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FORM 10-Q
---------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 OR 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended: Commission File Number:
August 31, 2002 0-15588
CANTERBURY CONSULTING GROUP, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2170505
- ------------------------------- -----------------------
(State of Incorporation) (IRS Employer Identification Number)
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 Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
X Yes No
---- ----
The number of shares outstanding of the registrant's common stock as
of the date of the filing of this report, October 15, 2002, is 12,130,712
shares.
FORM 10-Q
PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- -----------------------------
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
- ------
August 31,
2002 November 30,
(Unaudited) 2001
----------- ------------
Current Assets:
Cash and cash equivalents $ 325,477 $ 664,850
Accounts receivable, net of allowance for
doubtful accounts of $457,000 and $452,000 5,511,970 5,728,970
Notes receivable - current portion 469,582 459,029
Prepaid expenses and other assets 301,201 239,470
Inventory, principally finished goods, at cost 188,331 826,851
Deferred income tax benefit 149,011 149,011
----------- -----------
Total Current Assets 6,945,572 8,068,181
Property and equipment at cost, net of
accumulated depreciation of $2,412,000
and $2,038,000 984,153 1,315,942
Goodwill, net of accumulated amortization of
$1,234,000 4,192,104 4,162,604
Deferred income tax benefit 4,467,096 4,323,105
Notes receivable 6,619,616 6,966,743
Other assets 208,407 207,547
----------- -----------
Total Assets $23,416,948 $25,044,122
=========== ===========
See Accompanying Notes
2
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
August 31,
2002 November 30,
(Unaudited) 2001
----------- ------------
Current Liabilities:
Accounts payable - trade $ 1,776,305 $ 1,776,326
Accrued expenses 896,080 1,014,302
Unearned revenue 877,604 1,943,240
Income taxes payable - 18,540
Current portion, long-term debt 823,761 873,439
----------- -----------
Total Current Liabilities 4,373,750 5,625,847
Long-term debt 1,937,616 2,145,183
Deferred income tax 2,947,131 2,947,131
----------- -----------
Total Liabilities 9,258,497 10,718,161
Commitments and contingencies
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000 shares
authorized; 12,131,000 and 12,469,000 issued 12,131 12,469
Additional paid-in capital 23,759,219 24,232,735
Retained earnings (deficit) (5,972,091) (5,916,972)
Notes receivable for capital stock - related
parties (3,640,808) (4,002,271)
----------- -----------
Total Stockholders' Equity 14,158,451 14,325,961
----------- -----------
Total Liabilities and Stockholders' Equity $23,416,948 $25,044,122
=========== ===========
See Accompanying Notes
3
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended August 31, Six Months Ended August 31,
----------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Service revenue $3,902,293 $2,712,356 $12,742,931 $8,354,340
Product revenue 4,896,253 5,374,279 12,444,266 12,062,301
---------- ----------- ----------- -----------
Total net revenue 8,798,546 8,086,635 25,187,197 20,416,641
Service costs and expenses 2,818,704 1,552,583 8,446,998 4,789,035
Product costs and expenses 4,491,450 4,363,403 10,810,346 9,891,404
---------- ----------- ----------- -----------
Total costs and expenses 7,310,154 5,915,986 19,257,344 14,680,439
Gross profit 1,488,392 2,170,649 5,929,853 5,736,202
Selling 754,507 654,972 2,017,395 2,004,741
General and administrative 1,739,849 933,019 4,568,251 4,686,535
---------- ----------- ----------- -----------
Total operating expenses 2,494,356 1,587,991 6,585,646 6,691,276
Other income/(expenses)
Interest income 167,013 225,113 513,275 618,118
Interest expense (44,835) (35,356) (149,538) (128,184)
Other 731 (14,200) 114,937 (333,822)
---------- ----------- ----------- -----------
Total other income 122,909 175,557 478,674 156,112
Income (loss) before income
taxes and cumulative effect
of change in accounting
principle (883,055) 758,215 (177,119) (798,962)
Provision (benefit) for
income taxes (397,000) 302,000 (122,000) (31,000)
---------- ----------- ----------- -----------
Income (loss) before
Cumulative effect of
change in accounting
principle (486,055) 456,215 (55,119) (767,962)
Cumulative effect of change
in accounting principle - - - (213,088)
---------- ----------- ----------- -----------
Net income (loss) $ (486,055) $ 456,215 $ (55,119) $ (981,050)
========== =========== =========== ===========
See Accompanying Notes
4
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Continued
Three-Months Ended August 31, Six-Months Ended August 31,
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net income (loss) per
share and common share
equivalents
Net income (loss) $(486,055) $ 456,215 $ (55,119) $ (981,050)
Basic and diluted per share
data:
Income (loss) before
cumulative effect of
change in accounting
principle $(.04) $.04 $.00 $(.07)
Cumulative effect of
change in accounting
principle - - - (.02)
---- ----- ---- -----
Net income (loss) $(.04) $.04 $.00 $(.09)
==== ===== ==== =====
Weighted average number
of common shares -
basic 12,084,000 12,439,500 12,243,400 11,529,700
========== ========== ========== ==========
Weighted average number
of common shares -
diluted 12,213,100 12,706,700 12,372,500 11,796,900
========== ========== ========== ==========
See Accompanying Notes
5
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 2002 AND AUGUST 31, 2001
August 31, 2002 August 31, 2001
--------------- ---------------
(Unaudited) (Unaudited)
Operating activities:
Net loss $ (55,119) $ (767,962)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 381,013 1,223,907
Provision for losses on accounts receivable 40,504 177,103
Deferred income taxes (122,000) (31,000)
401(k) contribution 92,501 83,362
Receipt of stock for services - (793,240)
Other assets 860 111,217
Loss on sale of land - 324,455
Changes in operating assets, net of
acquisitions
Accounts receivable 176,496) 1,095,907
Inventory 638,520 (170,089)
Prepaid expenses and other assets (61,731) 463,356
Income taxes (18,540) (129,833)
Accounts payable (21) (561,373)
Accrued expenses (118,222) (23,805)
Unearned revenue (1,065,636) (16,322)
---------- -----------
Net cash provided by operating activities (111,375) 985,683
---------- -----------
Investing activities:
Proceeds from sale of land - 399,734
Capital expenditures, net (42,504) (27,943)
Proceeds from payments on notes receivable 336,574 297,142
Other (29,500) -
---------- -----------
Net cash provided by (used in) investing
activities 264,570 668,933
---------- -----------
Financing activities:
Purchase of treasury shares (250,323) -
Proceeds from issuance of common stock 15,000 -
Proceeds from revolving line of credit 300,000 -
Proceeds from long term debt - 1,500,000
Principal payments on long term debt (557,245) (1,998,070)
---------- -----------
Net cash used in financing activities (492,568) (498,070)
---------- -----------
Net increase (decrease) in cash (339,373) 1,156,546
---------- -----------
Cash, beginning of period 664,850 885,479
---------- -----------
Cash, end of period $ 325,477 $ 2,042,025
========== ===========
See Accompanying Notes
6
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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, 2001. 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.
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.
Stock Based Compensation
------------------------
The Company accounts for stock options under Accounting Principles
Board (APB) Opinion No. 25- Accounting for Stock Issued to Employees. The
Company discloses the pro forma net income and earnings per share effect as
if the Company had used the fair value method prescribed under SFAS No.123-
Accounting for Stock Based Compensation.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. The ultimate outcome and actual results could differ
from the estimates and assumptions used.
7
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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, consulting and
technical staffing services provided to customers under separate consulting
and service contracts. Revenues from these contracts are recognized as
services are rendered.
Change in Accounting
--------------------
The Securities and Exchange Commission (SEC) recently issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements," which provides additional guidance in applying generally
accepted accounting principles for revenue recognition. The Company
implemented the provisions of SAB 101 in the fourth quarter of fiscal 2001,
retroactive to December 1, 2000. The implementation of SAB 101 resulted in
a change in accounting for certain product shipments where title did not
transfer to the customer until delivery occurred. The cumulative effect of
the change for implementation of SAB101 resulted in a charge to the first
quarter of fiscal 2001 income of $213,088 (net of income taxes of $109,773).
For the first quarter ended February 28, 2001, the Company recognized
$1,560,000 of revenue which was included in the cumulative effect adjustment.
The effect of that revenue on fiscal 2001 was to increase income by $213,088
(net of income taxes of $109,773) during that period.
Statement of Cash Flows
-----------------------
For purposes of the Statement of Cash Flows, cash refers solely to
demand deposits with banks and cash on hand.
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,
8
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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 5 years
Furniture and fixture 5 to 7 years
Inventories
-----------
Inventories are stated at the lower of cost or market utilizing a first-
in, first-out method of determining cost.
Earnings Per Share
------------------
Basic earnings per share is computed using the weighted average common
shares outstanding during the year. Diluted earnings per share considers the
dilutive effect, if any, of common stock equivalents (options).
Concentration of Risk
---------------------
As previously discussed, the Company is in the business of providing
management and information technology services. 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.
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.
Reclassifications
-----------------
Certain reclassifications have been made to prior years balances in
order to conform to current presentations.
Recent Accounting Pronouncement
-------------------------------
The Financial Accounting Standards Board ("FASB") recently issued
Statement of Financial Accounting Standard No. 141 ("SFAS 141"), "Business
Combinations", and Statement of Financial Accounting Standard No. 142 ("SFAS
No. 142"), "Goodwill and Intangible Assets". SFAS No. 141 is effective for
all business combinations completed after June 30, 2001. SFAS No. 142 is
9
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
effective for fiscal years beginning after December 15, 2001 with early
adoption permitted for fiscal years beginning after March 15, 2001. However,
certain provisions of SFAS 142 apply to goodwill and other intangible assets
acquired between July 1, 2001 and the effective date of SFAS 142. Major
provisions of these Statements are as follows:
1. All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before
July 1, 2001.
2. Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented, or exchanged, either individually or as
part of a related contract, asset, or liability.
3. Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective with the adoption
of SFAS 142, all previously recognized goodwill and intangible assets
with indefinite lives will no longer be subject to amortization.
4. Effective with the adoption of SFAS 142, goodwill and intangible assets
with indefinite lives will be tested for impairment annually and
whenever there is an impairment indicator.
5. All acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.
The Company has adopted SFAS 142 effective at December 1, 2001.
Goodwill has been amortized at approximately $480,000 annually (or $120,000
quarterly) in prior periods. Therefore, no goodwill amortization was
recorded in the nine months ended August 31, 2002, and none will be recorded
in future periods.
The Company has completed the transition impairment test in accordance
with SFAS 142 and has found no goodwill impairment as of August 31, 2002.
2. Acquisitions
------------
On September 28, 2001, the Company completed the acquisition of User
Technology Services, Inc. ("Usertech") with an effective date of September 1,
2001. The purchase of 100% of the outstanding shares of Usertech common stock
was accounted for using the purchase method of accounting. The Company paid
$2,350,000 in cash; $1,200,000 in notes payable over three years, plus the
assumption of $851,000 in liabilities.
Usertech provides e-learning support, Enterprise Resource Planning (ERP)
and Customer Relationship Management (CRM) planning, implementation and
training, as well as post implementation support, for clients who have
installed Peoplesoft, SAP and Oracle software. Proprietary software packages
are also supported through a national network of skilled consultants.
10
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. Segment Reporting
-----------------
The Company is organized into four operating segments and the corporate
office. The operating segments are: training and consulting, value added
hardware reseller, technical staffing and software development. Summarized
financial information for the three months and nine months ended August 31,
2002 and August 31, 2001, for each segment, is as follows:
For the nine months ended August 31,
Value
Training Added
and Hardware Technical Software
2002 Consulting Reseller Staffing Development Corporate Total
- ---- ---------- -------- -------- ----------- --------- -----
Revenues $12,015,197 $12,332,002 $727,734 $112,264 $ - $25,187,197
Income before
taxes 6,445 662,994 (70,593) (18,708) (757,257) (177,119)
Assets 8,264,901 2,866,391 184,110 64,321 12,037,225 23,416,948
Interest income 460 - - 2,050 510,765 513,275
Interest expense 77,797 588 - 2,952 68,201 149,538
Depreciation and
amortization 314,032 29,290 14,573 6,394 16,724 381,013
Value
Training Added
and Hardware Technical Software
2001 Consulting Reseller Staffing Development Corporate Total
- ---- ---------- -------- -------- ----------- --------- -----
Revenues $7,030,789 $11,959,717 $1,210,366 $215,769 $ - $20,416,641
Income before
taxes 356,005 1,223,520 (202,092) 12,189 (2,188,584) (798,962)
Assets 10,000,763 3,468,414 222,778 77,830 14,565,381 28,335,166
Interest income - - - - 618,118 618,118
Interest expense 15,820 2,538 - - 109,826 128,184
Depreciation and
amortization 288,447 32,693 16,889 14,011 871,867 1,223,907
11
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
For the three months ended August 31,
Value
Training Added
and Hardware Technical Software
2002 Consulting Reseller Staffing Development Corporate Total
- ---- ---------- -------- -------- ----------- --------- -----
Revenues $3,753,173 $4,893,134 $149,120 $3,119 $ - $8,798,546
Income before
taxes (352,626) 2,570 (143,009) (7,967) (382,023) (883,055)
Assets 8,264,901 2,866,391 184,110 64,321 12,037,225 23,416,948
Interest income - - - - 167,013 167,013
Interest expense 24,937 565 - 881 18,452 44,835
Depreciation and
amortization 100,923 7,764 4,018 514 5,633 118,852
Value
Training Added
and Hardware Technical Software
2001 Consulting Reseller Staffing Development Corporate Total
- ---- ---------- -------- -------- ----------- --------- -----
Revenues $ 2,218,701 $5,399,118 $ 380,470 $ 88,346 $ - $ 8,086,635
Income before
taxes 261,130 647,491 (25,333) 4,977 (130,050) 758,215
Assets 10,000,763 3,468,414 222,778 77,830 14,565,381 28,335,166
Interest income - - - - 225,113 225,113
Interest expense 4,645 2,505 - - 28,206 35,356
Depreciation and
amortization 66,962 25,731 5,397 1,125 122,876 222,091
4. Property and Equipment
----------------------
Property and equipment consists of the following:
August 31, November 30,
2002 2001
------- -----------
Machinery and equipment $2,296,291 $2,253,787
Furniture and fixtures 566,576 566,576
Leased property under capital leases
and leasehold improvements 533,834 533,834
---------- ----------
3,396,701 3,354,197
Less: Accumulated depreciation (2,412,548) (2,038,255)
---------- ----------
Net property and equipment $ 984,153 $1,315,942
========== ==========
12
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Depreciation expense for the three months ended August 31, 2002 and
August 31, 2001 was $119,000 and $105,000, respectively.
5. Notes Receivable
----------------
The Company holds a note receivable with a remaining balance in the
amount of $2,494,754 at August 31, 2002. This note was received in November
1995 as part of the consideration for the sale of a former subsidiary. The
Company is 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 addition, the Company held notes receivable assets from related
parties in the aggregate amount of $4,594,444 at August 31, 2002. These notes
have interest terms that average 8.5% per year and are scheduled to mature at
various dates through December 2006, with a balloon payment of $1,596,000 in
December, 2007.
6. Long-Term Debt
--------------
August 31, November 30,
2002 2001
------- -----------
Long-term obligations consist of:
Term loan $1,100,000 $1,325,000
Revolving credit line 300,000 100,000
Note payable for acquisition 1,082,985 1,169,656
Capital lease obligations 39,082 81,743
Notes payable - equipment 239,310 342,223
---------- ----------
2,761,377 3,018,622
Less: Current maturities (823,761) (873,439)
---------- ----------
$1,937,616 $2,145,183
========== ==========
The Company's outstanding amount owed under the revolving credit line
with Chase Bank was refinanced in May, 2001 by establishing a commercial
lending relationship with Commerce Bank, N.A. (the Bank). As of the date of
the refinancing, approximately $883,000 was paid to Chase in full satisfaction
of the Company's outstanding obligations, out of the proceeds of a $1,500,000
five-year term loan from Commerce.
As part of the refinancing, the Company also secured a two-year
$2,500,000 working capital line of credit with the Bank collateralized by
trade accounts receivable and inventory. $1,500,000 was borrowed in
conjunction with the acquisition of User Technology Services, Inc.
("Usertech") on September 28, 2001. This $1,500,000 has been repaid in full.
Both loans carry an interest rate of the prime rate plus 1%. The credit
facility with Commerce Bank is structured so that as the original term loan
13
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
of $1,500,000 is paid down, the borrowing cap on the revolver increases so
that the total maximum outstanding debt is $4,000,000, subject to receivable
and inventory levels. As of August 31, 2002 the total available line is
$2,600,000. During May, 2002 the Bank extended the term on the revolving
line of credit until May 1, 2004.
The Bank's long term 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. The Company
remains in full compliance with all of the financial covenants of its loan
agreement with the Bank.
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 the
next three years at an annual amount of $400,000 plus accrued interest at 7%
per annum on the outstanding balance. Also as part of the purchase agreement,
the seller agreed to guarantee the collection of the acquired accounts
receivable with a 10% risk sharing threshold by Canterbury. The Company has
the right in the first year after the acquisition to offset the guaranteed
portion of any uncollectible receivable against the first $400,000 payment
scheduled to be made during September, 2002. As of September 28, 2002 the
Company notified the seller and put back $136,850 against the note payment.
The Company originally had until March 26, 2002 to put the uncollected
accounts receivable back to the seller, but both parties mutually agreed to
extend the deadline to September, 2002. On September 30, 2002 the Company
paid the seller a total of $342,360, which included accrued interest of
$79,210, less the put back of $136,850.
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 August 31, 2002, the note payable had an outstanding balance of
$239,310.
Aggregate fiscal maturities on long-term debt, exclusive of obligations
under capital leases, are approximately $393,000 in 2002; $843,000 in 2003;
$1,061,000 in 2004; $300,000 in 2005; and $125,000 thereafter.
The carrying value of the long-term debt approximates its fair value.
7. Capital Leases
--------------
Capital lease obligations are for certain equipment leases which expire
through Fiscal Year 2004. Future required payments under capitalized leases
together with the present value, calculated at the respective leases' implicit
interest rate of approximately 10.5% to 14.3% at their inception.
14
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Year ending November 30, 2002 $20,987
Year ending November 30, 2003 and thereafter 21,377
-------
Total minimum lease payments 42,364
Less amount representing interest (3,282)
-------
Present value of long-term obligations under capital leases $39,082
=======
8. Related Party Transactions
--------------------------
On April 10, 2001 the Company sold 550,000 restricted shares of
Canterbury common stock to the following Officers and Directors as an
incentive to continue and increase their efforts on behalf of the Company:
Stanton M. Pikus 200,000 Frank A. Cappiello 50,000
Kevin J. McAndrew 150,000 Alan Manin 25,000
Jean Z. Pikus 100,000 Stephen Vineberg 25,000
These shares of restricted common stock were purchased at $1.04 (the
Nasdaq National Market closing price at the time of purchase) with interest
bearing, recourse notes made payable to the Company. The notes carried an
interest rate of 4.0% and were due and payable on or before April, 2006.
These notes and accrued interest were collateralized by the issued shares.
Interest was accrued and payable quarterly. Each recipient also has granted
the Company a 15-day right of first refusal, in any sale of these shares.
On May 16, 2001 the Company sold 700,000 restricted shares of Canterbury
common stock to the following Officers and Directors for various services:
Stanton M. Pikus 250,000 Jean Z. Pikus 75,000
Kevin J. McAndrew 150,000 Alan Manin 50,000
Frank A. Cappiello 135,000 Stephen Vineberg 40,000
These shares of restricted common stock were purchased at $1.15 (the
Nasdaq National Market closing price at the time of purchase) with interest
bearing, recourse notes made payable to the Company. The notes carried an
interest rate of 4.0% and were due and payable on or before May, 2006. These
notes and accrued interest were collateralized by the issued shares. Interest
was accrued and payable quarterly. Each recipient also has granted the
Company a 15-day right of first refusal, in any sale of these shares.
The principal and interest for both sales may be paid in cash or the
transfer of stock valued at 100% of the then current market price of any
publicly traded company. There is no prepayment penalty on either principal
or interest payments.
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 shall become non-recourse as to principal and interest
15
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
as of September 1, 2002 with the issued shares continuing to collateralize
the notes. Principal and interest must be paid by recipients 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.
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. In the past, the
Board has issued and/or granted significant amounts of equity (in the form
of stock options or stock purchases) to these recipients on an annual basis.
The Compensation Committee did not wish any additional dilution of Company
stock at the current low prices. Also by reducing the term of the notes the
Compensation Committee believes that management would have a further
inducement to accelerate their efforts to increase shareholder value or risk
the loss of their shares.
At August 31, 2002 and November 30, 2001, the total notes receivable
plus accrued interest for the issuance of Company common stock to corporate
officers, corporate counsel and certain consultants totaled $3,641,000 and
$4,002,000, respectively. The 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%.
During Fiscal 2001, certain officers and directors of the Company
purchased a 33% ownership interest in a corporation which owns 100% of the
stock of a corporation which has notes payable to the Company in the amount of
$4,931,018 at August 31, 2002, the purchase was from an ownership group that
purchased the business from the Company in 1996. The Company has maintained
the same level of security interest protection and the same debt amortization
schedule as before the purchase. The Company earned $408,000 of interest
income from these notes in Fiscal 2001, and approximately $300,000 of interest
income in the nine months ended August 31, 2002. These notes have interest
terms that average 8.5% per year and are scheduled to mature at various dates
through December 2006, with a balloon payment of $1,596,000 in December, 2007.
9. Stock Listing
-------------
On February 15, 2002 the Company was notified by Nasdaq that it had
until May 15, 2002 to come into compliance with their minimum $1.00 per share
requirement for continued inclusion on their National Market listing. The
Company was and is in full compliance with the remaining listing requirements
of Nasdaq's Maintenance Standard #1. The Company complied with the minimum
price requirements by closing at a $1.00 per share for a period of 11
consecutive trading days before May 15, 2002. The minimum requirement was
that the Company's common stock close at a $1.00 bid or better for 10
consecutive days. Even though the Company met the minimum price requirement,
16
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Nasdaq considered intra day trading activity below $1.00 during the 11-day
period and did not approve the Company's continued listing on their National
Market listing. The Company appealed Nasdaq's initial decision and appeared
before an appeal panel on June 21, 2002. The appeal was denied and on July 31,
2002 the Company's common stock began trading on the Nasdaq SmallCap Market.
In order to stay listed on the Nasdaq SmallCap Market, the Company's stock
must close above a $1 bid price for at least 10 consecutive trading days by
February 10, 2003. If the minimum closing price requirement is not satisfied
the Company's stock will be eligible to be traded on the Bulletin Board. If
the Company's stock closes at or above a $1 bid for 30 consecutive days prior
to February 10, 2003, the Company's stock will be eligible for re-listing on
the Nasdaq National Market.
Item 2. Management's Discussion of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
Working capital at August 31, 2002 was $2,572,000, a decrease of
$130,000 since November 30, 2001. The Company's cash position decreased by
$340,000 during the first nine months of the fiscal year due primarily to
reductions in accrued expenses and unearned revenue. Inventory reduced by
$638,000 from year-end due to the fact that several significant hardware
orders that were in transit at November 30, 2001 were shipped during December
2001. The amount of inventory related to these shipments totaled $653,000.
In conjunction with these transactions, approximately $775,000 in deferred
revenue was also recorded.
The Company's outstanding amount owed under the revolving credit line
with Chase Bank was refinanced in May 2001 by establishing a commercial
lending relationship with Commerce Bank, N.A. (the Bank). As of the date of
the refinancing, approximately $883,000 was paid to Chase in full satisfaction
of the Company's outstanding obligations, out of the proceeds of a $1,500,000
five-year term loan from Commerce.
As part of the refinancing, the Company also secured a two-year
$2,500,000 working capital line of credit with the Bank collateralized by
trade accounts receivable and inventory. $1,500,000 was borrowed in
conjunction with the acquisition of User Technology Services, Inc.
("Usertech") on September 28, 2001. This $1,500,000 has been repaid in full.
Both loans carry an interest rate of the prime rate plus 1%. The credit
facility with Commerce Bank is structured so that as the original term loan
of $1,500,000 is paid down, the borrowing cap on the revolver increases so
that the total maximum outstanding debt is $4,000,000, subject to receivable
and inventory levels. As of August 31, 2002 the total available revolver line
was $2,600,000. During May, 2002 the Bank extended the term on the revolving
line of credit until May 1, 2004.
17
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
The Bank's long-term 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. The
Company remains in full compliance with all of the financial covenants of
its loan agreement with the Bank.
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 the
next three years at an annual amount of $400,000 plus accrued interest at 7%
per annum on the outstanding balance. Also as part of the purchase agreement,
the seller agreed to guarantee the collection of the acquired accounts
receivable with a 10% risk-sharing threshold by Canterbury. The Company has
the right in the first year after the acquisition to offset the guaranteed
portion of any uncollectible receivable against the first $400,000 payment
scheduled to be made during September 2002. As of September 28, 2002 the
Company notified the seller and put back $136,850 against the note payment.
The Company originally had until March 26, 2002 to put the uncollected
accounts receivable back to the seller, but both parties mutually agreed to
extend the deadline to September, 2002. On September 30, 2002 the Company
paid the seller a total of $342,360, which included accrued interest of
$79,210, less the put back of $136,850.
Management believes that future cash flow contributions from the
Company's operating subsidiaries will be sufficient to cover cash flow
requirements for Fiscal 2002. There was no material commitment for capital
expenditures as of August 31, 2002. Inflation was not a significant factor
in the Company's financial statements.
Net cash used in operating activities for the nine months ended August
31, 2002 was ($110,000). This represents a decrease of $1,097,000 over the
same nine-month period from the prior year. The reduction in operating cash
flow for the nine months ended August 31, 2002 is primarily due to a
significant reduction in unearned revenue from year end ($1,065,000), offset
by a reduction in inventory of $638,000. Many of the charges and expenses
which resulted in a pretax loss of $779,000 for the nine months ended August
31, 2001 were non-cash in nature. The reduced level of operating cash flow
experienced in Fiscal 2002 is the direct result of the overall slowdown in
corporate spending for IT. The Company will continue to focus on business
that is accretive to operating cash flow.
The Company's August 31, 2002 current ratio improved to 1.59 to 1.00
versus 1.43 to 1.00 at November 30, 2001. With its excess cash, the Company
completed a $250,000 stock buy back during the second quarter. As of August
31, 2002, the Company has $2,600,000 availability on its revolving line of
credit, subject to its receivable and inventory levels.
18
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Results of Operations
- ---------------------
Revenues
--------
Total revenues for the three months ended August 31, 2002 increased by
$712,000 (9%) over the comparable three-month period in Fiscal 2001. Service
revenue increased by $1,190,000 (44%) in the third quarter of Fiscal 2002
versus Fiscal 2001. The increase is the net result of the additional revenue
of Usertech/Canterbury of approximately $2,178,000 recorded in the third
quarter of Fiscal 2002 and a reduction of revenues from existing businesses
of approximately $988,000. For the nine months ended August 31, 2002 total
revenues increased by $4,770,000 (23%) over the previous year. This again is
the net result of the additional revenue from Usertech/Canterbury for the year
of $7,278,000 offset by reduced revenues from existing subsidiaries of
$2,508,000. Usertech/Canterbury was acquired in September 2001 and therefore
no revenue was reflected during the first, second or third quarters of Fiscal
2001. The reduction in revenue from existing businesses was due in part to
the continued negative impact that the terrorist attacks of September 11 had
on our training business in the Metro New York City area. Many classes were
cancelled, and there was reduced sales activity for the first half of the
year. Several of our largest customers were located at Ground Zero.
Consulting assignments were delayed or cancelled due to the chaos in and
around New York City. The Company's business interruption insurance policy
provided limited relief to the economic impact of the terrorist attacks.
Proceeds from the policy netted the Company approximately $85,000, which was
received in the first quarter of Fiscal 2002 and recorded as Other Income.
The economic downturn in the technology sector has softened demand for
certain training and consulting products during 2002. Several large clients
had reduced their training budgets in the second half of the year in response
to their own fiscal situations. New software rollouts were delayed and
application and technical training revenues suffered during the year as a
result. The acquisition of Usertech/Canterbury provides the Company with
even more expertise in distance learning. All of the Company's training
subsidiaries are beginning to work together to blend existing course content
with e-learning delivery capabilities. For clients in and around New York
City, as well as the rest of the world, the Company will have the capacity
to provide a distance learning solution to those who may choose not to attend
classroom training in the future.
Product revenue decreased in the third quarter of Fiscal 2002 by
$478,000 (9%) as compared to the three months ended August 31, 2001. For
the nine months ended August 31, 2002 product revenue increased by $382,000
(3%) over the same nine-month period in 2001. The Baltimore-Washington, D.C.
market is the hub for much of the Company's product sales. Again, like New
York, many of our clients delayed scheduled purchases while dealing with other
pressing concerns such as security. The product revenue slowdown in the third
quarter is again the result of overall softness in the economy in general and
IT spending specifically. Many corporations have delayed capital expenditures
due to poor operating results, while some government agencies have slowed
19
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
spending as a result of lower tax revenues over the past year. It was
previously believed and reported that a significant portion of USC/Canterbury's
future revenue would be greatly reduced as Hewlett Packard and Compaq move more
toward an agency relationship, with USC/Canterbury being paid an agent fee
which would approximate the current gross profit from each sale. It was
thought that the manufacturer would record the revenue and hold the accounts
receivable with the customer. This anticipated change in business flow has
not been significant to date, and it is now our current understanding that the
migration to the agency relationship will begin in the first quarter of Fiscal
2003, and may become significant during the second half of the year.
The Company is still experiencing revenue slowdown in the early stages
of the fourth quarter. If this trend continues both revenues and net income
for the fourth quarter will be adversely affected. At this point in time, it
appears that a number of clients have pushed significant portions of their IT
spending into 2003.
Costs and Expenses
------------------
Total costs and expenses increased by $1,394,000 (23%) during the three
months ended August 31, 2002 as compared to the same period of Fiscal 2001.
For the nine months ended August 31, 2002 costs and expenses increased by
$4,577,000 (31%). The increase is the result of the additional delivery costs
associated with the addition of Usertech of $1,455,000 and $4,570,000 for the
three and nine-month period ending August 31, 2002 coupled with increased
products costs of $128,000 and $919,000. There were cost reductions in the
services segment (not related to Usertech) of approximately $189,000 and
$912,000 for the three and nine months ended August 31, 2002.
Overall gross profit percentage was 17% for the third quarter of Fiscal
2002 as compared to 27% in the third quarter of Fiscal 2001. For the nine
months ended August 31, 2002 gross profit was 24% as compared to 28% for the
same nine-month period of Fiscal 2001. Service revenue margins for the three
months ended August 31, 2002 were 28% as compared to 43% for the same period
in Fiscal 2001 and for the nine months ended August 31, 2002 and 2001 service
margins were 33% and 43% respectively. Product margins for the first nine
months of Fiscal 2002 were 13% as compared to 18% for the same period in
Fiscal 2001.
Year to date margins in the service area have decreased due to under
utilization caused by slowdowns in customer spending. Much of the
infrastructure cost for training and technical services is fixed in nature.
While overall service revenue increased (due to the 2001 acquisition of
Usertech/Canterbury) much of the pre-existing revenues had declined from the
previous year. While the Company continues to adjust expenses to better match
revenue flow, the uncertainty surrounding the economy and corporate IT
spending makes forecasting difficult. Product gross margins have been
adversely affected by several factors. Again, a slowdown in corporate
spending for hardware has made the marketplace much more competitive.
Secondly, the recent Hewlett Packard and Compaq merger has eliminated many
20
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
manufacturer incentive rebate programs that were in place during 2001. The
future continuation of these programs is uncertain at this point.
Selling expenses for the nine months ended August 31, 2002 increased by
$13,000 (1%). Contributing to this net increase was cost reductions in
existing businesses of $669,000 offset by the additional costs of
Usertech/Canterbury for the first nine months of Fiscal 2002 of $682,000.
Reduction in sales staff and marketing expense represented the largest
components of the cost reduction for existing businesses.
General and administrative expenses increased during the three months
ended August 31, 2002 by $807,000 (86%) as compared to Fiscal 2001. The
increase was due to several factors. New Usertech costs of $631,000 in 2002;
$92,000 in Company 401(k) match (which occurred in the second quarter of
Fiscal 2001); and increased spending on corporate financial public relations
and investment banking services of $70,000 were the major reasons for the 2002
increase. For the nine months ended August 31, 2002, general and
administrative expenses decreased by $118,000 (3%). The major components of
this net decrease was the result of new Usertech expenses of $1,390,000 in
Fiscal 2002, offset by the $1,100,000 of non-recurring expenses which were
recorded in the second quarter of Fiscal 2001, as well as reduced goodwill
amortization expense of $360,000 in Fiscal 2002.
Other Income
------------
Other expense decreased by approximately $450,000 for the nine-month
period ended August 31, 2002 versus the same period in Fiscal 2001. This
decrease is the result of a loss on sale of property ($317,000) and security
impairment write down ($75,000) which occurred in the second quarter of
Fiscal 2001 and were non-recurring in nature. The Company also recognized
$85,000 in other income in the first quarter of Fiscal 2002 from insurance
proceeds related to business interruption caused by terrorist attacks on
September 11, 2001.
Procedures and Controls
-----------------------
Within the 90 days prior to the date of 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 and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the date of
their evaluation.
21
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
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 Stockholders
- ------
None
Item 5 Other Information
- ------
None
Item 6 Exhibits and Reports on Form 8-K
- ------ (a) Exhibits:
Exhibit 99.1 - Certification by Kevin J. McAndrew pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 - Certification by Kevin J. McAndrew pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: None
22
FORM 10-Q
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, C.P.A.
Chief Financial Officer
October 14, 2002
23
CERTIFICATION OF KEVIN J. MCANDREW AS PRESIDENT AND CHIEF EXECUTIVE OFFICER
PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14
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-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; 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; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: October 15, 2002
/s/ Kevin J. McAndrew
---------------------
Kevin J. McAndrew
President and Chief Executive Officer
CERTIFICATION OF KEVIN J. MCANDREW AS CHIEF FINANCIAL OFFICER
PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14
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-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; 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; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: October 15, 2002
/s/ Kevin J. McAndrew
---------------------
Kevin J. McAndrew
Chief Financial Officer