UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended February 29, 2004
Commission File Number: 0-15588
CANTERBURY CONSULTING GROUP, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2170505
- ----------------------------- -----------------
(State of Incorporation) (I.R.S. Employer
Identification
No.)
352 Stokes Road
Suite 200
Medford, New Jersey 08055
(Address of principal executive office)
Telephone Number: (609) 953-0044
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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 Act). YES NO X
--- ----
The number of shares outstanding of the Registrant's common stock as of the date
of the filing of this report 2,097,251 shares.
FORM 10-Q
PART 1 - FINANCIAL INFORMATION
- ---------------------------------
ITEM 1. FINANCIAL STATEMENTS
==============================
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEET
----------------------------------
ASSETS
- ------
February 29, 2004 November 30,
(Unaudited) 2003
----------------- --------------
Current Assets:
Cash and cash equivalents $1,365,263 $1,385,824
Marketable securities 300,000 300,000
Accounts receivable, net of
allowance for doubtful
accounts of $267,000 and
$271,000 1,411,486 2,477,060
Notes receivable - current
portion 293,370 287,845
Prepaid expenses and other
assets 48,027 93,311
Inventory, principally finished
goods, at cost 151,485 92,599
----------- -----------
Total Current Assets 3,569,631 4,636,639
Property and equipment at cost,
net of accumulated depreciation
of $1,171,000 and $1,093,000 531,352 604,449
Goodwill 2,433,381 2,433,381
Deferred tax assets 730,453 759,000
Notes receivable 3,396,805 3,472,253
Other assets 54,821 32,821
----------- -----------
Total Assets $10,716,443 $11,938,543
=========== ===========
See Accompanying Notes
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
February 29, 2004 November 30,
(Unaudited) 2003
----------------- --------------
Current Liabilities:
Accounts payable - trade $ 639,380 $ 963,588
Accrued expenses 511,245 532,597
Unearned revenue 370,273 470,107
Current portion, long-term debt 854,652 889,490
----------- -----------
Total Current Liabilities 2,375,550 2,855,782
Long-term debt 54,459 62,934
Subordinated convertible debt 355,000 355,000
----------- -----------
Total Liabilities 2,785,009 3,273,716
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.001 par value,
50,000,000 shares authorized;
2,097,251 issued and outstanding 2,097 2,097
Additional paid-in capital 24,248,039 24,248,039
Accumulated deficit (12,723,210) (11,989,817)
Notes receivable for common stock-
related parties (3,595,492) (3,595,492)
----------- -----------
Total Stockholders' Equity 7,931,434 8,664,827
----------- -----------
Total Liabilities and
Stockholders' Equity $10,716,443 $11,938,543
=========== ===========
See Accompanying Notes
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended
February 29, 2004 February 28, 2003
----------------- -----------------
(Unaudited) (Unaudited)
Service revenue $ 1,228,280 $ 2,640,791
Product revenue 1,406,872 1,767,955
----------- -----------
Total net revenue 2,635,152 4,408,746
Service costs and expenses 1,013,664 2,329,623
Product costs and expenses 1,259,399 1,597,194
----------- -----------
Total costs and expenses 2,273,063 3,926,817
Gross profit 362,089 481,929
Selling 317,303 415,271
General and administrative 802,752 1,368,611
----------- -----------
Total operating expenses 1,120,055 1,783,882
Other income/(expense)
Interest income 67,517 142,844
Interest expense (15,902) (30,401)
Other 11,662 136
----------- -----------
Total other income/(expense) 63,277 112,579
Loss from continuing operations
before income taxes (694,689) (1,189,374)
Income tax benefit - (222,000)
----------- -----------
Loss from continuing operations (694,689) (967,374)
Loss from discontinued operations
(net of income taxes of
$0 and $(8,000)) (38,704) (34,645)
----------- -----------
Net loss $ (733,393) $ (1,002,019)
=========== ============
Net loss per share and common
share equivalents
Basic and diluted:
Loss from continuing operations $(.33) $(.56)
Loss from discontinued operations $(.02) $(.02)
----------- -----------
Net loss $(.35) $(.58)
=========== ===========
Weighted average number of common
shares - basic and diluted 2,097,200 1,734,000
=========== ===========
See Accompanying Notes
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED FEBRUARY 29, 2004 AND FEBRUARY 28, 2003
February 29, 2004 February 28, 2003
------------------- -----------------
(Unaudited) (Unaudited)
Operating activities:
Net loss $(733,393) $(1,002,019)
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 78,476 102,309
Provision for losses on accounts
receivable 7,500 12,994
Deferred income taxes 28,547 (212,553)
401(k) contributions issued in stock - 211,029
Issuance of stock options to
consultants for services - 12,740
Changes in operating assets,
net of acquisitions
Accounts receivable 1,058,074 382,092
Inventory (58,886) 42,468
Prepaid expenses and other assets 45,284 53,580
Other assets - non-current (22,000) 2,415
Accounts payable (324,208) 299,481
Accrued expenses (21,352) (55,940)
Unearned revenue (99,834) (24,570)
---------- ---------
Net cash used in operating activities ( 41,792) (175,974)
---------- ---------
Investing activities:
Capital expenditures, net (5,379) (3,100)
Proceeds from payments on
notes receivable 69,923 119,406
---------- ---------
Net cash provided by investing
activities 64,544 116,306
---------- --------
Financing activities:
Proceeds from payments on
notes receivable for capital
stock - related parties - 45,314
Principal payments on long
term debt (43,313) (126,253)
---------- ---------
Net cash used in financing
activities (43,313) (80,939)
Net decrease in cash (20,561) (140,607)
Cash, beginning of period 1,385,824 395,477
---------- ---------
Cash, end of period $1,365,263 $ 254,870
========== ==========
See Accompanying Notes
10-Q
CANTERBURY CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements (Unaudited)
- ------------------------------------------------------
1. Operations and Summary of Significant Accounting Policies
=============================================================
Basis of Presentation
- ---------------------
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted
pursuant to those rules and regulations. It is suggested that these
unaudited consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's 10-K for
the year ended November 30, 2003. In the opinion of management, all
adjustments (which consist only of normal recurring accruals) necessary to
present fairly the financial position, results of operations and cash flows
of all periods presented have been made. Quarterly results are not
necessarily indicative of results for the full year.
Description of Business
- -----------------------
Canterbury Consulting Group, Inc. provides broad based information
technology and management consulting services and training to both corporate
and government clients. Canterbury's mandate is to become an integral part
of its clients' management and technical infrastructure, designing and
applying the best products and services to help them achieve a competitive
advantage.
For information about the Company's revenues, profit or loss, and
assets by segment, see Note 2 of the Notes to Consolidated Financial
Statements.
Principles of Consolidation
- ----------------------------
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries. All material intercompany transactions
have been eliminated.
Use of Estimates
- ----------------
Our consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States (US GAAP).
The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts in the financial statements and
accompanying notes. These estimates form the basis for judgments we make about
the carrying values of assets and liabilities that are not readily apparent
from other sources. We base our estimates and judgments on historical
experience and on various other assumptions that we believe are reasonable
under the circumstances. However, future events are subject to change and the
best estimates and judgments routinely require adjustment. US GAAP requires us
to make estimates and judgments in several areas, including those related to
impairment of goodwill and equity investments, revenue recognition,
recoverability of inventory and receivables, the useful lives of long lived
assets such as property and equipment, the future realization of deferred
income tax benefits and the recording of various accruals. The ultimate
outcome and actual results could differ from the estimates and assumptions
used.
Revenue Recognition
- -------------------
Product Revenue
Product revenue is recognized when there is persuasive evidence of an
arrangement, the product has been delivered, the sales price is fixed or
determinable, and collectibility is reasonably assured. The product is
considered delivered to the customer once it has been shipped, and title and
risk of loss have transferred. The Company defers revenue if there is
uncertainty about customer acceptance. Product revenue represents sales of
computer hardware and software. Generally, the Company is involved in
determining the nature, type, and specifications of the products ordered by the
customer.
Service Revenue
Service revenue is recognized when there is persuasive evidence of an
arrangement, the sales price is fixed or determinable, and collectibility is
reasonably assured. Service revenues represent training and consulting services
provided to customers under separate consulting and service contracts. Revenues
from these contracts are recognized as services are rendered.
Statement of Cash Flows
- -----------------------
For purposes of the Statement of Cash Flows, cash refers solely to demand
deposits with banks and cash on hand.
Marketable Securities
- ----------------------
At February 29, 2004 and November 30, 2003, the Company held marketable
securities comprised of a $300,000 investment in a long-term tax-exempt bond
fund. The Company's marketable securities are classified as available-for-sale
and are carried at fair market value. There were no unrealized gains or losses
on marketable securities for the period ended February 29, 2004.
Accounts Receivable
- -------------------
The carrying value of accounts receivable is based upon customer invoiced
amounts due to us, adjusted for allowances for doubtful accounts. We evaluate
the collectibility of our accounts receivable based on a combination of factors.
In cases where we are aware of circumstances that may impair a specific
customer's ability to meet its financial obligations to us, we record a specific
allowance against amounts due to us, and thereby reduce the net recognized
receivable to the amount we reasonably believe will be collected. For all other
customers, we estimate allowances for doubtful accounts based on the length of
time the receivables are past due, industry and geographic concentrations, the
current business environment and our historical experience.
Notes Receivable
- -----------------
The carrying value of notes receivable is based upon their principal
amounts as of February 29, 2004 and November 30, 2003. No allowance for
uncollectible amounts has been recorded due to the timely receipt of all
scheduled installments of principle and interest to date, and the expected
future receipt of remaining installment amounts due us. Interest income from
notes receivable is recognized as earned over time based on the stated terms of
the notes.
Inventories
- -----------
Inventories are stated at the lower of cost or market utilizing a first-in,
first-out method of determining cost.
Depreciation and Amortization
- --------------------------------
The Company depreciates and amortizes its property and equipment for
financial statement purposes using the straight-line method over the estimated
useful lives of the property and equipment (useful lives of leases or lives of
leasehold improvements and leased property under capital leases, whichever is
shorter). For income tax purposes, the Company uses accelerated methods of
depreciation.
The following estimated useful lives are used:
Building and improvements 7 years
Equipment 3 to 5 years
Furniture and fixtures 5 to 7 years
Income Taxes
- -------------
Income tax expense is based on pretax financial accounting income. Deferred
tax assets and liabilities are determined based on the difference between the US
GAAP financial statements and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse. Deferred tax assets are reduced by valuation allowances to amounts
that are more likely than not to be realized. No income tax benefit was
recorded for the period ended February 29, 2004 as there was a 100% valuation
allowance booked against the current period loss.
Reverse Stock Split
- -------------------
On January 24, 2003, the Company's Board of Directors approved a one for
seven reverse stock split of the Company's common shares. All share and per
share information contained in these financial statements gives retroactive
effect to the 1 for 7 reverse stock split.
Concentration of Risk
- ----------------------
The Company maintains cash balances at a creditworthy bank located in the
United States. Accounts at the institution are insured by the Federal Deposit
Insurance Corporation up to $100,000. The Company does not believe that it
has significant credit risk related to its cash balance.
The Company holds marketable securities in the form of mutual fund shares
with a highly reputable mutual fund company located in the United States.
As previously discussed, the Company is in the business of providing
management and information technology services and training. These services
are provided to a large number of customers in various industries in the United
States. The Company's trade accounts receivable are exposed to credit risk, but
the risk is limited due to the diversity of the customer base and the customers
wide geographic dispersion. The Company performs ongoing credit evaluations of
its customers' financial condition. The Company maintains reserves for potential
bad debt losses and such bad debt losses have been within the Company's
expectations.
As of March 2004, all Canterbury operating subsidiaries are headquartered
in the Mid Atlantic and Northeast region of the country. As such, the majority
of revenues were generated in these two geographic regions.
For the quarter ended February 29, 2004, a significant number of local and
state agencies in Maryland purchased equipment under a contract with the City of
Baltimore from USC/Canterbury (Value Added Hardware Reseller Segment). Total
purchases under this contract represented 49% of this segment's revenue and 26%
of consolidated revenue. If this contract is not renegotiated or extended in
2004, USC/Canterbury would not have access to sell into the City of Baltimore.
A decision from the City is expected in April 2004. A second group of
customers, from a county in Virginia, accounted for 33% of the revenues in the
reseller segment and 17% of consolidated revenues for the year. This group of
over 80 customers purchased equipment from USC/Canterbury under the City of
Baltimore contract as well. Approximately 70% of this revenue could be
purchased under the Virginia state contract if the Baltimore contract is not
renewed in 2004. One vendor represented 50% of the product cost in this segment
and 28% of consolidated costs. Another major vendor represented 24% and 13%
of segment and consolidated costs and expenses, respectively. For the quarter
ended February 29, 2004, one Usertech/Canterbury customer accounted for 26% of
service revenue and 12% of total revenue.
For the quarter ended February 28, 2003, a significant number of local and
state agencies in Maryland purchased equipment under a contract with the City
of Baltimore from USC/Canterbury (Value Added Hardware Reseller Segment).
Total purchases under this contract represented 68% of this segment's revenue
and 26% of consolidated revenue. A second group of customers, from a county in
Virginia, accounted for 14% of revenues in the reseller segment. This group of
over 80 customers purchased equipment from USC/Canterbury under the City of
Baltimore contract as well. Approximately 70% of this revenue could be
purchased under the Virginia state contract if the Baltimore contract is not
renewed.
Fair Value of Financial Instruments
- ------------------------------------
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. Management
believes that there are no material differences between the recorded book values
of its financial instruments and their estimated fair value.
Reclassifications
- -----------------
Certain reclassifications have been made to prior years' balances in order
to conform to current presentations.
2. Segment Reporting
======================
The Company is organized into two operating segments and the corporate
office. The operating segments are training and consulting and value added
hardware reseller. A third segment, software development, was discontinued as
of March 2004 and as such is reported as a discontinued operation as of February
29, 2004. A fourth segment, technical staffing, was discontinued during the
fourth quarter of Fiscal 2003. All historical information for the software
development and technical staffing segment has been omitted from the segment
presentation below. Summarized financial information for the three months
ended February 29, 2004 and February 28, 2003, for each segment, is as follows:
Training Value Added
and Hardware
2004 Consulting Reseller Corporate Total
- ------------ ------------- ----------- --------- ----------
Revenues $1,228,280 $1,406,872 $ - $2,635,152
(Loss) income
before taxes (370,145) 1,499 (326,043) (694,689)
Assets 3,152,283 1,139,687 6,289,998 10,581,968
Interest income 24 - 67,493 67,517
Interest expense 15,807 95 - 15,902
Depreciation and
amortization 70,082 1,484 6,910 78,476
Training Value Added
and Hardware
2003 Consulting Reseller Corporate Total
- ------ ---------- ----------- ------------ ---------
Revenues $2,640,791 $1,767,955 $ - $4,408,746
(Loss) income
before taxes (796,035) (31,489) (361,850) (1,189,374)
Assets 5,769,204 1,262,013 10,817,257 17,848,474
Interest income 214 - 142,630 142,844
Interest expense 16,681 270 13,450 30,401
Depreciation and
amortization 88,875 4,312 5,972 99,159
3. Notes Receivable
====================
During September, 2003, the Company received $2,295,327 representing the
remaining principal balance plus accrued interest for a note which was received
in November 1995 as part of the consideration for the sale of a former
subsidiary. The Company was scheduled to receive monthly payments of $33,975
inclusive of interest at 7.79% per year through November 2005 and a balloon
payment of $1,707,000 in December 2005. In conjunction with this prepayment,
the Company issued 145,000 shares of restricted common stock to consultants for
services rendered in this transaction valued at fair market value.
In addition, the Company held notes receivable assets from a related party
in the aggregate amount of $3,690,175 at February 29, 2004. These notes have
interest terms that average 7.3% per year and are scheduled to mature at various
dates through November 2006, with a balloon payment of $1,948,000 in December,
2006. The aggregate amount includes an $860,000 demand note. During April,
2003, in order to fortify the liquidity of the balance sheet, the Company
negotiated a $500,000 paydown of the demand note (from $1,360,000 to $860,000).
On April 3, 2003 the independent directors, who are a majority of the Board of
Directors of Canterbury, voted to reduce the annual interest rate on the note
from 10% to 5% per annum in exchange for the principal payment of $500,000 which
was received by the Company during April, 2003. The demand note is included in
the non-current portion of notes receivable at February 29, 2004 and November
30, 2003.
The company has received all scheduled monthly installments for notes
receivable outstanding as of February 29, 2004.
4. Property and Equipment
==========================
Property and equipment, which is recorded at cost, consists of the
following:
February 29, 2004 November 30, 2003
----------------- -----------------
Machinery and equipment $1,440,253 $1,434,874
Furniture and fixtures 225,230 225,230
Leased property under capital
leases and leasehold improvements 37,242 37,242
---------- ----------
1,702,725 1,697,346
Less: Accumulated depreciation (1,171,373) (1,092,897)
---------- ----------
Net property and equipment $ 531,352 $ 604,449
=========== ===========
Accumulated depreciation of leased property under capital leases at
February 29, 2004 amounted to $8,000.
5. Long-Term Debt
====================
February 29, 2004 November 30, 2003
----------------- -----------------
Long-term obligations consist of:
Note payable for acquisition $800,000 $800,000
Capital lease obligations 31,242 34,589
Notes payable - equipment 77,869 117,835
---------- ----------
909,111 952,424
Less: Current maturities (854,652) (889,490)
---------- ----------
$ 54,459 $ 62,934
========== ==========
In February, 2004 the Company and Commerce Bank agreed to an amended
loan agreement. The new agreement calls for a two-year, $1,500,000
revolving working capital line of credit collateralized by trade accounts
receivable and inventory. The loan carries an interest rate of the prime
rate plus one half of one percent (1/2%) and matures on May 1, 2005. As of
February 29, 2004 the line of credit was unused. Total credit available
under the agreement, subject to the carrying value of accounts receivable
and inventory collateral amounted to $1,235,000 at February 29, 2004.
The Bank's debt is secured by substantially all of the assets of the
Company and requires compliance with covenants which include the maintenance of
certain financial ratios and amounts. The Company is restricted by its bank
from paying cash dividends on its common stock. As of February 29, 2004, the
Company was in compliance with all of the financial covenants of its revised
loan agreement.
As part of the purchase price paid for the acquisition of Usertech in
September, 2001, the Company agreed to pay $1,200,000 to the seller over three
years at an annual amount of $400,000 plus accrued interest at 7% per annum on
the outstanding balance. On August 4, 2003, the Company initiated mandatory
binding arbitration proceedings against Ceridian Corporation, the previous owner
of Usertech/Canterbury, as required in the Stock Purchase Agreement between the
parties. As a result of this pending arbitration and the extent of the damages
claimed, the Company has withheld the scheduled $400,000 principal payment of
the note payable to Ceridian, as well as accrued interest of $56,000 due on
September 28, 2003, as the damages sought far outweigh the note payable to them.
The disputed $800,000 is classified as part of the current portion of long-
term debt as of February 29, 2004.
In conjunction with the purchase of 100% of the stock of Usertech, the
Company purchased computer equipment from the seller valued at $364,000 through
issuance of a note payable over three years with interest at an annual rate of
3.75%. At February 29, 2004, the note payable had an outstanding balance of
$24,608.
Aggregate fiscal maturities on long-term debt, exclusive of obligations
under capital leases, are $832,000 in 2004; $17,000 in 2005; and $15,000 in
2006, and $8,000 in 2007.
The carrying value of the long-term debt approximates its fair value.
6. Capital Leases
==================
Capital lease obligations are for certain equipment leases which expire
through fiscal year 2006. Future required payments under capitalized leases
together with the present value, calculated at the respective leases' implicit
interest rate of approximately 16% at their inception is as follows at February
29, 2004:
Total minimum lease payments through November 30, 2004 $12,327
Total minimum lease payments through November 30, 2005 16,436
Total minimum lease payments through November 30, 2006 9,588
-------
Total minimum lease payments 38,351
Less amount representing interest (7,109)
-------
Present value of long-term obligations under capital leases $31,242
=======
7. Related Party Transactions
==================================
During Fiscal 2001, certain officers and directors of the Company purchased
a 33% stock ownership in a corporation that was previously a subsidiary of the
Company prior to the November 1996 sale by the Company of its 100% stock
ownership in this corporation to an outside group. The Company holds note
receivables in the amount of $3,690,175 from this corporation of which
$3,636,000 pertains to notes originating on the November 1996 date of sale. The
Company maintained the same level of security interest protection and the same
debt amortization schedule. During the fourth quarter of Fiscal 2003, a 22%
owner of this corporation passed away. After his death, that corporation
purchased and retired his shares from his estate. As a result of this purchase
and retirement of his shares, certain officers and directors of the Company now
own 44% of this corporation.
At February 29, 2004 and November 30, 2003, the total notes receivable plus
accrued interest for issuances of Company common stock to corporate officers,
corporate counsel and certain consultants totaled $3,595,000. These non-
recourse notes are collateralized by common stock of the Company and are
reported as a contra-equity account. Interest rates range from 4% to 6.6%.
Prior to July 17, 2002, $1,739,000 of these notes were recourse notes. On
July 17, 2002 the Compensation Committee recommended, and the Board of Directors
approved a modification of the April 10, 2001 and the May 16, 2001 notes. The
notes became non-recourse as to principal and interest as of September 1, 2002
with the issued shares continuing to collateralize the notes. All accrued
interest on the notes as of September 1, 2002 has been paid to the Company.
Principal and interest must be paid by recipient before they are entitled to
sell their respective shares. If principal and interest have not been paid by
the maturity date of the recipient notes, then recipients' sole obligation shall
be that any shares relating to this nonpayment will be forfeited and returned to
the Company. If this event were to occur, both the underlying shares and the
notes receivable would be cancelled with no effect on the net worth of the
Company. In consideration for this modification the term of these notes was
reduced and shortened from April and May, 2006 to December 31, 2004. The Board
also prohibited the issuance of any stock options, stock or any other form of
equity to the recipients for all of Fiscal 2002.
8. Discontinued Operations
===========================
During March 2004, the Company entered into negotiations to sell
ATM/Canterbury back to the original owner. If finalized, Canterbury would sell
100% of the stock in ATM/Canterbury in exchange for 25,000 shares of Canterbury
common stock, which the owner had retained from the original transaction in
1997. The proposed transaction would be effective as of March 3, 2004. As of
this date, the Company was still in the process of negotiating final contract
language.
The Company's decision to sell ATM/Canterbury was based on the lack of
demand for their products by existing customers; the inability to increase
sales to new customers and the Company's desire to focus on its training and
consulting segment and its value added reseller segment. The Company estimates
that it will record a loss on the sale of approximately $20,000 in the second
quarter.
Historical financial data for ATM/Canterbury for the three months ended
February 29, 2004 and February 28, 2003:
February 29, 2004 February 28, 2003
----------------- -----------------
Revenues $58,866 $108,954
Pretax loss (38,704) (24,506)
Assets and liabilities of ATM/Canterbury as of February 29, 2004 included
in the consolidated balance sheet:
Net receivable $6,210
Net equipment 83,717
Other assets 2,706
Accounts payable and accrued expenses 17,844
Note payable 17,260
During the fourth quarter of Fiscal 2003, the Company discontinued the
operation of its technical staffing segment (DMI/Canterbury). The significant
decline in demand for contract, full and part-time technical employees due to
the economic downturn in the technology sector over the past several years was
the major cause for this action. There was no gain or loss realized on the
abandonment of this business segment.
Historical financial data for DMI/Canterbury for the three months
ended February 28, 2003:
February 28, 2003
-------------------
Revenues $150,679
Pretax loss (18,140)
Assets and liabilities for DMI/Canterbury as of November 30, 2003 included in
the consolidated balance sheet:
Net receivable $7,290
Other assets 162
Accounts payable and accrued expenses 1,710
ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
===========================================================================
Cautionary Statement
- --------------------
When used in this Report on Form 10-Q and in other public statements, both
oral and written, by the Company and Company officers, the word "estimates,"
"project," "intend," "believe," "anticipate," and similar expressions, are
intended to identify forward-looking statements regarding events and financial
trends that may affect the Company's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause the Company's actual results and financial position to differ
materially. Such factors include, among others: (1) the Company's success in
attracting new business; (2) the competition in the industry in which the
Company competes; (3) the sensitivity of the Company's business to general
economic conditions; and (4) other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices. The Company undertakes no obligations to publicly
release the result of any revision of these forward-looking statements to
reflect events or circumstances after the date they are made or to reflect the
occurrence of unanticipated events.
Risk Factors That Relate To Our Business
- ----------------------------------------
Uncertain economic conditions continue to affect many of our customers'
businesses and many clients continue to delay and reduce their purchases of
training services, software, hardware and consulting. The Company's recovery
from the past several years of economic downturn continues to lag behind the
current economic recovery.
Delay Or Inability To Return To Positive Operating Cash Flow
While the Company has taken significant steps to reduce fixed costs and
increase revenue, a significant delay in returning to positive operating cash
flow could adversely effect our liquidity and ability to conduct business.
The Company reduced payroll expense and facility leases significantly during
Fiscal 2003. Four facilities were closed and two more were greatly downsized,
as management introduced a more flexible cost model into the business. Annual
rent and occupancy expense were reduced by over $1,000,000 from the beginning
of Fiscal 2003 to the beginning of Fiscal 2004. Over sixty employees were
eliminated in several workforce reductions during 2003. Even with these
cost reductions, revenues must increase in Fiscal 2004 over Fiscal 2003 in
order to achieve positive operating profit and cash flows. The newly formed
sales subsidiary, Canterbury Corporate University must increase sales pipeline
activity in the near term to positively impact reported revenues for the
training and consulting segment. If this does not occur it could negatively
effect our operating cash flow.
Downturn In Economy
If the economy does not continue to recover and our clients continue to
decrease or eliminate spending for technology and training, our ability to
continue operating at our current reduced level of revenues will be greatly
tested. The Company cannot generate profits or positive cash flow at recent
revenue levels. Many clients have considered certain training to be
discretionary in these uncertain economic times. Technology expenditures are
being delayed by many of them in an attempt to balance their own budget
objectives. These factors can cause significant financial disruption to small
vendors such as Canterbury and could have a material adverse effect on our
consolidated operating results.
Competition
If our customers choose to purchase goods and/or services from new or
existing competitors, it could have a material adverse effect on our operating
results and stock price.
The various operating segments of the Company have relatively low
barriers to entry. New and existing organizations are constantly attempting
to penetrate our customer base. Larger, more financially seasoned competitors
have the ability to overwhelm our markets and customers though more aggressive
sales tactics. Internal training departments within our current and potential
client base are also a primary competitor. There is also increasing
competition from computer hardware and software vendors as they attempt to
capture more of the technology services market. Finally, low cost providers
in the training and consulting market are attempting to buy business through
their low cost, value proposition.
Dependency on Key Personnel
If we are unable to recruit and retain qualified personnel, it could
have a material adverse effect on our operating results. Our success depends
on the continued employment of our senior executives and managers and other
key personnel. The loss of these people, especially without advance notice,
could have a material adverse effect on our operations. Sales and delivery
staff are vital to ongoing customer relations and satisfaction. A
significant portion of our consolidated revenue is service oriented (47% in
the first quarter of Fiscal 2004). As such the loss of key personnel could
have a negative impact on our ability to deliver and service our clients.
As the economy improves, it will become more difficult to retain existing
employees and attract new recruits due to the fact that they have more
employment options available to them.
Municipal Budget Constraints
USC/Canterbury, our value added hardware reseller, does a significant
amount of business with the states of Maryland and Virginia (82% of this
segments total revenue for the quarter ended February 29, 2004). Lower tax
revenues in these states have reduced the amount of funding for technology
purchases recently and this trend could continue. If this trend does
continue, it could have a material adverse effect on this segment's
operating results. This segment has been the most profitable segment for
the Company since Fiscal 2000, and its ongoing contribution to revenue and
profits is vital to the Company's future.
Pending City of Baltimore Contract
USC/Canterbury is a bidder on an eight-year hardware procurement
contract with the City of Baltimore. The decision by the City is currently
pending and is expected during the second quarter of Fiscal 2004. If
USC/Canterbury, the incumbent vendor, is not awarded this contract it could
have a material adverse effect on the operating results of the value added
hardware reseller segment and the Company.
Shifts in Technology and Training Platforms
In the training and consulting segment, much of our success depends upon
the introduction and adoption of new technology. Our customers tend to
increase their demand for training at times when new technology or software is
being introduced. When there are delays in the introduction of these new
products demand for training may decrease, and it could have a material
adverse effect on our operating results. Also as our customers move toward
new distance learning platforms to replace instructor-led training, our
ability to retain our customers by providing these new electronic training
services introduces a potential risk in client retention, which could have a
material adverse effect on our operating results.
Ongoing Collection of Notes Receivable With A Related Party
A significant portion of the Company's assets and tangible net worth is
represented by notes receivable with a related party. To date there have been
no collection issues with the notes. However, if the related party
experiences a significant downturn in operating cash flow or becomes insolvent
the collectibility of the notes would be in jeopardy and could have a material
adverse effect on the Company's asset base and tangible net worth.
Acts of Terrorism
The majority of revenue recorded by the Company is generated in both the
New York City and Washington D.C. areas. Both of these locations were targets
of the terrorist attacks in 2001. If there is a repeat of those events in
either one of these markets, our clients there will be distracted from their
normal course of business and as such will most likely delay or cancel
projects with the Company. This could have a material adverse effect on our
operating results.
Other Factors
Other factors that may affect our operating results include:
* reduced reliance on reseller channel by hardware manufacturers
* ability to secure sufficient contractor resources to met short-term
customer demand
* insufficient training facilities to met client demand for
instructor-led technology training
* loss of key clients through merger, sale or divestiture
* ongoing cost of compliance with provisions of Sarbanes-Oxley
Overview
- --------
The Company is engaged in the business of providing information
technology products, services and training to both commercial and government
clients. The focus of Canterbury is to become an integral part of our
clients' IT solution, designing and applying the best products, services and
training to help them achieve competitive advantage by helping their employees
to succeed.
The two primary business units for the Company are training and
consulting and value added hardware reseller. In the training and consulting
segment we provide a variety of technical and management training.
Our training encompasses a wide spectrum of hardware and software
products as well as many important business skill topics. These training
products are delivered in a variety of ways: at our classroom facilities in
New Jersey and New York; at our clients' location; or electronically via the
Internet; or on the end users computer. Many of these training products are
custom developed for our clients and contain a blended training solution
combining both instructor-led training in the classroom with distance learning
products to complete the education process.
The Company also provides various technical consulting services to our
clients including programming, systems integration, network security and
network management.
The value added reseller segment provides hardware and software solutions
to the Mid-Atlantic market. Its primary focus is on state and local
government clients who have an ongoing need for technology products and
services.
Liquidity and Capital Resources
- --------------------------------
Working capital at February 29, 2004 was $1,194,000 which was $587,000
lower than November 30, 2003. The lower revenue volume during the quarter
caused a reduction in accounts receivable of $1,066,000. It is anticipated
that consolidated accounts receivables will increase in subsequent periods as
a result of higher sales volume. Offsetting this reduction in receivables was
a corresponding reduction in accounts payable ($325,000) and unearned revenue
($100,000). The balance has continued to shrink as the Company has downsized
in recent months, and overall business activity has declined.
In February, 2004 the Company and Commerce Bank agreed to an amended
loan agreement. The new agreement calls for a two-year, $1,500,000
revolving working capital line of credit collateralized by trade accounts
receivable and inventory. The loan carries an interest rate of the prime
rate plus one half of one percent (1/2%) and matures on May 1, 2005. As of
February 29, 2004 the line of credit was unused. Total credit available
under the agreement, subject to the carrying value of accounts receivable
and inventory collateral amounted to $1,235,000 at February 29, 2004.
The Bank's debt is secured by substantially all of the assets of the
Company and requires compliance with covenants which include the maintenance of
certain financial ratios and amounts. The Company is restricted by its bank
from paying cash dividends on its common stock. As of February 29, 2004, the
Company was in compliance with all of the financial covenants of its revised
loan agreement.
As part of the purchase price paid for the acquisition of Usertech in
September, 2001, the Company agreed to pay $1,200,000 to the seller over three
years at an annual amount of $400,000 plus accrued interest at 7% per annum on
the outstanding balance. On August 4, 2003, the Company initiated mandatory
binding arbitration proceedings against Ceridian Corporation, the previous owner
of Usertech/Canterbury, as required in the Stock Purchase Agreement between the
parties. The Company's claims arise from the September 2001 purchase of User
Technology Services, Inc. from Ceridian. Canterbury is making various claims
ranging from breach of contract/warranty to actual/legal fraud, fraudulent
concealment, constructive/equitable fraud, and negligent/misrepresentation.
Ceridian Corporation has denied the allegations set forth by the Company and has
instituted a counterclaim in the arbitration proceedings. Ceridian is claiming
breach of a sublease agreement by Canterbury for office space ($76,000) and
acceleration of a note payable of $800,000. Canterbury has denied the
allegations set forth in the counterclaim. In order to pursue its claims,
Canterbury will sustain ongoing legal and filing fees and there is no assurance
that the aforementioned arbitration will result in a favorable outcome for
Canterbury. As a result of this pending arbitration and the extent of the
damages claimed, the Company has withheld the scheduled $400,000 principal
payment of the note payable to Ceridian, as well as accrued interest of
$56,000 due on September 28, 2003, as the damages sought far outweigh the note
payable to them. The disputed $800,000 is classified as part of the current
portion of long-term debt as of February 29, 2004.
Cash flow used in operating activities for the quarter ended February 29,
2004 was $(42,000) an improvement of $134,000 over the same three month period
in Fiscal 2003. Significant revenue declines in all operating segments
contributed to the loss. Total assets declined by $1,222,000 from November 30,
2003 while total liabilities were reduced by $489,000. The Company's current
ratio was 1.50:1.00 versus 1.62:1.00 at November 30, 2003.
Management believes that the Company will have sufficient funds to cover
cash flow requirements for Fiscal 2004 as a result of significant reductions in
fixed operating costs, its satisfactory balance sheet, its ability to borrow
from its revolving line of credit and ongoing collection from its note
receivable. Management anticipates that the recent significant reduction in
fixed expenses if coupled with substantially improved sales activity
could permit the Company to return to a positive operating cash flow position
in the future. There was no material commitment for capital expenditures as of
February 29, 2004. Inflation was not a significant factor in the Company's
financial statements.
RESULTS OF OPERATIONS
=====================
Revenues
- ---------
Consolidated revenues decreased by $1,774,000 (40%) in the first three
months of Fiscal 2004 as compared to the same period in 2003. This overall
reduction was the result of an across the board revenue decease in all
operating segments of the Company. The training and consulting segment
recorded a decline in revenues of $1,413,000 (53%). The value added hardware
reseller segment saw revenues decline by $361,000 (20%). Software development
revenues for Fiscal 2004 and 2003 have been excluded given that this segment
has been classified as a discontinued operation as of February 29, 2004.
Technical staffing revenues are no longer being reported due to its
classification as a discontinued operating segment effective as of the fourth
quarter of Fiscal 2003.
The downward trend in consolidated revenues continued through the first
quarter of Fiscal 2004. Technology spending by many customers has been reduced,
delayed or eliminated. The significant reduction in Company revenues had forced
drastic changes to the cost structure of the organization during Fiscal 2003.
While delivery and support costs have been greatly reduced through consolidation
of facilities and elimination of under-utilized personnel, the Company will
attempt to invest further into sales and marketing in order to take advantage of
sales opportunities as the economy begins to improve.
During the fourth quarter of 2003, the Company restructured its sales
department. A Corporate Sales Manager was hired to consolidate the three
separate sales teams in the training and consulting segment. Canterbury
Corporate University, Inc. ("CCU"), a wholly owned subsidiary of the Company,
was formed to market and sell all of Canterbury's training products and services
in one comprehensive training unit. The Company has always attempted to promote
cross selling of our products and services between subsidiaries. Some of our
largest clients are purchasers of the various training products we offer. Under
previous subsidiary management, the sharing of business leads did not occur at
an acceptable level, and many potential sales opportunities were lost before
they were ever attempted.
The Corporate Sales Manager and the Company have initiated several key
sales strategies in order to overcome the shortcomings of the past including the
lack of attention to marketing, sales and more by the former President of
Usertech. All training and consulting sales representatives are being
compensated and measured using the same plan. Quota attainment is now a
benchmark for continued employment. Quotas are set up with goals for selling
all of the Company's training and consulting products, not just what was sold in
the past on a subsidiary-by-subsidiary basis. A Customer Relationship
Management ("CRM") system is being installed to better consolidate, track and
manage the pipeline of sales activity. Also based upon feedback from our
customers, the Company is developing new products utilizing both instructor-led
and distance-learning delivery platforms. We have also formalized reseller
relationships with several high quality channel partners, whereby the sales team
introduces the various products from this program to our client base and the
Company receives a negotiated share of any sales generated.
The Company has taken several steps to increase lead generation. The
formation of an inside sales team; contracting with an outside telemarketing
firm; increasing the amount of marketing information to our clients through e-
mail announcements; pilot program events and more informative web sites are all
contributing to new lead flow.
During the fourth quarter of Fiscal 2003, the Company made the decision to
exit the open enrollment public computer training segment that was part of
CALC/Canterbury's offerings for the past twenty years. The high fixed cost of
delivery was too much to sustain in relationship to the amount of revenue being
generated. By exiting this training delivery methodology, there will be an
anticipated decline in instructor-led computer training revenues for Fiscal
2004. Reduced capacity, reduced marketing emphasis, and alternative delivery
options will all contribute to the projected decline. CALC/Canterbury will
continue to offer private and general admission classes at its two training
facilities (New York City and Parsippany, New Jersey) as well as room rentals.
There will be more emphasis on offering private training at the clients'
locations. This planned exit from the scheduled open enrollment public training
segment was done in order to reduce the high fixed cost associated with its
delivery and introduce more variability to the cost structure of our training
business.
In the value added hardware reseller segment, budget constraints in state
and local municipalities had a negative impact on technology spending during
2003 and the early part of Fiscal 2004. While this segment was among the last
to feel the impact of the recent economic downturn, it will also take longer to
recover based on projected tax revenues flowing into state and local budgets and
then finally into capital expenditures. The $361,000 reduction in revenues for
the first three months of Fiscal 2004 as compared to 2003 is due primarily to
reduced pricing for most computer hardware products. While it is difficult to
pinpoint the precise decline in the cost and sales price of the specific
computer hardware sold by this segment over the past year, it is safe to
estimate that prices have dropped anywhere from 20% to 30%. If this is the
case, most, if not all of the decline in revenue for the first quarter of Fiscal
2004 can be attributed to a lower sales price on approximately the same unit
volume. This trend may continue for the balance of Fiscal 2004.
It is management's intent to more fully integrate the sales team from the
training and consulting segment with the value added hardware reseller segment.
Product profiles are being shared between the two groups and the Company
anticipates the efforts of these two sales organizations will become more
integrated during Fiscal 2004.
It is projected that the majority of product to be sold in Fiscal 2004 may
be Hewlett Packard/Compaq hardware. When Hewlett Packard/Compaq moves toward an
agent model with their resellers, USC/Canterbury would be paid an agent fee
which approximates the current gross profit from each sale. This may greatly
reduce the reported revenue in this segment. The manufacturer would record the
revenue and hold the accounts receivable with the client. This possible change
in business flow has not happened to date, but it is possible that the migration
to the agent model will begin in the second quarter of Fiscal 2004, and may then
become more significant during the second half of the year.
The value added hardware reseller segment has always had very high client
revenue concentration. In the first quarter of Fiscal 2004 two groups of
clients accounted for 82% of the revenue in this segment. There is obvious
risk associated with this very high customer concentration. See Footnote 1,
Concentration of Risk, for more details on this topic. USC/Canterbury is
currently making a concerted effort to diversify its revenue mix. Certain sales
representatives have been given responsibility, through quotas, to penetrate the
commercial market in the Baltimore/Washington area. New strategic relationships
have been formed with several manufacturers to increase product offerings and
reduce dependency on Hewlett Packard/Compaq. Management believes that there is
still a significant amount of uncertainty regarding future revenues from the
value added hardware reseller segment for Fiscal 2004.
Technology spending appears to be recovering slightly in the early part of
2004, but the duration of the recovery is not yet known. More clients are
engaging us in conversations and proposals about new projects and training
requirements. The sales pipeline is fuller now than it was in the last half of
Fiscal 2003. One of the biggest challenges that faces the Company is the timing
of customers decisions to begin project work that has already been sold. The
delays that were experienced late in Fiscal 2003 have continued into the early
part of 2004. These delays add to the uncertainty in revenue projections for
Fiscal 2004. It is management's belief that by the middle of the year we will
have a much better understanding of our client's schedule and requirements.
Costs and Expenses
- -------------------
Total costs and expenses decreased by $1,654,000 (42%) in the first three
months of Fiscal 2004 versus the same period in Fiscal 2003. The decrease was
due to reduced sales volume in both product and service revenues, as well as
the significant reduction in fixed costs which were eliminated in the fourth
quarter of Fiscal 2003. Overall gross profit increased to 14% from 11% in
Fiscal 2003. Service gross profit improved to 17% in Fiscal 2004 from 12% in
the previous year's first quarter. Product gross profit was approximately 10%
for the first quarters of Fiscal 2004 and 2003. Currently the biggest problem
regarding gross profit is sales volume. The absolute dollar contribution must
increase to cover operating costs and show a profit.
Product margins were negatively effected by several factors. Continued
weakness in technology spending forced margins lower as many suppliers competed
for the same business. Manufacturers continued to eliminate reseller incentives
as the products they were offering became more commoditized. The Company is
currently partnering with several new hardware and software manufacturers who
have specialized products that command higher profit margins. These types of
relationships could become more important for the future as downward pressure
continues on margins for personal computers, printers and servers. Management
anticipates that gross margins for product sales will remain in the 10% range
for the balance of Fiscal 2004.
While overall costs and expenses have been reduced through reductions
in long-term lease commitments and several workforce reductions, the challenge
the Company faces now is to increase revenues beyond breakeven levels and reap
the benefits that the leverage of reduced overhead and fixed costs will provide.
This is borne out by the fact that the training and consulting segment reported
a 42% improvement in gross profit percentage (from 12% to 17%) on a 53% decline
in revenues.
When, and if, revenues increase, more profit is attainable due to the fact
that the fixed cost component has been drastically reduced and a larger portion
of the delivery expense will be variable in nature. However, if sales increase
significantly in the short term, the Company risks having insufficient resources
to deliver services due to reduced manpower and facility capacity. The Company
will need to contract for part-time consultants and acquire additional space
through short-term rentals in order to meet client demand, which is possible,
but would be more expensive to implement.
Selling expense decreased by $98,000 (24%) in the first quarter of Fiscal
2004 as compared to the previous year. Personnel expense (salaries, bonuses,
commissions and payroll burden) decrease of $90,000 was the biggest component of
the reduction. There were less sales and marketing staff during Fiscal 2004 as
non-productive sales representatives were terminated during the end of Fiscal
2003. The Company is actively searching additional sales personnel and is
currently recruiting in several markets throughout the country, including New
York City.
General and administrative expense was reduced by $338,000 (21%) due
primarily to significant reductions in administrative and support staff as part
of the workforce reduction discussed previously.
Interest income decreased by $75,000 (52%) in the first quarter of Fiscal
2004 as compared to the same three months in the previous year. The prepayment
of the note receivable from the sale of a former subsidiary in September 2003
and the $500,000 reduction in the demand note and accompanying reduction in the
interest rate with a related party in early 2003 were the primary reasons for
the decrease. Total notes receivable decreased by approximately $3,200,000 in
the twelve-month period ending February 29, 2004.
Interest expense was reduced by $14,000 (47%) in the first quarter of
Fiscal 2004 versus Fiscal 2003. Reduced borrowings on the revolving line of
credit and the payoff of the remaining term debt ($800,000) with the primary
lender were the major reasons for the reduction.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
===================================================================
We are not exposed to market risk from changes in interest rates.
Currently, we have $900,000 invested in short term certificates of deposit and
$300,000 invested in a municipal bond mutual fund. We account for these
investments in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." These investments are treated as available-for-
sale under SFAS No. 115. The carrying value of these investments approximates
fair market value.
ITEM 4. CONTROLS AND PROCEDURES
================================
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer/Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15 under
the Securities Exchange Act of 1934, as amended. Based upon that evaluation,
the Company's Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings with the Securities and Exchange Commission.
The Company's management is also responsible for establishing and
maintaining adequate internal control over financial reporting. There were no
changes in the Company's internal control over financial reporting identified
in connection with the evaluation of it that occurred during the Company's last
fiscal quarter that materially affected, or are reasonably likely to materially
affect, internal control over financial reporting.
PART II - OTHER INFORMATION
=========================================
Item 1 Legal Proceedings - None
Item 2 Changes in Securities - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Stock Holders - None
Item 5 Other Information - None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 31 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act-Kevin J. McAndrew
Exhibit 32 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act. - Kevin J. McAndrew
(b)Reports on Form 8-K:
On December 8, 2003, the Company filed a Current Report on
Form 8-K dated November 17, 2003 to disclose, under Item 5,
the Company's exit from the public classroom portion of its
information technology training business. The Form 8-K also
included, under Item 7, a press release with respect to the
event disclosed.
CANTERBURY CONSULTING GROUP, INC.
SIGNATURES
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 thereunto duly authorized.
CANTERBURY CONSULTING GROUP, INC.
-----------------------------------
(Registrant)
By/s/ Kevin J. McAndrew
----------------------------------------------
Kevin J. McAndrew
President and Chief Executive Officer
By: /s/ Kevin J. McAndrew
----------------------------------------------
Kevin J. McAndrew
Chief Financial Officer
April 13, 2004