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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:
February 28, 2003 0-15588
CANTERBURY CONSULTING GROUP, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2170505
- ------------------------------- ---------------------------
(State of Incorporation) (IRS 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 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 1,848,909 shares.
FORM 10-Q
PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- -----------------------------
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
- ------
February 28,
2003 November 30,
(Unaudited) 2002
----------- ------------
Current Assets:
Cash and cash equivalents $ 254,870 $ 395,477
Accounts receivable, net of
allowance for doubtful accounts
of $396,000 and $383,000 2,455,848 2,850,934
Notes receivable - current portion 501,913 492,377
Prepaid expenses and other assets 268,246 321,826
Inventory, principally finished goods, at cost 130,650 173,118
Deferred income tax benefit 272,660 272,660
---------- ----------
Total Current Assets 3,884,187 4,506,392
Property and equipment at cost, net of
accumulated depreciation of $1,451,000 and
$1,349,000 786,093 885,302
Goodwill 3,608,381 3,608,381
Deferred income tax benefit 3,200,281 2,987,728
Notes receivable 6,345,324 6,474,266
Other assets 204,495 206,910
---------- ----------
Total Assets $18,028,761 $18,668,979
=========== ===========
See Accompanying Notes
2
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
February 28, 2003 November 30,
(Unaudited) 2002
---------------- ------------
Current Liabilities:
Accounts payable - trade $ 917,605 $ 618,124
Accrued expenses 765,358 821,298
Unearned revenue 867,679 892,249
Current portion, long-term debt 872,492 882,880
----------- ----------
Total Current Liabilities 3,423,134 3,214,551
Long-term debt 1,093,760 1,209,625
Deferred income tax 2,036,203 2,036,203
----------- -----------
Total Liabilities 6,553,097 6,460,379
Commitments
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000
shares authorized; 1,848,909 and
1,732,959 issued and outstanding 1,849 1,733
Additional paid-in capital 24,006,150 23,782,498
Accumulated deficit (8,936,841) (7,934,823)
Notes receivable for capital stock -
related parties (3,595,494) (3,640,808)
----------- -----------
Total Stockholders' Equity 11,475,664 12,208,600
----------- -----------
Total Liabilities and
Stockholders' Equity $18,028,761 $18,668,979
=========== ===========
See Accompanying Notes
3
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Months Ended February 28,
2003 2002
----- ----
(Unaudited) (Unaudited)
Service revenue $ 2,842,864 $ 4,019,695
Product revenue 1,825,515 2,729,299
----------- -----------
Total net revenue 4,668,379 6,748,994
Service costs and expenses 2,426,748 2,797,442
Product costs and expenses 1,611,904 2,144,662
----------- -----------
Total costs and expenses 4,038,652 4,942,104
Gross profit 629,727 1,806,890
Selling 460,436 597,509
General and administrative 1,513,144 1,323,391
----------- -----------
Total operating expenses 1,973,580 1,920,900
Other income/(expense)
Interest income 142,844 169,744
Interest expense (31,146) (47,681)
Other 136 113,178
----------- -----------
Total other income/(expense) 111,834 235,241
(Loss) income before income taxes (1,232,019) 121,231
Provision (benefit) for income tax (230,000) 46,000
----------- -----------
Net (loss) income $ (1,002,019) $ 75,231
============= ===========
Net (loss) income per share
and common share equivalents
Basic and diluted:
Net (loss) income $(.58) $ .04
====== ======
Weighted average number
of common shares - basic 1,734,000 1,766,500
============= ===========
Weighted average number
of common shares -diluted 1,734,000 1,774,500
============= ===========
See Accompanying Notes
4
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 2003 AND FEBRUARY 28, 2002
February 28, February 28,
2003 2002
------------ --------------
(Unaudited) (Unaudited)
Operating activities:
Net (loss) income $(1,002,019) $ 75,231
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 102,309 138,370
Provision for losses on accounts
receivable 12,994 (12,042)
Deferred income taxes (212,553) -
401(k) contributions issued in stock 211,029 -
Issuance of stock options to
consultants for services 12,740 -
Other assets 2,415 1,798
Changes in operating assets,
net of acquisitions
Accounts receivable 382,092 1,780,965
Inventory 42,468 586,189
Prepaid expenses and other assets 53,580 (77,008)
Income taxes - 21,665
Accounts payable 299,481 (920,259)
Accrued expenses (55,940) (17,507)
Unearned revenue (24,570) (753,922)
-------- ---------
Net cash provided by/(used in)
operating activities (175,974) 823,480
-------- ---------
Investing activities:
Capital expenditures, net (3,100) (44,678)
Proceeds from payments on notes
receivable 119,406 113,752
Other - (29,500)
-------- ---------
Net cash provided by investing activities 116,306 39,574
-------- ---------
Financing activities:
Proceeds from issuance of common stock - 15,000
Proceeds from payments on notes
receivable for capital stock -
related parties 45,314 -
Principal payments on long term debt (126,253) (228,245)
-------- ---------
Net cash used in financing activities (80,939) (213,245)
Net (decrease) increase in cash (140,607) 649,809
Cash, beginning of period 395,477 664,850
---------- ----------
Cash, end of period $ 254,870 $1,314,659
========== ==========
See Accompanying Notes
6
FORM 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, 2002. In
the opinion of management, all adjustments (which consist only of normal
recurring accruals) necessary to present fairly the financial position,
results of operations and cash flows of all periods presented have been
made. Quarterly results are not necessarily indicative of results for
the full year.
Description of Business
- ------------------------
Canterbury Consulting Group, Inc. provides broad based information
technology and management consulting services and training to both
corporate and government clients. Canterbury's mandate is to become an
integral part of its clients' management and technical infrastructure,
designing and applying the best products and services to help them
achieve a competitive advantage.
For information about the Company's revenues, profit or loss, and
assets by segment, see Note 2 of the Notes to Consolidated Financial
Statements.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries. All material intercompany
transactions have been eliminated.
Use of Estimates
- ----------------
Our consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States (US GAAP). The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts in
the financial statements and accompanying notes. These estimates form
the basis for judgments we make about the carrying values of assets and
liabilities that are not readily apparent from other sources. We base
our estimates and judgments on historical experience and on various
other assumptions that we believe are reasonable under the
circumstances. However, future events are subject to change and the best
estimates and judgments routinely require adjustment. US GAAP requires
us to make estimates and judgments in several areas, including those
related to impairment of goodwill and equity investments, revenue
recognition, recoverability of inventory and receivables, the useful
lives of long lived assets such as property and equipment, the future
realization of deferred income tax benefits and the recording of various
accruals. The ultimate outcome and actual results could differ from the
estimates and assumptions used.
Change in Accounting
- ----------------------
As of December 1, 2001, the Company adopted SFAS 142, "Goodwill and
Other Intangible Assets," which addresses the financial accounting and
reporting standards for goodwill subsequent to its acquisition. This
standard requires that goodwill no longer be amortized, and instead, be
tested for impairment on an annual basis.
Reverse Stock Split
- -------------------
On January 24, 2003, the Company's Board of Directors approved a one
for seven reverse stock split of the Company's common shares. All share
and per share information contained in these financial statements gives
retroactive effect to the 1 for 7 reverse stock split.
Concentration of Risk
- ----------------------
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.
For the quarter ended February 28, 2003, a significant number of
local and state agencies in Maryland purchased equipment under a
contract with the City of Baltimore from USC/Canterbury (Value Added
Hardware Reseller Segment). Total purchases under this contract
represented 68% of this segment's revenue and 26% of consolidated
revenue. If this contract were not replaced or extended in September 2003,
there would be no vehicle in place for USC/Canterbury to sell into the City.
A second group of customers, from a county in Virginia, accounted for 14% of
revenues in the reseller segment. This group of
over 80 customers purchased equipment from USC/Canterbury under the City
of Baltimore contract as well. Approximately 70% of this revenue could
be purchased under the Virginia state contract if the Baltimore contract
is not renewed in September 2003.
Five of the six operating subsidiaries are headquartered in the Mid
Atlantic and Northeast region of the country. As such, the majority of
revenues for the first quarter of Fiscal 2003 and Fiscal 2002 were
generated in these two geographic regions.
Reclassifications
- ------------------
Certain reclassifications have been made to prior years balances in
order to conform to current presentations.
2. Segment Reporting
- ----------------------
The Company is organized into four operating segments and the
corporate office. The operating segments are: training and consulting,
value added hardware reseller, technical staffing and software
development. Prior to the adoption of SFAS 142 for fiscal 2002, the
Company accounted for goodwill and any related amortization expense or
impairment charges at the corporate level. For fiscal 2003, goodwill
has been assigned to reporting units for purposes of impairment testing
and segment reporting as required by SFAS 142. Summarized financial
information for the three months ended February 28, 2003 and February
28, 2002, for each segment, is as follows:
Training Value Added
and Hardware Technical Software
2003 Consulting Reseller Staffing Development Corporate Total
- ---- ---------- -------- --------- ----------- --------- -----
Revenues $ 2,692,185 $ 1,795,622 $150,679 $ 29,893 $ - $ 4,668,379
(Loss) income
before taxes (796,035) (49,271) (18,140) (6,724) (361,850) (1,232,019)
Assets 5,769,204 1,262,013 126,201 54,086 10,817,257 18,028,761
Interest income 214 - - - 142,630 142,844
Interest expense 16,681 270 - 744 13,451 31,146
Depreciation and
amortization 88,875 4,312 987 2,163 5,972 102,309
Training Value Added
and Hardware Technical Software
2002 Consulting Reseller Staffing Development Corporate Total
- ---- ---------- -------- --------- ----------- --------- -----
Revenues $ 3,695,813 $ 2,639,049 $ 323,882 $ 90,250 $ - $ 6,748,994
Income (loss)
before taxes (83,059) 274,595 58,771 13,189 (142,265) 121,231
Assets 7,241,272 1,199,945 308,415 167,322 14,319,155 23,236,109
Interest income 460 - - - 169,284 169,744
Interest expense 26,602 23 - 1,059 19,997 47,681
Depreciation and
amortization 118,594 5,081 5,274 3,893 5,528 138,370
3. Notes Receivable
- --------------------
The Company holds a note receivable with a remaining balance in the
amount of $2,384,995 at February 28, 2003. 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 a related
party in the aggregate amount of $4,462,242 at February 28, 2003. These
notes have interest terms that average 8.5% 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 a $1,360,000
note receivable on demand. As a subsequent event, in order to fortify the
liquidity of the balance sheet, the Company has negotiated a $500,000 paydown
of the $1,360,000 demand note, with a related party. 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 a principal payment of $500,000 to be received
by the Company on or before April 30, 2003. The $1,360,000 demand note is
included in the non-current portion of notes receivable at February
28, 2003 and November 30, 2002.
The company has received all scheduled monthly installments for all
of its notes receivable outstanding as of February 28, 2003.
4. Property and Equipment
- --------------------------
Property and equipment, which is recorded at cost, consists of the
following:
February 28, November 30,
2003 2002
---- ----
Machinery and equipment $1,633,239 $1,630,274
Furniture and fixtures 454,407 454,407
Leased property under capital leases
and leasehold improvements 149,345 149,345
---------- -----------
2,236,991 2,234,026
Less: Accumulated depreciation (1,450,898) (1,348,724)
---------- -----------
Net property and equipment $ 786,093 $ 885,302
========== ===========
Accumulated depreciation of leased property under capital leases at
February 28, 2003 amounted to $138,000.
5. Long-Term Debt
- ------------------
February 28, November 30,
2003 2002
Long-term obligations consist of: ---- ----
Term loan $ 950,000 $1,025,000
Revolving credit line - -
Note payable for acquisition 800,000 800,000
Capital lease obligations 11,696 23,841
Notes payable - equipment 204,556 243,664
---------- -----------
1,966,252 2,092,505
Less: Current maturities (872,492) (882,880)
---------- -----------
$1,093,760 $1,209,625
========== ==========
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 Bank
in full satisfaction of the Company's outstanding obligations, from the
proceeds of a $1,500,000 five-year term loan from Commerce. As of
February 28, 2003, $550,000 of this loan has been repaid.
As part of the refinancing, the Company also secured a two-year
$2,500,000 working capital line of credit with Commerce 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 was
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 revolver debt is $2,500,000, subject to receivable
and inventory levels. 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. As a result of recent losses, the Company was in breach
of the minimum tangible net worth covenant in the loan agreement with
the Bank. At February 28, 2003 the covenant calls for a minimum
tangible net worth of $8,000,000. The Company reported a tangible net
worth of $7,868,000, a shortfall of $132,000. The Company has
requested, and was granted, a waiver from the Bank for the quarter
ended February 28, 2003 related to this covenant breach. The waiver
was granted in conjunction with an amendment to the existing loan
agreement related to total availability under the facility. Effective
April 8, 2003, the maximum amount available under the credit facility
has been reduced from $2,500,000 to $1,500,000 less the principal
balance outstanding under the Commerce Bank term loan, subject to
receivable and inventory levels. Had this amendment been effective at
February 28, 2003, the total available line at that date would have
been $550,000. The Company remains in compliance with all other
financial covenants in the loan agreement as of February 28, 2003.
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.
In conjunction with the purchase of 100% of the stock of Usertech,
the Company purchased computer equipment from the seller valued at
$364,000 through issuance of a note payable over three years with
interest at an annual rate of 3.75%. At February 28, 2003, the note
payable had an outstanding balance of $169,079.
Aggregate fiscal maturities on long-term debt, exclusive of
obligations under capital leases, are approximately $744,000 in 2003;
$773,000 in 2004; $307,000 in 2005; and $130,000 in 2006.
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 2003. 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 is as follows at February 28, 2003:
Total minimum lease payments through November 30, 2003 $ 12,119
Less amount representing interest (423)
---------
Present value of long-term obligations under capital leases $ 11,696
=========
7. Related Party Transactions
- --------------------------------
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 from an outside group who purchased the
business from the Company in 1996 which has notes payable to the Company
in the amount of $4,462,242 at February 28, 2003. The Company maintained
the same level of security interest protection and the same debt
amortization schedule.
At February 28, 2003 and November 30, 2002, the total notes
receivable plus accrued interest for issuances of Company common stock
to corporate officers, corporate counsel and certain consultants totaled
$3,595,000 and $3,641,000, 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%. Prior to
July 17, 2002, $1,739,000 of these notes were recourse notes.
On July 17, 2002 the Compensation Committee recommended, and the
Board of Directors approved a modification of the April 10, 2001 and the
May 16, 2001 notes. The notes became non-recourse as to principal and
interest as of September 1, 2002 with the issued shares continuing to
collateralize the notes. All accrued interest on the notes as of
September 1, 2002 has been paid to the Company. Principal and interest
must be paid by each 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. 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.
8. 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, 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
needed to close above a $1 bid price for at least 10 consecutive trading
days by February 10, 2003.
In order to remain in compliance with the Nasdaq minimum price
requirement, the Board of Directors voted for a one for seven reverse
split effective January 24, 2003. On February 13, 2003 the Company
received a letter from Nasdaq stating that Canterbury had evidenced
compliance with all requirements necessary for continued listing on the
Nasdaq SmallCap Market. Accordingly, Nasdaq determined to continue the
listing of the Company's securities on the Nasdaq SmallCap Market.
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 and success of its mergers and acquisitions program; (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.
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.
Liquidity and Capital Resources
- --------------------------------
Working capital at February 28, 2003, was $461,000. This was a
decrease of $831,000 since November 30, 2002. Accounts receivable
decreased by $395,000, due primarily to the reduction in revenue during
the first quarter of Fiscal 2003. This decline in revenue from the prior
quarter amounted to $1,094,000 as a result of the overall decline in
spending in the technology sector. Technology and training expenditures
by the Company's clients have slowed or been delayed in light of various
factors affecting their businesses such as the uncertain economy, the
threat of terrorism, the war in Iraq and other international conflicts.
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, from the
proceeds of a $1,500,000 five-year term loan from Commerce. As of
February 28, 2003, $550,000 of this loan has been repaid.
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 was 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 revolver
debt is $2,500,000, subject to receivable and inventory levels.
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. As a result of recent losses, the Company was in breach
of the minimum tangible net worth covenant in the loan agreement with
the Bank. At February 28, 2003 the covenant calls for a minimum
tangible net worth of $8,000,000. The Company reported a tangible net
worth of $7,868,000, a shortfall of $132,000. The Company has
requested, and was granted, a waiver from the Bank for the quarter
ended February 28, 2003 related to this covenant breach. The waiver
was granted in conjunction with an amendment to the existing loan
agreement related to total availability under the facility. Effective
April 8, 2003, the maximum amount available under the credit facility
has been reduced from $2,500,000 to $1,500,000 less the principal
balance outstanding under the Commerce Bank term loan, subject to
receivable and inventory levels. Had this amendment been effective at
February 28, 2003, the total available line at that date would have
been $550,000. The Company remains in compliance with all other
financial covenants in the loan agreement as of February 28, 2003.
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.
Management believes that anticipated positive cash flow contributions
from the Company's operating subsidiaries and the availability to borrow
from its revolving line of credit should be sufficient to cover cash
flow requirements for Fiscal 2003. There was no material commitment for
capital expenditures as of February 28, 2003. Inflation was not a
significant factor in the Company's financial statements.
Cash flow from operating activities for the quarter ended February
28, 2003 was $(176,000), a decrease of $999,000 over the first quarter
of Fiscal 2002. The reduction in operating cash flow from 2002 was due
in large part to the reduced levels of operating profitability from each
of the subsidiaries. The balance sheet has continued to shrink during
the first quarter of Fiscal 2003 as business has continued to slow. The
Company's February 28, 2003 current ratio was 1.13:1.00 versus 1.40:1.0
at November 30, 2002.
As a subsequent event, in order to fortify the liquidity of the
balance sheet, the Company has negotiated a $500,000 paydown of the
$1,360,000 demand note, with a related party. 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 a principal payment of $500,000 to
be received by the Company on or before April 30, 2003. The $1,360,000
demand note is included in the non-current portion of notes receivable
at February 28, 2003 and November 30, 2002.
RESULTS OF OPERATIONS
- ----------------------
Revenues
- --------
Total revenues for the three months ended February 28, 2003 decreased
by $2,081,000 (31%) from the same three-month period in Fiscal 2002.
Service revenue decreased by $1,177,000 (29%) and product revenue
decreased by $904,000 (33%) during the first quarter of Fiscal 2003 as
compared to the first quarter of Fiscal 2002. All four operating
segments experienced a revenue downturn during the quarter.
The declining revenue in all of the operating segments is the result
of reduced client spending in all phases of information technology and
training. Budgets have been reduced or eliminated. Projects have been
delayed or reduced in scope. Many businesses are attempting to use
internal resources instead of outsourcing in an attempt to save money
during these difficult economic times. The Company is dealing with this
business downturn in a number of ways. Facility consolidations,
workforce reductions in areas other than sales, salary freezes and
reductions, and the hiring of more sales personnel are all being
utilized as a means to preserve cash and to increase revenues and cash
flow.
CALC/Canterbury has reduced its fixed overhead by sharing its
Parsippany, New Jersey facility with both DMI/Canterbury and
Usertech/Canterbury. During February, 2003 CALC/Canterbury executed a
licensing agreement with ExecuTrain, an international learning solutions
provider, whereby it will become part of their global training network.
As a result, CALC/Canterbury can now offer national and international
training delivery to its existing clients with multiple locations. The
alliance will also allow CALC/Canterbury to market itself to new clients
who have not used them in the past due to its lack of national training
capability. CALC/Canterbury is currently in search of qualified sales
personnel to help expand its presence in the metro New York City
marketplace.
Usertech/Canterbury experienced a significant downturn in revenues
during the last quarter of Fiscal 2002. Several large projects ended
during the quarter and were not replaced with new business. Many
clients delayed or cancelled large-scale training projects due to their
own poor operating results. Many of Usertech/Canterbury's consultants
were under utilized during the quarter. As the softness in revenue has
continued into the early part of Fiscal 2003, the Company has taken
several significant steps to preserve cash flow. First, the
Saddlebrook, New Jersey office was closed in December, 2002 and those
employees were relocated to Parsippany, New Jersey to share office space
with CALC/Canterbury. The Company saved approximately $175,000 annually
by not renewing the Saddlebrook lease. There was also a significant
workforce reduction during the first quarter of 2003. Twenty-seven (27)
employees have been laid off resulting in annual salary and benefits
savings of approximately $2,200,000. As a result of this staff
reduction, Usertech/Canterbury's organization was restructured and
streamlined resulting in additional savings. Usertech/Canterbury is
also searching for additional account executives in order to reach more
potential customers on a national basis. In addition,
Usertech/Canterbury plans to offer its learning solutions through the
ExecuTrain national franchise network as a result of the licensing
agreement between CALC/Canterbury and ExecuTrain. ExecuTrain has been
planning to expand its product offerings in the ERP market and
Usertech/Canterbury can now provide quality delivery and service to the
client base that ExecuTrain currently services through its network of
training centers.
USC/Canterbury has been dealing with a number of business issues as a
result of the Hewlett-Packard/Compaq merger. Lower margins, more
competition and delays in product availability have all taken their toll
on revenues and gross profit. Margins in Fiscal 2002 were 12% compared
to approximately 10% in the first quarter of Fiscal 2003. Many
manufacturer rebate programs have been discontinued. USC/Canterbury is
attempting to expand its reseller relationships to manufacturers other
than Hewlett Packard and Compaq in order to provide customers with more
purchasing options as well as to reduce its dependence on a sole source
for product. The majority of USC/Canterbury's clients are
municipalities in state and local government. With many state budgets
running at a deficit, there is less money being allocated to information
technology spending. USC/Canterbury continues to focus on expanding its
business to commercial clients to reduce its overall dependence on
government clients. The pending change with Hewlett Packard to an agent
model from the current system of recording gross revenues and costs did
not have a material impact on revenues for the quarter.
MSI/Canterbury's management and sales training tends to be a more
discretionary expenditure by its clients during difficult economic
times. Many clients have reduced or eliminated certain programs for the
time being. Over the past thirty years of its existence MSI/Canterbury
has experienced the ebb and flow caused by current economic conditions.
While dealing with the current downturn, this subsidiary has taken
several steps to address the situation. First, MSI/Canterbury has
expanded its reach by entering into several alliance programs with local
chambers of commerce. There have been reductions in support staff and
consultants, while at the same time an ongoing search for qualified
sales personnel is being conducted. MSI/Canterbury also plans to offer
its services through the ExecuTrain national network in conjunction with
the agreement between CALC/Canterbury and ExecuTrain. MSI/Canterbury is
also developing distance learning products to complement its live
delivery platform.
ATM/Canterbury has also experienced declining revenues caused in
large part to the downturn in spending for information technology
products as a result of poor economic conditions in the country. New
products are being developed in an effort to penetrate markets that were
previously not addressed. Lower priced versions of various software
packages are being introduced to new clients who have less demanding
performance requirements. ATM/Canterbury continues to search for
strategic partners who will use its software as an integral component in
a packaged solution for asset tracking or document tracking and
retrieval.
DMI/Canterbury's revenues have been adversely affected by the poor
economic condition of many of the industries that it serves. A lack of
information technology job openings coupled with a surplus of IT
professionals has resulted in a reduction in revenue. In order to
combat this difficult operating environment, DMI/Canterbury has
established various strategic alliances with major staffing providers
who have significant relationships with large customers who are still
utilizing outsourced labor. As the economy improves, it is the
Company's belief that DMI/Canterbury will be among the first
subsidiaries to experience an increase in revenues as the pool of
qualified available labor diminishes and job requirements increase.
The Company continues to advocate and promote cross marketing between
all of its operating subsidiaries. During the current economic
downturn, the number of opportunities for Canterbury to provide an all-
inclusive technology or training solution to its substantial customer
list has been limited. All of the subsidiaries continue to present the
full complement of Canterbury products and services to their clients.
It is management's belief that when business conditions improve, the
Company will inherit markets that have been abandoned by competitors who
have gone out of business, or who do not have sufficient working capital
to take advantage of future opportunities.
Costs and Expenses
- ------------------
Total costs and expenses decreased by $903,000 (18%) during the first
quarter of Fiscal 2003 as compared to the first quarter of Fiscal 2002.
Service costs declined by $370,000 (13%), while product costs decreased
by $533,000 (25%). The decreases are a direct result of the lower
revenues recognized during the quarter and aggressive cost cutting by
Company management. The service cost reduction is the result of lower
personnel related costs $315,000, lower repair, maintenance and support
costs of $181,000, offset by the 401(k) match for trainers and
consultants of $126,000 made in the first quarter of Fiscal 2003. In
Fiscal 2002, this match was not made until the third quarter of the
year. These cost reductions were not sufficient to offset the revenue
decrease resulting in a much lower gross profit. The consolidated gross
profit margin declined from 27% for the first quarter of Fiscal 2002 to
13% in the first quarter of Fiscal 2003. The significant cost
reductions outlined previously should have a positive impact on future
gross margins as the overall breakeven point for the business has been greatly
reduced.
Gross profit on services declined from 30% in Fiscal 2002 to 15% in
Fiscal 2003 due primarily to the underutilization of consultants and
relatively high fixed costs for training. Product margins declined to
12% from 21% in the previous year's first quarter. Many manufacturers
rebate programs have been eliminated as competitive pricing pressures
have forced them to be more cost efficient. Also, in the economy's
current state, pricing to customers has become much more competitive.
Selling expense declined by $137,000 (23%) due primarily to
reductions in personnel related expenses including reduced commissions
on lower reported revenues and gross profit.
General and administrative expenses were increased by $190,000 (14%)
during the first quarter of Fiscal 2003 as compared to the same three-
month period in the previous year. There were several reasons for the
increase. The 401(k) match in Company stock ($80,000) for
administrative employees occurred during the first quarter of Fiscal
2003. In 2002 this match was not made until the third quarter. Public
company expenses (accounting, legal, public relations, etc.) increased
by $78,000 in 2003 reflecting the increased cost of operating as a
public company in today's business environment. The balance of the
increase ($32,000) is related to non-recurring personnel related
expenses.
As a subsequent event, on March 1, 2003 Canterbury's corporate
management team, inclusive of the Chairman, President and Vice
President, has voluntarily reduced their present salaries by 8%. This
is in line with a recently instituted 8% salary reduction at one of the
Company's largest subsidiaries.
Other income for Fiscal 2003 declined by $113,000 over the previous
year's first quarter. The most significant portion of the decrease was
the result of the Company receiving $85,000 in insurance proceeds in
2002, related to business interruption caused by the terrorist attacks
on September 11, 2001. There was no activity in this account
classification for Fiscal 2003.
Critical Accounting Policies
- ----------------------------
Goodwill
- --------
As previously stated, the Company adopted SFAS 142, "Goodwill and
Other Intangible Assets" as of December 1, 2001. This standard requires
that goodwill no longer be amortized, but instead, be tested for
impairment on an annual basis.
The Company's earnings forecasts for purposes of these impairment
tests are consistent with forecasts and budgets currently used in the
management of these businesses. The estimated fair value of the
goodwill amounts are based upon future expectations, and if actual
results are significantly lower, the likelihood is that these estimates
would change, resulting in future impairment charges.
Revenue Recognition
- --------------------
The Company's revenue recognition policies are in accordance with
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. SAB
101 states that 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
vast majority of our revenue transactions contain standard business
terms and conditions that result in a clear determination of when
revenues should be recognized. Our revenue recognition policy requires
an assessment as to whether collectibility is probable, which inherently
requires us to evaluate the creditworthiness of our customers and their
acceptance of our delivered products and services.
Valuation Allowance-Deferred Tax Assets
- ----------------------------------------
The Company records valuation allowances to reduce deferred tax
assets to amounts that are more likely than not to be realized. This
process involves forecasting the future profitability of our businesses
to determine whether the company is expecting to generate sufficient
taxable income to fully utilize our existing tax loss carryforwards and
other tax assets that become future tax deductions.
The determination of the valuation allowance is based upon our
earnings forecasts that we use in the management of our businesses.
Therefore, we are required to make estimates and judgments based upon
historical experience and the best information available to us.
However, future events are subject to change and we may have to adjust
the valuation allowance in future periods, accordingly.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Stock Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b)Reports on Form 8-K:
A Form 8-K was filed with the SEC on January 24, 2003 -
The Registrant declared a one for seven reverse split of
its common stock.
As a subsequent event, A Form 8-K was filed with the SEC
on March 18, 2003 - The Employment of the President of its
wholly owned subsidiary, Usertech/Canterbury Corp. has
been terminated, and he has been removed as an officer and
director of that subsidiary.
CANTERBURY CONSULTING GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANTERBURY CONSULTING GROUP, INC.
--------------------------------------
(Registrant)
By/s/ Kevin J. McAndrew
--------------------------------------
Kevin J. McAndrew
President and Chief Executive Officer
By/s/ Kevin J. McAndrew
--------------------------------------
Kevin J. McAndrew
Chief Financial Officer
April 11, 2003
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: April 11, 2003
/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: April 11, 2003
/s/ Kevin J. McAndrew
----------------------------
Kevin J. McAndrew
Chief Financial Officer
CANTERBURY CONSULTING GROUP, INC.
------------------------------------
EXHIBIT INDEX
-------------
Exhibit
No. Document
------------------
99.1 Statement of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
99.2 Statement of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350