10-Q 1 ccg10q801.txt QUARTERLY REPORT FOR PERIOD ENDED AUGUST 31, 2001 FORM 10-Q --------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report Under Section 13 OR 15(d) Of the Securities Exchange Act of 1934 For Quarter Ended: Commission File Number: August 31, 2001 0-15588 CANTERBURY CONSULTING GROUP, INC. --------------------------------- FORMERLY CANTERBURY INFORMATION TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-2170505 ------------------------------- ----------------------- (State of Incorporation) (IRS Employer Identification Number) 1600 Medford Plaza Rt. 70 & Hartford Road Medford, New Jersey 08055 (Address of principal executive offices) Telephone Number: (609) 953-0044 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No ---- ---- The number of shares outstanding of the registrant's common stock as of the date of the filing of this report 12,430,671 shares. FORM 10-Q PART 1 - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements ----------------------------- CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEET ASSETS ------ August 31, 2001 November 30, (Unaudited) 2000 ----------- ------------ Current Assets: Cash and cash equivalents $ 2,042,025 $ 885,479 Accounts receivable, net 3,591,446 4,864,456 Notes receivable - current portion 419,789 393,597 Prepaid expenses and other assets 188,963 652,319 Inventory, principally finished goods, at cost 372,121 202,032 Deferred income tax benefit 91,412 91,412 ---------- ---------- Total Current Assets 6,705,756 7,089,295 Property and equipment at cost, net of accumulated depreciation and amortization of $3,276,000 and $5,886,000 962,780 1,989,650 Goodwill net of accumulated amortization of $3,688,000 and $2,816,000 8,458,279 9,330,435 Deferred income tax benefit 2,109,785 1,508,251 Notes receivable 7,113,905 7,237,239 Investments, at market 2,727,072 3,315,878 Other assets 257,499 713,664 ----------- ----------- Total Assets $28,335,166 $31,184,412 =========== =========== See Accompanying Notes 2 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEET LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ August 31, 2001 November 30, (Unaudited) 2000 ----------- ------------ Current Liabilities: Accounts payable - trade $ 1,716,073 $ 2,277,446 Accrued expenses 631,399 655,204 Unearned revenue 843,973 860,295 Income taxes payable - 129,833 Current portion, long-term debt 297,934 1,346,112 ----------- ----------- Total Current Liabilities 3,489,379 5,268,890 Long-term debt 1,228,411 678,303 Deferred income tax liability 3,024,961 3,157,118 ----------- ----------- Total Liabilities 7,742,751 9,104,311 Stockholder's Equity: Common stock, $.001 par value, 50,000,000 shares authorized;12,431,000 and 10,685,000 shares issued 12,431 10,685 Additional paid in capital 24,607,548 22,456,731 Accumulated other comprehensive income 111,325 779,244 Retained earnings 474,921 1,242,883 Notes receivable for capital stock (4,206,533) (2,002,142) Less treasury shares, at cost (407,277) (407,300) ----------- ----------- Total Shareholders' Equity 20,592,415 22,080,101 ----------- ----------- Total Liabilities and Shareholders' Equity $28,335,166 $31,184,412 =========== =========== See Accompanying Notes 3 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME Three months ended Six months ended August 31, August 31, ------------------ ---------------- (Unaudited) (Unaudited) 2001 2000 2001 2000 ---- ---- ---- ---- Service revenue $2,712,356 $3,375,756 $ 8,354,340 $ 9,069,430 Product revenue 5,374,279 6,136,621 12,062,301 12,405,672 ---------- ---------- ----------- ----------- Total net revenue 8,086,635 9,512,377 20,416,641 21,475,102 Service cost and expenses 1,552,583 1,876,288 4,789,035 5,233,960 Product cost and expenses 4,363,403 5,228,184 9,891,404 10,540,526 ---------- ---------- ----------- ----------- Total cost and expenses 5,915,986 7,104,472 14,680,439 15,774,486 Gross profit 2,170,649 2,407,905 5,736,202 5,700,616 Selling 654,972 641,890 2,004,741 1,673,705 General and administrative 933,019 1,202,810 4,686,535 3,255,416 ---------- ---------- ----------- ----------- Total operating expenses 1,587,991 1,844,700 6,691,276 4,929,121 Other income/(expenses) Interest income 225,113 194,941 618,118 526,209 Interest expense (35,356) (69,363) (128,184) (231,637) Other (14,200) 9,317 (333,822) 497,881 ---------- ---------- ----------- ----------- Total other income 175,557 134,895 156,112 792,453 Income (loss) before income taxes 758,215 698,100 (798,962) 1,563,948 Provision (benefit) for income Taxes 302,000 272,000 (31,000) 610,000 ---------- ---------- ----------- ----------- Net income (loss) $ 456,215 $ 426,100 $ (767,962)$ 953,948 ========== ========== =========== =========== Net income (loss) per share and common share equivalents: Basic net income (loss) per share $ .04 $ .04 $ (.07) $ .10 ======== ======= ========= ======= Diluted net income (loss) per share $ .04 $ .04 $ (.07) $ .09 ======== ======= ========= ======= Weighted average number of common shares - basic 12,439,500 10,345,400 11,529,700 9,840,000 ========== ========== ========== ========== Weighted average number of common shares - diluted 12,706,700 11,320,800 11,796,900 10,800,700 ========== ========== ========== ========== See Accompanying Notes 4 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MAY 31, 2001 AND MAY 31, 2000 August 31, August 31, 2001 2001 ----------- ----------- (Unaudited) (Unaudited) Operating activities: Net income (loss) $ (767,962) $ 953,948 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,223,907 766,867 Provision for losses on accounts receivable 177,103 47,674 Deferred income taxes (31,000) 616,517 Loss on sale of land and vehicles 324,455 - Receipt of stock for services (793,240) - 401(k) contributions 83,362 59,498 Other assets 111,217 (785,160) Changes in operating assets, net of acquisitions Accounts receivable 1,095,907 (2,322,529) Inventory (170,089) (432,469) Prepaid expenses and other assets 463,356 86,140 Income taxes (129,833) - Accounts payable (561,373) 1,801,881 Accrued expenses (23,805) (107,716) Unearned revenue (16,322) (197,413) ----------- ---------- Net cash provided by operating activities 985,683 487,238 ----------- ---------- Investing activities: Proceeds form sale of land 399,734 - Capital expenditures (27,943) (96,453) ----------- ---------- Net cash provided by/(used in) investing activities 371,791 (96,453) ----------- ---------- Financing activities: Principal payments on long term debt (1,998,070) (942,374) Other - (50,001) Proceeds from long term debt 1,500,000 38,300 Proceeds from payments on notes receivable 297,142 270,152 ----------- ---------- Net cash used in financing activities (200,928) (683,923) ----------- ---------- Net increase in cash 1,156,546 (293,138) Cash, beginning of period 885,479 1,060,434 ----------- ---------- Cash, end of period $2,042,025 $ 767,296 =========== ========== See Accompanying Notes 5 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ 1. Operations and Summary of Significant Accounting Policies --------------------------------------------------------- Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations. It is suggested that these unaudited consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's 10-K for the year ended November 30, 2000. 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., formerly Canterbury Information Technology, Inc., (hereinafter referred to as "the Registrant" or "the Company") is engaged in the business of providing information technology products and services to both commercial and government clients. Canterbury is comprised of five operating subsidiaries with offices located in New Jersey, New York, Maryland, Georgia and Texas. The focus of the Canterbury companies is to become an integral part of our clients IT solution, designing and applying the best products and services to help them achieve a competitive advantage and helping their employees to succeed. Our subsidiaries offer the following technology solutions: * systems engineering and consulting * web development * IT contractors and permanent * technical and desktop applications staffing training * management training programs * records and asset management systems * hardware sales and support * distance learning portals * software development * industry specific portals Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All material intercompany transactions have been eliminated. Stock Based Compensation ------------------------ The Company accounts for stock options under Accounting Principles Board (APB) Opinion No. 25- Accounting for Stock Issued to Employees. The Company discloses the pro forma net income and earnings per share effect as if the Company had used the fair value method prescribed under SFAS No.123- Accounting for Stock Based Compensation. 6 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ (continued) Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The ultimate outcome and actual results could differ from the estimates and assumptions used. Revenue Recognition ------------------- Staff Accounting Bulletin #101 (SAB 101) was recently issued by the SEC. SAB 101 states that revenue recognition cannot occur until the earnings process is complete, evidenced by an agreement between the Company and the customer, there has been delivery and acceptance, collectibility is probable, and pricing is fixed and determinable. If significant obligations remain after delivery, revenue is deferred until such obligations are fulfilled. The Company had followed these principles of revenue recognition prior to the implementation of SAB 101. Therefore, SAB 101 has had no impact on revenue reporting. Product revenue represents sales of computer hardware and software. In general, the Company is involved in determining the nature, type, and specifications of the products ordered by the customer. The Company also provides training, consulting and technical staffing to customers under separate consulting and service contracts. Revenues from these consulting and service contracts are recognized as services are rendered over the contract or service period. Statement of Cash Flows ----------------------- For purposes of the Statement of Cash Flows, cash refers solely to demand deposits with banks and cash on hand. Valuation of Long Lived Assets ------------------------------ The Company evaluates its long lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations indicate that the future undiscounted cash flows of certain long lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. 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. 7 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ (continued) The following estimated useful lives are used: Building and improvements 7 years Equipment 5 years Furniture and fixture 5 to 7 years Intangible Assets ----------------- Goodwill is being amortized over periods ranging from twenty to twenty- five years using the straight-line method. The Company periodically evaluates whether the remaining estimated useful life of intangibles may warrant revision or the remaining balance of intangibles may require adjustment generally based upon expectations of discounted cash flows and operating income. Inventories ----------- Inventories are stated at the lower of cost or market utilizing a first-in, first-out method of determining cost. Earnings Per Share ------------------ Basic earnings per share is computed using the weighted average common shares outstanding during the year. Diluted earnings per share considers the dilutive effect, if any, of common stock equivalents (options). Concentration of Risk --------------------- As previously discussed, the Company is in the business of providing information technology services. These services are provided to a large number of customers in various industries in the United States. The Company's trade accounts receivable are exposed to credit risk, but the risk is limited due to the diversity of the customer base and the customers wide geographic dispersion. The Company performs ongoing credit evaluations of its customer's financial condition. The Company maintains reserves for potential bad debt losses and such bad debt losses have been within the Company's expectations. The Company maintains cash balances at several large creditworthy banks located in the United States. Accounts at each 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. Comprehensive Income -------------------- During the three months ended August 31, 2001 and August 31, 2000, net comprehensive loss amounted to ($1,547,000) and ($98,000) respectively. For 8 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ (continued) the nine months ended August 31, 2001 and August 31, 2000, net comprehensive loss amounted to ($1,436,000) and ($716,000) respectively. Comprehensive income consists of net income and net unrealized gains and losses on securities available for sale, and is adjusted quarterly to reflect current market value of these securities. Recent Accounting Pronouncements -------------------------------- The Financial Accounting Standards Board ("FASB") recently issued Statement of Financial Accounting Standard No. 141 ("SFAS 141"), "Business Combinations", and Statement of Financial Accounting Standard No. 142 ("SFAS No. 142"), "Goodwill and Intangible Assets". SFAS No. 141 is effective for all business combinations completed after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 with early adoption permitted for fiscal years beginning after March 15, 2001. However, certain provisions of SFAS 142 apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements are as follows: 1) All business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001. 2) Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented, or exchanged, either individually or as part of a related contract, asset, or liability. 3) Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective with the adoption of SFAS 142, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization. 4) Effective with the adoption of SFAS 142, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. 5) All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. As of this date, the Company has not determined whether an early adoption of SFAS 142 will be effected at December 1, 2001 or whether the general effective date of December 1, 2002 will be used. Goodwill is currently being amortized at approximately $ 480,000 annually. The Company is currently evaluating the provisions of SFAS 142 and has not yet determined 9 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ (continued) the effect that the adoption of this standard will have on its financial statements. 2. Segment Reporting ----------------- The Company is organized into four operating segments and the corporate office. The operating segments are: training and consulting, value added hardware reseller, technical staffing and software development. Summarized financial information for the three months and nine months ended August 31, 2001 and August 31, 2000, for each segment, is as follows: For the nine months ended August 31, Value Training Added and Hardware Technical Software 2001 Consulting Reseller Staffing Development Corporate Total ---- ---------- -------- -------- ----------- --------- ----- Revenues $7,030,789 $11,959,717 $1,210,366 $215,769 $ - $20,416,641 Income before taxes 356,005 1,223,520 (202,092) 12,189 (2,188,584) (798,962) Interest income - - - - 618,118 618,118 Interest expense 15,820 2,538 - - 109,826 128,184 Depreciation and amortization 288,447 32,693 16,889 14,011 871,867 1,223,907 Value Training Added and Hardware Technical Software 2000 Consulting Reseller Staffing Development Corporate Total ---- ---------- -------- -------- ----------- --------- ----- Revenues $9,061,087 $12,110,847 $ - $303,168 $ - $21,475,102 Income before taxes 999,746 984,071 - 9,165 (429,034) 1,563,948 Interest income - - - - 526,209 526,209 Interest expense - 37 - - 231,600 231,637 Depreciation and amortization 376,049 29,252 - 14,920 346,646 766,867 For the three months ended August 31, Value Training Added and Hardware Technical Software 2001 Consulting Reseller Staffing Development Corporate Total ---- ---------- -------- -------- ----------- --------- ----- Revenues $2,218,701 $ 5,399,118 $ 380,470 $ 88,346 $ - $ 8,086,635 Income before taxes 261,130 647,491 (25,333) 4,977 (130,050) 758,215 Interest income - - - - 225,113 225,113 Interest expense 4,645 2,505 - - 28,206 35,356 Depreciation and amortization 66,962 25,731 5,397 1,125 122,876 222,091
10 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ (continued) Value Training Added and Hardware Technical Software 2000 Consulting Reseller Staffing Development Corporate Total ---- ---------- -------- -------- ----------- --------- ----- Revenues $3,367,413 $ 5,956,361 - $188,603 $ - $ 9,512,377 Income before taxes 453,288 556,386 - 6,811 (318,385) 698,100 Interest income - - - - 194,941 194,941 Interest expense - - - - 69,363 69,363 Depreciation and amortization 103,418 8,520 - 4,187 121,997 238,122
3. Property and Equipment ---------------------- Property and equipment consists of the following: August 31, November 30, 2001 2000 ---------- ----------- Land, buildings and improvements $ - $ 725,910 Machinery and equipment 3,384,590 5,085,176 Furniture and fixtures 567,502 1,413,289 Leased property under capital leases and leasehold improvements 286,983 651,089 ---------- ---------- 4,239,075 7,875,464 Less: Accumulated depreciation (3,276,205) (5,885,814) ---------- ---------- Net property and equipment $ 962,870 $1,989,650 ========== ========== Depreciation expense for the three months ended August 31, 2001 and August 31, 2000 was $105,000 and $123,000, respectively. 4. Long-Term Debt -------------- August 31, November 30, 2001 2000 ---------- ----------- Long-term obligations consist of: Term debt $ - $ - Revolving credit line 1,425,000 $1,859,620 Capital lease obligations 101,345 164,795 ---------- ---------- 1,526,345 2,024,415 Less: Current maturities (297,934) (1,346,112) ---------- ---------- $1,228,411 $ 678,303 ========== ========== 11 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ (continued) The Company's outstanding amount owed under the revolving credit line with Chase Bank was refinanced in May, 2001 by establishing a commercial lending relationship with Commerce Bank, N.A. As of the date of the refinancing, approximately $883,000 was paid to Chase in full satisfaction of the Company's outstanding obligations, out of the proceeds of a $1,500,000 five-year term loan from Commerce. As part of the refinancing, the Company also secured a two-year $2,500,000 working capital line of credit collateralized by trade accounts receivable and inventory. Through the date of this filing, $1,500,000 was borrowed in conjunction with the acquisition of User Technology Services, Inc. ("Usertech") on September 28, 2001. Both loans carry an interest rate of the prime rate plus 1%. The long term debt is secured by substantially all of the assets of the Company and requires compliance with covenants which include the maintenance of certain financial ratios and amounts. The Company is restricted by its primary lender from paying cash dividends on its common stock. Aggregate fiscal maturities on long-term debt, exclusive of obligations under capital leases, are approximately $75,000 in 2001; $300,000 in 2002; $300,000 in 2003; 300,000 in 2004; and $450,000 thereafter. The carrying value of the long-term debt approximates its fair value. 5. Capital Leases -------------- Capital lease obligations are for certain equipment leases which expire through fiscal year 2003. Future required payments under capitalized leases together with the present value, calculated at the respective leases' implicit interest rate of approximately 10.5% to 14.3% at their inception. Year ending November 30, 2001 $ 29,065 Year ending November 30, 2002 64,630 Year ending November 30, 2003 and thereafter 20,825 -------- Total minimum lease payments 114,520 Less amount representing interest (13,175) -------- Present value of long-term obligations under capital leases $101,345 ======== 6. Securities Available for Sale ----------------------------- At August 31, 2001 and November 30, 2000, the Company held investment securities in two public companies. For one of these companies Canterbury has an ownership interest in the aggregate of approximately 18%. The market value 12 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ (continued) of this investment at August 31, 2001 and November 30, 2000 was $2,727,000 and $3,294,000, respectively, and cost at August 31, 2001 of $2,538,000. Another security has a fair market value of $0 at August 31, 2001 and $22,000 at November 30, 2000, and a cost basis at August 31, 2001 of $0 after impairment writedown. Management has classified these investments as available for sale and are included in investments in the accompanying balance sheet. The Company did not sell any available for sale securities during 2001 or 2000. 7. Related Party Transactions -------------------------- At August 31, 2001 the total notes receivable plus accrued interest for corporate officers, directors, corporate counsel and certain consultants totaled $4,206,000. The recourse notes are collateralized by the common stock and are reported as a contra-equity account. Interest rates range from 4.0% to 7.0%. During the second quarter, certain officers and directors of the Company purchased a 33% ownership interest in a limited liability corporation which owns 100% of the stock of a corporation which has notes payable to the Company in the amount of $4,833,228 at August 31, 2001. 8. Subsequent Event ---------------- On September 28, 2001, the Company completed the acquisition of User Technology Services, Inc. ("Usertech") with an effective date of September 1, 2001. The purchase of 100% of the outstanding shares of Usertech common stock was accounted for using the purchase method of accounting. The Company paid $2,350,000 in cash; $1,200,000 in notes payable over three years, plus the assumption of $851,000 in liabilities. Usertech provides e-learning support, Enterprise Resource Planning (ERP) and Customer Retaionship Management (CRM) planning, implementation and training, as well as post implementation support, for clients who have installed Peoplesoft, SAP and Oracle software. Proprietary software packages are also supported through a national network of skilled consultants. Item 2. Management's Discussion of Financial Condition and Results of Operations -------------------------------------------------------------------------------- Liquidity and Capital Resources ------------------------------- Working capital at August 31, 2001 was $3,216,000, an increase of $1,396,000 over November 30, 2000. This increase was primarily the result of the bank refinancing completed during May, 2001. The Company was able to replace Chase Manhattan as its primary lender, and establish new and expanded credit facilities with Commerce Bank, N.A. As of the date of the refinancing, approximately $883,000 was paid to Chase, in full satisfaction 13 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ (continued) of the Company's outstanding obligations, out of the proceeds of a $1,500,000 five-year term loan from Commerce. The improved terms of the new loan greatly enhanced the current ratio of the Company, reducing current maturities of long term debt by over $1,000,000 from the year end. As part of the refinancing, the Company also secured a $2,500,000 two- year working capital line of credit collateralized by trade accounts receivable and inventory. As of October 15, 2001, $1,500,000 was borrowed in conjunction with the acquisition of Usertech on September 28, 2001. The long term debt is secured by substantially all of the assets of the Company and requires compliance with covenants which include maintenance of certain financial ratios and amounts. The Company is restricted by its primary lender from paying cash dividends on its common stock. Management believes that positive cash flow contributions from the Company's operating subsidiaries and the availability from the line of credit will be sufficient to cover cash flow requirements for fiscal 2001. There was no material commitment for capital expenditures as of August 31, 2001. Inflation was not a significant factor in the Company's financial statements. Cash flow from continuing operations for the nine months ended August 31, 2001 was $986,000. This represents an increase of $499,000 over the same period from the prior year. Strong collection of accounts receivable was the main reason for the improved cash flow performance. MARKET RISK The Company is subject to market risk principally arising from the potential change in the value of its investments. The Company's investments in equity securities at August 31, 2001 of $2,727,000 is subject to changes in value based on changes in equity prices in United States markets. Results of Operations --------------------- Revenues -------- Revenues for the three months ended August 31, 2001 decreased by $1,425,000 (14%) over the comparable three-month period in fiscal 2000, due primarily to a decrease in product sales at USC/Canterbury Corp. caused by delays in distributor assembly and the temporary delay of several large orders into Sepember. For the nine months ended August 31, 2001, revenues decreased by $1,058,000 (4%) due again primarily to lower product sales from USC/Canterbury. 14 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ (continued) The tragic events of September 11, 2001 in New York City and Washington, D.C. have had an immediate and profound impact on the Company's business dealings in these two markets. There have been significant cancellations of training programs due to the loss of property and life, as well as the uncertainty surrounding the general business environment in the metro New York City area. There has also been a major slow down in new business bookings since the attack. Revenue projections for the next several months are very difficult to determine as many customers who were directly and indirectly effected by the terrorist bombing try to cope with their own business priorities of regrouping and moving forward. The Company has filed a business interruption insurance claim to assist in offsetting some of the negative impact on the Company's financial condition. It is Management's belief that the Company will be able to withstand the negative financial impact caused by the events of September 11, 2001 through the combination of insurance proceeds, existing business opportunities with clients not effected by the disaster, the recent acquisition of Usertech (with a more national client base) and our ability to assist many of our clients in New York City, through staff augmentation, technical training and technical services. Costs and Expenses ------------------ Costs and expenses for the three months ended August 31, 2001 decreased by $1,188,000 (16%). This was due primarily to lower sales volume on products sold in fiscal 2001 versus fiscal 2000. The $1,094,000 (6%) decrease for the nine months ended August 31, 2001 was also due to the USC/Canterbury operations. Overall gross margins percentages for the quarter ended August 31, 2001 increased from 25% to 26% due to the increase in service sales versus product revenues for the period. Overall gross margins percentages for the nine months ended August 31, 2001 increased from 26% to 28% due to the increase in overall product margins for the nine-month period. Selling expenses for the nine months ended August 31, 2001 increased by $331,000 (19%), over the same period in fiscal 2000. The increase was due primarily to the significant selling costs associated with DMI/Canterbury Corp. This subsidiary was not acquired until August, 2000 and hence was not included in the results of operations for the period ended August 31, 2000. General and administrative expense for the quarter decreased by $269,000 (22%). Reduction in support staff and lower bad debt expense are the major factors resulting in this quarterly decrease. For the nine months ended Augsut 31, 2001, general and administrative expense increased by $1,431,000 (43%) due to a number of non-recurring charges made during the second quarter of fiscal 2001 totalling approximately $1,127,000. 15 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ (continued) Other Income\Expense -------------------- Interest income increased by $30,000 (15%) and $92,000 (17%) for the three- and nine-month periods ended August 31, 2001, respectively, versus the same periods from fiscal 2000 due to the interest generated from the notes receivable for capital stock purchases made over the past year. Interest expense decreased for both the three- and nine-month periods ended August 31, 2001 as compared to the previous year due to the significant reduction in outstanding bank debt over the past year. The three-month decrease of $34,000 (49%) and the nine-month reduction of $104,000 (44%) are directly attributed to the aggressive paydown of bank debt to Chase Manhattan Bank. The remaining Chase debt of $883,000 was paid off as part of the refinancing with Commerce Bank, which occurred in May, 2001. Other expense of $334,000 for the nine months ended August 31, 2001 was the result of a loss generated by the sale of the Bedminster property of $317,000. The Company sold the property, net of expenses for $400,000. The carrying value of the property had been $725,000. PART II - OTHER INFORMATION --------------------------- Item 1 Legal Proceedings ------ On January 8, 2001, the Registrant filed a complaint against Allied Consultants, Inc. and its three principals in the United States District Court, District of New Jersey Civil Action No. 01 CV-0070 for damages allegedly caused by these defendants in a failed acquisition negotiation based on over $85,000 spent on due diligence expenses expended on reliance of defendants' promise to abide by certain terms and conditions, which they failed to honor. Arbitration has been scheduled for November 2001. There are no further developments to report at this time. 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 16 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ (continued) Item 5 Other Information ------ None Item 6 Exhibits and Reports on Form 8-K ------ (a) Exhibits: None (b) Reports on Form 8-K: On August 28, 2001, Canterbury executed a Stock Purchase Agreement and effectuated a Closing with Ceridian Corporation, a Delaware corporation, who is the sole owner of User Technology Services, Inc., a New York corporation, whereby Canterbury acquired all of the issued and outstanding shares of capital stock of User Technology Services Inc. from Ceridian for cash and promissory notes. On August 9, 2001, Ernst & Young LLP's appointment as principal accountants was terminated and Baratz & Associates, P.A. was engaged as principal accountants. The decision to change accountants was based on financial considerations and was approved by the audit committee and the full Board of Directors of the Registrant. On June 11, 2001 the Company filed an 8-K notifying that the Board of Directors resolved that Kevin J. McAndrew, Canterbury's former Executive Vice President, has been appointed President and Chief Executive Officer, and will continue as Chief Financial Officer. Stanton M. Pikus, Canterbury's former President and Chief Executive Officer, would remain an employee of Canterbury on a full-time basis and would continue on with his duties as Chairman of the Board. 17 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CANTERBURY CONSULTING GROUP, INC. --------------------------------- (Registrant) By:/s/ Kevin J. McAndrew --------------------------------- Kevin J. McAndrew President and Chief Executive Officer (Chief Financial Officer and duly authorized signer) October 15, 2001 18