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 28, 2005
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 2,769,393 shares.
FORM 10-Q
PART 1 - FINANCIAL INFORMATION
- ---------------------------------
ITEM 1. FINANCIAL STATEMENTS
==============================
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEET
----------------------------------
ASSETS
- ------
February 28, 2005 November 30,
(Unaudited) 2004
----------------- --------------
Current Assets:
Cash and cash equivalents $610,677 $319,757
Marketable securities 100,000 100,000
Accounts receivable, net of
allowance for doubtful
accounts of $119,000 and
$168,000 1,368,749 1,809,230
Notes receivable - current
portion 316,572 310,602
Prepaid expenses and other
assets 118,351 92,079
Inventory, principally finished
goods, at cost 76,660 144,702
----------- -----------
Total Current Assets 2,591,009 2,776,370
Property and equipment at cost,
net of accumulated depreciation
of $788,000 and $1,234,000 285,348 310,431
Goodwill 1,788,381 1,788,381
Notes receivable 3,080,632 3,161,651
Other assets 52,780 52,780
----------- -----------
Total Assets $7,798,150 $8,089,613
=========== ===========
See Accompanying Notes
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
February 28, 2005 November 30,
(Unaudited) 2004
----------------- --------------
Current Liabilities:
Accounts payable - trade $ 312,749 $ 579,638
Accrued expenses 441,430 404,126
Unearned revenue 512,296 332,434
Current portion, long-term debt 583,989 233,989
----------- -----------
Total Current Liabilities 1,850,464 1,550,187
Long-term debt 44,397 52,418
Subordinated convertible debt - 355,000
----------- -----------
Total Liabilities 1,894,861 1,957,605
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.001 par value,
50,000,000 shares authorized;
2,769,393 and 1,965,822 issued
and outstanding 2,770 1,966
Additional paid-in capital 21,616,316 22,751,620
Accumulated deficit (15,055,103) (14,471,384)
Notes receivable for common stock-
related parties (660,694) (2,150,194)
----------- -----------
Total Stockholders' Equity 5,903,289 6,132,008
----------- -----------
Total Liabilities and
Stockholders' Equity $7,798,150 $8,089,613
=========== ===========
See Accompanying Notes
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended
February 28, February 29,
2005 2004
----- ----
(Unaudited) (Unaudited)
Service revenue $ 1,159,687 $ 1,228,280
Product revenue 1,505,958 1,406,872
----------- -----------
Total net revenue 2,665,645 2,635,152
Service costs and expenses 960,444 1,013,664
Product costs and expenses 1,383,984 1,259,399
----------- -----------
Total costs and expenses 2,344,428 2,273,063
Gross profit 321,217 362,089
Selling 298,132 317,303
General and administrative 669,348 802,752
----------- -----------
Total operating expenses 967,480 1,120,055
Other income/(expense)
Interest income 61,797 67,517
Interest expense (18,793) (15,902)
Other 19,540 11,662
----------- ------------
Total other income/(expense) 62,544 63,277
Loss from continuing
operations before income taxes (583,719) (694,689)
Income tax (benefit)/provision - -
----------- -----------
Loss from continuing
operations (583,719) (694,689)
Loss from discontinuing
operations (net of income
taxes of $0) - (38,704)
----------- ----------
Net loss $ (583,719) $ (733,393)
============= ==========
Net loss per share
and common share equivalents
Basic and diluted:
Loss from
continuing operations $(.22) $(.33)
Loss from discontinuing
operations - $(.02)
----------- -----------
Net loss $(.22) $(.35)
============= ===========
Weighted average number
of common shares - basic
and diluted 2,648,200 2,097,200
============= ===========
See Accompanying Notes
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004
February 28, 2005 February 29, 2004
------------------- -----------------
(Unaudited) (Unaudited)
Operating activities:
Net loss $(583,719) $(733,393)
Adjustments to reconcile
net loss to net cash
used in operating activities:
Depreciation and amortization 38,384 78,476
Provision for losses on accounts
receivable (48,500) 7,500
Deferred income taxes - 28,547
Changes in operating assets,
Accounts receivable 488,981 1,058,074
Inventory 68,042 (58,886)
Prepaid expenses and other assets (26,272) 45,284
Other assets - non-current - (22,000)
Accounts payable (266,889) (324,208)
Accrued expenses 37,304 (21,352)
Unearned revenue 179,862 (99,834)
---------- ---------
Net cash used in operating activities (112,807) (41,792)
---------- ---------
Investing activities:
Capital expenditures, net (13,301) (5,379)
Proceeds from payments on
notes receivable 75,049 69,923
---------- ---------
Net cash provided by investing
activities 61,748 64,544
---------- --------
Financing activities:
Principal payments on long
term debt (8,021) (43,313)
Proceeds from line of credit 350,000 -
---------- ---------
Net cash provided by/(used in)
financing activities 341,979 (43,313)
Net increase/(decrease)in cash 290,920 (20,561)
Cash, beginning of period 319,757 1,385,824
---------- ---------
Cash, end of period $ 610,677 $1,365,263
========== ==========
Non Cash Transaction:
During the first quarter of Fiscal 2005 $355,000 of subordinated
convertible debt was converted into 1,000,000 restricted shares of Company
common stock.
During the first quarter of Fiscal 2005, $1,489,500 of notes receivable
for common stock - related parties were cancelled in return for 196,429 shares
of Company common stock in full satisfaction of the liability.
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, 2004. 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, 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 28, 2005 and November 30, 2004, the Company held marketable
securities comprised of a $100,000 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 28, 2005.
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 28, 2005 and November 30, 2004. 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 three-month period ended February 28, 2005 as there was a
100% valuation allowance booked against the current period loss.
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 February 2005, all Canterbury operating subsidiaries were
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 three months ended February 28, 2005, 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 by the City under this contract represented 37% of
this segment's revenue and 21% of consolidated revenue for the three-month
period ended February 28, 2005. Purchases from other local government agencies
allowed to use the contract accounted for 51% of the revenues in the reseller
segment and 29% of consolidated revenues for the first three months of Fiscal
2005. For the quarter ended February 28, 2005, one Usertech/Canterbury customer
accounted for 15% of service revenue and 6% of total revenue. During April,
2004 USC/Canterbury was awarded the contract, along with one other vendor, to
provide the City of Baltimore with Hewlett Packard hardware. The contract is
for three years with five one-year options by the City of Baltimore.
One vendor represented 46% of the product cost in the Value Added
Reseller Segment and 27% of consolidated costs for the first three months of
Fiscal 2005. Another major vendor represented 27% and 16% of segment and
consolidated costs and expenses, respectively for the same three-month period.
In the training and consulting segment one customer accounted for 15% of
this segments revenues for the first quarter of Fiscal 2005 and 6% of the
consolidated revenues for the period.
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 33% of this segment's revenue and 18%
of consolidated revenue. Purchases from other local government agencies allowed
to use the contract accounted for 61% of the revenues in the reseller segment
and 33% of consolidated revenues for the quarter.
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.
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. All historical information for the software development segment has
been omitted from the segment presentation below. Summarized financial
information for the three months ended February 28, 2005 and February 29, 2004,
for each segment, is as follows:
Training Value Added
and Hardware
2005 Consulting Reseller Corporate Total
- ------------ ------------- ----------- --------- ----------
Revenues $1,159,687 $1,505,958 $ - $2,665,645
(Loss)/income
before taxes (364,109) (9,062) (210,548) (583,719)
Assets 2,871,094 632,287 4,294,769 7,798,150
Interest income 6 - 61,791 61,797
Interest expense 18,780 13 - 18,793
Depreciation and
amortization 31,522 - 6,862 38,384
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
3. Notes Receivable
====================
The Company held notes receivable assets from a related party
in the aggregate amount of $3,397,204 at February 28, 2005. These notes had
interest terms that averaged 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 28, 2005 and November 30, 2004.
The company has received all scheduled monthly installments for notes
receivable outstanding as of February 28, 2005.
As a subsequent event, during April, 2005 the Company renegotiated a
refinancing of the note receivable from a related party. The demand note and
the acquisition notes were combined totaling $3,270,000 as of April 15, 2004.
The Company received an $800,000 paydown on the combined note and agreed to term
out the balance of $2,470,000 over the next eight years at 8%.
4. Property and Equipment
==========================
Property and equipment, which is recorded at cost, consists of the
following:
February 28, 2005 November 30, 2004
----------------- -----------------
Machinery and equipment $ 771,081 $1,241,441
Furniture and fixtures 213,786 227,042
Leased property under capital
leases and leasehold improvements 88,566 76,066
---------- ----------
1,073,433 1,544,549
Less: Accumulated depreciation ( 788,084) (1,234,117)
---------- ----------
Net property and equipment $ 285,349 $ 310,432
=========== ===========
Accumulated depreciation of leased property under capital leases at
February 28, 2005 amounted to $24,000.
5. Long-Term Debt
====================
February 28, 2005 November 30, 2004
----------------- -----------------
Long-term obligations consist of:
Revolving credit line 550,000 200,000
Capital lease obligations 52,855 58,405
Notes payable - equipment 25,531 28,001
---------- ----------
628,386 286,406
Less: Current maturities (583,989) (233,989)
---------- ----------
$ 44,397 $ 52,417
========== ==========
The Bank's debt was 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 November 30, 2004, the
Company was in compliance with all of the financial covenants of its revised
loan agreement. The Company, however, was within $11,000 of violating its
cumulative pretax loss covenant as of November 30, 2004 (limit per covenant is
$1,050,000 cumulative loss from December 1, 2003). The actual pretax loss
amount is calculated as loss from continuing operations plus any non-cash charge
(goodwill impairment).
During the first quarter of Fiscal 2005, the Company breached the cumulative
pretax loss covenant. As a result of this occurrence the Company and its
primary lender executed a forbearance agreement and an amendment to the loan
agreement during March 2005. The maximum revolving credit was reduced to
$750,000 and it was agreed that the outstanding revolver balance would be paid
in full by April 30, 2005. The loan was paid off on April 14, 2005 and the loan
agreement with the bank has been terminated. The bank has released all liens of
the Company's balance sheet. The Company is currently pursuing alternative
financing sources to support its value added hardware reseller segment.
Aggregate fiscal maturities on long-term debt, exclusive of obligations
under capital leases, are $557,000 in 2005; $10,000 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
28, 2005:
Total minimum lease payments through November 30, 2005 $26,127
Total minimum lease payments through November 30, 2006 30,728
Total minimum lease payments through November 30, 2007 9,200
-------
Total minimum lease payments 66,055
Less amount representing interest (13,200)
-------
Present value of long-term obligations under capital leases $52,855
=======
7. Related Party Transactions
==================================
As a subsequent event, during April, 2005 the Company renegotiated a
refinancing of the note receivable from a related party. The demand note and
the acquisition notes were combined totaling $3,270,000 as of April 15, 2004.
The Company received an $800,000 paydown on the combined note and agreed to term
out the balance of $2,470,000 over the next eight years at 8%.
At February 28, 2005 and November 30, 2004, the total notes receivable
plus accrued interest for issuances of Company common stock to corporate
officers, corporate counsel and certain consultants totaled $661,000 and
$2,150,000, respectively. 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%. The remaining $661,000 in notes
have no stated term.
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 for all of Fiscal 2002 to the recipients.
During the first quarter of Fiscal 2005, $1,489,500 of notes receivable
for common stock - related parties were cancelled in return for 196,429 shares
of Company common stock in full satisfaction of the liability.
8. Stock Listing
=================
On December 8, 2004 the Nasdaq Stock Market ("Nasdaq") notified Canterbury
that "The Company has not regained compliance in accordance with Marketplace
Rule 4310(c)(8)(B). Accordingly, its securities will be delisted from The
Nasdaq SmallCap Market at the opening of business on December 17, 2004."
On September 8, 2004, Nasdaq had notified the Company that "its common
stock had not maintained a minimum market value of publicly held shares
("MVPHS") of $1,000,000 over the previous 30 consecutive trading days, and, as a
result, did not comply with Marketplace Rule 4310(c)(7) (the "Rule").
Therefore, in accordance with Marketplace Rule 4310(c)(8)(B), the Company was
provided 90 calendar days, or until December 7, 2004, to regain compliance with
the Rule."
On December 1, 2004 the Nasdaq Stock Market notified Canterbury that:
"Accordingly, the Company does not comply with Marketplace Rule
4350(e) and 4350(g) ("the Rules") and Staff has determined to delist
the Company's securities from The Nasdaq Stock Market at the opening
of business on December 10, 2004."
These Rules relate to the requirement to hold an annual meeting of
shareholders.
Based upon the letter of December 8, 2004, the Company determined that it
would not appeal the December 1, 2004 delisting letter.
An additional determining factor in the Company's decision was a third
delisting letter received on June 23, 2004 which stated:
"For the last 30 consecutive business days, the bid price of the
Company's common stock has closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4310(c)(4)
(the "Rule"). Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), the Company will be provided 180 calendar days, or
until December 20, 2004, to regain compliance. If, at anytime before
December 20, 2004, the bid price of the Company's common stock closes
at $1.00 per share or more for a minimum of 10 consecutive business
days, Staff will provide written notification that it complies with
the Rule."
The Company requested that various of its current market makers continue to
make markets in the Company's common stock on the OTC Bulletin Board.
9. Discontinued Operations
===========================
During March 2004, the Company entered into negotiations to sell
ATM/Canterbury back to the original owner. The transaction was finalized in
April, 2004. Canterbury sold 100% of the stock in ATM/Canterbury in exchange
for 25,000 shares of Canterbury common stock (which have been retired), that the
owner had retained from the original transaction in 1997. The transaction was
effective as of March 3, 2004. As a result of the transaction the Company
recorded a $9,194 loss on the sale of discontinued operation in the second
quarter of Fiscal 2004.
The Company's decision to sell ATM/Canterbury was based on the lack of
demand for ATM/Canterbury's products and services 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.
Historical financial data for ATM/Canterbury for the three months ended
February 29, 2004:
February 29, 2004
-----------------
Revenues $ 58,866
Pretax loss (38,704)
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, 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 2005 over Fiscal 2004 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.
Competition
If our current customers choose to purchase goods and/or services from new
or existing competitors, it could have a material adverse effect on our
operating results.
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 price business model.
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. An ongoing sales and
delivery staff are vital to ongoing customer relations and satisfaction. A
significant portion of our consolidated revenue is service oriented (44% for
the first three months of Fiscal 2005). 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 since they will 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 (88% of this
segments total revenue for the three months ended February 28, 2005). Lower tax
revenues in these states have reduced the amount of funding for technology
purchases recently and this trend could continue. If this trend
continues, 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 revenues and
profits is vital to the Company's future.
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 these 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, cash flow and tangible net worth.
Acts of Terrorism
The majority of revenues 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 could be distracted from their
normal course of business and as such would 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 adversely affect our operating results include:
* reduced reliance on reseller channel by hardware manufacturers
* inability to secure sufficient contractor resources to meet short-
term customer demand
* insufficient training facilities to meet client demand for
instructor-led technology training
* loss of key clients through merger, sale or divestiture
* ongoing cost of compliance with provisions of the Sarbanes-Oxley
legislation and other such compliance required by the
Securities and Exchange Commission or other regulatory bodies
* loss of working capital financing
Overview
- --------
The Company is engaged in the business of providing information
technology products, services and training to both commercial and government
clients. Canterbury's focus 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 necessary 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' locations; electronically via the
Internet; or on the end user's computer. Many of these training products are
custom developed for our clients. Many contain a blended training solution
combining both instructor-led training in the classroom with distance learning
products to complete the educational 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 state and local
government clients that have an ongoing need for technology products and
services.
Liquidity and Capital Resources
- --------------------------------
Working capital at February 28, 2005 was $741,000, a decrease of
$485,000 since November 30, 2004. This decrease was the direct result of
operating losses incurred during the first quarter of the year. As a subsequent
event, during April 2005 the Company refinanced its notes receivable with a
related party. As part of the refinancing, the Company received an $800,000
payment from the related party and used these proceeds to pay off its revolving
line of credit with its primary lender. This payoff totaled $550,000. On a pro
forma basis as of February 28, 2005, the working capital of the Company improved
by $713,000, since the note receivable was classified primarily as a long term
asset and the revolving line of credit was classified as a current liability.
The Bank's debt was secured by substantially all of the assets of the
Company and required compliance with covenants which include the maintenance of
certain financial ratios and amounts. The Company was restricted by its bank
from paying cash dividends on its common stock. As of November 30, 2004, the
Company was in compliance with all of the financial covenants of its revised
loan agreement. The Company, however, was within $11,000 of violating its
cumulative pretax loss covenant as of November 30, 2004 (limit per covenant is
$1,050,000 cumulative loss from December 1, 2003). The actual pretax loss
amount was calculated as loss from continuing operations plus any non-cash
charge (goodwill impairment).
As a subsequent event, during the first quarter of Fiscal 2005, the Company
breached the cumulative pretax loss covenant. As a result of this occurrence
the Company and its primary lender executed a forbearance agreement and an
amendment to the loan agreement during March 2005. The maximum revolving credit
was reduced to $750,000 and it was agreed that the outstanding revolver balance
would be paid in full by April 30, 2005. The loan was paid off on April 14,
2004 and the loan agreement with the bank has been terminated. The bank has
released all liens of the Company's balance sheet. The Company is currently
pursuing alternative financing sources to support its value added hardware
reseller segment.
Cash flow used in operating activity was ($113,000) for the quarter ended
February 28, 2005, a decrease of $71,000 as compared to the same quarter in
Fiscal 2004. Again the primary reason for this use of operating funds was
the operating loss of $584,000 recorded during the quarter. Total assets
declined by $292,000 from November 30, 2004, while total liabilities declined
by $63,000. The Company's current ratio was 1.40:1.00 versus 1.79:1.00 at
November 30, 2004. On a pro forma basis, after the note receivable refinancing
and revolving line of credit payoff the current ratio would have
been 2.12:1.00 at February 28, 2005.
Management believes the Company should have sufficient funds to cover cash
flow requirements for the balance of Fiscal 2005 assuming that the Company can
increase its sales pipeline in the near term to provide sufficient revenues
which would produce positive cash flow and can secure an alternative lending
source to support its value added hardware reseller segment. With the Company's
reduced cost structure a moderate increase in overall sales should allow the
Company to return to a positive operating cash flow position for the balance of
the year. There was no material commitment for capital expenditures as of
February 28, 2005. Inflation was not a significant factor in the Company's
financial statements.
RESULTS OF OPERATIONS
=====================
Revenues
- ---------
Consolidated revenues increased by $31,000 (1%) in the first three months
of Fiscal 2005 as compared to the same period in 2004. The training and
consulting segment experienced a $68,000 (5%) decrease in revenues, while the
value added hardware reseller segment reported a $99,000 (7%) increase in
revenue for the first quarter. Software development revenues for the first
quarter of Fiscal 2004 have been excluded given that this segment has been
classified as a discontinued operation as of February 29, 2004.
While revenues remained fairly consistent from year to year for the first
quarter, they were not at a level that would return the Company to profitability
and positive operating cash flow. Because our profit margins are much higher in
our training and consulting segment, it is crucial that we reverse the declining
revenue in that segment. Historically, the first fiscal quarter is the weakest
three months of the year. Holidays, poor weather conditions in the Northeast
and client year-end budgeting process all contribute to the revenue slow down
across all subsidiaries. The Company continues to refine its sales and
marketing focus in an attempt to increase sales pipeline opportunities.
In the training and consulting segment, new products are being developed
or repackaged. Underperforming sales personnel are being replaced with
new employees. The Company continues to pursue partnerships where additional
revenue generation is the primary focus.
In the value added hardware reseller segment, the Company is currently
preparing for its annual summer spike in sales to several municipalities. The
Company is in the process of securing alternative funding sources to facilitate
the significant upswing in revenues for the third fiscal quarter. The Company
terminated its borrowing arrangement with Commerce Bank during April 2005 when
the outstanding revolving line of credit was paid off. Since that time, the
Company's primary focus has been to secure an alternative lending source to
facilitate timely shipment of product to our customers. Several options are
being pursued and it is Management's belief that a funding source will be
contracted in time to meet our clients' delivery needs.
The value added hardware reseller segment has always had a very high client
revenue concentration. In the first quarter of Fiscal 2005, two groups of
clients accounted for 88% of the revenue in this segment. There is obvious risk
associated with this very high customer concentration. See Footnote 1,
Concentrated Risk, for more details on this topic. USC/Canterbury continues to
make a concerted effort to diversify its revenue mix. Certain sales
representatives have been given responsibility to penetrate the commercial
market in the Baltimore/Washington market, as well as new clients in state and
local governments in Maryland and Virginia.
Costs and Expenses
- -------------------
Total costs and expenses increased by $71,000 (3%) for the first three
months of Fiscal 2005 as compared to the previous year. Service costs decreased
by $54,000 (5%) due primarily to lower sales volume, while product costs
increased by $124,000 (10%) due to higher sales volume and lower profit margins
on the products that were sold. Product margins in our value added hardware
reseller segment declined to 8% for the first three months of 2005 from 11% in
the first quarter of Fiscal 2004. Service gross profit in our training and
consulting segment remained stable in the 17%-18% range for both years.
Consolidated gross profit declined to 12% in Fiscal 2005 as compared to 14% in
the first quarter of Fiscal 2004. While it is anticipated that product gross
profit will remain in the 7% to 8% range, service gross profit should increase
significantly over the balance of the year based on projected increased sales
volume. As has been previously reported, the delivery cost model for the
training and consulting segment is highly variable. The fixed cost component of
the model is covered at the lower revenue levels. Increased revenue will
contribute higher percentage and absolute dollars to the gross profit of this
segment. The challenge remains to increase sales to take full advantage of this
positively leveraged structure.
Selling expense decreased by $19,000 (6%) in the first quarter of Fiscal
2005 as compared to the previous year. Lower personnel expense accounted for
this modest decrease. The Company continually is searching for additional
qualified sales staff for its training and consulting segment.
General and administrative expense declined by $134,000 (17%) in the three
months ended February 28, 2005 when compared to the same three-month period of
Fiscal 2004. Lower personnel expense (salaries, taxes and health insurance) of
$54,000; lower bad debt expense of $56,000 and lower accounting expense of
approximately $20,000 were the primary reasons for the decrease.
ITEM 3. 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/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 Unregistered Sales of Equity Securities and Use of Proceeds 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
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
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
June 3, 2005
Exhibit 31
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, Kevin J. McAndrew, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Canterbury
Consulting Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under my supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-
47986]
c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal year that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: June 6, 2005
/s/ Kevin J. McAndrew
-------------------------------------
Kevin J. McAndrew
President, Chief Executive Officer
and Chief Financial Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
Securities and Exchange Commission
450 Fifth Street, N.W
Washington, D.C. 20549
Ladies and Gentlemen:
The certification set forth below is being submitted to the Securities and
Exchange Commission solely for the purpose of complying with Section 1350 of
Chapter 63 of Title 18 of the United States Code. This certification is not to
be deemed filed pursuant to the Securities Exchange Act of 1934 and does not
constitute a part of the quarterly report on Form 10-Q (the Report) accompanying
this letter.
Kevin J. McAndrew, the President, Chief Executive Officer and Chief Financial
Officer of Canterbury Consulting Group, Inc., certifies that to my knowledge:
1. the Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
Canterbury Consulting Group, Inc. (as of and for the periods presented in the
Report).
/s/ Kevin J. McAndrew
--------------------------------------
Kevin J. McAndrew
President, Chief Executive Officer and
Chief Financial Officer
Date: June 3, 2005
1