-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q+7YrjbbYel3L0LOUMz0C8BEjMt50E1ebl5ugPsmdnHJSwLLkTR6Wc+Ocn4nqoGx e2xsIs+dUIHVdvAgJ9Q2ZA== 0000794927-04-000026.txt : 20041007 0000794927-04-000026.hdr.sgml : 20041007 20041007104636 ACCESSION NUMBER: 0000794927-04-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040831 FILED AS OF DATE: 20041007 DATE AS OF CHANGE: 20041007 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANTERBURY CONSULTING GROUP INC CENTRAL INDEX KEY: 0000794927 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 232170505 STATE OF INCORPORATION: PA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15588 FILM NUMBER: 041069504 BUSINESS ADDRESS: STREET 1: 352 STOKES ROAD STREET 2: SUITE 200 CITY: MEDFORD STATE: NJ ZIP: 08055 BUSINESS PHONE: 609-953-0044 MAIL ADDRESS: STREET 1: 352 STOKES ROAD STREET 2: SUITE 200 CITY: MEDFORD STATE: NJ ZIP: 08055 FORMER COMPANY: FORMER CONFORMED NAME: CANTERBURY INFORMATION TECHNOLOGY INC DATE OF NAME CHANGE: 19970620 FORMER COMPANY: FORMER CONFORMED NAME: CANTERBURY CORPORATE SERVICES INC DATE OF NAME CHANGE: 19940323 FORMER COMPANY: FORMER CONFORMED NAME: CANTERBURY EDUCATIONAL SERVICES INC /PA/ DATE OF NAME CHANGE: 19920703 10-Q 1 ccg8304.txt QUARTERLY REPORT FOR THE PERIOD ENDED AUGUST 31, 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 August 31, 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 1,965,822 shares. FORM 10-Q PART 1 - FINANCIAL INFORMATION - --------------------------------- ITEM 1. FINANCIAL STATEMENTS ============================== CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEET ---------------------------------- ASSETS - ------ August 31, 2004 November 30, (Unaudited) 2003 ----------------- -------------- Current Assets: Cash and cash equivalents $1,015,756 $1,385,824 Marketable securities 100,000 300,000 Accounts receivable, net of allowance for doubtful accounts of $219,000 and $271,000 4,813,282 2,477,060 Notes receivable - current portion 304,741 287,845 Prepaid expenses and other assets 25,531 93,311 Inventory, principally finished goods, at cost 307,137 92,599 ----------- ----------- Total Current Assets 6,566,447 4,636,639 Property and equipment at cost, net of accumulated depreciation of $1,187,000 and $1,093,000 354,885 604,449 Goodwill 2,083,381 2,433,381 Deferred tax assets 750,532 759,000 Notes receivable 3,241,538 3,472,253 Other assets 52,780 32,821 ----------- ----------- Total Assets $13,049,563 $11,938,543 =========== =========== See Accompanying Notes FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ August 31, 2004 November 30, (Unaudited) 2003 ----------------- -------------- Current Liabilities: Accounts payable - trade $ 2,355,498 $ 963,588 Accrued expenses 584,761 532,597 Unearned revenue 332,681 470,107 Current portion, long-term debt 832,774 889,490 ----------- ----------- Total Current Liabilities 4,105,714 2,855,782 Long-term debt 1,360,997 62,934 Subordinated convertible debt 355,000 355,000 ----------- ----------- Total Liabilities 5,821,711 3,273,716 ----------- ----------- Commitments and Contingencies Stockholders' Equity: Common stock, $.001 par value, 50,000,000 shares authorized; 1,965,822 and 2,097,251 issued and outstanding 1,966 2,097 Additional paid-in capital 22,751,621 24,248,039 Accumulated deficit (13,375,543) (11,989,817) Notes receivable for common stock- related parties (2,150,192) (3,595,492) ----------- ----------- Total Stockholders' Equity 7,227,852 8,664,827 ----------- ----------- Total Liabilities and Stockholders' Equity $13,049,563 $11,938,543 =========== =========== See Accompanying Notes FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three-Months Ended August 31, Nine-Months Ended August 31, 2004 2003 2004 2003 ----- ---- ----- ---- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Service revenue $ 1,687,508 $ 2,511,377 $ 4,773,849 $ 8,319,397 Product revenue 7,449,404 5,628,275 10,386,774 9,429,739 ----------- ----------- ----------- ----------- Total net revenue 9,136,912 8,139,652 15,160,623 17,749,136 Service costs and expenses 1,141,583 1,830,168 3,372,608 6,162,112 Product costs and expenses 6,949,037 5,161,795 9,553,248 8,569,639 ----------- ----------- ----------- ---------- Total costs and expenses 8,090,620 6,991,963 12,925,856 14,731,751 Gross profit 1,046,292 1,147,689 2,234,767 3,017,385 Selling 330,312 438,648 1,055,615 1,243,166 General and administrative 769,052 1,072,011 2,343,014 3,444,644 Goodwill Impairment 350,000 - 350,000 - ----------- ----------- ----------- ----------- Total operating expenses 1,449,364 1,510,659 3,748,629 4,687,810 Other income/(expense) Interest income 81,502 116,258 215,168 387,569 Interest expense (34,032) (29,408) (74,050) (90,358) Other 11,863 989 34,916 2,935 ----------- ------------ ----------- ---------- Total other income/(expense) 59,333 87,839 176,034 300,146 Loss from continuing operations before income taxes (343,739) (275,131) (1,337,828) (1,370,279) Income tax (benefit)/provision - (71,000) - (261,000) ----------- ----------- ----------- ----------- Loss from continuing operations (343,739) (204,131) (1,337,828) (1,109,279) (Loss)/income from discontinuing operations (net of income taxes of $0, $2,000, $0 and $(11,000)) - 8,626 (47,898) (47,790) ----------- ---------- ----------- ----------- Net loss $ (343,739) $ (195,505) $(1,385,726) $(1,157,069) ============= ========== =========== =========== Net loss per share and common share equivalents Basic and diluted: Loss from continuing operations $(.17) $(.11) $(.65) $(.61) Loss from discontinuing operations - - (.02) (.03) ----------- ----------- ----------- ----------- Net loss $(.17) $(.11) $(.67) $(.64) ============= =========== =========== ========== Weighted average number of common shares - basic and diluted 2,011,200 1,852,700 2,066,800 1,814,100 ============= =========== ============ ==========
See Accompanying Notes FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED AUGUST 31, 2004 AND AUGUST 31, 2003 August 31, 2004 August 31, 2003 ------------------- ----------------- (Unaudited) (Unaudited) Operating activities: Net loss $(1,385,726) $(1,157,069) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 217,901 279,481 Provision for losses on accounts receivable 14,500 (20,975) Deferred income taxes 8,468 (253,535) 401(k) contributions issued in stock - 211,029 Loss on sale of subsidiary 9,194 - Issuance of stock options to consultants for services - 12,740 Issuance of common stock to officers in lieu of salary - 77,504 Goodwill impairment 350,000 - Changes in operating assets, Accounts receivable (2,350,722) 297,663 Inventory (214,538) (216,743) Prepaid expenses and other assets 67,780 20,953 Other assets - non-current (19,959) 2,415 Accounts payable 1,391,910 667,822 Accrued expenses 52,164 (255,369) Unearned revenue (137,426) (183,520) ---------- --------- Net cash used in operating activities (1,996,454) (517,604) ---------- --------- Investing activities: Proceeds from redemption of marketable securities 200,000 - Capital expenditures, net (28,216) (26,862) Proceeds from payments on notes receivable 213,255 857,754 ---------- --------- Net cash provided by investing activities 385,039 830,892 ---------- -------- Financing activities: Proceeds from payments on notes receivable for capital stock - related parties - 45,315 Principal payments on long term debt (58,653) (365,467) Proceeds from subordinated convertible debt - 355,000 Proceeds from line of credit 1,300,000 - ---------- --------- Net cash provided by financing activities 1,241,347 34,848 Net (decrease)/increase in cash (370,068) 348,136 Cash, beginning of period 1,385,824 395,477 ---------- --------- Cash, end of period $1,015,756 $ 743,613 ========== ========== Non Cash Transaction: During the second quarter of Fiscal 2004, the Company sold ATM/Canterbury to its previous owner. The Company received and retired 25,000 shares of its common stock in exchange for 100% of the common stock of ATM/Canterbury. During the third quarter of Fiscal 2004 the Company entered into a $38,824 capital lease obligation in exchange for new equipment. During the third quarter of Fiscal 2004, 106,429 shares of Company stock was returned in full cancellation of non-recourse notes totaling $1,445,000. These shares were retired upon receipt by the Company. 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, 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 August 31, 2004 and November 30, 2003, the Company held marketable securities comprised of $100,000 and $300,000 investment, respectively, 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 August 31, 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 August 31, 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 three or nine-month period ended August 31, 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 were headquartered in the Mid Atlantic and Northeast region of the country. As such, the majority of revenues were generated in these two geographic regions. For the three and nine months ended August 31, 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 10% of this segment's revenue and 8% of consolidated revenue for the three-month period ended August 31, 2004. Total purchases under this contract represented 23% of this segment's revenue and 16% of consolidated revenue for the nine-month period. During April, 2004 USC/Canterbury was awarded the contract, along with one other vendor, to provide the City of Baltimore with Hewlett Packard hardware. The contract is for three years with five one-year options by the City of Baltimore. A second group of customers, from a county in Virginia, accounted for 65% of the revenues in the reseller segment and 44% of consolidated revenues for the first nine months of Fiscal 2004. This group of over 80 customers purchased equipment from USC/Canterbury under the City of Baltimore contract as well. For the quarter ended August 31, 2004, this group of customers accounted for 81% of revenues in this segment and 65% of consolidated revenues. For the nine months ended August 31, 2004, one Usertech/Canterbury customer accounted for 20% of service revenue and 6% of total revenue. For the quarter ended August 31, 2004, the same Usertech/Canterbury customer accounted for 20% of service revenue and 4% of total revenue. One vendor represented 64% of the product cost in the Value Added Reseller Segment and 48% of consolidated costs for the first nine months of Fiscal 2004. Another major vendor represented 26% and 19% of segment and consolidated costs and expenses, respectively for the same nine-month period. For the quarter ended August 31, 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 33% of this segment's revenue and 22% of consolidated revenue. A second group of customers, from a county in Virginia, accounted for 61% of the revenues in the reseller segment and 42% of consolidated revenues for the quarter. This group of over 80 customers purchased equipment from USC/Canterbury under the City of Baltimore contract as well. 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 and nine months ended August 31, 2004 and August 31, 2003, for each segment, is as follows: For the nine months ended August 31, Training Value Added and Hardware 2004 Consulting Reseller Corporate Total - ------------ ------------- ----------- --------- ---------- Revenues $4,773,849 $10,386,774 $ - $15,160,623 (Loss)/income before taxes (724,859) 369,713 (982,682) (1,337,828) Assets 3,256,021 3,658,865 6,134,678 13,049,564 Interest income 33 - 215,135 215,168 Interest expense 49,760 1,186 23,104 74,050 Depreciation and amortization 192,798 4,373 20,730 217,901 Training Value Added and Hardware 2003 Consulting Reseller Corporate Total - ------------ ------------- ----------- ------------ ----------- Revenues $8,319,397 $9,429,739 $ - $17,749,136 (Loss)/income before taxes (942,984) 464,857 (892,152) (1,370,279) Assets 5,864,023 1,704,724 10,239,924 17,808,671 Interest income 214 - 387,355 387,569 Interest expense 47,697 821 41,840 90,358 Depreciation and amortization 239,673 14,122 17,608 271,403 For the three months ended August, 31, Training Value Added and Hardware 2004 Consulting Reseller Corporate Total - ------------ ------------- ----------- --------- ---------- Revenues $1,687,508 $7,449,404 $ - $9,136,912 (loss)/income before taxes (383,887) 362,693 (322,545) (343,739) Assets 3,256,021 3,658,865 6,134,678 13,049,564 Interest income 2 - 81,500 81,502 Interest expense 17,790 49 16,193 34,032 Depreciation and amortization 62,210 1,405 6,910 70,525 Training Value Added and Hardware 2003 Consulting Reseller Corporate Total - ------ ---------- ----------- ------------ ------------- Revenues $2,511,377 $5,628,275 $ - $ 8,139,652 (Loss)/income before taxes (280,384) 304,752 (299,499) (275,131) Assets 5,864,023 1,704,724 10,239,924 17,808,671 Interest income - - 116,258 116,258 Interest expense 15,277 295 13,836 29,408 Depreciation and amortization 69,442 4,540 5,668 79,650 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 $3,546,279 at August 31, 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 August 31, 2004 and November 30, 2003. The company has received all scheduled monthly installments for notes receivable outstanding as of August 31, 2004. 4. Property and Equipment ========================== Property and equipment, which is recorded at cost, consists of the following: August 31, 2004 November 30, 2003 ----------------- ----------------- Machinery and equipment $1,240,870 $1,434,874 Furniture and fixtures 224,895 225,230 Leased property under capital leases and leasehold improvements 76,066 37,242 ---------- ---------- 1,541,831 1,697,346 Less: Accumulated depreciation (1,186,946) (1,092,897) ---------- ---------- Net property and equipment $ 354,885 $ 604,449 =========== =========== Accumulated depreciation of leased property under capital leases at August 31, 2004 amounted to $14,000. 5. Goodwill ========================== The Company recorded $350,000 of goodwill impairment charges related to MSI/Canterbury (Training and Consulting Segment) during the third quarter of Fiscal 2004. The continued declining revenues during the year (and especially over the summer months) has caused a significant reduction in MSI/Canterbury operating income over previous years. The fair value of this subsidiary's goodwill was estimated based on recent earnings history and our future earnings expectations for this business as of August 31, 2004. The Company will perform its annual goodwill impairment tests for all reporting units as of November 30, 2004. The changes in carrying amount of goodwill for the nine months ended August 31, 2004 by reportable segment are as follows: Training Value Added and Hardware Consulting Reseller Total ------------- ------------- -------------- Balance as of November 30, 2003 $2,074,629 $ 358,752 $ 2,433,381 Impairment loss for 2004 (350,000) - (350,000) ---------- ---------- ----------- Balance as of August 31, 2004 $1,724,629 $ 358,752 $2,083,381 ========== ========== =========== 6. Long-Term Debt ==================== August 31, 2004 November 30, 2003 ----------------- ----------------- Long-term obligations consist of: Note payable for acquisition $800,000 $800,000 Revolving credit line 1,300,000 - Capital lease obligations 63,298 34,589 Notes payable - equipment 30,473 117,835 ---------- ---------- 2,193,771 952,424 Less: Current maturities (832,774) (889,490) ---------- ---------- $1,360,997 $ 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 the maturity date was recently extended six months to November 1, 2005. Total credit available under the agreement, subject to the carrying value of accounts receivable and inventory collateral amounted to $1,500,000 at August 31, 2004. Total unused credit available amounted to $200,000 at August 31, 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 August 31, 2004, the Company was in compliance with all of the financial covenants of its revised loan agreement. The Company, however, is within $62,000 of violating its cumulative pretax loss covenant as of August 31, 2004 (limit per covenant is $1,050,000 cumulative loss from December 1, 2003). The actual pretax loss amount is calculated as loss from continuing operations plus any non-cash charge (goodwill impairment, income tax reserves, etc.) 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 $800,000 in principal payments of the note payable to Ceridian, as well as the total accrued interest of $112,000, through September 28, 2004, 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 August 31, 2004. Aggregate fiscal maturities on long-term debt, exclusive of obligations under capital leases, are $802,000 in 2004; $1,310,000 in 2005; and $10,000 in 2006, and $8,000 in 2007. The carrying value of the long-term debt approximates its fair value. 7. Capital Leases ================== Capital lease obligations are for certain equipment leases which expire through fiscal year 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 August 31, 2004: Total minimum lease payments through November 30, 2004 $ 8,709 Total minimum lease payments through November 30, 2005 34,837 Total minimum lease payments through November 30, 2006 30,728 Total minimum lease payments through November 30, 2007 9,200 ------- Total minimum lease payments 83,474 Less amount representing interest (20,176) ------- Present value of long-term obligations under capital leases $63,298 ======= 8. 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. These officers and directors purchased their ownership from this outside group. The Company holds notes receivable in the amount of $3,546,279 from this corporation of which $2,599,413 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 August 31, 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 $2,150,000 and $3,595,000, respectively. These non-recourse notes are collateralized by common stock of the Company and are reported as a contra-equity account. Interest rates average 4%. During the third quarter of Fiscal 2004, 106,429 shares of Company common stock was returned and retired in full satisfaction of $1,445,000 in notes receivable plus accrued interest. As part of this third quarter transaction, all seven members of its Board of Directors (inclusive of three corporate executives) as well as two subsidiary presidents have returned 88,571 shares of Canterbury restricted common stock to the Company. These shares had been posted as collateral by all of these individuals against notes payable to the Company totaling $1,202,800. The notes came due on June 28, 2004, and the aforementioned individuals had the option of returning these shares to the Company or paying the associated notes and accrued interest in full. All of the individuals determined to return their shares to the Company. There was no impact on the Company's income statement or net worth as a result of these common stock retirements since the carrying value of the common stock and the notes receivable were identical. The Company uses variable accounting under SFAS 123 to account for Company stock issued for non-recourse notes. This type of transaction is similar in economic substance to the issuance of stock options. No amounts have been charged to earnings to date due to the decrease in market value of Company stock during the term of the notes. 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 additional stock options, stock or any other form of equity to the recipients for all of Fiscal 2002. 9. Stock Listing ================= On September 8, 2004 the Nasdaq Stock Market ("Nasdaq") notified Canterbury that the Company's common stock has not maintained a minimum market value of publicly held shares ("MVPHS") of $1,000,000 as required for continued inclusion by Nasdaq's Marketplace Rule 4310(c)(7) (the "Rule"). Therefore, in accordance with Marketplace Rule 4310(c)(8)(B), the Company will be provided 90 calendar days, or until December 7, 2004, to regain compliance. If, at anytime before December 7, 2004, the MVPHS of the Company's common stock is $1,000,000 or more for a minimum of 10 consecutive trading days, Nasdaq will provide written notification that the Company complies with the Rule. If compliance with this Rule cannot be demonstrated by December 7, 2004, Nasdaq will provide written notification that the Company's securities will be delisted. On June 23, 2004 Nasdaq had notified Canterbury that the bid price of the Company's common stock had closed below the minimum requirement for continued inclusion under Marketplace Rule 4310(c)(4), and that in accordance with Marketplace Rule 4310(c)(8)(D), the Company must regain compliance by December 20, 2004 or be delisted. 10. Discontinued Operations =========================== During March 2004, the Company entered into negotiations to sell ATM/Canterbury back to the original owner. The transaction was finalized in April, 2004. Canterbury sold 100% of the stock in ATM/Canterbury in exchange for 25,000 shares of Canterbury common stock (which have been retired), that the owner had retained from the original transaction in 1997. The transaction was effective as of March 3, 2004. As a result of the transaction the Company recorded a $9,194 loss on the sale of discontinued operation in the second quarter of Fiscal 2004. The Company's decision to sell ATM/Canterbury was based on the lack of demand for ATM/Canterbury's products and services by existing customers; the inability to increase sales to new customers and the Company's desire to focus on its training and consulting segment and its value added reseller segment. Historical financial data for ATM/Canterbury for the three months ended August 31, 2004 and August 31, 2003: August 31, 2004 August 31, 2003 ----------------- ----------------- Revenues $ - $102,574 Pretax loss - (23,342) Historical financial data for ATM/Canterbury for the nine months ended August 31, 2004 and August 31, 2003: August 31, 2004 August 31, 2003 ----------------- ----------------- Revenues $58,866 $307,260 Pretax loss (38,704) (72,603) 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 August 31, 2004 and August 31, 2003: August 31, 2004 August 31, 2003 ----------------- ----------------- Revenues $ - $ 83,463 Pretax income - 33,966 Historical financial data for DMI/Canterbury for the nine months ended August 31, 2004 and August 31, 2003: August 31, 2004 August 31, 2003 ----------------- ----------------- Revenues $ - $368,786 Pretax income - 13,813 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, hardware and consulting. The Company's recovery from the past several years of economic downturn continues to lag behind the current economic recovery. Delay Or Inability To Return To Positive Operating Cash Flow While the Company has taken significant steps to reduce fixed costs and increase revenue, a significant delay in returning to positive operating cash flow could adversely effect our liquidity and ability to conduct business. The Company reduced payroll expense and facility leases significantly during Fiscal 2003. Four facilities were closed and two more were greatly downsized, as management introduced a more flexible cost model into the business. Annual rent and occupancy expense were reduced by over $1,000,000 from the beginning of Fiscal 2003 to the beginning of Fiscal 2004. Over sixty employees were eliminated in several workforce reductions during 2003. Even with these cost reductions, revenues must increase in Fiscal 2005 over Fiscal 2004 in order to achieve positive operating profit and cash flows. The newly formed sales subsidiary, Canterbury Corporate University must increase sales pipeline activity in the near term to positively impact reported revenues for the training and consulting segment. If this does not occur it could negatively effect our operating cash flow. Downturn In Economy If the economy does not continue to recover and if our clients continue to decrease, delay 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 current customers choose to purchase goods and/or services from new or existing competitors, it could have a material adverse effect on our operating results. The various operating segments of the Company have relatively low barriers to entry. New and existing organizations are constantly attempting to penetrate our customer base. Larger, more financially seasoned competitors have the ability to overwhelm our markets and customers though more aggressive sales tactics. Internal training departments within our current and potential client base are also a primary competitor. There is also increasing competition from computer hardware and software vendors as they attempt to capture more of the technology services market. Finally, low cost providers in the training and consulting market are attempting to buy business through their low price business model. Dependency on Key Personnel If we are unable to recruit and retain qualified personnel, it could have a material adverse effect on our operating results. Our success depends on the continued employment of our senior executives and managers and other key personnel. The loss of these people, especially without advance notice, could have a material adverse effect on our operations. An ongoing sales and delivery staff are vital to ongoing customer relations and satisfaction. A significant portion of our consolidated revenue is service oriented (31% for the first nine months 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 since they will have more employment options available to them. Municipal Budget Constraints USC/Canterbury, our value added hardware reseller, does a significant amount of business with the states of Maryland and Virginia (88% of this segments total revenue for the nine months ended August 31, 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 continues, it could have a material adverse effect on this segment's operating results. This segment has been the most profitable segment for the Company since Fiscal 2000, and its ongoing contribution to revenues and profits is vital to the Company's future. Shifts in Technology and Training Platforms In the training and consulting segment, much of our success depends upon the introduction and adoption of new technology. Our customers tend to increase their demand for training at times when new technology or software is being introduced. When there are delays in the introduction of these new products demand for training may decrease, and it could have a material adverse effect on our operating results. Also as our customers move toward new distance learning platforms to replace instructor-led training, our ability to retain our customers by providing these new electronic training services introduces a potential risk in client retention, which could have a material adverse effect on our operating results. Ongoing Collection of Notes Receivable With A Related Party A significant portion of the Company's assets and tangible net worth is represented by notes receivable with a related party. To date there have been no collection issues with these notes. However, if the related party experiences a significant downturn in operating cash flow or becomes insolvent the collectibility of the notes would be in jeopardy and could have a material adverse effect on the Company's asset base, cash flow and tangible net worth. Acts of Terrorism The majority of revenues recorded by the Company is generated in both the New York City and Washington D.C. areas. Both of these locations were targets of the terrorist attacks in 2001. If there is a repeat of those events in either one of these markets, our clients there could be distracted from their normal course of business and as such would most likely delay or cancel projects with the Company. This could have a material adverse effect on our operating results. Other Factors Other factors that may affect our operating results include: * reduced reliance on reseller channel by hardware manufacturers * inability to secure sufficient contractor resources to meet short- term customer demand * insufficient training facilities to meet client demand for instructor-led technology training * loss of key clients through merger, sale or divestiture * ongoing cost of compliance with provisions of the Sarbanes-Oxley legislation and other such compliance required by Nasdaq, the Securities and Exchange Commission or other regulatory bodies * loss of working capital financing Overview - -------- The Company is engaged in the business of providing information technology products, services and training to both commercial and government clients. Canterbury's focus is to become an integral part of our clients' IT solution, designing and applying the best products, services and training to help them achieve competitive advantage by helping their employees to succeed. The two primary business units for the Company are training and consulting and value added hardware reseller. In the training and consulting segment we provide a variety of technical and management training. Our training encompasses a wide spectrum of hardware and software products as well as many necessary business skill topics. These training products are delivered in a variety of ways: at our classroom facilities in New Jersey and New York; at our clients' locations; electronically via the Internet; or on the end user's computer. Many of these training products are custom developed for our clients. Many contain a blended training solution combining both instructor-led training in the classroom with distance learning products to complete the educational process. The Company also provides various technical consulting services to our clients including programming, systems integration, network security and network management. The value added reseller segment provides hardware and software solutions to the Mid-Atlantic market. Its primary focus is state and local government clients that have an ongoing need for technology products and services. Liquidity and Capital Resources - -------------------------------- Working capital at August 31, 2004 was $2,460,000, an increase of $679,000 since November 30, 2003. The increase is due to the significant increase in accounts receivable of $2,336,000, offset by the smaller increase in accounts payable of $1,392,000. The annual Prince William County purchase of desktops and printers during the third quarter was the reason for the increase in both these accounts. The Company utilized its revolving line of credit to fund this large transaction (over $5,000,000) and as of August 31, 2004 there was $1,300,000 still outstanding on the line, which is classified as long term debt on the balance sheet. 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 the maturity date was recently extended six months to November 1, 2005. Total credit available under the agreement, subject to the carrying value of accounts receivable and inventory collateral amounted to $1,500,000 at August 31, 2004. Total unused credit available amounted to $200,000 at August 31, 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 August 31, 2004, the Company was in compliance with all of the financial covenants of its revised loan agreement. The Company, however, is within $62,000 of violating its cumulative pretax loss covenant as of August 31, 2004 (limit per covenant is $1,050,000 cumulative loss from December 1, 2003). The actual pretax loss amount is calculated as loss from continuing operations plus any non-cash charge (goodwill impairment, income tax reserves, etc.) 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 $800,000 in principal payments of the note payable to Ceridian, as well as the total accrued interest of $112,000, through September 28, 2004, 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 August 31, 2004. As of October 4, 2004 the Company is negotiating with Ceridian Corporation to resolve the aforementioned dispute. The Company wired $912,000 to Ceridian to be held by them in a separate, interest bearing account pending a successful conclusion to these negotiations. If these negotiations are not successful, the money will be returned to the Company along with accrued interest, and the arbitration process will continue. Cash flow used in operating activities for the quarter ended August 31, 2004 was $(1,996,000), a decrease of $1,478,000 over the same nine month period in Fiscal 2003. When coupled with the year-to-date net loss of $1,386,000, the previously mentioned significant increase in accounts receivable of $2,336,000, offset by the smaller increase in accounts payable of $1,392,000 were the most significant factors affecting operating cash flow. Total assets increased by $1,111,000 from November 30, 2003 while total liabilities were increased by $2,548,000. The Company's current ratio at August 31, 2004 was 1.60:1.00 versus 1.62:1.00 at November 30, 2003. Management believes that the Company will have sufficient funds to cover cash flow requirements for the balance of 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 of its notes receivable. Management's goal is to return to a positive operating cash flow position in the future based upon the recent, significant reduction in fixed expenses, coupled with substantially improved sales activity. There was no material commitment for capital expenditures as of August 31, 2004. Inflation was not a significant factor in the Company's financial statements. RESULTS OF OPERATIONS ===================== Revenues - --------- Consolidated revenues decreased by $2,588,000 (15%) in the first nine months of Fiscal 2004 as compared to the same period in 2003. This consolidated reduction was the combined result of lower training and consulting revenues of $3,545,000 (43%), offset by an increase in revenue from the value added reseller segment of $957,000 (10%). For the three months ended August 31, 2004, training and consulting revenues were $824,000 (33%) lower than the same three-month period in Fiscal 2003. Product revenues for the quarter ended August 31, 2004 were $1,821,000 (32%) higher than the previous year's third quarter. The decline in service revenue is consistent with the reduction experienced earlier in the year due to the staff and facility downsizing the Company undertook during the fourth quarter of Fiscal 2003. Revenues in this business segment must increase in order for it to return to profitability. We have initiated an ongoing and increased emphasis on sales and marketing activities in order to take advantage of business opportunities as the economy improves. 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 associated activities 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 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 various 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 robust 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, the three and nine month increase in revenues were the direct result of a significant increase in the annual purchase of computer hardware by Price William County in Fiscal 2004. The County purchased approximately $2,400,000 more desktops and printers in the first nine months of Fiscal 2004 than they did in Fiscal 2003. Several new high schools and elementary schools opened in September, 2004 and needed to be completely equipped with new computer equipment. 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 in the future. The majority of product to be sold in the near future will be Hewlett Packard/Compaq hardware. If Hewlett Packard/Compaq moves toward an agent model with its 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 first half of Fiscal 2005, and this could significantly affect the recording of revenues and expenses in the future. The value added hardware reseller segment has always had very high client revenue concentration. In the first nine months of Fiscal 2004 two groups of clients accounted for 88% of the revenue in this segment. There is obvious risk associated with this very high customer concentration. See Footnote 1, 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 2005. Technology spending in general, appears to be recovering in Fiscal 2004, but the duration and extent of a 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, but how much of this pipeline will result in sales is still unknown. 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 2004. These delays add to the uncertainty in revenue projections for the future. Many clients continue to delay the start of various training projects, without giving us firm timetables. Software development revenues for Fiscal 2004 and 2003 have been excluded given that this segment has been classified as a discontinued operation as of August 31, 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. Costs and Expenses - ------------------- Total costs and expenses decreased by $1,806,000 (12%) for the first nine months of Fiscal 2004 as compared to the previous year, and increased by $1,099,000 (16%) for the three months ended August 31, 2004 versus August 31, 2003. The year-to-date decrease was due to the significant reduction in fixed expenses in the training and consulting segment which occurred late in Fiscal 2003. This reduction in expenses of $2,789,000 was offset by a $983,000 increase in product costs associated with the increased sales volume in the value added reseller segment. Consolidated gross profit for the nine-month period ended August 31, 2004 was 15% versus 17% the prior year. The decrease is due to the higher sales volume and lower margin in the value added reseller segment. The following chart summarizes the gross margin percentages for the Company for the three and nine-month periods of 2004 and 2003. Three-Months Ended, Nine-Months Ended August 31, August 31, 2004 2003 2004 2003 ----------------------------------------------------- Service 32% 27% 29% 26% Product 7% 8% 8% 9% Consolidated 11% 14% 15% 17% The improvement in service revenue gross profit (on lower sales volume) is again attributable to the significant reduction in fixed costs for the business segment at the end of Fiscal 2003. The biggest problem regarding gross is sales volume. The absolute dollar contribution must increase in order to cover operating costs and permit us to 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 relationships could become more important in 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, and into next year. While overall costs and expenses have been reduced through reductions in long-term lease commitments and workforce reductions, the challenge the Company faces now is to increase revenues and attain the benefits that reduced overhead and fixed costs would provide. The training and consulting segment reported a 11% improvement in gross profit percentage (from 26% to 29%) on a 43% decline in revenues for the first nine months of Fiscal 2004 as compared to the same nine-month period in 2003. When, and if, revenues increase, a higher profit level would be attainable since our fixed cost component has been drastically reduced and a larger portion of the delivery expense would 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 would 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 $188,000 (15%) in the first nine months of Fiscal 2004 as compared to the previous year. Personnel expense (salaries, bonuses, commissions and payroll burden) decrease was the biggest component of the reduction. Selling expense also decreased by $109,000 (25%) for the three months ended August 31, 2004 as compared to the previous year, again related to a reduction in personnel-related expenses. General and administrative expense was reduced by $1,102,000 (32%) for the first nine months of Fiscal 2004 due primarily to significant reductions in administrative and support staff as part of the workforce reduction discussed previously. For the three-month period ended August 31, 2004, general and administrative expense was also reduced by $303,000 (28%) for the same reasons. During the third quarter of Fiscal 2004, the Company recorded a goodwill impairment charge of $350,000 related to the carrying value of goodwill associated with MSI/Canterbury. Recent earning trends have been weak and Management concluded that a charge of $350,000 would bring the carrying value into line with recent results. The current value of the MSI/Canterbury goodwill is now $909,000. We will continue to analyze the appropriate carrying value of all goodwill associated with our subsidiaries, to determine if further improvement charges are warranted. Interest income decreased by $172,000 (44%) in the first nine months of Fiscal 2004 as compared to the same nine months in the previous year. The prepayment of a 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 $2,560,000 in the twelve-month period ending August 31, 2004. Interest expense was reduced by $16,000 (18%) in the nine months 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. For the three months ended August 31, 2004 interest expense increased by $5,000 due to a higher interest rate on the revolving line of credit. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK =================================================================== We are exposed to some market risk from changes in interest rates. The line of credit with Commerce Bank is variable and floats with the Prime lending rate. A significant increase in this benchmark rate will cause our interest expense to increase on any outstanding borrowings. Currently, we have $100,000 invested in a municipal bond mutual fund. We account for this investment 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/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 Refer to the Liquidity and Capital Resources Section of the Management's Discussion of Financial Condition and Results of Operations for disclosure on legal proceedings. 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 Exhibit 31 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act-Kevin J. McAndrew Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act. - Kevin J. McAndrew CANTERBURY CONSULTING GROUP, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CANTERBURY CONSULTING GROUP, INC. ----------------------------------- (Registrant) By/s/ Kevin J. McAndrew ---------------------------------------------- Kevin J. McAndrew President and Chief Executive Officer By: /s/ Kevin J. McAndrew ---------------------------------------------- Kevin J. McAndrew Chief Financial Officer October 7, 2004 EX-31 2 ccg31.txt CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT Exhibit 31 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Kevin J. McAndrew, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Canterbury Consulting Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared; b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34- 47986] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: October 7, 2004 /s/ Kevin J. McAndrew ------------------------------------- Kevin J. McAndrew President, Chief Executive Officer and Chief Financial Officer EX-32 3 ccg32.txt CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANEX-OXLEY ACT EXHIBIT 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT Securities and Exchange Commission 450 Fifth Street, N.W Washington, D.C. 20549 Ladies and Gentlemen: The certification set forth below is being submitted to the Securities and Exchange Commission solely for the purpose of complying with Section 1350 of Chapter 63 of Title 18 of the United States Code. This certification is not to be deemed filed pursuant to the Securities Exchange Act of 1934 and does not constitute a part of the quarterly report on Form 10-Q (the Report) accompanying this letter. Kevin J. McAndrew, the President, Chief Executive Officer and Chief Financial Officer of Canterbury Consulting Group, Inc., certifies that to my knowledge: 1. the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Canterbury Consulting Group, Inc. (as of and for the periods presented in the Report). /s/ Kevin J. McAndrew -------------------------------------- Kevin J. McAndrew President, Chief Executive Officer and Chief Financial Officer Date: October 7, 2004 -----END PRIVACY-ENHANCED MESSAGE-----