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UNITED STATES
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                         March 31, 2004                         

OR

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

For the transition period from            Not Applicable                                to                                                

Commission File Number                      0-17840                     

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

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

1900 S. State College Boulevard, 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 March 31, 2004: 10,451,158


1

PART I. ITEM 1 FINANCIAL STATEMENTS

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
(Dollars in thousands, except per share data)

  March 31,   December 31,  
  2004   2003  
Assets            
Current assets:  
       Cash and cash equivalents   $ 8,325   $ 10,850  
       Accounts receivable, net    14,983    14,496  
       Inventories    1,368    1,283  
       Prepaid expenses    7,587    7,329  
       Refundable income taxes    759    980  
       Deferred tax assets    3,643    3,643  
       Other current assets    1,315    1,299  
                Total current assets    37,980    39,880  
                 
Property and equipment, net    13,369    14,381  
Goodwill    18,368    18,368  
Cash surrender value of life insurance    1,360    1,360  
Deferred tax assets, net    21,941    21,941  
Notes from officers and director    1,011    1,011  
Other assets    1,363    1,412  
Total Assets   $ 95,392   $ 98,353  
Liabilities and Stockholders' Equity  
Current Liabilities:  
       Current portion of long-term debt   $ 6,671   $ 3,000  
       Accounts payable    4,020    4,267  
       Deferred revenue    19,039    20,032  
       Other current liabilities    14,045    14,613  
                Total current liabilities    43,775    41,912  
                 
Long-term debt, excluding current portion    --    4,566  
Deferred rent    2,277    2,278  
Other long-term liabilities    773    824  
                Total liabilities    46,825    49,580  
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;  
              10,636,158 shares issued; 10,451,158 and 10,450,157  
              shares issued and outstanding at March 31, 2004  
               and December 31, 2003, respectively    106    106  
       Additional paid-in capital    48,569    48,562  
       Retained earnings    1,190    1,403  
       Treasury stock at cost - 185,000 shares at March 31, 2004  
              and December 31, 2003    (1,298 )  (1,298 )
                Total stockholders' equity    48,567    48,773  
Total Liabilities & Stockholders' Equity   $ 95,392   $ 98,353  

See accompanying notes to consolidated financial statements.

2

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2004 and 2003
(Dollars in thousands, except per share data)

  Three months ended March 31,
  2004  2003
Revenues            
     Franchising  
         Franchise fees   $ 480   $ 304  
         Royalties    4,046    4,245  
         Courseware sales and other    5,122    5,030  
 
 
 
         Total franchising revenues    9,648    9,579  
                 
     Company-owned training centers    23,615    26,248  
          Total revenues    33,263    35,827  
                 
Cost of revenues    19,416    20,010  
Selling, general and administrative expenses    14,199    15,374  
Operating (loss) income    (352 )  443  
                 
Other income       44     --  
Interest expense    (82 )  (208 )
Investment income    35    42  
(Loss) income before income taxes    (355 )  277  
                 
(Benefit) provision for income taxes    (142 )  111  
Net (loss) income   $ (213 ) $ 166  
                 
Weighted average number of common shares outstanding - Basic    10,450    10,388  
                 
Weighted average number of common shares outstanding - Diluted    10,450    10,388  
                 
Basic Earnings Per Share   $ (0.02 ) $ 0.02  
                 
Diluted Earnings Per Share   $ (0.02 ) $ 0.02  

See accompanying notes to consolidated financial statements

3



NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003
(Dollars in thousands)

  Three months ended March 31,
  2004  2003
Cash flows from operating activities:                
       Net (loss) income   $ (213 )  166  
Adjustments to reconcile net (loss) income to net cash and cash  
    equivalents (used in) provided by operating activities:  
       Depreciation and amortization    1,713    1,744  
       Gain on disposal of property and equipment    5    (14 )
       Provision for bad debts    17    181  
       Cash (used in) provided by the change in:  
          Accounts receivable    (504 )  1,052  
          Inventories    (85 )  (13 )
          Prepaid expenses and other assets    (225 )  (1,071 )
          Income taxes    221    (306 )
          Accounts payable    (247 )  (459 )
          Deferred revenue    (993 )  333  
          Other liabilities    (619 )  2,104  
          Deferred rent    (1 )  120  
             Net cash (used in) provided by operating activities    (931 )  3,837  
                 
Cash flows from investing activities:  
       Additions to property and equipment    (706 )  (821 )
       Proceeds from sale of property and equipment    --    36  
              Net cash used in investing activities    (706 )  (785 )
Cash flows from financing activities:  
       Proceeds from exercise of stock options    7    --  
       Proceeds from issuance of debt    --    10,939  
       Principal payments on debt obligations    (895 )  (15,189 )
              Net cash used in financing activities    (888 )  (4,250 )
                 
Net decrease in cash and cash equivalents    (2,525 )  (1,198 )
                 
Cash and cash equivalents at beginning of period    10,850    8,585  
Cash and cash equivalents at end of period   $ 8,325   $ 7,387  
Supplemental disclosure of cash flow information  
       Cash paid for:  
          Interest   $ 76   $ 236  
          Income taxes   $ 402   $ 159  
                 
Noncash investing and financing activities:  
       Income tax benefit from the exercise of stock options   $ 7   $ --  

See accompanying notes to consolidated financial statements.

4

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2004
(Dollars in thousands, except per share data)

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, technical certification, and business skills 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 March 31, 2004, the Company and its franchisees delivered training in 25 company-owned and 232 franchised locations in 52 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 March 31, 2004 and the results of operations for the three month periods ended March 31, 2004 and 2003. 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, 2003.
     
    Certain items have been reclassified to conform to 2004 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 month periods ended March 31, 2004 and 2003 are presented below. The Company accounts for stock options and warrants issued to non-employees based on the fair value method, but has elected the intrinsic value method for grants to employees and directors. 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 March 31, 2004, 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 month periods ending March 31, 2004 and 2003 would have been as follows:

5


NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2004
(Dollars in thousands, except per share data)

    Three months ended March 31,  
    2004   2003  
   
    Net (loss) income, as reported     $ (213 ) $ 166  
    Deduct: Total stock-based employee compensation expense                
      determined under fair value based method for all awards, net of related tax effects    (597 )  (878 )
   
    Pro forma net income (loss)   $ (810 ) $ (712 )
   
                     
    Pro forma net income (loss) per common share - Basic     $ (0.08 ) $ (0.07 )
   
    Pro forma net income (loss) per common share - Diluted     $ (0.08 ) $ (0.07 )
   

    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 3.3%, volatility of 85%, and zero dividend yield for 2004 grants, a risk-free interest rate of 2.3 – 3.3%, volatility of 67%, and zero dividend yield for 2003 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 reporting unit operates wholly-owned computer training centers in 15 metropolitan cities within the continental United States and generates revenue through the sale and delivery of PC applications, technical software training courses and business skills courses. 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.
     
    Summarized financial information concerning the Company’s reportable segments is shown in the following tables:

6

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2004
(Dollars in thousands, except per share data)


    For the three months ended March 31, 2004:                            
  Company-owned       Executive      
  Centers   Franchising   Office   Consolidated  
 
    Revenues from external customers     $ 23,615   $ 9,648   $ --   $ 33,263  
    Inter-segment revenues    --    2,243    --    2,243  
    Depreciation and amortization    789    924    --    1,713  
    Interest expense       82     --     --     82  
    Interest income    16    19    --    35  
    Net income (loss) before income taxes    (1,086 )  731    --    (355 )
    Income tax provision (benefit)    (426 )  284    --    (142 )
    Net income (loss)    (659 )  446    --    (213 )
    Total assets    57,227    22,919    15,246    95,392  
    Capital expenditures    367    339    --    706  
    Accounts receivable    6,603    8,339    41    14,983  


    For the three months ended March 31, 2003:                            
  Company-owned       Executive      
  Centers   Franchising   Office   Consolidated  
 
    Revenues from external customers     $ 26,248   $ 9,579   $ --   $ 35,827  
    Inter-segment revenues    --    2,156    --    2,156  
    Depreciation and amortization    1,002    742    --    1,744  
    Interest expense       208     --     --     208  
    Interest income    21    21    --    42  
    Net income (loss) before income taxes    (700 )  977    --    277  
    Income tax provision (benefit)    (258 )  369    --    111  
    Net income (loss)    (442 )  608    --    166  
    Total assets    72,899    21,326    13,096    107,321  
    Capital expenditures    586    235    --    821  
    Accounts receivable    9,396    8,980    17    18,393  

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.

7

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2004
(Dollars in thousands, except per share data)

    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 month periods ended March 31, 2004 and 2003 totaled 2,401,966 and 2,289,549, 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 March 31, 2004, the term loan has a total commitment equal to its outstanding balance of $6,671. 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 March 31, 2004. 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 March 31, 2004 for $650. At March 31, 2004, $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 0.50%. 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 2.75%. 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 March 31, 2004 was 4.03%.
     
    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 and acquisitions. As of March 31, 2004, the Company was in compliance with all covenants per the agreement except for the minimum quarterly adjusted EBITDA ratio. The Company received a letter from Wells Fargo Bank, National Association, dated April 21, 2004, waiving the bank’s default rights with respect to the breach during the quarter ended March 31, 2004.
     
    The Wells Fargo Credit Agreement is secured by the Company’s cash and cash equivalents, accounts receivable, intangible assets, and investments, if any.

8

NEW HORIZONS WORLDWIDE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2004
(Dollars in thousands, except per share data)

7.   Other Current Liabilities
     
    Other current liabilities consist of:
  March 31, 2004  December 31, 2003 
 
 
    Accounts payable to franchises     $ 1,854   $ 2,664  
    Accrued wages and commissions    4,127    4,687  
    Royalties and fees payable to courseware partners    4,582    3,602  
    Accrued operating expenses and other    3,482    3,660  
        $ 14,045   $ 14,613  

8.   Refundable Income Taxes
     
    Refundable income taxes represent excess estimated federal and state income tax payments and income tax refunds due to the Company. The Company expects to receive $519 of refundable income taxes in the form of cash during 2004. The remainder, or $240, will be applied to the Company’s 2003 tax liability.
     
9.    Change in Estimates
     
    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. Historical student attendance data from the past eight analyses, or two years of trailing data, are combined to determine the estimates used in revenue recognition. 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.
     
    The continual revision of estimated student attendance rates results in cumulative adjustments to revenue recognized for sales transactions consummated in prior periods. Upon completion of the historical student attendance analyses in the first quarter of 2004, the Company determined that in certain programs, primarily training vouchers and technical certification programs, students were taking less time to complete classes compared to past historical experience. As a result, the Company adjusted its revenue recognition rates and recorded a decrease in deferred revenue of $342, resulting in pre-tax income, net of adjustments to related deferred commissions, of $309.
     
    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.

9



  ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  The following discussion should be read in conjunction with the March 31, 2004 Condensed Consolidated Financial Statements and related notes and the December 31, 2003 annual report.

  (Dollars in thousands)

  GENERAL

  The Company operates and franchises computer training centers. The Company has two reporting units, company-owned training centers and franchising operations. The company-owned training centers reporting unit operates wholly-owned computer training centers in 15 metropolitan cities within the continental United States and generates revenue through the sale and delivery of PC applications, technical software training courses and business skills courses. The franchising operations reporting unit earns revenue through the sale of New Horizons master and unit franchises within the United States and abroad, on-going royalties in return for providing franchises systems of instruction, sales, and management concepts concerning computer training, and the sale of courseware materials and eLearning products to franchises. The franchising operations reporting unit has places of business in Anaheim, California; Amsterdam, Netherlands; and Singapore. Each reporting unit operates within the IT training industry.

  CRITICAL ACCOUNTING POLICIES

  Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. The following critical accounting policies include: (a) accounting estimates made by management that were highly uncertain at the time of estimation, and (b) accounting estimates in which there were a range of potential reasonable estimates the Company could have used in the current period and changes in these estimates are reasonably likely to occur from period to period. Changes in these estimates could potentially have a material impact on the presentation of the Company’s financial position or results of operations.

  Revenue Recognition

  The Company recognizes revenue for training vouchers, technical tracks and programs, and club arrangements of certain durations based on estimates of how the Company delivers training to customers over the service period. These estimates differ from the straight-line method. Combined, these products comprise a material amount of the Company’s consolidated revenues. Management has determined historical student attendance pattern rates are the best estimate of how the Company will deliver training to customers in the future.

  The Company performs historical student attendance analyses on a quarterly basis. In these analyses, the Company reviews approximately 15% of the sales transactions for these products, selected randomly, to determine the number of courses delivered under each arrangement and the time period between each course date and the invoice date. Based on this data, the Company is able to determine the historical rates at which customers have attended class for each product type. In order to provide customers with adequate time to take courses, the Company allows a period of one-year from the date of sale before performing student attendance analyses.

  Historical student attendance data from the past eight analyses, or two years of trailing data, are combined to determine the estimates used in revenue recognition.

10



  Due to the use of estimated delivery rates rather than actual delivery, revenue recognition for training vouchers, technical tracks and programs, and club arrangements based on estimated delivery rates could differ materially from that of actual course delivery. Additionally, the Company’s estimates based on historical student attendance patterns may not accurately forecast future attendance patterns.

  The continual revision of estimated student attendance rates may result in cumulative adjustments to revenue recognized for sales transactions consummated in prior periods. Upon completion of historical student attendance rates in the first quarter of 2004, the Company recorded an increase in revenue of $342.

  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.

  Deferred Costs

  The Company defers those direct and incremental costs associated with the sale of products and services for which revenue is deferred, including 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.

  Accounts Receivable
  Accounts receivable is presented 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 training centers segments. The franchising segment records an allowance for bad debt each period based upon specifically identified uncollectible receivables, the geographic location of the customer, and historical experience of bad debts. The company-owned training 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 training centers segment and is estimated based on each center’s historical experience.

  Deferred Tax Asset

  In 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.

  The Company regularly analyzes the future recovery of its deferred tax assets based on its best estimates of future taxable income. Taxable income is forecasted over the periods in which the deferred tax assets relate. In order to realize its deferred tax asset balance of $25,584 at March 31, 2004, the Company’s future taxable income must exceed approximately $63,960 over a period of up to thirty years.

11



  Accounting for Goodwill

  The goodwill balances attributable to the Company’s franchising and company-owned centers reporting units are tested for impairment annually as of December 31st and also in the event of an impairment indicator. Impairment tests are comprised of two steps. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the reporting unit’s goodwill is considered impaired and the second step of the impairment test is required. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of reporting unit goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess, limited to the carrying amount of reporting unit goodwill.

  The Company utilizes outside valuation consultants in determining the fair value of its reporting units. The consultant utilizes both the income approach and the market approach in determining fair value. The consultant’s fair value estimates using the income approach utilize the Company’s best estimates of future operating performance.

  OVERVIEW

  The IT training industry is highly fragmented. Customers are serviced by multi-national conglomerates that specialize in hardware and software implementations and provide initial training to support these products, electronics merchandisers that offer supplementary applications training, independent training providers such as the Company, and accredited public and private institutions.

  From 1995 to 2000, the IT training industry exhibited significant growth as a result of the advent of the Internet and the increase in number of PCs owned by households and used in the workplace. Additionally, the strength of the domestic capital markets during this time period fueled commercial growth and expansion that resulted in significant hardware and software implementations at commercial entities and a strong demand for IT professionals and computer-savvy employees.

  Since 2001, the IT training industry has experienced a decline from previous levels. The decline in the IT training industry mirrored the decline in domestic capital markets and has yet to recover similar to the domestic capital market’s recovery in 2003. Corporate IT spending for hardware, software implementations, and employee training declined consistently with corporate earnings and stock valuations. During this period corporations have been able to rely on existing IT resources due to fiscal constraints and the lack of a revolutionary application which drives immediate business efficiencies.

  In reaction to the aforementioned industry trends, the Company made reductions in its cost structure, identified additional sources of revenue, segmented its sales force, and continued to create products for increasingly complex customer needs. While these activities were primarily consummated during fiscal year 2003, these activities continued to affect the Company’s results of operations during the first quarter of 2004.

  Reductions in Cost Structure

  The Company has made significant reductions in its cost structure as a direct response to decreases in sales opportunities and student attendance. The reductions in cost structure were affected through reduced headcount and capacity and through maintaining certain class delivery efficiency metrics.

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  The Company monitors its exposure to compensation expense in terms of selling, instructor, and other non-selling headcount. The following table illustrates the Company’s selling, instructor, and other non-selling headcount:

    March 31,   March 31,  
    2004   2003  
   
 
 
  Company-owned training centers        
  Selling headcount 231    300   
  Instructor headcount 237    265   
  Other non-selling headcount 284    301   
   
 
 
  Company-owned training centers 751    866   
           
  Franchising operations 166    151   
           
  Total 917    1,017   

  The Company has executed subleases and lease termination agreements for facilities with excess capacity created by decreases in student attendance and training events. As a result of these subleases and termination agreements, the Company recognized cost savings of approximately $186 in the first quarter of 2004. The Company intends to continue to execute these agreements in the future when the opportunity exists for under-utilized facilities.

  Maintaining minimum class delivery efficiency metrics requires the Company to scale down operations consistent with decreases in student attendance. These metrics include number of students, number of training events, students per event, instructor utilization, and average price per class day. Instructor utilization represents the ratio of class days taught to the number of available instructor days. The average price per day metric approximates the dollar value, per student class day, of products sold during a period.

  Maintaining minimum levels of instructor utilization and students per class performance metrics have allowed the Company to consolidate course schedules. Schedule consolidation has reduced course delivery costs through a reduction in instructor headcount and the number of courses delivered.

  The following table illustrates the Company’s class delivery efficiency metrics within the company-owned training centers for the three months ended March 31, 2004 and 2003:

      2004     2003  
   
 
 
  Training events   10,101     10,997  
  Number of students   82,524     97,678  
  Students per event   8.2     8.9  
  Instructor utilization   88%     82%  
  Average price per day $ 235   $ 231  

  Additional Sources of Revenue and Segmented Sales Force

  Historically, the Company’s sales force almost exclusively targeted small-to-medium size businesses. Weak corporate operating performance, the perception that employee training is discretionary, and unemployment levels that find qualified IT professionals without jobs have resulted in decreased sales opportunities at small-to-medium businesses. As a result, the Company identified additional revenue sources by dividing the IT training market into three segments: consumers, small-to-medium businesses, and governmental agencies and large corporations (together known as the enterprise/government segment).

  Each market segment has distinctly different characteristics. Consumers, or non-employer sponsored individuals, need technical certifications and vendor specific skills required to gain employment in the IT industry. Small-to-medium businesses necessitate IT solutions to customer specific business problems. Enterprise/government customers require IT solutions to their business problems, as well as additional logistical support in the coordination of delivery of IT training in multiple locations and modalities.

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  Consumer demand has been fueled by higher unemployment rates and career minded individuals who seek to switch to an IT related career. Consumer revenue growth has been exceptionally strong at the company-owned centers as a result of strategic marketing campaigns and consumer oriented product offerings. Additionally, the Company is often able to facilitate financing for consumer programs through third party financial institutions and/or governmental agencies.

  The Company estimates the enterprise/government segment to spend approximately $3.6 billion annually on IT related training. Given the number of domestic and international delivery locations within the New Horizons network, the Company’s eLearning product offerings, and the release of the Integrated Learning Manager, the Company believes it is poised to effectively service this segment. During 2003, the Company invested significantly in enterprise/government segment infrastructure and sales personnel and, as a result, both enterprise/government sales and requests for proposal activity grew throughout fiscal year 2003 and the first quarter of 2004, primarily due to contracts executed with governmental agencies.

  In order to effectively sell into the consumer, small-to-medium business, and enterprise/government segments, the Company divided its sales force accordingly. Under the segmented model, sales persons focus on an individual market segment and utilize more sophisticated sales techniques in order to diagnose business problems and prescribe IT training solutions.

  Increasingly Complex Customer Needs

  The needs of IT training customers have become increasingly more complex. During the industry’s rapid growth, customers required specific software applications training to make employees more efficient in the workplace and to train their IT staff on recently acquired technologies and new IT standards.

  Currently, customers are seeking IT solutions to customer specific business problems, as well as multiple delivery methods, and a high return on investment. To satisfy current customer needs, the Company develops relevant product offerings for each market segment, provides blended learning solutions, and obtains the highest quality rankings available in the industry.

  To address the customer specific business problems of small-to-medium businesses and enterprise/government customers, the Company offers a high volume of technical courses, cross-vendor platform programs and vendor neutral programs that provide students appropriate technical knowledge to solve current day business issues such as information security, network administration, project management, and fundamental business skills and written communication. In the first quarter of 2004, the Company released course offerings on additional topics such as wireless networks and help desk certification.

  In response to consumer needs, the Company offers a multitude of programs that enable students to obtain technical certifications necessary to gain employment in the IT profession. These certification programs include Microsoft Certified System Administrator, Microsoft Certified System Engineer, A+, Network +, Security +, and Cisco Certified Network Administrator. Additionally, the Company offers English as a second language (ESL) courses for international consumers. In 2004, the Company released a series of courses intended for consumers in the field of health information management.

  The Company offers integrated learning solutions via both instructor-led training and eLearning. Through the Company’s Online LIVE and Online ANYTIME product offerings, the Company has products which offer online access to an array of technology-based training courses and content, in addition to its instructor-led course offerings. The Company’s eLearning products have been well received, primarily because eLearning products provide customers the ability for mobile and remote workers to access training through web-conferencing software and self-paced content libraries. Additionally, eLearning products are typically less expensive than traditional, instructor-led training.

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  The Company obtains the highest quality rankings in the industry. To monitor the quality of instruction, the Company utilizes Metrics That Matter scores, which are independent student satisfaction surveys conducted at each of Microsoft’s Certified Partner Learning Solutions centers. At March 31, 2004 and 2003, New Horizons had more centers ranked in the top twenty in overall Microsoft training customer satisfaction than all other training centers combined.

  Successful product development materializes into customer demand for New Horizons training products. The Company analyzes two key performance indicators in judging the demand for New Horizons training products. These key performance indicators include non-eLearning courseware sales and system-wide sales comparisons.

  Non-eLearning courseware sales are comprised primarily of physical courseware and other class materials, such as kits and books, sold to the franchise network. The Company views these figures as an indicator of the sales and delivery volume occurring throughout the franchise network.

  Non-eLearning courseware sales for the quarters ended March 31, 2004 and 2003 are illustrated in the table below:

      2004     2003  
   
 
 
  Non-eLearning courseware sales $ 3,528   $ 3,498  

  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. Same center revenues represent revenues from company-owned training centers and franchises open during both periods of comparison. Total system-wide revenues for the quarters ended March 31, 2004 and 2003 are illustrated in the table below:

      2004     2003  
   
 
 
  Total system-wide revenues $ 98,053   $ 101,039  
  System-wide same center revenues   95,578     96,816  

  RESULTS OF OPERATIONS

  Revenues

  Revenues totaled $33,263 for the three months ended March 31, 2004, a decrease of $2,564, or 7%, from $35,827 for the three months ended March 31, 2003. The revenue decrease is the result of the net effect of a revenue decrease at company-owned training centers of $2,633 and an increase in franchising revenue of $69.

  Company-Owned Training Centers
  Company-owned training centers earned revenue of $23,615 during the first quarter of 2004, a decrease of $2,633, or 10%, from $26,248 during the first quarter of 2003. The decrease in company-owned training center revenue is the result of continued weakness in demand for training by small-to-medium businesses. Revenues earned from the consumer and enterprise/government segments during the quarter ended March 31, 2004 were comparable to those earned in the same period in 2003. eLearning revenue, or those fees earned from the delivery of Online ANYTIME and Online LIVE products, decreased 13%, or $232, during the first quarter of 2004, as compared to the same period in 2003.

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  The Company, upon completing its historical student attendance analyses, revised revenue recognition rates utilized for training vouchers, club memberships, and technical certification programs. As a result of these revised rates, the Company recorded an increase to revenue of $342 in the first quarter of 2004.

  Franchising
  Franchising revenues totaled $9,648 during the first quarter of 2004, an increase of $69 from $9,579 during the same period in 2003. The increase in franchising revenues resulted from increases in franchise fees, courseware sales, eLearning sales, and Enterprise Learning Solutions (ELS) revenues, net against a decrease in franchise royalties. Franchise fees increased $176 from the same period in 2003, primarily due to the execution of three unit franchisee agreements by the master franchisee in China during the quarter. Courseware sales and eLearning sales increased slightly, $30 and $42, respectively, in comparison to the same period in 2003. ELS revenues increased $70, or 62%, due to increased levels of enterprise/government transactions throughout the franchise network. Franchise royalties decreased $199 resulting from a greater percentage of franchise revenues earned internationally. The Company’s effective royalty rates for international franchises are less than those of North American franchises. In the first quarter of 2004, international franchise revenues comprised 27% of system-wide revenues, whereas in the first quarter of 2003 international franchise revenues comprised only 24% of system-wide revenues.

  System-wide
  System wide revenues totaled $98,053 during the quarter ended March 31, 2004, a decrease of 3%, or $2,986, from $101,039 during the same period in 2003.

  The decrease in system-wide revenues is comprised of the net effect of revenue decreases at company-owned training centers and North American franchises and increases in revenue at international franchises. As discussed above, company-owned training center revenue decreased 10%, or $2,635, in the first quarter of 2004, as compared to the same period in 2003. Similar to the company-owned training centers, North American franchises have experienced decreases in revenue due to the weakness in demand for computer training by small-to-medium businesses. Additionally, North American franchises have not yet replicated the success of company-owned training centers in penetrating the consumer market. In total, North American franchise revenues decreased 6% or $3,042, in the first quarter of 2004. International franchises have experienced revenue increases of $2,691, or 11%, in the first quarter of 2004, as compared to the same period in 2003. Increases in international franchise revenues resulted primarily from strong growth in Middle Eastern franchises, due to governmental spending on IT infrastructure.

  Cost of Revenues

  Cost of revenues decreased $594 or 3% in the first quarter of 2004 compared to the same period in 2003. As a percentage of revenues, cost of revenues remained stable at 58%. The decrease in the cost of revenues in absolute dollars was a result of decreased revenues, as discussed above, and the effect of 2003 cost reduction initiatives that decreased facilities costs at company-owned training centers.

  Selling, General and Administrative Expenses

  Selling, general and administrative expenses decreased $1,175 or 8% in the first quarter of 2004 as compared to the first quarter of 2003. As a percentage of revenues, selling, general and administrative expenses remained stable at 43%. The decrease in selling, general and administrative expenses in absolute dollars was due to reductions in personnel at company-owned training centers. Additionally, the revenue decrease resulted in a lesser amount of commission expense and incentive compensation.

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  Interest Expense

  Interest expense totaled $82 for the first quarter of 2004, a decrease of $126 from $208 recorded in the first quarter of 2003. The decrease is due to lesser amounts of outstanding debt in 2004 as compared to 2003 and decreased effective interest rates on the Company’s floating rate debt facilities.

  Liquidity and Capital Resources

  The Company’s sources of cash are comprised of sales of IT training courses at company-owned training centers, the sale of master and unit franchise territories, continuing royalties from franchises, courseware sales to franchises, and available credit on the Company’s debt facility with Wells Fargo Bank.

  Historically, the Company has been able to fund operations and meet its debt obligations through cash provided by operating activities. Cash used in operations for the three months ended March 31, 2004 totaled $931. Cash provided by operations for the three months ended March 31, 2003 totaled $3,837.

  The Company’s future obligations consist primarily of its debt facility with Wells Fargo Bank, trade payables and future delivery of IT training courses, a litigation settlement, and off-balance sheet obligations and contractual commitments.

  At March 31, 2004, the outstanding balance on the Company’s debt facility totaled $6,671. The debt facility with Wells Fargo Bank requires the Company to maintain minimum financial ratios and contains restrictive covenants including restrictions on the occurrence of additional indebtedness and acquisitions. As of March 31, 2004, the Company was in compliance with all covenants and minimum financial ratios per the credit agreement, except for the minimum quarterly adjusted EBITDA ratio. The Company has received a waiver letter from Wells Fargo Bank waiving the bank’s default rights with respect to the breach during the quarter ended March 31, 2004. The Company believes its relationship with Wells Fargo is good as of March 31, 2004. Based on this relationship, the Company believes it may have access to additional capital in the future, in the form of debt secured by the assets of the Company.

  At March 31, 2004, the Company’s accounts payable and accrued liabilities total a combined $18,065. The Company believes these amounts will be required to be paid in cash during the next year. Additionally, the Company’s deferred revenue balance, which represents the Company’s obligation to provide future IT training to customers, totaled $19,039 at March 31, 2004. The Company believes these obligations will be performed during the next year, requiring cash outflows for incremental delivery costs of approximately $5,712.

  The Company settled litigation related to its discontinued environmental remediation business in the amount of $557. The Company expects this amount will be paid in the second quarter of 2004.

  Off-Balance Sheet Arrangements and Contractual Obligations

  The Company’s off-balance sheet arrangements and contractual obligations consist of purchase commitments and outstanding guarantees and surety bonds.

  The Company’s purchase commitments consist of contracts with software vendors for services related to additional software development associated with the Company’s Integrated Learning Manager and minimum purchase commitments with a provider of courseware materials. At March 31, 2004, purchase commitments total $1,500, all of which will require settlement in cash during 2004.

  The Company has outstanding guarantees and surety bonds of $650 and $1,073, respectively. Outstanding guarantees pertain to a letter of credit issued to a landlord of a certain company-owned training center as a security deposit. The Company has issued surety bonds on behalf of company-owned training centers and certain franchises to guarantee performance in various states in respect to providing training to consumers. In the event the Company were 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 has not recorded any liability for these guarantees and surety bonds within its financial statements as of March 31, 2004.

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  The nature of the IT training industry requires substantial cash commitments for the purchase of computer equipment, software, and training facilities. During 2003, New Horizons spent approximately $4,132 on capital items. Capital expenditures during the first quarter of 2004 totaled $706. Capital expenditures for 2004 are expected to total approximately $4,000.

  The Company has never paid cash dividends on its common stock and has no present intention to pay any cash dividends in the foreseeable future.

  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 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.

  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.

  In the future, the Company plans to continue to grow through improved revenues and profits at company-owned and franchised locations; the sale of additional franchises; the development of new course offerings and market segments than can be delivered through the existing distribution channel; 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. 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.

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  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

  The Company’s primary interest rate risk exposure results from floating rate debt on its line of credit. As of March 31, 2004, the Company’s total bank debt consisted of floating rate debt. If interest rates were to increase 100 basis points (1.0%) from March 31, 2004 rates, and assuming no changes in bank debt from the March 31, 2004 levels, the additional annual expense would be approximately $67 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 is not material.

  ITEM 4. CONTROLS AND PROCEDURES

  (a)  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 March 31, 2004 (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.

  (b) Changes in Internal Controls

  There were no changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter ended March 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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  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.

  ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
  The Company filed or furnished Current Reports on Form 8-K on March 11, 2004 and April 22, 2004.

  EXHIBIT NO.                               EXHIBIT DESCRIPTION
       
  4.1   Waiver, dated April 21, 2004, to the Credit Agreement between the Registrant and Wells Fargo Bank, N.A.
       
  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:     May 10, 2004   By:  /s/  Robert S. McMillan          
      Robert S. McMillan
      NEW HORIZONS WORLDWIDE, INC
      Chief Financial Officer



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