FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
500 Campus Drive, Morganville, New Jersey 07751
(Address of principal executive offices)
(Zip Code)
(732) 536-8501
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Number of shares of common stock outstanding at September 30, 1998:
7,425,583
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
New Horizons Worldwide, Inc. and Subsidiaries
September 30, 1998 and December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------- ------------------
Assets (unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,995 $ 3,129
Investments 17,983 23,058
Accounts receivable, net 15,848 11,887
Inventories 558 720
Prepaid expenses 1,055 731
Deferred income tax assets 1,429 1,429
Other current assets 640 887
---------------- -----------------
Total current assets 46,508 41,841
Property, plant and equipment, net 8,081 7,848
Intangible assets 21,279 13,546
Cash surrender value of life
insurance 763 763
Other assets 3,381 2,573
---------------- -----------------
Total Assets $ 80,012 $ 66,571
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
New Horizons Worldwide, Inc. and Subsidiaries
September 30, 1998 and December 31, 1997
(Dollars in thousands)
September 30, 1998 December 31, 1997
------------------ -----------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,577 $ 2,489
Current portion of long-term obligations 1,078 1,792
Income taxes payable - 1,049
Other current liabilities 16,243 9,508
----------------- -----------------
Total current liabilities 19,898 14,838
Long-term obligations, excluding current portion 364 1,516
Deferred income tax liabilities 659 563
Deferred rent 667 598
----------------- -----------------
Total liabilities 21,588 17,515
----------------- -----------------
Stockholders' equity:
Preferred stock, without par value,
2,000,000 shares authorized, no
shares issued - -
Common stock, $.01 par value,
15,000,000 shares authorized;
issued and outstanding
7,610,583 shares in 1998
and 7,327,331 shares in 1997 76 73
Additional paid-in capital 31,647 26,646
Retained earnings 27,952 23,635
Treasury stock at cost - 185,000
shares in 1998 and 1997 (1,298) (1,298)
Unrealized investment gain, net of tax 47 -
----------------- -----------------
Total stockholders' equity 58,424 49,056
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 80,012 $ 66,571
================= =================
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
New Horizons Worldwide, Inc. and Subsidiaries
Nine and Three Months ended September 30, 1998 and September 30, 1997
(Unaudited)
(Dollars in thousands except Earnings Per Share)
Nine Months Ended Three Months Ended
--------------------------------------- --------------------------------------
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
--------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Revenues
Franchising
Franchise fees $ 1,303 $ 767 $ 595 $ 296
Royalties 11,831 8,637 4,234 3,205
Other 1,442 494 498 214
----------------- ------------------ ------------------ -----------------
Total franchising revenues 14,576 9,898 5,327 3,715
Company-owned training centers 37,578 28,919 14,332 10,072
----------------- ------------------ ------------------ -----------------
Total revenues 52,154 38,817 19,659 13,787
Cost of revenues 23,530 19,987 8,635 6,970
Selling, general and
administrative expenses 22,457 17,345 8,197 5,866
----------------- ------------------ ------------------ -----------------
Operating income 6,167 1,485 2,827 951
Investment income, net 894 565 323 225
Gain from release of certain
franchise obligations - 2,600 - -
----------------- ------------------ ------------------ -----------------
Income before income taxes 7,061 4,650 3,150 1,176
Provision for income taxes 2,744 1,717 1,281 429
----------------- ------------------ ------------------ -----------------
Net income $ 4,317 $ 2,933 $ 1,869 $ 747
================= ================== ================== =================
Basic Earnings Per Share $ 0.59 $ 0.41 $ 0.25 $ 0.11
================= ================== ================== =================
Diluted Earnings Per Share $ 0.57 $ 0.40 $ 0.24 $ 0.10
================= ================== ================== =================
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
New Horizons Worldwide, Inc. and Subsidiaries
Nine Months ended September 30, 1998 and September 30, 1997
(Unaudited)
(Dollars in thousands)
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,317 $ 2,933
Adjustments to reconcile net income to net cash
provided by operating activities (net of acquisitions):
Depreciation and amortization 2,900 2,921
Loss on disposal of equipment 8 5
Deferred income taxes 96 (282)
Cash provided (used) from the change in:
Accounts receivable (3,335) 3,896
Inventories 272 (29)
Prepaid expenses and other current assets (75) 4,810
Other assets (793) (217)
Accounts payable (192) (2,041)
Accrued expenses 6,022 1,416
Income tax payable/refundable (1,049) 347
Deferred rent 69 -
----------------- -----------------
Net cash provided by operating activities 8,240 13,759
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (23,723) (18,300)
Redemption of marketable securities 28,798 -
Additions to property, plant and equipment (2,244) (3,836)
Cash paid for acquisition, net of cash received (3,787) -
------------------ -----------------
Net cash used in investing activities (956) (22,136)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 481 623
Proceeds from debt obligations 78 1,532
Principal payments on debt obligations (1,977) (1,314)
------------------ ------------------
Net cash (used in) provided by financing activities (1,418) 841
------------------ -----------------
Net increase (decrease) in cash and cash equivalents 5,866 (7,536)
Cash and cash equivalents at beginning of period 3,129 11,411
----------------- -----------------
Cash and cash equivalents at end of period $ 8,995 $ 3,875
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash was paid for:
Interest $ 184 $ 109
================= =================
Income taxes $ 2,740 $ 558
================= =================
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
New Horizons Worldwide, Inc. and Subsidiaries
Nine Months ended September 30, 1998
(Unaudited)
(Dollars in thousands)
<S> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS -
On April 30, 1998, the Company acquired the Memphis,
Tennessee franchise in a transaction summarized as
follows (Note 4):
Fair value of assets acquired $ 6,401
Value of stock issued (1,932)
Cash paid, net of cash acquired (3,844)
--------
Liabilities assumed $ 625
========
On April 30, 1998, the Company acquired the Nashville,
Tennessee franchise in a transaction summarized as
follows (Note 4):
Fair value of assets acquired $ 2,990
Value of stock issued (2,641)
Cash acquired, net of cash paid 57
-------
Liabilities assumed $ 406
=======
</TABLE>
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Notes to Condensed Consolidated Financial Statements
New Horizons Worldwide, Inc. and Subsidiaries
For the Nine and Three Months Ended September 30, 1998 and September 30, 1997
(Unaudited)
(Dollars in thousands except Earnings Per Share)
Note 1 In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (all of
which are normal and recurring) necessary to present fairly the
financial position of the Company at September 30, 1998 and the
results of operations for the nine and three month periods ended
September 30, 1998 and September 30, 1997. 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, 1997.
Note 2 The investments consist of tax-exempt bonds and municipal funds.
The Company's investments are presented at their aggregate fair
value. Unrealized gains and losses are included as a component of
stockholders' equity, net of tax, until realized.
Note 3 Certain items on the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
Note 4 On April 30, 1998 New Horizons Education Corporation (NHEC), wholly
owned subsidiary of New Horizons Worldwide (NEWH), purchased the
assets of two of its franchises in Memphis and Nashville, Tennessee
and operate the centers as company-owned locations. The consideration
paid included $3,787 in cash, net of cash acquired, and 248,252
shares of NEWH stock. Based upon the closing price of the New
Horizons stock as of April 30, 1998 the acquisition is valued at
approximately $8.5 million. The selling shareholders will receive
additional consideration, in cash and stock, if certain performance
targets are achieved. The acquisition has been recorded using the
purchase method of accounting and resulted in goodwill at September
30, 1998 of $8,139, which is being amortized over 25 years.
If the results from the acquired locations had been included in the
results of operations for the first nine months of 1998 and 1997, the
Company's pro forma revenue, net income and earnings per share would
have been as follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Revenue $ 55,208 $ 44,814
Net Income $ 4,518 $ 3,216
Basic Earnings Per Share $ 0.62 $ 0.44
Diluted Earnings Per Share $ 0.59 $ 0.43
</TABLE>
Note 5 On October 30, 1998 New Horizons Education Corporation (NHEC),
wholly owned subsidiary of New Horizons Worldwide (NEWH), purchased
the assets of its franchise in Hartford, Connecticut and will operate
the center as a company-owned location. The purchase included net
assets totaling approximately $377. The consideration paid included
a $3,000 promissory note bearing 5% interest due January 4, 1999 and
secured by an irrevocable standby letter of credit in the amount of
$3,000, $200 in cash and 48,242 shares of NEWH stock. Based upon the
closing price of the New Horizons stock as of October 30, 1998 the
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acquisition is valued at approximately $4.1 million. The selling
shareholders will receive additional consideration, in cash and
stock, if certain performance targets are achieved.
If the results from the acquired locations had been included in the
results of operations for the first nine months of 1998 and 1997, the
Company's revenue, net income and earnings per share would have been
the pro forma amounts shown below:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C>
<C>
Revenue $ 56,488 $ 41,344
Net Income $ 4,579 $ 3,326
Basic Earnings Per Share $ 0.62 $ 0.47
Diluted Earnings Per Share $ 0.60 $ 0.45
</TABLE>
Note 6 On October 2, 1998 the Company purchased 8.3 acres of undeveloped
land in Santa Ana, California for approximately $5.1 million. The
Company intends to construct a building on the land that will serve
as the world headquarters for its franchising company and the main
training facility for its Orange County company-owned training
center. Currently the Company occupies two leased facilities in
Orange County and will consolidate those facilities at or before the
expiration of the leases in 2001 and 2002.
Note 7 As of December 31, 1997 the Company adopted SFAS No. 128, "Earnings
Per Share" (EPS). SFAS No. 128 requires the Company to report Basic
EPS, as defined therein, which assumes no dilution from outstanding
stock options, and Diluted EPS, as defined therein, which assumes
dilution from the outstanding stock options. Earnings per share
amounts for all periods presented have been restated to conform to
the requirements of SFAS No. 128.
The computation of Basic EPS is based on the weighted average number
of shares actually outstanding during each year. The computation of
Diluted EPS is based upon the weighted average number of shares
actually outstanding, plus the shares that would be outstanding
assuming the exercise of all outstanding options and warrants,
computed using the treasury stock method.
The weighted average number of shares outstanding in determining
Basic EPS for the nine months ended September 30, 1998 and 1997 was
7,282,321 and 7,084,505 and for the three months ended September 30,
1998 and 1997 was 7,425,583 and 7,059,710. The weighted average
number of shares outstanding used in determining Diluted EPS for the
nine months ended September 30, 1998 and 1997 was 7,608,722 and
7,271,677 and for the three months ended September 30, 1998 and 1997
was 7,816,048,and 7,279,495.
The difference between the shares used for calculating Basic and
Diluted EPS relates to common stock equivalents consisting of stock
options and warrants outstanding during the respective periods.
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Note 8 Effective January 1, 1998, the Company adopted SFAS No. 130
"Reporting Comprehensive Income". The Company's comprehensive income
for the nine months ended September 30, 1998 and 1997 is presented
below:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net income $ 4,317 $ 2,933
----------------- ----------------
Other comprehensive income,
before tax:
Unrealized holding gains on securities
arising during period 78 -
Income tax provision related to other
comprehensive income (31) -
----------------- ----------------
Other comprehensive income,
net of tax 47 -
----------------- ----------------
Comprehensive income $ 4,364 $ 2,933
================= ================
</TABLE>
Note 9 In June 1997, The Financial Accounting Standards Board issued SFAS
No.131 "Disclosures About Segments of an Enterprise and Related
Information". SFAS No.131 must be adopted by the Company for the
fiscal year ended December 31, 1998 and will result in expanded
disclosures regarding the Company's operations on a segmented basis.
The disclosure requirements are not required for interim periods in
the year of adoption.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
GENERAL
The Company operates computer training centers in the United States and
franchises computer training centers in the United States and abroad.
Corporate revenues are defined as revenues from company-owned training centers,
initial franchise fees and royalties from franchised operations. System-wide
revenues are comprised of total revenues from all centers, both company-owned
and franchised. System-wide revenues are used to gauge the growth rate of the
entire New Horizons training network.
Revenues from company-owned training centers operated by New Horizons consist
primarily of training fees and fees derived from the sale of courseware. Cost of
revenues consists primarily of instructor costs, courseware, rent, utilities,
classroom equipment, and computer hardware, software and peripheral expenses.
Included in selling, general and administrative expenses are costs associated
with technical support personnel, facilities support personnel, scheduling
personnel, training personnel, accounting and finance personnel and sales
executives.
Revenues for the franchising operation consist primarily of initial franchise
fees paid by franchisees for the purchase of specific franchise territories and
franchise rights; royalty and advertising fees based on a percentage of gross
training revenues realized by the franchisees; and percentage royalty fees
received on the gross sales of courseware. Cost of revenues consists primarily
of costs associated with 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, courseware development,
accounting and finance support, major account program support, advertising
expenses, and franchise sales expenses.
REVENUES
Revenues increased $5,872 or 42.6% to $19,659 for the third quarter of 1998 and
increased $13,337 or 34.4% for the nine months of 1998 compared to the same
periods in 1997. This was primarily due to improved revenues at company-owned
locations, additional revenues resulting from the acquisition of the Tennessee
franchises, same-center revenue increases and additional franchises added to the
system. System-wide revenues for the third quarter were $93,482, up 31.1% from
$71,306 for the same period in 1997. For the first nine months of 1998
system-wide revenues grew 34.1% to $261,037 from $194,593 for the corresponding
first nine months of 1997. System-wide revenues include revenues from both
franchised locations and company-owned training centers. Revenues from locations
open more than 12 months, both franchised and company-owned, grew 27.7% in the
third quarter of 1998 and 29.6% for the first nine months of 1998 compared to
the same periods in 1997.
COST OF REVENUES
Cost of revenues increased $1,665 or 23.9% for the third quarter of 1998 and
increased $3,543 or 17.7% for the first nine months of 1998 compared to the same
periods in 1997. As a percentage of revenues, cost of revenues decreased to
43.9% for the third quarter of 1998 and to 45.1% for the first nine months of
1998, from 50.6% and 51.5% respectively, for the same periods in 1997. The
increase in the cost of revenues in absolute dollars was a result of the
increase in the revenues for the quarter and the first nine months of 1998 as
discussed above, higher training, facilities and depreciation expenses in and
associated with the expansion of the centers in Los Angeles and New York City,
and the acquisition of the Memphis and Nashville, Tennessee franchises in the
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second quarter, 1998. The decrease in cost of revenues as a percentage of
revenues was primarily due to improved absorption of fixed costs and increased
revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $2,331 or 39.7% for the
third quarter of 1998 and increased $5,112 or 29.5% for the first nine months of
1998, compared to the same periods in 1997. As a percentage of revenues,
selling, general and administrative expenses decreased to 41.7% for the third
quarter of 1998 and to 43.1% for the first nine months of 1998 from 42.5% and
44.7% respectively, for the same periods in 1997. The increase in selling,
general and administrative expenses in absolute dollars was due to increased
spending in the areas of sales and marketing, national advertising, the
expansion of the Major Accounts Program, franchise support for international
operations, the acquisition of the Memphis and Nashville, Tennessee franchises,
and expenses associated with expansion of the new centers in Los Angeles and in
New York City. The decrease in selling, general and administrative expenses as a
percentage of revenues was primarily due to the increase in revenue and control
over the addition of non-revenue producing employees.
OPERATING INCOME
Operating income increased $1,876 or 197% for the third quarter of 1998 and
increased $4,682 or 315% for the first nine months of 1998 compared with the
same periods of 1997. As a percentage of revenues, operating income rose to
14.4% from 6.9% for the third quarter of 1998, and rose to 11.8% for the first
nine months of 1998 from 3.8% for the same period in 1997. The increase in
operating income for the three months ended September 30, 1998 and the first
nine months of 1998 resulted mainly from the increase in revenues and the
reduction in expenses as a percentage of revenues.
INVESTMENT INCOME, NET
Investment income increased $28 or 8.2% to $369 for the third quarter of 1998
and increased $169 or 18.1% to $1,102 for the first nine months of 1998,
compared with the same periods for 1997. As a percentage of revenues, investment
income decreased to 1.9% in the third quarter of 1998 and to 2.1% for the first
nine months of 1998, from 2.5% and 2.4% respectively, for the same periods in
1997. The increase in investment income in absolute dollars was due mainly to
the short term investment of cash provided by operations and the collection of
accounts receivable from discontinued operations subsequent to September 30,
1997. The decrease in investment income as a percentage of revenues was
primarily due to the increase in revenues.
Interest expense decreased $70 or 60.3% to $46 for the third quarter of 1998 and
decreased $160 or 43.5% to $208 for the first nine months of 1998, compared with
the same periods for 1997. As a percentage of revenues, interest expense
decreased to 0.2% in the third quarter of 1998 and to 0.4% for the first nine
months of 1998, from 0.8% from 0.9% respectively for the same periods in 1997.
The decrease in interest expense, both in absolute dollars and as a percentage
of revenues, was due mainly to lower outstanding borrowings in these periods in
1998 when compared to the same periods in 1997.
INCOME TAXES
The provision for income taxes as a percentage of income before income taxes
increased to 40.7% for the third quarter of 1998 and to 38.9% for the first nine
months of 1998, from 36.5% and 36.9% respectively, for the same periods in 1997.
The increase in the provision for income taxes as a percentage of income before
income taxes was due principally to higher foreign income taxes in 1998 when
compared to 1997 and lower tax-free investments in 1998.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's working capital was $26,610, and its
cash, cash equivalents and short-term investments totaled $26,978. Working
capital as of September 30, 1998 decreased $393 or 1.5% from $27,003 as of
December 31, 1997.
The Company currently maintains a credit facility with a commercial bank
providing availability of $3,750 at a variable interest rate equal to 1.0% under
the bank's prime rate (8.5% at September 30, 1998). As of September 30, 1998
there was no amount outstanding under this facility. On October 30, 1998, as
part of the acquisition of the Hartford franchise, the Company issued a
promissory note for $3,000 due January 4, 1999. The note is secured by an
irrevocable standby letter of credit issued by the Company's commercial bank.
The issuance of the standby letter of credit reduced the availability under the
credit facility to $750.
The nature of the computer education and training industry requires substantial
cash commitments for the purchase of computer equipment, software and training
facilities. During the first nine months of 1998 the Company spent approximately
$2,244 on capital items and anticipates spending up to $7,800 for the fiscal
year ended December 31, 1998. The anticipated spending amount includes $5,100
for the purchase of undeveloped land in Santa Ana, California, during October
1998 (Note 6).
Management believes that its current working capital position and cash flows
from operations, along with its credit facility, will be adequate to support its
current and anticipated capital and operating expenditures and its strategies to
grow its computer education and training business.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 establishes standards for the way public business enterprises are
to report information about operating segments in annual financial statements
and requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. Statement 131 is
effective for financial statements for periods beginning after December 15,
1997. In the initial year of application, comparative information for earlier
years is to be restated, unless it is impracticable to do so. Statement 131 need
not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application shall be reported in financial statement for interim periods in
the second year of application.
YEAR 2000
The issues raised by the inability of computers, software and other equipment
utilizing microprocessors to recognize and properly process data fields
containing a 2-digit year are commonly referred to as the Year 2000 ("Y2K")
issues. A company-wide Y2K compliance program has been implemented to determine
Y2K issues and develop strategies to assure compliance. The compliance program
has four major areas of concentration: internal information technology systems;
non-information technology systems; systems and processes utilized by
franchisees; and compliance issues related to major suppliers. A Y2K project
team has been established and is directing the activity regarding the issues
confronted in each area, monitoring progress of the effort and reporting
findings to management. As the Y2K compliance program proceeds, contingency
plans will be prepared, updated and implemented as necessary to address the
risks identified, including a plan for a yet to be determined worst case
scenario.
With respect to internal information technology systems, among the most critical
systems to the ongoing operations of both the company-owned and franchised
training centers are those systems which provide customer contact and
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student registration information. The systems currently used by the
company-owned centers are not Y2K compliant, but the Company is preparing the
necessary upgrades. The cost of developing these upgrades has not been, and is
not expected to be, material. Certain franchised locations use the same systems
as the company-owned centers, and will receive these upgrades from the Company
by the end of 1998. Other franchised locations use contact management and/or
student registration software from various vendors which, in many cases, may
require updating to become Y2K compliant. Franchisees have been and will
continue to be advised to bring their systems into compliance. However,
simultaneous with these efforts, the Company has also engaged a third party to
develop a comprehensive replacement information management system (NHMS) for use
in all company-owned and franchised locations. The Company expects to commence
deployment of this system, which is designed to be Y2K compliant, in the second
quarter of 1999. In addition to the foregoing, the Company is reviewing its
other computer hardware and software systems and upgrading or replacing them as
necessary. With respect to the Company's accounting system currently used to
consolidate results from the company-owned centers, the Company is now in the
process of selecting a new system. The cost of the new system is expected to be
less than $450,000. Installation is expected to be completed by September 1999.
Regarding non-information technology systems, the project team has inventoried
the items potentially affected by Y2K issues, and is currently assessing
compliance of those systems considered to have the potential for a material
impact. Those items which appear to have the potential for such an effect that
are determined not to be in compliance will be upgraded or replaced by mid-1999.
Those costs are not expected to be material.
The project team is preparing a Y2K readiness report to disseminate to
franchisees by the end of 1998. The operation of a franchise is substantially
similar to the operation of a company-owned center, and accordingly, this report
is a by-product of the analysis the project team is performing on the
company-owned locations. As noted above, it is believed that many franchisees
have contact management and/or student registration systems which are not Y2K
compliant. Because the Company derives a significant portion of its revenue from
royalties received from its franchisees, the Company could be materially
adversely affected if the systems utilized by the franchisees are not Y2K
compliant. In order to minimize this exposure, the Company intends to make NHMS
available to franchisees in 1999 and to furnish to users of the older systems
upgrades which are expected to bring these systems into Y2K compliance.
As part of its Y2K compliance efforts, the Company has initiated formal
communications with suppliers providing goods or services material to the
Company's operations in order to determine the extent to which the Company's
systems and operations are vulnerable to any failure by such third parties to
remediate their Y2K problems. There can be no assurance, however, that the
systems of those suppliers will be converted in a timely fashion and will not
have an adverse effect on the Company. The lack of Y2K compliance on the part of
a customer of a company-owned or franchised center should not have a direct
adverse impact on the operations of the Company. However, to the extent the
costs associated with Y2K compliance reduces a customer's information technology
training budget, the Company could experience a reduction in revenues.
The Company believes that the cost of the Y2K compliance efforts for its
information and non-information technology systems will not be material to its
financial position or results of operations in any given year. However, due to
the inherent uncertainties surrounding Y2K issues, there can be no assurance
that Y2K failures or implications, including litigation, will not have a
material adverse effect on the Company's business, operating results or
financial position, particularly in the event any significant third parties
cannot in a timely manner provide the Company with products, services or systems
that meet the Y2K requirements. The conclusions and estimates in this Y2K
information include forward-looking statements and are based upon management's
current best estimates of future events.
13
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FORM 10Q - PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit
Number Description of Documents
------- ------------------------
27 Financial Data Schedule*
*Filed herewith
14
<PAGE>
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 13, 1998 By: /S/ ROBERT S. MCMILLAN
---------------------------
Robert S. McMillan
NEW HORIZONS WORLDWIDE, INC.
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,995
<SECURITIES> 17,983
<RECEIVABLES> 17,250
<ALLOWANCES> (1,402)
<INVENTORY> 558
<CURRENT-ASSETS> 46,508
<PP&E> 17,919
<DEPRECIATION> 9,838
<TOTAL-ASSETS> 80,012
<CURRENT-LIABILITIES> 19,898
<BONDS> 364
0
0
<COMMON> 76
<OTHER-SE> 58,348
<TOTAL-LIABILITY-AND-EQUITY> 80,012
<SALES> 52,154
<TOTAL-REVENUES> 52,154
<CGS> 23,530
<TOTAL-COSTS> 45,987
<OTHER-EXPENSES> (1,102)
<LOSS-PROVISION> 257
<INTEREST-EXPENSE> 208
<INCOME-PRETAX> 7,061
<INCOME-TAX> 2,744
<INCOME-CONTINUING> 4,317
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,317
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.57
</TABLE>
