10-Q 1 ccg22904.txt 10-Q FOR THE QUARTER ENDED FEBRUARY 29, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q --------- Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended February 29, 2004 Commission File Number: 0-15588 CANTERBURY CONSULTING GROUP, INC. ---------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2170505 ----------------------------- ----------------- (State of Incorporation) (I.R.S. Employer Identification No.) 352 Stokes Road Suite 200 Medford, New Jersey 08055 (Address of principal executive office) Telephone Number: (609) 953-0044 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- ---- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES NO X --- ---- The number of shares outstanding of the Registrant's common stock as of the date of the filing of this report 2,097,251 shares. FORM 10-Q PART 1 - FINANCIAL INFORMATION --------------------------------- ITEM 1. FINANCIAL STATEMENTS ============================== CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEET ---------------------------------- ASSETS ------ February 29, 2004 November 30, (Unaudited) 2003 ----------------- -------------- Current Assets: Cash and cash equivalents $1,365,263 $1,385,824 Marketable securities 300,000 300,000 Accounts receivable, net of allowance for doubtful accounts of $267,000 and $271,000 1,411,486 2,477,060 Notes receivable - current portion 293,370 287,845 Prepaid expenses and other assets 48,027 93,311 Inventory, principally finished goods, at cost 151,485 92,599 ----------- ----------- Total Current Assets 3,569,631 4,636,639 Property and equipment at cost, net of accumulated depreciation of $1,171,000 and $1,093,000 531,352 604,449 Goodwill 2,433,381 2,433,381 Deferred tax assets 730,453 759,000 Notes receivable 3,396,805 3,472,253 Other assets 54,821 32,821 ----------- ----------- Total Assets $10,716,443 $11,938,543 =========== =========== See Accompanying Notes FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ February 29, 2004 November 30, (Unaudited) 2003 ----------------- -------------- Current Liabilities: Accounts payable - trade $ 639,380 $ 963,588 Accrued expenses 511,245 532,597 Unearned revenue 370,273 470,107 Current portion, long-term debt 854,652 889,490 ----------- ----------- Total Current Liabilities 2,375,550 2,855,782 Long-term debt 54,459 62,934 Subordinated convertible debt 355,000 355,000 ----------- ----------- Total Liabilities 2,785,009 3,273,716 ----------- ----------- Commitments and Contingencies Stockholders' Equity: Common stock, $.001 par value, 50,000,000 shares authorized; 2,097,251 issued and outstanding 2,097 2,097 Additional paid-in capital 24,248,039 24,248,039 Accumulated deficit (12,723,210) (11,989,817) Notes receivable for common stock- related parties (3,595,492) (3,595,492) ----------- ----------- Total Stockholders' Equity 7,931,434 8,664,827 ----------- ----------- Total Liabilities and Stockholders' Equity $10,716,443 $11,938,543 =========== =========== See Accompanying Notes FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three-Months Ended February 29, 2004 February 28, 2003 ----------------- ----------------- (Unaudited) (Unaudited) Service revenue $ 1,228,280 $ 2,640,791 Product revenue 1,406,872 1,767,955 ----------- ----------- Total net revenue 2,635,152 4,408,746 Service costs and expenses 1,013,664 2,329,623 Product costs and expenses 1,259,399 1,597,194 ----------- ----------- Total costs and expenses 2,273,063 3,926,817 Gross profit 362,089 481,929 Selling 317,303 415,271 General and administrative 802,752 1,368,611 ----------- ----------- Total operating expenses 1,120,055 1,783,882 Other income/(expense) Interest income 67,517 142,844 Interest expense (15,902) (30,401) Other 11,662 136 ----------- ----------- Total other income/(expense) 63,277 112,579 Loss from continuing operations before income taxes (694,689) (1,189,374) Income tax benefit - (222,000) ----------- ----------- Loss from continuing operations (694,689) (967,374) Loss from discontinued operations (net of income taxes of $0 and $(8,000)) (38,704) (34,645) ----------- ----------- Net loss $ (733,393) $ (1,002,019) =========== ============ Net loss per share and common share equivalents Basic and diluted: Loss from continuing operations $(.33) $(.56) Loss from discontinued operations $(.02) $(.02) ----------- ----------- Net loss $(.35) $(.58) =========== =========== Weighted average number of common shares - basic and diluted 2,097,200 1,734,000 =========== =========== See Accompanying Notes FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED FEBRUARY 29, 2004 AND FEBRUARY 28, 2003 February 29, 2004 February 28, 2003 ------------------- ----------------- (Unaudited) (Unaudited) Operating activities: Net loss $(733,393) $(1,002,019) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 78,476 102,309 Provision for losses on accounts receivable 7,500 12,994 Deferred income taxes 28,547 (212,553) 401(k) contributions issued in stock - 211,029 Issuance of stock options to consultants for services - 12,740 Changes in operating assets, net of acquisitions Accounts receivable 1,058,074 382,092 Inventory (58,886) 42,468 Prepaid expenses and other assets 45,284 53,580 Other assets - non-current (22,000) 2,415 Accounts payable (324,208) 299,481 Accrued expenses (21,352) (55,940) Unearned revenue (99,834) (24,570) ---------- --------- Net cash used in operating activities ( 41,792) (175,974) ---------- --------- Investing activities: Capital expenditures, net (5,379) (3,100) Proceeds from payments on notes receivable 69,923 119,406 ---------- --------- Net cash provided by investing activities 64,544 116,306 ---------- -------- Financing activities: Proceeds from payments on notes receivable for capital stock - related parties - 45,314 Principal payments on long term debt (43,313) (126,253) ---------- --------- Net cash used in financing activities (43,313) (80,939) Net decrease in cash (20,561) (140,607) Cash, beginning of period 1,385,824 395,477 ---------- --------- Cash, end of period $1,365,263 $ 254,870 ========== ========== See Accompanying Notes 10-Q CANTERBURY CONSULTING GROUP, INC. Notes to Consolidated Financial Statements (Unaudited) ------------------------------------------------------ 1. Operations and Summary of Significant Accounting Policies ============================================================= Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations. It is suggested that these unaudited consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's 10-K for the year ended November 30, 2003. In the opinion of management, all adjustments (which consist only of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows of all periods presented have been made. Quarterly results are not necessarily indicative of results for the full year. Description of Business ----------------------- Canterbury Consulting Group, Inc. provides broad based information technology and management consulting services and training to both corporate and government clients. Canterbury's mandate is to become an integral part of its clients' management and technical infrastructure, designing and applying the best products and services to help them achieve a competitive advantage. For information about the Company's revenues, profit or loss, and assets by segment, see Note 2 of the Notes to Consolidated Financial Statements. Principles of Consolidation ---------------------------- The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All material intercompany transactions have been eliminated. Use of Estimates ---------------- Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (US GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. US GAAP requires us to make estimates and judgments in several areas, including those related to impairment of goodwill and equity investments, revenue recognition, recoverability of inventory and receivables, the useful lives of long lived assets such as property and equipment, the future realization of deferred income tax benefits and the recording of various accruals. The ultimate outcome and actual results could differ from the estimates and assumptions used. Revenue Recognition ------------------- Product Revenue Product revenue is recognized when there is persuasive evidence of an arrangement, the product has been delivered, the sales price is fixed or determinable, and collectibility is reasonably assured. The product is considered delivered to the customer once it has been shipped, and title and risk of loss have transferred. The Company defers revenue if there is uncertainty about customer acceptance. Product revenue represents sales of computer hardware and software. Generally, the Company is involved in determining the nature, type, and specifications of the products ordered by the customer. Service Revenue Service revenue is recognized when there is persuasive evidence of an arrangement, the sales price is fixed or determinable, and collectibility is reasonably assured. Service revenues represent training and consulting services provided to customers under separate consulting and service contracts. Revenues from these contracts are recognized as services are rendered. Statement of Cash Flows ----------------------- For purposes of the Statement of Cash Flows, cash refers solely to demand deposits with banks and cash on hand. Marketable Securities ---------------------- At February 29, 2004 and November 30, 2003, the Company held marketable securities comprised of a $300,000 investment in a long-term tax-exempt bond fund. The Company's marketable securities are classified as available-for-sale and are carried at fair market value. There were no unrealized gains or losses on marketable securities for the period ended February 29, 2004. Accounts Receivable ------------------- The carrying value of accounts receivable is based upon customer invoiced amounts due to us, adjusted for allowances for doubtful accounts. We evaluate the collectibility of our accounts receivable based on a combination of factors. In cases where we are aware of circumstances that may impair a specific customer's ability to meet its financial obligations to us, we record a specific allowance against amounts due to us, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we estimate allowances for doubtful accounts based on the length of time the receivables are past due, industry and geographic concentrations, the current business environment and our historical experience. Notes Receivable ----------------- The carrying value of notes receivable is based upon their principal amounts as of February 29, 2004 and November 30, 2003. No allowance for uncollectible amounts has been recorded due to the timely receipt of all scheduled installments of principle and interest to date, and the expected future receipt of remaining installment amounts due us. Interest income from notes receivable is recognized as earned over time based on the stated terms of the notes. Inventories ----------- Inventories are stated at the lower of cost or market utilizing a first-in, first-out method of determining cost. Depreciation and Amortization -------------------------------- The Company depreciates and amortizes its property and equipment for financial statement purposes using the straight-line method over the estimated useful lives of the property and equipment (useful lives of leases or lives of leasehold improvements and leased property under capital leases, whichever is shorter). For income tax purposes, the Company uses accelerated methods of depreciation. The following estimated useful lives are used: Building and improvements 7 years Equipment 3 to 5 years Furniture and fixtures 5 to 7 years Income Taxes ------------- Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are determined based on the difference between the US GAAP financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by valuation allowances to amounts that are more likely than not to be realized. No income tax benefit was recorded for the period ended February 29, 2004 as there was a 100% valuation allowance booked against the current period loss. Reverse Stock Split ------------------- On January 24, 2003, the Company's Board of Directors approved a one for seven reverse stock split of the Company's common shares. All share and per share information contained in these financial statements gives retroactive effect to the 1 for 7 reverse stock split. Concentration of Risk ---------------------- The Company maintains cash balances at a creditworthy bank located in the United States. Accounts at the institution are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company does not believe that it has significant credit risk related to its cash balance. The Company holds marketable securities in the form of mutual fund shares with a highly reputable mutual fund company located in the United States. As previously discussed, the Company is in the business of providing management and information technology services and training. These services are provided to a large number of customers in various industries in the United States. The Company's trade accounts receivable are exposed to credit risk, but the risk is limited due to the diversity of the customer base and the customers wide geographic dispersion. The Company performs ongoing credit evaluations of its customers' financial condition. The Company maintains reserves for potential bad debt losses and such bad debt losses have been within the Company's expectations. As of March 2004, all Canterbury operating subsidiaries are headquartered in the Mid Atlantic and Northeast region of the country. As such, the majority of revenues were generated in these two geographic regions. For the quarter ended February 29, 2004, a significant number of local and state agencies in Maryland purchased equipment under a contract with the City of Baltimore from USC/Canterbury (Value Added Hardware Reseller Segment). Total purchases under this contract represented 49% of this segment's revenue and 26% of consolidated revenue. If this contract is not renegotiated or extended in 2004, USC/Canterbury would not have access to sell into the City of Baltimore. A decision from the City is expected in April 2004. A second group of customers, from a county in Virginia, accounted for 33% of the revenues in the reseller segment and 17% of consolidated revenues for the year. This group of over 80 customers purchased equipment from USC/Canterbury under the City of Baltimore contract as well. Approximately 70% of this revenue could be purchased under the Virginia state contract if the Baltimore contract is not renewed in 2004. One vendor represented 50% of the product cost in this segment and 28% of consolidated costs. Another major vendor represented 24% and 13% of segment and consolidated costs and expenses, respectively. For the quarter ended February 29, 2004, one Usertech/Canterbury customer accounted for 26% of service revenue and 12% of total revenue. For the quarter ended February 28, 2003, a significant number of local and state agencies in Maryland purchased equipment under a contract with the City of Baltimore from USC/Canterbury (Value Added Hardware Reseller Segment). Total purchases under this contract represented 68% of this segment's revenue and 26% of consolidated revenue. A second group of customers, from a county in Virginia, accounted for 14% of revenues in the reseller segment. This group of over 80 customers purchased equipment from USC/Canterbury under the City of Baltimore contract as well. Approximately 70% of this revenue could be purchased under the Virginia state contract if the Baltimore contract is not renewed. Fair Value of Financial Instruments ------------------------------------ The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Management believes that there are no material differences between the recorded book values of its financial instruments and their estimated fair value. Reclassifications ----------------- Certain reclassifications have been made to prior years' balances in order to conform to current presentations. 2. Segment Reporting ====================== The Company is organized into two operating segments and the corporate office. The operating segments are training and consulting and value added hardware reseller. A third segment, software development, was discontinued as of March 2004 and as such is reported as a discontinued operation as of February 29, 2004. A fourth segment, technical staffing, was discontinued during the fourth quarter of Fiscal 2003. All historical information for the software development and technical staffing segment has been omitted from the segment presentation below. Summarized financial information for the three months ended February 29, 2004 and February 28, 2003, for each segment, is as follows: Training Value Added and Hardware 2004 Consulting Reseller Corporate Total ------------ ------------- ----------- --------- ---------- Revenues $1,228,280 $1,406,872 $ - $2,635,152 (Loss) income before taxes (370,145) 1,499 (326,043) (694,689) Assets 3,152,283 1,139,687 6,289,998 10,581,968 Interest income 24 - 67,493 67,517 Interest expense 15,807 95 - 15,902 Depreciation and amortization 70,082 1,484 6,910 78,476
Training Value Added and Hardware 2003 Consulting Reseller Corporate Total ------ ---------- ----------- ------------ --------- Revenues $2,640,791 $1,767,955 $ - $4,408,746 (Loss) income before taxes (796,035) (31,489) (361,850) (1,189,374) Assets 5,769,204 1,262,013 10,817,257 17,848,474 Interest income 214 - 142,630 142,844 Interest expense 16,681 270 13,450 30,401 Depreciation and amortization 88,875 4,312 5,972 99,159
3. Notes Receivable ==================== During September, 2003, the Company received $2,295,327 representing the remaining principal balance plus accrued interest for a note which was received in November 1995 as part of the consideration for the sale of a former subsidiary. The Company was scheduled to receive monthly payments of $33,975 inclusive of interest at 7.79% per year through November 2005 and a balloon payment of $1,707,000 in December 2005. In conjunction with this prepayment, the Company issued 145,000 shares of restricted common stock to consultants for services rendered in this transaction valued at fair market value. In addition, the Company held notes receivable assets from a related party in the aggregate amount of $3,690,175 at February 29, 2004. These notes have interest terms that average 7.3% per year and are scheduled to mature at various dates through November 2006, with a balloon payment of $1,948,000 in December, 2006. The aggregate amount includes an $860,000 demand note. During April, 2003, in order to fortify the liquidity of the balance sheet, the Company negotiated a $500,000 paydown of the demand note (from $1,360,000 to $860,000). On April 3, 2003 the independent directors, who are a majority of the Board of Directors of Canterbury, voted to reduce the annual interest rate on the note from 10% to 5% per annum in exchange for the principal payment of $500,000 which was received by the Company during April, 2003. The demand note is included in the non-current portion of notes receivable at February 29, 2004 and November 30, 2003. The company has received all scheduled monthly installments for notes receivable outstanding as of February 29, 2004. 4. Property and Equipment ========================== Property and equipment, which is recorded at cost, consists of the following: February 29, 2004 November 30, 2003 ----------------- ----------------- Machinery and equipment $1,440,253 $1,434,874 Furniture and fixtures 225,230 225,230 Leased property under capital leases and leasehold improvements 37,242 37,242 ---------- ---------- 1,702,725 1,697,346 Less: Accumulated depreciation (1,171,373) (1,092,897) ---------- ---------- Net property and equipment $ 531,352 $ 604,449 =========== =========== Accumulated depreciation of leased property under capital leases at February 29, 2004 amounted to $8,000. 5. Long-Term Debt ==================== February 29, 2004 November 30, 2003 ----------------- ----------------- Long-term obligations consist of: Note payable for acquisition $800,000 $800,000 Capital lease obligations 31,242 34,589 Notes payable - equipment 77,869 117,835 ---------- ---------- 909,111 952,424 Less: Current maturities (854,652) (889,490) ---------- ---------- $ 54,459 $ 62,934 ========== ========== In February, 2004 the Company and Commerce Bank agreed to an amended loan agreement. The new agreement calls for a two-year, $1,500,000 revolving working capital line of credit collateralized by trade accounts receivable and inventory. The loan carries an interest rate of the prime rate plus one half of one percent (1/2%) and matures on May 1, 2005. As of February 29, 2004 the line of credit was unused. Total credit available under the agreement, subject to the carrying value of accounts receivable and inventory collateral amounted to $1,235,000 at February 29, 2004. The Bank's debt is secured by substantially all of the assets of the Company and requires compliance with covenants which include the maintenance of certain financial ratios and amounts. The Company is restricted by its bank from paying cash dividends on its common stock. As of February 29, 2004, the Company was in compliance with all of the financial covenants of its revised loan agreement. As part of the purchase price paid for the acquisition of Usertech in September, 2001, the Company agreed to pay $1,200,000 to the seller over three years at an annual amount of $400,000 plus accrued interest at 7% per annum on the outstanding balance. On August 4, 2003, the Company initiated mandatory binding arbitration proceedings against Ceridian Corporation, the previous owner of Usertech/Canterbury, as required in the Stock Purchase Agreement between the parties. As a result of this pending arbitration and the extent of the damages claimed, the Company has withheld the scheduled $400,000 principal payment of the note payable to Ceridian, as well as accrued interest of $56,000 due on September 28, 2003, as the damages sought far outweigh the note payable to them. The disputed $800,000 is classified as part of the current portion of long- term debt as of February 29, 2004. In conjunction with the purchase of 100% of the stock of Usertech, the Company purchased computer equipment from the seller valued at $364,000 through issuance of a note payable over three years with interest at an annual rate of 3.75%. At February 29, 2004, the note payable had an outstanding balance of $24,608. Aggregate fiscal maturities on long-term debt, exclusive of obligations under capital leases, are $832,000 in 2004; $17,000 in 2005; and $15,000 in 2006, and $8,000 in 2007. The carrying value of the long-term debt approximates its fair value. 6. Capital Leases ================== Capital lease obligations are for certain equipment leases which expire through fiscal year 2006. Future required payments under capitalized leases together with the present value, calculated at the respective leases' implicit interest rate of approximately 16% at their inception is as follows at February 29, 2004: Total minimum lease payments through November 30, 2004 $12,327 Total minimum lease payments through November 30, 2005 16,436 Total minimum lease payments through November 30, 2006 9,588 ------- Total minimum lease payments 38,351 Less amount representing interest (7,109) ------- Present value of long-term obligations under capital leases $31,242 ======= 7. Related Party Transactions ================================== During Fiscal 2001, certain officers and directors of the Company purchased a 33% stock ownership in a corporation that was previously a subsidiary of the Company prior to the November 1996 sale by the Company of its 100% stock ownership in this corporation to an outside group. The Company holds note receivables in the amount of $3,690,175 from this corporation of which $3,636,000 pertains to notes originating on the November 1996 date of sale. The Company maintained the same level of security interest protection and the same debt amortization schedule. During the fourth quarter of Fiscal 2003, a 22% owner of this corporation passed away. After his death, that corporation purchased and retired his shares from his estate. As a result of this purchase and retirement of his shares, certain officers and directors of the Company now own 44% of this corporation. At February 29, 2004 and November 30, 2003, the total notes receivable plus accrued interest for issuances of Company common stock to corporate officers, corporate counsel and certain consultants totaled $3,595,000. These non- recourse notes are collateralized by common stock of the Company and are reported as a contra-equity account. Interest rates range from 4% to 6.6%. Prior to July 17, 2002, $1,739,000 of these notes were recourse notes. On July 17, 2002 the Compensation Committee recommended, and the Board of Directors approved a modification of the April 10, 2001 and the May 16, 2001 notes. The notes became non-recourse as to principal and interest as of September 1, 2002 with the issued shares continuing to collateralize the notes. All accrued interest on the notes as of September 1, 2002 has been paid to the Company. Principal and interest must be paid by recipient before they are entitled to sell their respective shares. If principal and interest have not been paid by the maturity date of the recipient notes, then recipients' sole obligation shall be that any shares relating to this nonpayment will be forfeited and returned to the Company. If this event were to occur, both the underlying shares and the notes receivable would be cancelled with no effect on the net worth of the Company. In consideration for this modification the term of these notes was reduced and shortened from April and May, 2006 to December 31, 2004. The Board also prohibited the issuance of any stock options, stock or any other form of equity to the recipients for all of Fiscal 2002. 8. Discontinued Operations =========================== During March 2004, the Company entered into negotiations to sell ATM/Canterbury back to the original owner. If finalized, Canterbury would sell 100% of the stock in ATM/Canterbury in exchange for 25,000 shares of Canterbury common stock, which the owner had retained from the original transaction in 1997. The proposed transaction would be effective as of March 3, 2004. As of this date, the Company was still in the process of negotiating final contract language. The Company's decision to sell ATM/Canterbury was based on the lack of demand for their products by existing customers; the inability to increase sales to new customers and the Company's desire to focus on its training and consulting segment and its value added reseller segment. The Company estimates that it will record a loss on the sale of approximately $20,000 in the second quarter. Historical financial data for ATM/Canterbury for the three months ended February 29, 2004 and February 28, 2003: February 29, 2004 February 28, 2003 ----------------- ----------------- Revenues $58,866 $108,954 Pretax loss (38,704) (24,506) Assets and liabilities of ATM/Canterbury as of February 29, 2004 included in the consolidated balance sheet: Net receivable $6,210 Net equipment 83,717 Other assets 2,706 Accounts payable and accrued expenses 17,844 Note payable 17,260 During the fourth quarter of Fiscal 2003, the Company discontinued the operation of its technical staffing segment (DMI/Canterbury). The significant decline in demand for contract, full and part-time technical employees due to the economic downturn in the technology sector over the past several years was the major cause for this action. There was no gain or loss realized on the abandonment of this business segment. Historical financial data for DMI/Canterbury for the three months ended February 28, 2003: February 28, 2003 ------------------- Revenues $150,679 Pretax loss (18,140) Assets and liabilities for DMI/Canterbury as of November 30, 2003 included in the consolidated balance sheet: Net receivable $7,290 Other assets 162 Accounts payable and accrued expenses 1,710 ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS =========================================================================== Cautionary Statement -------------------- When used in this Report on Form 10-Q and in other public statements, both oral and written, by the Company and Company officers, the word "estimates," "project," "intend," "believe," "anticipate," and similar expressions, are intended to identify forward-looking statements regarding events and financial trends that may affect the Company's future operating results and financial position. Such statements are subject to risks and uncertainties that could cause the Company's actual results and financial position to differ materially. Such factors include, among others: (1) the Company's success in attracting new business; (2) the competition in the industry in which the Company competes; (3) the sensitivity of the Company's business to general economic conditions; and (4) other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. The Company undertakes no obligations to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. Risk Factors That Relate To Our Business ---------------------------------------- Uncertain economic conditions continue to affect many of our customers' businesses and many clients continue to delay and reduce their purchases of training services, software, hardware and consulting. The Company's recovery from the past several years of economic downturn continues to lag behind the current economic recovery. Delay Or Inability To Return To Positive Operating Cash Flow While the Company has taken significant steps to reduce fixed costs and increase revenue, a significant delay in returning to positive operating cash flow could adversely effect our liquidity and ability to conduct business. The Company reduced payroll expense and facility leases significantly during Fiscal 2003. Four facilities were closed and two more were greatly downsized, as management introduced a more flexible cost model into the business. Annual rent and occupancy expense were reduced by over $1,000,000 from the beginning of Fiscal 2003 to the beginning of Fiscal 2004. Over sixty employees were eliminated in several workforce reductions during 2003. Even with these cost reductions, revenues must increase in Fiscal 2004 over Fiscal 2003 in order to achieve positive operating profit and cash flows. The newly formed sales subsidiary, Canterbury Corporate University must increase sales pipeline activity in the near term to positively impact reported revenues for the training and consulting segment. If this does not occur it could negatively effect our operating cash flow. Downturn In Economy If the economy does not continue to recover and our clients continue to decrease or eliminate spending for technology and training, our ability to continue operating at our current reduced level of revenues will be greatly tested. The Company cannot generate profits or positive cash flow at recent revenue levels. Many clients have considered certain training to be discretionary in these uncertain economic times. Technology expenditures are being delayed by many of them in an attempt to balance their own budget objectives. These factors can cause significant financial disruption to small vendors such as Canterbury and could have a material adverse effect on our consolidated operating results. Competition If our customers choose to purchase goods and/or services from new or existing competitors, it could have a material adverse effect on our operating results and stock price. The various operating segments of the Company have relatively low barriers to entry. New and existing organizations are constantly attempting to penetrate our customer base. Larger, more financially seasoned competitors have the ability to overwhelm our markets and customers though more aggressive sales tactics. Internal training departments within our current and potential client base are also a primary competitor. There is also increasing competition from computer hardware and software vendors as they attempt to capture more of the technology services market. Finally, low cost providers in the training and consulting market are attempting to buy business through their low cost, value proposition. Dependency on Key Personnel If we are unable to recruit and retain qualified personnel, it could have a material adverse effect on our operating results. Our success depends on the continued employment of our senior executives and managers and other key personnel. The loss of these people, especially without advance notice, could have a material adverse effect on our operations. Sales and delivery staff are vital to ongoing customer relations and satisfaction. A significant portion of our consolidated revenue is service oriented (47% in the first quarter of Fiscal 2004). As such the loss of key personnel could have a negative impact on our ability to deliver and service our clients. As the economy improves, it will become more difficult to retain existing employees and attract new recruits due to the fact that they have more employment options available to them. Municipal Budget Constraints USC/Canterbury, our value added hardware reseller, does a significant amount of business with the states of Maryland and Virginia (82% of this segments total revenue for the quarter ended February 29, 2004). Lower tax revenues in these states have reduced the amount of funding for technology purchases recently and this trend could continue. If this trend does continue, it could have a material adverse effect on this segment's operating results. This segment has been the most profitable segment for the Company since Fiscal 2000, and its ongoing contribution to revenue and profits is vital to the Company's future. Pending City of Baltimore Contract USC/Canterbury is a bidder on an eight-year hardware procurement contract with the City of Baltimore. The decision by the City is currently pending and is expected during the second quarter of Fiscal 2004. If USC/Canterbury, the incumbent vendor, is not awarded this contract it could have a material adverse effect on the operating results of the value added hardware reseller segment and the Company. Shifts in Technology and Training Platforms In the training and consulting segment, much of our success depends upon the introduction and adoption of new technology. Our customers tend to increase their demand for training at times when new technology or software is being introduced. When there are delays in the introduction of these new products demand for training may decrease, and it could have a material adverse effect on our operating results. Also as our customers move toward new distance learning platforms to replace instructor-led training, our ability to retain our customers by providing these new electronic training services introduces a potential risk in client retention, which could have a material adverse effect on our operating results. Ongoing Collection of Notes Receivable With A Related Party A significant portion of the Company's assets and tangible net worth is represented by notes receivable with a related party. To date there have been no collection issues with the notes. However, if the related party experiences a significant downturn in operating cash flow or becomes insolvent the collectibility of the notes would be in jeopardy and could have a material adverse effect on the Company's asset base and tangible net worth. Acts of Terrorism The majority of revenue recorded by the Company is generated in both the New York City and Washington D.C. areas. Both of these locations were targets of the terrorist attacks in 2001. If there is a repeat of those events in either one of these markets, our clients there will be distracted from their normal course of business and as such will most likely delay or cancel projects with the Company. This could have a material adverse effect on our operating results. Other Factors Other factors that may affect our operating results include: * reduced reliance on reseller channel by hardware manufacturers * ability to secure sufficient contractor resources to met short-term customer demand * insufficient training facilities to met client demand for instructor-led technology training * loss of key clients through merger, sale or divestiture * ongoing cost of compliance with provisions of Sarbanes-Oxley Overview -------- The Company is engaged in the business of providing information technology products, services and training to both commercial and government clients. The focus of Canterbury is to become an integral part of our clients' IT solution, designing and applying the best products, services and training to help them achieve competitive advantage by helping their employees to succeed. The two primary business units for the Company are training and consulting and value added hardware reseller. In the training and consulting segment we provide a variety of technical and management training. Our training encompasses a wide spectrum of hardware and software products as well as many important business skill topics. These training products are delivered in a variety of ways: at our classroom facilities in New Jersey and New York; at our clients' location; or electronically via the Internet; or on the end users computer. Many of these training products are custom developed for our clients and contain a blended training solution combining both instructor-led training in the classroom with distance learning products to complete the education process. The Company also provides various technical consulting services to our clients including programming, systems integration, network security and network management. The value added reseller segment provides hardware and software solutions to the Mid-Atlantic market. Its primary focus is on state and local government clients who have an ongoing need for technology products and services. Liquidity and Capital Resources -------------------------------- Working capital at February 29, 2004 was $1,194,000 which was $587,000 lower than November 30, 2003. The lower revenue volume during the quarter caused a reduction in accounts receivable of $1,066,000. It is anticipated that consolidated accounts receivables will increase in subsequent periods as a result of higher sales volume. Offsetting this reduction in receivables was a corresponding reduction in accounts payable ($325,000) and unearned revenue ($100,000). The balance has continued to shrink as the Company has downsized in recent months, and overall business activity has declined. In February, 2004 the Company and Commerce Bank agreed to an amended loan agreement. The new agreement calls for a two-year, $1,500,000 revolving working capital line of credit collateralized by trade accounts receivable and inventory. The loan carries an interest rate of the prime rate plus one half of one percent (1/2%) and matures on May 1, 2005. As of February 29, 2004 the line of credit was unused. Total credit available under the agreement, subject to the carrying value of accounts receivable and inventory collateral amounted to $1,235,000 at February 29, 2004. The Bank's debt is secured by substantially all of the assets of the Company and requires compliance with covenants which include the maintenance of certain financial ratios and amounts. The Company is restricted by its bank from paying cash dividends on its common stock. As of February 29, 2004, the Company was in compliance with all of the financial covenants of its revised loan agreement. As part of the purchase price paid for the acquisition of Usertech in September, 2001, the Company agreed to pay $1,200,000 to the seller over three years at an annual amount of $400,000 plus accrued interest at 7% per annum on the outstanding balance. On August 4, 2003, the Company initiated mandatory binding arbitration proceedings against Ceridian Corporation, the previous owner of Usertech/Canterbury, as required in the Stock Purchase Agreement between the parties. The Company's claims arise from the September 2001 purchase of User Technology Services, Inc. from Ceridian. Canterbury is making various claims ranging from breach of contract/warranty to actual/legal fraud, fraudulent concealment, constructive/equitable fraud, and negligent/misrepresentation. Ceridian Corporation has denied the allegations set forth by the Company and has instituted a counterclaim in the arbitration proceedings. Ceridian is claiming breach of a sublease agreement by Canterbury for office space ($76,000) and acceleration of a note payable of $800,000. Canterbury has denied the allegations set forth in the counterclaim. In order to pursue its claims, Canterbury will sustain ongoing legal and filing fees and there is no assurance that the aforementioned arbitration will result in a favorable outcome for Canterbury. As a result of this pending arbitration and the extent of the damages claimed, the Company has withheld the scheduled $400,000 principal payment of the note payable to Ceridian, as well as accrued interest of $56,000 due on September 28, 2003, as the damages sought far outweigh the note payable to them. The disputed $800,000 is classified as part of the current portion of long-term debt as of February 29, 2004. Cash flow used in operating activities for the quarter ended February 29, 2004 was $(42,000) an improvement of $134,000 over the same three month period in Fiscal 2003. Significant revenue declines in all operating segments contributed to the loss. Total assets declined by $1,222,000 from November 30, 2003 while total liabilities were reduced by $489,000. The Company's current ratio was 1.50:1.00 versus 1.62:1.00 at November 30, 2003. Management believes that the Company will have sufficient funds to cover cash flow requirements for Fiscal 2004 as a result of significant reductions in fixed operating costs, its satisfactory balance sheet, its ability to borrow from its revolving line of credit and ongoing collection from its note receivable. Management anticipates that the recent significant reduction in fixed expenses if coupled with substantially improved sales activity could permit the Company to return to a positive operating cash flow position in the future. There was no material commitment for capital expenditures as of February 29, 2004. Inflation was not a significant factor in the Company's financial statements. RESULTS OF OPERATIONS ===================== Revenues --------- Consolidated revenues decreased by $1,774,000 (40%) in the first three months of Fiscal 2004 as compared to the same period in 2003. This overall reduction was the result of an across the board revenue decease in all operating segments of the Company. The training and consulting segment recorded a decline in revenues of $1,413,000 (53%). The value added hardware reseller segment saw revenues decline by $361,000 (20%). Software development revenues for Fiscal 2004 and 2003 have been excluded given that this segment has been classified as a discontinued operation as of February 29, 2004. Technical staffing revenues are no longer being reported due to its classification as a discontinued operating segment effective as of the fourth quarter of Fiscal 2003. The downward trend in consolidated revenues continued through the first quarter of Fiscal 2004. Technology spending by many customers has been reduced, delayed or eliminated. The significant reduction in Company revenues had forced drastic changes to the cost structure of the organization during Fiscal 2003. While delivery and support costs have been greatly reduced through consolidation of facilities and elimination of under-utilized personnel, the Company will attempt to invest further into sales and marketing in order to take advantage of sales opportunities as the economy begins to improve. During the fourth quarter of 2003, the Company restructured its sales department. A Corporate Sales Manager was hired to consolidate the three separate sales teams in the training and consulting segment. Canterbury Corporate University, Inc. ("CCU"), a wholly owned subsidiary of the Company, was formed to market and sell all of Canterbury's training products and services in one comprehensive training unit. The Company has always attempted to promote cross selling of our products and services between subsidiaries. Some of our largest clients are purchasers of the various training products we offer. Under previous subsidiary management, the sharing of business leads did not occur at an acceptable level, and many potential sales opportunities were lost before they were ever attempted. The Corporate Sales Manager and the Company have initiated several key sales strategies in order to overcome the shortcomings of the past including the lack of attention to marketing, sales and more by the former President of Usertech. All training and consulting sales representatives are being compensated and measured using the same plan. Quota attainment is now a benchmark for continued employment. Quotas are set up with goals for selling all of the Company's training and consulting products, not just what was sold in the past on a subsidiary-by-subsidiary basis. A Customer Relationship Management ("CRM") system is being installed to better consolidate, track and manage the pipeline of sales activity. Also based upon feedback from our customers, the Company is developing new products utilizing both instructor-led and distance-learning delivery platforms. We have also formalized reseller relationships with several high quality channel partners, whereby the sales team introduces the various products from this program to our client base and the Company receives a negotiated share of any sales generated. The Company has taken several steps to increase lead generation. The formation of an inside sales team; contracting with an outside telemarketing firm; increasing the amount of marketing information to our clients through e- mail announcements; pilot program events and more informative web sites are all contributing to new lead flow. During the fourth quarter of Fiscal 2003, the Company made the decision to exit the open enrollment public computer training segment that was part of CALC/Canterbury's offerings for the past twenty years. The high fixed cost of delivery was too much to sustain in relationship to the amount of revenue being generated. By exiting this training delivery methodology, there will be an anticipated decline in instructor-led computer training revenues for Fiscal 2004. Reduced capacity, reduced marketing emphasis, and alternative delivery options will all contribute to the projected decline. CALC/Canterbury will continue to offer private and general admission classes at its two training facilities (New York City and Parsippany, New Jersey) as well as room rentals. There will be more emphasis on offering private training at the clients' locations. This planned exit from the scheduled open enrollment public training segment was done in order to reduce the high fixed cost associated with its delivery and introduce more variability to the cost structure of our training business. In the value added hardware reseller segment, budget constraints in state and local municipalities had a negative impact on technology spending during 2003 and the early part of Fiscal 2004. While this segment was among the last to feel the impact of the recent economic downturn, it will also take longer to recover based on projected tax revenues flowing into state and local budgets and then finally into capital expenditures. The $361,000 reduction in revenues for the first three months of Fiscal 2004 as compared to 2003 is due primarily to reduced pricing for most computer hardware products. While it is difficult to pinpoint the precise decline in the cost and sales price of the specific computer hardware sold by this segment over the past year, it is safe to estimate that prices have dropped anywhere from 20% to 30%. If this is the case, most, if not all of the decline in revenue for the first quarter of Fiscal 2004 can be attributed to a lower sales price on approximately the same unit volume. This trend may continue for the balance of Fiscal 2004. It is management's intent to more fully integrate the sales team from the training and consulting segment with the value added hardware reseller segment. Product profiles are being shared between the two groups and the Company anticipates the efforts of these two sales organizations will become more integrated during Fiscal 2004. It is projected that the majority of product to be sold in Fiscal 2004 may be Hewlett Packard/Compaq hardware. When Hewlett Packard/Compaq moves toward an agent model with their resellers, USC/Canterbury would be paid an agent fee which approximates the current gross profit from each sale. This may greatly reduce the reported revenue in this segment. The manufacturer would record the revenue and hold the accounts receivable with the client. This possible change in business flow has not happened to date, but it is possible that the migration to the agent model will begin in the second quarter of Fiscal 2004, and may then become more significant during the second half of the year. The value added hardware reseller segment has always had very high client revenue concentration. In the first quarter of Fiscal 2004 two groups of clients accounted for 82% of the revenue in this segment. There is obvious risk associated with this very high customer concentration. See Footnote 1, Concentration of Risk, for more details on this topic. USC/Canterbury is currently making a concerted effort to diversify its revenue mix. Certain sales representatives have been given responsibility, through quotas, to penetrate the commercial market in the Baltimore/Washington area. New strategic relationships have been formed with several manufacturers to increase product offerings and reduce dependency on Hewlett Packard/Compaq. Management believes that there is still a significant amount of uncertainty regarding future revenues from the value added hardware reseller segment for Fiscal 2004. Technology spending appears to be recovering slightly in the early part of 2004, but the duration of the recovery is not yet known. More clients are engaging us in conversations and proposals about new projects and training requirements. The sales pipeline is fuller now than it was in the last half of Fiscal 2003. One of the biggest challenges that faces the Company is the timing of customers decisions to begin project work that has already been sold. The delays that were experienced late in Fiscal 2003 have continued into the early part of 2004. These delays add to the uncertainty in revenue projections for Fiscal 2004. It is management's belief that by the middle of the year we will have a much better understanding of our client's schedule and requirements. Costs and Expenses ------------------- Total costs and expenses decreased by $1,654,000 (42%) in the first three months of Fiscal 2004 versus the same period in Fiscal 2003. The decrease was due to reduced sales volume in both product and service revenues, as well as the significant reduction in fixed costs which were eliminated in the fourth quarter of Fiscal 2003. Overall gross profit increased to 14% from 11% in Fiscal 2003. Service gross profit improved to 17% in Fiscal 2004 from 12% in the previous year's first quarter. Product gross profit was approximately 10% for the first quarters of Fiscal 2004 and 2003. Currently the biggest problem regarding gross profit is sales volume. The absolute dollar contribution must increase to cover operating costs and show a profit. Product margins were negatively effected by several factors. Continued weakness in technology spending forced margins lower as many suppliers competed for the same business. Manufacturers continued to eliminate reseller incentives as the products they were offering became more commoditized. The Company is currently partnering with several new hardware and software manufacturers who have specialized products that command higher profit margins. These types of relationships could become more important for the future as downward pressure continues on margins for personal computers, printers and servers. Management anticipates that gross margins for product sales will remain in the 10% range for the balance of Fiscal 2004. While overall costs and expenses have been reduced through reductions in long-term lease commitments and several workforce reductions, the challenge the Company faces now is to increase revenues beyond breakeven levels and reap the benefits that the leverage of reduced overhead and fixed costs will provide. This is borne out by the fact that the training and consulting segment reported a 42% improvement in gross profit percentage (from 12% to 17%) on a 53% decline in revenues. When, and if, revenues increase, more profit is attainable due to the fact that the fixed cost component has been drastically reduced and a larger portion of the delivery expense will be variable in nature. However, if sales increase significantly in the short term, the Company risks having insufficient resources to deliver services due to reduced manpower and facility capacity. The Company will need to contract for part-time consultants and acquire additional space through short-term rentals in order to meet client demand, which is possible, but would be more expensive to implement. Selling expense decreased by $98,000 (24%) in the first quarter of Fiscal 2004 as compared to the previous year. Personnel expense (salaries, bonuses, commissions and payroll burden) decrease of $90,000 was the biggest component of the reduction. There were less sales and marketing staff during Fiscal 2004 as non-productive sales representatives were terminated during the end of Fiscal 2003. The Company is actively searching additional sales personnel and is currently recruiting in several markets throughout the country, including New York City. General and administrative expense was reduced by $338,000 (21%) due primarily to significant reductions in administrative and support staff as part of the workforce reduction discussed previously. Interest income decreased by $75,000 (52%) in the first quarter of Fiscal 2004 as compared to the same three months in the previous year. The prepayment of the note receivable from the sale of a former subsidiary in September 2003 and the $500,000 reduction in the demand note and accompanying reduction in the interest rate with a related party in early 2003 were the primary reasons for the decrease. Total notes receivable decreased by approximately $3,200,000 in the twelve-month period ending February 29, 2004. Interest expense was reduced by $14,000 (47%) in the first quarter of Fiscal 2004 versus Fiscal 2003. Reduced borrowings on the revolving line of credit and the payoff of the remaining term debt ($800,000) with the primary lender were the major reasons for the reduction. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK =================================================================== We are not exposed to market risk from changes in interest rates. Currently, we have $900,000 invested in short term certificates of deposit and $300,000 invested in a municipal bond mutual fund. We account for these investments in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These investments are treated as available-for- sale under SFAS No. 115. The carrying value of these investments approximates fair market value. ITEM 4. CONTROLS AND PROCEDURES ================================ As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer/Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings with the Securities and Exchange Commission. The Company's management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company's last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting. PART II - OTHER INFORMATION ========================================= Item 1 Legal Proceedings - None Item 2 Changes in Securities - None Item 3 Defaults Upon Senior Securities - None Item 4 Submission of Matters to a Vote of Stock Holders - None Item 5 Other Information - None Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 31 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act-Kevin J. McAndrew Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act. - Kevin J. McAndrew (b)Reports on Form 8-K: On December 8, 2003, the Company filed a Current Report on Form 8-K dated November 17, 2003 to disclose, under Item 5, the Company's exit from the public classroom portion of its information technology training business. The Form 8-K also included, under Item 7, a press release with respect to the event disclosed. CANTERBURY CONSULTING GROUP, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CANTERBURY CONSULTING GROUP, INC. ----------------------------------- (Registrant) By/s/ Kevin J. McAndrew ---------------------------------------------- Kevin J. McAndrew President and Chief Executive Officer By: /s/ Kevin J. McAndrew ---------------------------------------------- Kevin J. McAndrew Chief Financial Officer April 13, 2004