applications; (4) the level of expenditures devoted to upgrading information systems and computer software by customers; (5) the Company’s ability to compete effectively with low cost training providers who may not be authorized by software manufacturers; and (6) the Company’s ability to manage the growth of its business.

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  The Company’s strategy focuses on enhancing revenues and profits at current locations, and also includes the possible opening of new company-owned locations, the sale of additional franchises, the selective acquisition of existing franchises in the United States which have demonstrated the ability to achieve above average profitability while increasing market share, and the acquisition of companies in similar or complementary businesses. The Company’s growth strategy is premised on a number of assumptions concerning trends in the information technology training industry. These include the continuation of growth in the market for information technology training and the trend toward outsourcing. To the extent that the Company’s assumptions with respect to any of these matters are inaccurate, its results of operations and financial condition could be adversely affected.

  Item 3: Quantitative and Qualitative Disclosures About Market Risk

  The Company is exposed to market risk related to changes in interest rates. It monitors the risks associated with interest rates and financial instrument positions.

  The Company’s primary interest rate risk exposure results from floating rate debt on its credit facility with Wells Fargo Bank. As of September 30, 2003, the Company’s total bank debt consisted of floating rate debt. If interest rates were to increase 100 basis points (1.0%) from September 30, 2003 rates, and assuming no changes in bank debt from the September 30, 2003 levels, the additional annual expense would be approximately $84 on a pre-tax basis. The Company currently does not hedge its exposure to floating interest rate risk.

  The Company’s revenue derived from international operations is paid by its franchisees in United States dollars and, accordingly, the foreign currency exchange rate fluctuation has no impact on the Company’s business.

  Item 4: Controls and Procedures

  Evaluation of Disclosure Controls and Procedures

  The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2003 (the “Evaluation Date”), have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.

  Changes in Internal Controls

  During the fiscal quarter ended September 30, 2003, there were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date.

  PART II. Other Information

  Item 2: Changes in Securities and Use of Proceeds

  c)           Recent Sale of Unregistered Securities

  No securities of the Company that were not registered under the Securities Act of 1933 have been issued or sold by the Company for the period covered by this Quarterly Report on Form 10-Q.

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  Item 6: Exhibits and Reports on Form 8-K
  During the third quarter of 2003, the Company filed or furnished a Current Report on Form 8-K on July 30, 2003.

  Exhibits:  
  31.1 Rule 13a - 14(a) Certification of the Company's Chief Executive Officer.
  31.2 Rule 13a - 14(a) Certification of the Company's Chief Financial Officer
  32.1 Section 1350 Certification of the Company's Chief Executive Officer
  32.2 Section 1350 Certification of the Company's Chief Financial Officer





SIGNATURE

  Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
        NEW HORIZONS WORLDWIDE, INC.
        (Registrant)
         
         
         
  Date: November 14, 2003 By: /s/ Robert S. McMillan                                     
               Robert S. McMillan
               NEW HORIZONS WORLDWIDE, INC.
               Chief Financial Officer





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