10-Q 1 ccg22805.txt 10-Q FOR THE FISCAL QUARTER ENDED FEBRUARY 28, 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q --------- Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended February 28, 2005 Commission File Number: 0-15588 CANTERBURY CONSULTING GROUP, INC. ---------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2170505 ----------------------------- ----------------- (State of Incorporation) (I.R.S. Employer Identification No.) 352 Stokes Road Suite 200 Medford, New Jersey 08055 (Address of principal executive office) Telephone Number: (609) 953-0044 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- ---- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES NO X --- ---- The number of shares outstanding of the Registrant's common stock as of the date of the filing of this report 2,769,393 shares. FORM 10-Q PART 1 - FINANCIAL INFORMATION --------------------------------- ITEM 1. FINANCIAL STATEMENTS ============================== CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEET ---------------------------------- ASSETS ------ February 28, 2005 November 30, (Unaudited) 2004 ----------------- -------------- Current Assets: Cash and cash equivalents $610,677 $319,757 Marketable securities 100,000 100,000 Accounts receivable, net of allowance for doubtful accounts of $119,000 and $168,000 1,368,749 1,809,230 Notes receivable - current portion 316,572 310,602 Prepaid expenses and other assets 118,351 92,079 Inventory, principally finished goods, at cost 76,660 144,702 ----------- ----------- Total Current Assets 2,591,009 2,776,370 Property and equipment at cost, net of accumulated depreciation of $788,000 and $1,234,000 285,348 310,431 Goodwill 1,788,381 1,788,381 Notes receivable 3,080,632 3,161,651 Other assets 52,780 52,780 ----------- ----------- Total Assets $7,798,150 $8,089,613 =========== =========== See Accompanying Notes FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ February 28, 2005 November 30, (Unaudited) 2004 ----------------- -------------- Current Liabilities: Accounts payable - trade $ 312,749 $ 579,638 Accrued expenses 441,430 404,126 Unearned revenue 512,296 332,434 Current portion, long-term debt 583,989 233,989 ----------- ----------- Total Current Liabilities 1,850,464 1,550,187 Long-term debt 44,397 52,418 Subordinated convertible debt - 355,000 ----------- ----------- Total Liabilities 1,894,861 1,957,605 ----------- ----------- Commitments and Contingencies Stockholders' Equity: Common stock, $.001 par value, 50,000,000 shares authorized; 2,769,393 and 1,965,822 issued and outstanding 2,770 1,966 Additional paid-in capital 21,616,316 22,751,620 Accumulated deficit (15,055,103) (14,471,384) Notes receivable for common stock- related parties (660,694) (2,150,194) ----------- ----------- Total Stockholders' Equity 5,903,289 6,132,008 ----------- ----------- Total Liabilities and Stockholders' Equity $7,798,150 $8,089,613 =========== =========== See Accompanying Notes FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three-Months Ended February 28, February 29, 2005 2004 ----- ---- (Unaudited) (Unaudited) Service revenue $ 1,159,687 $ 1,228,280 Product revenue 1,505,958 1,406,872 ----------- ----------- Total net revenue 2,665,645 2,635,152 Service costs and expenses 960,444 1,013,664 Product costs and expenses 1,383,984 1,259,399 ----------- ----------- Total costs and expenses 2,344,428 2,273,063 Gross profit 321,217 362,089 Selling 298,132 317,303 General and administrative 669,348 802,752 ----------- ----------- Total operating expenses 967,480 1,120,055 Other income/(expense) Interest income 61,797 67,517 Interest expense (18,793) (15,902) Other 19,540 11,662 ----------- ------------ Total other income/(expense) 62,544 63,277 Loss from continuing operations before income taxes (583,719) (694,689) Income tax (benefit)/provision - - ----------- ----------- Loss from continuing operations (583,719) (694,689) Loss from discontinuing operations (net of income taxes of $0) - (38,704) ----------- ---------- Net loss $ (583,719) $ (733,393) ============= ========== Net loss per share and common share equivalents Basic and diluted: Loss from continuing operations $(.22) $(.33) Loss from discontinuing operations - $(.02) ----------- ----------- Net loss $(.22) $(.35) ============= =========== Weighted average number of common shares - basic and diluted 2,648,200 2,097,200 ============= =========== See Accompanying Notes FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 February 28, 2005 February 29, 2004 ------------------- ----------------- (Unaudited) (Unaudited) Operating activities: Net loss $(583,719) $(733,393) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 38,384 78,476 Provision for losses on accounts receivable (48,500) 7,500 Deferred income taxes - 28,547 Changes in operating assets, Accounts receivable 488,981 1,058,074 Inventory 68,042 (58,886) Prepaid expenses and other assets (26,272) 45,284 Other assets - non-current - (22,000) Accounts payable (266,889) (324,208) Accrued expenses 37,304 (21,352) Unearned revenue 179,862 (99,834) ---------- --------- Net cash used in operating activities (112,807) (41,792) ---------- --------- Investing activities: Capital expenditures, net (13,301) (5,379) Proceeds from payments on notes receivable 75,049 69,923 ---------- --------- Net cash provided by investing activities 61,748 64,544 ---------- -------- Financing activities: Principal payments on long term debt (8,021) (43,313) Proceeds from line of credit 350,000 - ---------- --------- Net cash provided by/(used in) financing activities 341,979 (43,313) Net increase/(decrease)in cash 290,920 (20,561) Cash, beginning of period 319,757 1,385,824 ---------- --------- Cash, end of period $ 610,677 $1,365,263 ========== ========== Non Cash Transaction: During the first quarter of Fiscal 2005 $355,000 of subordinated convertible debt was converted into 1,000,000 restricted shares of Company common stock. During the first quarter of Fiscal 2005, $1,489,500 of notes receivable for common stock - related parties were cancelled in return for 196,429 shares of Company common stock in full satisfaction of the liability. See Accompanying Notes 10-Q CANTERBURY CONSULTING GROUP, INC. Notes to Consolidated Financial Statements (Unaudited) ------------------------------------------------------ 1. Operations and Summary of Significant Accounting Policies ============================================================= Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations. It is suggested that these unaudited consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's 10-K for the year ended November 30, 2004. In the opinion of management, all adjustments (which consist only of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows of all periods presented have been made. Quarterly results are not necessarily indicative of results for the full year. Description of Business ----------------------- Canterbury Consulting Group, Inc. provides broad based information technology, management consulting services and training to both corporate and government clients. Canterbury's mandate is to become an integral part of its clients' management and technical infrastructure, designing and applying the best products and services to help them achieve a competitive advantage. For information about the Company's revenues, profit or loss, and assets by segment, see Note 2 of the Notes to Consolidated Financial Statements. Principles of Consolidation ---------------------------- The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All material intercompany transactions have been eliminated. Use of Estimates ---------------- Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (US GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. US GAAP requires us to make estimates and judgments in several areas, including those related to impairment of goodwill and equity investments, revenue recognition, recoverability of inventory and receivables, the useful lives of long lived assets such as property and equipment, the future realization of deferred income tax benefits and the recording of various accruals. The ultimate outcome and actual results could differ from the estimates and assumptions used. Revenue Recognition ------------------- Product Revenue Product revenue is recognized when there is persuasive evidence of an arrangement, the product has been delivered, the sales price is fixed or determinable, and collectibility is reasonably assured. The product is considered delivered to the customer once it has been shipped, and title and risk of loss have transferred. The Company defers revenue if there is uncertainty about customer acceptance. Product revenue represents sales of computer hardware and software. Generally, the Company is involved in determining the nature, type, and specifications of the products ordered by the customer. Service Revenue Service revenue is recognized when there is persuasive evidence of an arrangement, the sales price is fixed or determinable, and collectibility is reasonably assured. Service revenues represent training and consulting services provided to customers under separate consulting and service contracts. Revenues from these contracts are recognized as services are rendered. Statement of Cash Flows ----------------------- For purposes of the Statement of Cash Flows, cash refers solely to demand deposits with banks and cash on hand. Marketable Securities ---------------------- At February 28, 2005 and November 30, 2004, the Company held marketable securities comprised of a $100,000 investment in a long-term tax-exempt bond fund. The Company's marketable securities are classified as available-for-sale and are carried at fair market value. There were no unrealized gains or losses on marketable securities for the period ended February 28, 2005. Accounts Receivable ------------------- The carrying value of accounts receivable is based upon customer invoiced amounts due to us, adjusted for allowances for doubtful accounts. We evaluate the collectibility of our accounts receivable based on a combination of factors. In cases where we are aware of circumstances that may impair a specific customer's ability to meet its financial obligations to us, we record a specific allowance against amounts due to us, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we estimate allowances for doubtful accounts based on the length of time the receivables are past due, industry and geographic concentrations, the current business environment and our historical experience. Notes Receivable ----------------- The carrying value of notes receivable is based upon their principal amounts as of February 28, 2005 and November 30, 2004. No allowance for uncollectible amounts has been recorded due to the timely receipt of all scheduled installments of principle and interest to date, and the expected future receipt of remaining installment amounts due us. Interest income from notes receivable is recognized as earned over time based on the stated terms of the notes. Inventories ----------- Inventories are stated at the lower of cost or market utilizing a first-in, first-out method of determining cost. Depreciation and Amortization -------------------------------- The Company depreciates and amortizes its property and equipment for financial statement purposes using the straight-line method over the estimated useful lives of the property and equipment (useful lives of leases or lives of leasehold improvements and leased property under capital leases, whichever is shorter). For income tax purposes, the Company uses accelerated methods of depreciation. The following estimated useful lives are used: Building and improvements 7 years Equipment 3 to 5 years Furniture and fixtures 5 to 7 years Income Taxes ------------- Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are determined based on the difference between the US GAAP financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by valuation allowances to amounts that are more likely than not to be realized. No income tax benefit was recorded for the three-month period ended February 28, 2005 as there was a 100% valuation allowance booked against the current period loss. Concentration of Risk ---------------------- The Company maintains cash balances at a creditworthy bank located in the United States. Accounts at the institution are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company does not believe that it has significant credit risk related to its cash balance. The Company holds marketable securities in the form of mutual fund shares with a highly reputable mutual fund company located in the United States. As previously discussed, the Company is in the business of providing management and information technology services and training. These services are provided to a large number of customers in various industries in the United States. The Company's trade accounts receivable are exposed to credit risk, but the risk is limited due to the diversity of the customer base and the customers wide geographic dispersion. The Company performs ongoing credit evaluations of its customers' financial condition. The Company maintains reserves for potential bad debt losses and such bad debt losses have been within the Company's expectations. As of February 2005, all Canterbury operating subsidiaries were headquartered in the Mid Atlantic and Northeast region of the country. As such, the majority of revenues were generated in these two geographic regions. For the three months ended February 28, 2005, a significant number of local and state agencies in Maryland purchased equipment under a contract with the City of Baltimore from USC/Canterbury (Value Added Hardware Reseller Segment). Total purchases by the City under this contract represented 37% of this segment's revenue and 21% of consolidated revenue for the three-month period ended February 28, 2005. Purchases from other local government agencies allowed to use the contract accounted for 51% of the revenues in the reseller segment and 29% of consolidated revenues for the first three months of Fiscal 2005. For the quarter ended February 28, 2005, one Usertech/Canterbury customer accounted for 15% of service revenue and 6% of total revenue. During April, 2004 USC/Canterbury was awarded the contract, along with one other vendor, to provide the City of Baltimore with Hewlett Packard hardware. The contract is for three years with five one-year options by the City of Baltimore. One vendor represented 46% of the product cost in the Value Added Reseller Segment and 27% of consolidated costs for the first three months of Fiscal 2005. Another major vendor represented 27% and 16% of segment and consolidated costs and expenses, respectively for the same three-month period. In the training and consulting segment one customer accounted for 15% of this segments revenues for the first quarter of Fiscal 2005 and 6% of the consolidated revenues for the period. For the quarter ended February 29, 2004, a significant number of local and state agencies in Maryland purchased equipment under a contract with the City of Baltimore from USC/Canterbury (Value Added Hardware Reseller Segment). Total purchases under this contract represented 33% of this segment's revenue and 18% of consolidated revenue. Purchases from other local government agencies allowed to use the contract accounted for 61% of the revenues in the reseller segment and 33% of consolidated revenues for the quarter. Fair Value of Financial Instruments ------------------------------------ The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Management believes that there are no material differences between the recorded book values of its financial instruments and their estimated fair value. 2. Segment Reporting ====================== The Company is organized into two operating segments and the corporate office. The operating segments are training and consulting and value added hardware reseller. A third segment, software development, was discontinued as of March 2004 and as such is reported as a discontinued operation as of February 29, 2004. All historical information for the software development segment has been omitted from the segment presentation below. Summarized financial information for the three months ended February 28, 2005 and February 29, 2004, for each segment, is as follows: Training Value Added and Hardware 2005 Consulting Reseller Corporate Total ------------ ------------- ----------- --------- ---------- Revenues $1,159,687 $1,505,958 $ - $2,665,645 (Loss)/income before taxes (364,109) (9,062) (210,548) (583,719) Assets 2,871,094 632,287 4,294,769 7,798,150 Interest income 6 - 61,791 61,797 Interest expense 18,780 13 - 18,793 Depreciation and amortization 31,522 - 6,862 38,384 Training Value Added and Hardware 2004 Consulting Reseller Corporate Total ------------ ------------- ----------- ------------ ----------- Revenues $1,228,280 $1,406,872 $ - $2,635,152 (Loss)/income before taxes (370,145) 1,499 (326,043) (694,689) Assets 3,152,283 1,139,687 6,289,998 10,581,968 Interest income 24 - 67,493 67,517 Interest expense 15,807 95 - 15,902 Depreciation and amortization 70,082 1,484 6,910 78,476 3. Notes Receivable ==================== The Company held notes receivable assets from a related party in the aggregate amount of $3,397,204 at February 28, 2005. These notes had interest terms that averaged 7.3% per year and are scheduled to mature at various dates through November 2006, with a balloon payment of $1,948,000 in December, 2006. The aggregate amount includes an $860,000 demand note. During April, 2003, in order to fortify the liquidity of the balance sheet, the Company negotiated a $500,000 paydown of the demand note (from $1,360,000 to $860,000). On April 3, 2003 the independent directors, who are a majority of the Board of Directors of Canterbury, voted to reduce the annual interest rate on the note from 10% to 5% per annum in exchange for the principal payment of $500,000 which was received by the Company during April, 2003. The demand note is included in the non-current portion of notes receivable at February 28, 2005 and November 30, 2004. The company has received all scheduled monthly installments for notes receivable outstanding as of February 28, 2005. As a subsequent event, during April, 2005 the Company renegotiated a refinancing of the note receivable from a related party. The demand note and the acquisition notes were combined totaling $3,270,000 as of April 15, 2004. The Company received an $800,000 paydown on the combined note and agreed to term out the balance of $2,470,000 over the next eight years at 8%. 4. Property and Equipment ========================== Property and equipment, which is recorded at cost, consists of the following: February 28, 2005 November 30, 2004 ----------------- ----------------- Machinery and equipment $ 771,081 $1,241,441 Furniture and fixtures 213,786 227,042 Leased property under capital leases and leasehold improvements 88,566 76,066 ---------- ---------- 1,073,433 1,544,549 Less: Accumulated depreciation ( 788,084) (1,234,117) ---------- ---------- Net property and equipment $ 285,349 $ 310,432 =========== =========== Accumulated depreciation of leased property under capital leases at February 28, 2005 amounted to $24,000. 5. Long-Term Debt ==================== February 28, 2005 November 30, 2004 ----------------- ----------------- Long-term obligations consist of: Revolving credit line 550,000 200,000 Capital lease obligations 52,855 58,405 Notes payable - equipment 25,531 28,001 ---------- ---------- 628,386 286,406 Less: Current maturities (583,989) (233,989) ---------- ---------- $ 44,397 $ 52,417 ========== ========== The Bank's debt was secured by substantially all of the assets of the Company and requires compliance with covenants which include the maintenance of certain financial ratios and amounts. The Company is restricted by its bank from paying cash dividends on its common stock. As of November 30, 2004, the Company was in compliance with all of the financial covenants of its revised loan agreement. The Company, however, was within $11,000 of violating its cumulative pretax loss covenant as of November 30, 2004 (limit per covenant is $1,050,000 cumulative loss from December 1, 2003). The actual pretax loss amount is calculated as loss from continuing operations plus any non-cash charge (goodwill impairment). During the first quarter of Fiscal 2005, the Company breached the cumulative pretax loss covenant. As a result of this occurrence the Company and its primary lender executed a forbearance agreement and an amendment to the loan agreement during March 2005. The maximum revolving credit was reduced to $750,000 and it was agreed that the outstanding revolver balance would be paid in full by April 30, 2005. The loan was paid off on April 14, 2005 and the loan agreement with the bank has been terminated. The bank has released all liens of the Company's balance sheet. The Company is currently pursuing alternative financing sources to support its value added hardware reseller segment. Aggregate fiscal maturities on long-term debt, exclusive of obligations under capital leases, are $557,000 in 2005; $10,000 in 2006; and $8,000 in 2007. The carrying value of the long-term debt approximates its fair value. 6. Capital Leases ================== Capital lease obligations are for certain equipment leases which expire through fiscal year 2006. Future required payments under capitalized leases together with the present value, calculated at the respective leases' implicit interest rate of approximately 16% at their inception is as follows at February 28, 2005: Total minimum lease payments through November 30, 2005 $26,127 Total minimum lease payments through November 30, 2006 30,728 Total minimum lease payments through November 30, 2007 9,200 ------- Total minimum lease payments 66,055 Less amount representing interest (13,200) ------- Present value of long-term obligations under capital leases $52,855 ======= 7. Related Party Transactions ================================== As a subsequent event, during April, 2005 the Company renegotiated a refinancing of the note receivable from a related party. The demand note and the acquisition notes were combined totaling $3,270,000 as of April 15, 2004. The Company received an $800,000 paydown on the combined note and agreed to term out the balance of $2,470,000 over the next eight years at 8%. At February 28, 2005 and November 30, 2004, the total notes receivable plus accrued interest for issuances of Company common stock to corporate officers, corporate counsel and certain consultants totaled $661,000 and $2,150,000, respectively. These non-recourse notes are collateralized by common stock of the Company and are reported as a contra-equity account. Interest rates range from 4% to 6.6%. The remaining $661,000 in notes have no stated term. On July 17, 2002 the Compensation Committee recommended, and the Board of Directors approved a modification of the April 10, 2001 and the May 16, 2001 notes. The notes became non-recourse as to principal and interest as of September 1, 2002 with the issued shares continuing to collateralize the notes. All accrued interest on the notes as of September 1, 2002 has been paid to the Company. Principal and interest must be paid by recipient before they are entitled to sell their respective shares. If principal and interest have not been paid by the maturity date of the recipient notes, then recipients' sole obligation shall be that any shares relating to this nonpayment will be forfeited and returned to the Company. If this event were to occur, both the underlying shares and the notes receivable would be cancelled with no effect on the net worth of the Company. In consideration for this modification the term of these notes was reduced and shortened from April and May, 2006 to December 31, 2004. The Board also prohibited the issuance of any stock options, stock or any other form of equity for all of Fiscal 2002 to the recipients. During the first quarter of Fiscal 2005, $1,489,500 of notes receivable for common stock - related parties were cancelled in return for 196,429 shares of Company common stock in full satisfaction of the liability. 8. Stock Listing ================= On December 8, 2004 the Nasdaq Stock Market ("Nasdaq") notified Canterbury that "The Company has not regained compliance in accordance with Marketplace Rule 4310(c)(8)(B). Accordingly, its securities will be delisted from The Nasdaq SmallCap Market at the opening of business on December 17, 2004." On September 8, 2004, Nasdaq had notified the Company that "its common stock had not maintained a minimum market value of publicly held shares ("MVPHS") of $1,000,000 over the previous 30 consecutive trading days, and, as a result, did not comply with Marketplace Rule 4310(c)(7) (the "Rule"). Therefore, in accordance with Marketplace Rule 4310(c)(8)(B), the Company was provided 90 calendar days, or until December 7, 2004, to regain compliance with the Rule." On December 1, 2004 the Nasdaq Stock Market notified Canterbury that: "Accordingly, the Company does not comply with Marketplace Rule 4350(e) and 4350(g) ("the Rules") and Staff has determined to delist the Company's securities from The Nasdaq Stock Market at the opening of business on December 10, 2004." These Rules relate to the requirement to hold an annual meeting of shareholders. Based upon the letter of December 8, 2004, the Company determined that it would not appeal the December 1, 2004 delisting letter. An additional determining factor in the Company's decision was a third delisting letter received on June 23, 2004 which stated: "For the last 30 consecutive business days, the bid price of the Company's common stock has closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4) (the "Rule"). Therefore, in accordance with Marketplace Rule 4310(c)(8)(D), the Company will be provided 180 calendar days, or until December 20, 2004, to regain compliance. If, at anytime before December 20, 2004, the bid price of the Company's common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, Staff will provide written notification that it complies with the Rule." The Company requested that various of its current market makers continue to make markets in the Company's common stock on the OTC Bulletin Board. 9. Discontinued Operations =========================== During March 2004, the Company entered into negotiations to sell ATM/Canterbury back to the original owner. The transaction was finalized in April, 2004. Canterbury sold 100% of the stock in ATM/Canterbury in exchange for 25,000 shares of Canterbury common stock (which have been retired), that the owner had retained from the original transaction in 1997. The transaction was effective as of March 3, 2004. As a result of the transaction the Company recorded a $9,194 loss on the sale of discontinued operation in the second quarter of Fiscal 2004. The Company's decision to sell ATM/Canterbury was based on the lack of demand for ATM/Canterbury's products and services by existing customers; the inability to increase sales to new customers and the Company's desire to focus on its training and consulting segment and its value added reseller segment. Historical financial data for ATM/Canterbury for the three months ended February 29, 2004: February 29, 2004 ----------------- Revenues $ 58,866 Pretax loss (38,704) ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS =========================================================================== Cautionary Statement -------------------- When used in this Report on Form 10-Q and in other public statements, both oral and written, by the Company and Company officers, the word "estimates," "project," "intend," "believe," "anticipate," and similar expressions, are intended to identify forward-looking statements regarding events and financial trends that may affect the Company's future operating results and financial position. Such statements are subject to risks and uncertainties that could cause the Company's actual results and financial position to differ materially. Such factors include, among others: (1) the Company's success in attracting new business; (2) the competition in the industry in which the Company competes; (3) the sensitivity of the Company's business to general economic conditions; and (4) other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. The Company undertakes no obligations to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. Risk Factors That Relate To Our Business ---------------------------------------- Uncertain economic conditions continue to affect many of our customers' businesses and many clients continue to delay and reduce their purchases of training services, hardware and consulting. The Company's recovery from the past several years of economic downturn continues to lag behind the current economic recovery. Delay Or Inability To Return To Positive Operating Cash Flow While the Company has taken significant steps to reduce fixed costs and increase revenue, a significant delay in returning to positive operating cash flow could adversely effect our liquidity and ability to conduct business. The Company reduced payroll expense and facility leases significantly during Fiscal 2003. Four facilities were closed and two more were greatly downsized, as management introduced a more flexible cost model into the business. Annual rent and occupancy expense were reduced by over $1,000,000 from the beginning of Fiscal 2003 to the beginning of Fiscal 2004. Over sixty employees were eliminated in several workforce reductions during 2003. Even with these cost reductions, revenues must increase in Fiscal 2005 over Fiscal 2004 in order to achieve positive operating profit and cash flows. The newly formed sales subsidiary, Canterbury Corporate University must increase sales pipeline activity in the near term to positively impact reported revenues for the training and consulting segment. If this does not occur it could negatively effect our operating cash flow. Competition If our current customers choose to purchase goods and/or services from new or existing competitors, it could have a material adverse effect on our operating results. The various operating segments of the Company have relatively low barriers to entry. New and existing organizations are constantly attempting to penetrate our customer base. Larger, more financially seasoned competitors have the ability to overwhelm our markets and customers though more aggressive sales tactics. Internal training departments within our current and potential client base are also a primary competitor. There is also increasing competition from computer hardware and software vendors as they attempt to capture more of the technology services market. Finally, low cost providers in the training and consulting market are attempting to buy business through their low price business model. Dependency on Key Personnel If we are unable to recruit and retain qualified personnel, it could have a material adverse effect on our operating results. Our success depends on the continued employment of our senior executives and managers and other key personnel. The loss of these people, especially without advance notice, could have a material adverse effect on our operations. An ongoing sales and delivery staff are vital to ongoing customer relations and satisfaction. A significant portion of our consolidated revenue is service oriented (44% for the first three months of Fiscal 2005). As such the loss of key personnel could have a negative impact on our ability to deliver and service our clients. As the economy improves, it will become more difficult to retain existing employees and attract new recruits since they will have more employment options available to them. Municipal Budget Constraints USC/Canterbury, our value added hardware reseller, does a significant amount of business with the states of Maryland and Virginia (88% of this segments total revenue for the three months ended February 28, 2005). Lower tax revenues in these states have reduced the amount of funding for technology purchases recently and this trend could continue. If this trend continues, it could have a material adverse effect on this segment's operating results. This segment has been the most profitable segment for the Company since Fiscal 2000, and its ongoing contribution to revenues and profits is vital to the Company's future. Shifts in Technology and Training Platforms In the training and consulting segment, much of our success depends upon the introduction and adoption of new technology. Our customers tend to increase their demand for training at times when new technology or software is being introduced. When there are delays in the introduction of these new products demand for training may decrease, and it could have a material adverse effect on our operating results. Also as our customers move toward new distance learning platforms to replace instructor-led training, our ability to retain our customers by providing these new electronic training services introduces a potential risk in client retention, which could have a material adverse effect on our operating results. Ongoing Collection of Notes Receivable With A Related Party A significant portion of the Company's assets and tangible net worth is represented by notes receivable with a related party. To date there have been no collection issues with these notes. However, if the related party experiences a significant downturn in operating cash flow or becomes insolvent the collectibility of the notes would be in jeopardy and could have a material adverse effect on the Company's asset base, cash flow and tangible net worth. Acts of Terrorism The majority of revenues recorded by the Company is generated in both the New York City and Washington D.C. areas. Both of these locations were targets of the terrorist attacks in 2001. If there is a repeat of those events in either one of these markets, our clients there could be distracted from their normal course of business and as such would most likely delay or cancel projects with the Company. This could have a material adverse effect on our operating results. Other Factors Other factors that may adversely affect our operating results include: * reduced reliance on reseller channel by hardware manufacturers * inability to secure sufficient contractor resources to meet short- term customer demand * insufficient training facilities to meet client demand for instructor-led technology training * loss of key clients through merger, sale or divestiture * ongoing cost of compliance with provisions of the Sarbanes-Oxley legislation and other such compliance required by the Securities and Exchange Commission or other regulatory bodies * loss of working capital financing Overview -------- The Company is engaged in the business of providing information technology products, services and training to both commercial and government clients. Canterbury's focus is to become an integral part of our clients' IT solution, designing and applying the best products, services and training to help them achieve competitive advantage by helping their employees to succeed. The two primary business units for the Company are training and consulting and value added hardware reseller. In the training and consulting segment we provide a variety of technical and management training. Our training encompasses a wide spectrum of hardware and software products as well as many necessary business skill topics. These training products are delivered in a variety of ways: at our classroom facilities in New Jersey and New York; at our clients' locations; electronically via the Internet; or on the end user's computer. Many of these training products are custom developed for our clients. Many contain a blended training solution combining both instructor-led training in the classroom with distance learning products to complete the educational process. The Company also provides various technical consulting services to our clients including programming, systems integration, network security and network management. The value added reseller segment provides hardware and software solutions to the Mid-Atlantic market. Its primary focus is state and local government clients that have an ongoing need for technology products and services. Liquidity and Capital Resources -------------------------------- Working capital at February 28, 2005 was $741,000, a decrease of $485,000 since November 30, 2004. This decrease was the direct result of operating losses incurred during the first quarter of the year. As a subsequent event, during April 2005 the Company refinanced its notes receivable with a related party. As part of the refinancing, the Company received an $800,000 payment from the related party and used these proceeds to pay off its revolving line of credit with its primary lender. This payoff totaled $550,000. On a pro forma basis as of February 28, 2005, the working capital of the Company improved by $713,000, since the note receivable was classified primarily as a long term asset and the revolving line of credit was classified as a current liability. The Bank's debt was secured by substantially all of the assets of the Company and required compliance with covenants which include the maintenance of certain financial ratios and amounts. The Company was restricted by its bank from paying cash dividends on its common stock. As of November 30, 2004, the Company was in compliance with all of the financial covenants of its revised loan agreement. The Company, however, was within $11,000 of violating its cumulative pretax loss covenant as of November 30, 2004 (limit per covenant is $1,050,000 cumulative loss from December 1, 2003). The actual pretax loss amount was calculated as loss from continuing operations plus any non-cash charge (goodwill impairment). As a subsequent event, during the first quarter of Fiscal 2005, the Company breached the cumulative pretax loss covenant. As a result of this occurrence the Company and its primary lender executed a forbearance agreement and an amendment to the loan agreement during March 2005. The maximum revolving credit was reduced to $750,000 and it was agreed that the outstanding revolver balance would be paid in full by April 30, 2005. The loan was paid off on April 14, 2004 and the loan agreement with the bank has been terminated. The bank has released all liens of the Company's balance sheet. The Company is currently pursuing alternative financing sources to support its value added hardware reseller segment. Cash flow used in operating activity was ($113,000) for the quarter ended February 28, 2005, a decrease of $71,000 as compared to the same quarter in Fiscal 2004. Again the primary reason for this use of operating funds was the operating loss of $584,000 recorded during the quarter. Total assets declined by $292,000 from November 30, 2004, while total liabilities declined by $63,000. The Company's current ratio was 1.40:1.00 versus 1.79:1.00 at November 30, 2004. On a pro forma basis, after the note receivable refinancing and revolving line of credit payoff the current ratio would have been 2.12:1.00 at February 28, 2005. Management believes the Company should have sufficient funds to cover cash flow requirements for the balance of Fiscal 2005 assuming that the Company can increase its sales pipeline in the near term to provide sufficient revenues which would produce positive cash flow and can secure an alternative lending source to support its value added hardware reseller segment. With the Company's reduced cost structure a moderate increase in overall sales should allow the Company to return to a positive operating cash flow position for the balance of the year. There was no material commitment for capital expenditures as of February 28, 2005. Inflation was not a significant factor in the Company's financial statements. RESULTS OF OPERATIONS ===================== Revenues --------- Consolidated revenues increased by $31,000 (1%) in the first three months of Fiscal 2005 as compared to the same period in 2004. The training and consulting segment experienced a $68,000 (5%) decrease in revenues, while the value added hardware reseller segment reported a $99,000 (7%) increase in revenue for the first quarter. Software development revenues for the first quarter of Fiscal 2004 have been excluded given that this segment has been classified as a discontinued operation as of February 29, 2004. While revenues remained fairly consistent from year to year for the first quarter, they were not at a level that would return the Company to profitability and positive operating cash flow. Because our profit margins are much higher in our training and consulting segment, it is crucial that we reverse the declining revenue in that segment. Historically, the first fiscal quarter is the weakest three months of the year. Holidays, poor weather conditions in the Northeast and client year-end budgeting process all contribute to the revenue slow down across all subsidiaries. The Company continues to refine its sales and marketing focus in an attempt to increase sales pipeline opportunities. In the training and consulting segment, new products are being developed or repackaged. Underperforming sales personnel are being replaced with new employees. The Company continues to pursue partnerships where additional revenue generation is the primary focus. In the value added hardware reseller segment, the Company is currently preparing for its annual summer spike in sales to several municipalities. The Company is in the process of securing alternative funding sources to facilitate the significant upswing in revenues for the third fiscal quarter. The Company terminated its borrowing arrangement with Commerce Bank during April 2005 when the outstanding revolving line of credit was paid off. Since that time, the Company's primary focus has been to secure an alternative lending source to facilitate timely shipment of product to our customers. Several options are being pursued and it is Management's belief that a funding source will be contracted in time to meet our clients' delivery needs. The value added hardware reseller segment has always had a very high client revenue concentration. In the first quarter of Fiscal 2005, two groups of clients accounted for 88% of the revenue in this segment. There is obvious risk associated with this very high customer concentration. See Footnote 1, Concentrated Risk, for more details on this topic. USC/Canterbury continues to make a concerted effort to diversify its revenue mix. Certain sales representatives have been given responsibility to penetrate the commercial market in the Baltimore/Washington market, as well as new clients in state and local governments in Maryland and Virginia. Costs and Expenses ------------------- Total costs and expenses increased by $71,000 (3%) for the first three months of Fiscal 2005 as compared to the previous year. Service costs decreased by $54,000 (5%) due primarily to lower sales volume, while product costs increased by $124,000 (10%) due to higher sales volume and lower profit margins on the products that were sold. Product margins in our value added hardware reseller segment declined to 8% for the first three months of 2005 from 11% in the first quarter of Fiscal 2004. Service gross profit in our training and consulting segment remained stable in the 17%-18% range for both years. Consolidated gross profit declined to 12% in Fiscal 2005 as compared to 14% in the first quarter of Fiscal 2004. While it is anticipated that product gross profit will remain in the 7% to 8% range, service gross profit should increase significantly over the balance of the year based on projected increased sales volume. As has been previously reported, the delivery cost model for the training and consulting segment is highly variable. The fixed cost component of the model is covered at the lower revenue levels. Increased revenue will contribute higher percentage and absolute dollars to the gross profit of this segment. The challenge remains to increase sales to take full advantage of this positively leveraged structure. Selling expense decreased by $19,000 (6%) in the first quarter of Fiscal 2005 as compared to the previous year. Lower personnel expense accounted for this modest decrease. The Company continually is searching for additional qualified sales staff for its training and consulting segment. General and administrative expense declined by $134,000 (17%) in the three months ended February 28, 2005 when compared to the same three-month period of Fiscal 2004. Lower personnel expense (salaries, taxes and health insurance) of $54,000; lower bad debt expense of $56,000 and lower accounting expense of approximately $20,000 were the primary reasons for the decrease. ITEM 3. CONTROLS AND PROCEDURES ================================ As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer/Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Company's Chief Executive Officer/Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings with the Securities and Exchange Commission. The Company's management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company's last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting. PART II - OTHER INFORMATION ========================================= Item 1 Legal Proceedings - None Item 2 Unregistered Sales of Equity Securities and Use of Proceeds None Item 3 Defaults Upon Senior Securities - None Item 4 Submission of Matters to a Vote of Stock Holders - None Item 5 Other Information - None Item 6 Exhibits Exhibit 31 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act-Kevin J. McAndrew Exhibit 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act. - Kevin J. McAndrew CANTERBURY CONSULTING GROUP, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CANTERBURY CONSULTING GROUP, INC. ----------------------------------- (Registrant) By/s/ Kevin J. McAndrew ---------------------------------------------- Kevin J. McAndrew President and Chief Executive Officer By: /s/ Kevin J. McAndrew ---------------------------------------------- Kevin J. McAndrew Chief Financial Officer June 3, 2005 Exhibit 31 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Kevin J. McAndrew, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Canterbury Consulting Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared; b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34- 47986] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: June 6, 2005 /s/ Kevin J. McAndrew ------------------------------------- Kevin J. McAndrew President, Chief Executive Officer and Chief Financial Officer EXHIBIT 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT Securities and Exchange Commission 450 Fifth Street, N.W Washington, D.C. 20549 Ladies and Gentlemen: The certification set forth below is being submitted to the Securities and Exchange Commission solely for the purpose of complying with Section 1350 of Chapter 63 of Title 18 of the United States Code. This certification is not to be deemed filed pursuant to the Securities Exchange Act of 1934 and does not constitute a part of the quarterly report on Form 10-Q (the Report) accompanying this letter. Kevin J. McAndrew, the President, Chief Executive Officer and Chief Financial Officer of Canterbury Consulting Group, Inc., certifies that to my knowledge: 1. the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Canterbury Consulting Group, Inc. (as of and for the periods presented in the Report). /s/ Kevin J. McAndrew -------------------------------------- Kevin J. McAndrew President, Chief Executive Officer and Chief Financial Officer Date: June 3, 2005 1