10-Q 1 ccg10q203.txt QUARTERLY REPORT FOR PERIOD ENDING FEBRUARY 28, 2003 FORM 10-Q --------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: Commission File Number: February 28, 2003 0-15588 CANTERBURY CONSULTING GROUP, INC. --------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2170505 ------------------------------- --------------------------- (State of Incorporation) (IRS Employer Identification No.) 352 Stokes Road Suite 200 Medford, New Jersey 08055 --------------------------------------- (Address of principal executive office) Telephone Number: (609) 953-0044 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No ---- ---- The number of shares outstanding of the registrant's common stock as of the date of the filing of this report 1,848,909 shares. FORM 10-Q PART 1 - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements ----------------------------- CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEET -------------------------- ASSETS ------ February 28, 2003 November 30, (Unaudited) 2002 ----------- ------------ Current Assets: Cash and cash equivalents $ 254,870 $ 395,477 Accounts receivable, net of allowance for doubtful accounts of $396,000 and $383,000 2,455,848 2,850,934 Notes receivable - current portion 501,913 492,377 Prepaid expenses and other assets 268,246 321,826 Inventory, principally finished goods, at cost 130,650 173,118 Deferred income tax benefit 272,660 272,660 ---------- ---------- Total Current Assets 3,884,187 4,506,392 Property and equipment at cost, net of accumulated depreciation of $1,451,000 and $1,349,000 786,093 885,302 Goodwill 3,608,381 3,608,381 Deferred income tax benefit 3,200,281 2,987,728 Notes receivable 6,345,324 6,474,266 Other assets 204,495 206,910 ---------- ---------- Total Assets $18,028,761 $18,668,979 =========== =========== See Accompanying Notes 2 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ February 28, 2003 November 30, (Unaudited) 2002 ---------------- ------------ Current Liabilities: Accounts payable - trade $ 917,605 $ 618,124 Accrued expenses 765,358 821,298 Unearned revenue 867,679 892,249 Current portion, long-term debt 872,492 882,880 ----------- ---------- Total Current Liabilities 3,423,134 3,214,551 Long-term debt 1,093,760 1,209,625 Deferred income tax 2,036,203 2,036,203 ----------- ----------- Total Liabilities 6,553,097 6,460,379 Commitments Stockholders' Equity: Common stock, $.001 par value, 50,000,000 shares authorized; 1,848,909 and 1,732,959 issued and outstanding 1,849 1,733 Additional paid-in capital 24,006,150 23,782,498 Accumulated deficit (8,936,841) (7,934,823) Notes receivable for capital stock - related parties (3,595,494) (3,640,808) ----------- ----------- Total Stockholders' Equity 11,475,664 12,208,600 ----------- ----------- Total Liabilities and Stockholders' Equity $18,028,761 $18,668,979 =========== =========== See Accompanying Notes 3 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three-Months Ended February 28, 2003 2002 ----- ---- (Unaudited) (Unaudited) Service revenue $ 2,842,864 $ 4,019,695 Product revenue 1,825,515 2,729,299 ----------- ----------- Total net revenue 4,668,379 6,748,994 Service costs and expenses 2,426,748 2,797,442 Product costs and expenses 1,611,904 2,144,662 ----------- ----------- Total costs and expenses 4,038,652 4,942,104 Gross profit 629,727 1,806,890 Selling 460,436 597,509 General and administrative 1,513,144 1,323,391 ----------- ----------- Total operating expenses 1,973,580 1,920,900 Other income/(expense) Interest income 142,844 169,744 Interest expense (31,146) (47,681) Other 136 113,178 ----------- ----------- Total other income/(expense) 111,834 235,241 (Loss) income before income taxes (1,232,019) 121,231 Provision (benefit) for income tax (230,000) 46,000 ----------- ----------- Net (loss) income $ (1,002,019) $ 75,231 ============= =========== Net (loss) income per share and common share equivalents Basic and diluted: Net (loss) income $(.58) $ .04 ====== ====== Weighted average number of common shares - basic 1,734,000 1,766,500 ============= =========== Weighted average number of common shares -diluted 1,734,000 1,774,500 ============= =========== See Accompanying Notes 4 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2003 AND FEBRUARY 28, 2002 February 28, February 28, 2003 2002 ------------ -------------- (Unaudited) (Unaudited) Operating activities: Net (loss) income $(1,002,019) $ 75,231 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 102,309 138,370 Provision for losses on accounts receivable 12,994 (12,042) Deferred income taxes (212,553) - 401(k) contributions issued in stock 211,029 - Issuance of stock options to consultants for services 12,740 - Other assets 2,415 1,798 Changes in operating assets, net of acquisitions Accounts receivable 382,092 1,780,965 Inventory 42,468 586,189 Prepaid expenses and other assets 53,580 (77,008) Income taxes - 21,665 Accounts payable 299,481 (920,259) Accrued expenses (55,940) (17,507) Unearned revenue (24,570) (753,922) -------- --------- Net cash provided by/(used in) operating activities (175,974) 823,480 -------- --------- Investing activities: Capital expenditures, net (3,100) (44,678) Proceeds from payments on notes receivable 119,406 113,752 Other - (29,500) -------- --------- Net cash provided by investing activities 116,306 39,574 -------- --------- Financing activities: Proceeds from issuance of common stock - 15,000 Proceeds from payments on notes receivable for capital stock - related parties 45,314 - Principal payments on long term debt (126,253) (228,245) -------- --------- Net cash used in financing activities (80,939) (213,245) Net (decrease) increase in cash (140,607) 649,809 Cash, beginning of period 395,477 664,850 ---------- ---------- Cash, end of period $ 254,870 $1,314,659 ========== ========== See Accompanying Notes 6 FORM 10-Q CANTERBURY CONSULTING GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------ 1. Operations and Summary of Significant Accounting Policies -------------------------------------------------------------- Basis of Presentation ---------------------- The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations. It is suggested that these unaudited consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's 10-K for the year ended November 30, 2002. In the opinion of management, all adjustments (which consist only of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows of all periods presented have been made. Quarterly results are not necessarily indicative of results for the full year. Description of Business ------------------------ Canterbury Consulting Group, Inc. provides broad based information technology and management consulting services and training to both corporate and government clients. Canterbury's mandate is to become an integral part of its clients' management and technical infrastructure, designing and applying the best products and services to help them achieve a competitive advantage. For information about the Company's revenues, profit or loss, and assets by segment, see Note 2 of the Notes to Consolidated Financial Statements. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All material intercompany transactions have been eliminated. Use of Estimates ---------------- Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (US GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. US GAAP requires us to make estimates and judgments in several areas, including those related to impairment of goodwill and equity investments, revenue recognition, recoverability of inventory and receivables, the useful lives of long lived assets such as property and equipment, the future realization of deferred income tax benefits and the recording of various accruals. The ultimate outcome and actual results could differ from the estimates and assumptions used. Change in Accounting ---------------------- As of December 1, 2001, the Company adopted SFAS 142, "Goodwill and Other Intangible Assets," which addresses the financial accounting and reporting standards for goodwill subsequent to its acquisition. This standard requires that goodwill no longer be amortized, and instead, be tested for impairment on an annual basis. Reverse Stock Split ------------------- On January 24, 2003, the Company's Board of Directors approved a one for seven reverse stock split of the Company's common shares. All share and per share information contained in these financial statements gives retroactive effect to the 1 for 7 reverse stock split. Concentration of Risk ---------------------- As previously discussed, the Company is in the business of providing management and information technology services. These services are provided to a large number of customers in various industries in the United States. The Company's trade accounts receivable are exposed to credit risk, but the risk is limited due to the diversity of the customer base and the customers wide geographic dispersion. The Company performs ongoing credit evaluations of its customers' financial condition. The Company maintains reserves for potential bad debt losses and such bad debt losses have been within the Company's expectations. The Company maintains cash balances at a creditworthy bank located in the United States. Accounts at the institution are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company does not believe that it has significant credit risk related to its cash balance. For the quarter ended February 28, 2003, a significant number of local and state agencies in Maryland purchased equipment under a contract with the City of Baltimore from USC/Canterbury (Value Added Hardware Reseller Segment). Total purchases under this contract represented 68% of this segment's revenue and 26% of consolidated revenue. If this contract were not replaced or extended in September 2003, there would be no vehicle in place for USC/Canterbury to sell into the City. A second group of customers, from a county in Virginia, accounted for 14% of revenues in the reseller segment. This group of over 80 customers purchased equipment from USC/Canterbury under the City of Baltimore contract as well. Approximately 70% of this revenue could be purchased under the Virginia state contract if the Baltimore contract is not renewed in September 2003. Five of the six operating subsidiaries are headquartered in the Mid Atlantic and Northeast region of the country. As such, the majority of revenues for the first quarter of Fiscal 2003 and Fiscal 2002 were generated in these two geographic regions. Reclassifications ------------------ Certain reclassifications have been made to prior years balances in order to conform to current presentations. 2. Segment Reporting ---------------------- The Company is organized into four operating segments and the corporate office. The operating segments are: training and consulting, value added hardware reseller, technical staffing and software development. Prior to the adoption of SFAS 142 for fiscal 2002, the Company accounted for goodwill and any related amortization expense or impairment charges at the corporate level. For fiscal 2003, goodwill has been assigned to reporting units for purposes of impairment testing and segment reporting as required by SFAS 142. Summarized financial information for the three months ended February 28, 2003 and February 28, 2002, for each segment, is as follows: Training Value Added and Hardware Technical Software 2003 Consulting Reseller Staffing Development Corporate Total ---- ---------- -------- --------- ----------- --------- ----- Revenues $ 2,692,185 $ 1,795,622 $150,679 $ 29,893 $ - $ 4,668,379 (Loss) income before taxes (796,035) (49,271) (18,140) (6,724) (361,850) (1,232,019) Assets 5,769,204 1,262,013 126,201 54,086 10,817,257 18,028,761 Interest income 214 - - - 142,630 142,844 Interest expense 16,681 270 - 744 13,451 31,146 Depreciation and amortization 88,875 4,312 987 2,163 5,972 102,309
Training Value Added and Hardware Technical Software 2002 Consulting Reseller Staffing Development Corporate Total ---- ---------- -------- --------- ----------- --------- ----- Revenues $ 3,695,813 $ 2,639,049 $ 323,882 $ 90,250 $ - $ 6,748,994 Income (loss) before taxes (83,059) 274,595 58,771 13,189 (142,265) 121,231 Assets 7,241,272 1,199,945 308,415 167,322 14,319,155 23,236,109 Interest income 460 - - - 169,284 169,744 Interest expense 26,602 23 - 1,059 19,997 47,681 Depreciation and amortization 118,594 5,081 5,274 3,893 5,528 138,370
3. Notes Receivable -------------------- The Company holds a note receivable with a remaining balance in the amount of $2,384,995 at February 28, 2003. This note was received in November 1995 as part of the consideration for the sale of a former subsidiary. The Company is scheduled to receive monthly payments of $33,975 inclusive of interest at 7.79% per year through November 2005 and a balloon payment of $1,707,000 in December 2005. In addition, the Company held notes receivable assets from a related party in the aggregate amount of $4,462,242 at February 28, 2003. These notes have interest terms that average 8.5% per year and are scheduled to mature at various dates through November 2006, with a balloon payment of $1,948,000 in December, 2006. The aggregate amount includes a $1,360,000 note receivable on demand. As a subsequent event, in order to fortify the liquidity of the balance sheet, the Company has negotiated a $500,000 paydown of the $1,360,000 demand note, with a related party. On April 3, 2003 the independent directors, who are a majority of the Board of Directors of Canterbury, voted to reduce the annual interest rate on the note from 10% to 5% per annum in exchange for a principal payment of $500,000 to be received by the Company on or before April 30, 2003. The $1,360,000 demand note is included in the non-current portion of notes receivable at February 28, 2003 and November 30, 2002. The company has received all scheduled monthly installments for all of its notes receivable outstanding as of February 28, 2003. 4. Property and Equipment -------------------------- Property and equipment, which is recorded at cost, consists of the following: February 28, November 30, 2003 2002 ---- ---- Machinery and equipment $1,633,239 $1,630,274 Furniture and fixtures 454,407 454,407 Leased property under capital leases and leasehold improvements 149,345 149,345 ---------- ----------- 2,236,991 2,234,026 Less: Accumulated depreciation (1,450,898) (1,348,724) ---------- ----------- Net property and equipment $ 786,093 $ 885,302 ========== =========== Accumulated depreciation of leased property under capital leases at February 28, 2003 amounted to $138,000. 5. Long-Term Debt ------------------ February 28, November 30, 2003 2002 Long-term obligations consist of: ---- ---- Term loan $ 950,000 $1,025,000 Revolving credit line - - Note payable for acquisition 800,000 800,000 Capital lease obligations 11,696 23,841 Notes payable - equipment 204,556 243,664 ---------- ----------- 1,966,252 2,092,505 Less: Current maturities (872,492) (882,880) ---------- ----------- $1,093,760 $1,209,625 ========== ========== The Company's outstanding amount owed under the revolving credit line with Chase Bank was refinanced in May 2001 by establishing a commercial lending relationship with Commerce Bank, N.A. (the Bank). As of the date of the refinancing, approximately $883,000 was paid to Chase Bank in full satisfaction of the Company's outstanding obligations, from the proceeds of a $1,500,000 five-year term loan from Commerce. As of February 28, 2003, $550,000 of this loan has been repaid. As part of the refinancing, the Company also secured a two-year $2,500,000 working capital line of credit with Commerce Bank collateralized by trade accounts receivable and inventory. $1,500,000 was borrowed in conjunction with the acquisition of User Technology Services, Inc. ("Usertech") on September 28, 2001. This $1,500,000 has been repaid in full. Both loans carry an interest rate of the prime rate plus 1%. The credit facility with Commerce Bank was structured so that as the original term loan of $1,500,000 is paid down, the borrowing cap on the revolver increases so that the total maximum outstanding revolver debt is $2,500,000, subject to receivable and inventory levels. During May, 2002 the Bank extended the term on the revolving line of credit until May 1, 2004. The Bank's long term debt is secured by substantially all of the assets of the Company and requires compliance with covenants which include the maintenance of certain financial ratios and amounts. The Company is restricted by its bank from paying cash dividends on its common stock. As a result of recent losses, the Company was in breach of the minimum tangible net worth covenant in the loan agreement with the Bank. At February 28, 2003 the covenant calls for a minimum tangible net worth of $8,000,000. The Company reported a tangible net worth of $7,868,000, a shortfall of $132,000. The Company has requested, and was granted, a waiver from the Bank for the quarter ended February 28, 2003 related to this covenant breach. The waiver was granted in conjunction with an amendment to the existing loan agreement related to total availability under the facility. Effective April 8, 2003, the maximum amount available under the credit facility has been reduced from $2,500,000 to $1,500,000 less the principal balance outstanding under the Commerce Bank term loan, subject to receivable and inventory levels. Had this amendment been effective at February 28, 2003, the total available line at that date would have been $550,000. The Company remains in compliance with all other financial covenants in the loan agreement as of February 28, 2003. As part of the purchase price paid for the acquisition of Usertech in September, 2001, the Company agreed to pay $1,200,000 to the seller over the next three years at an annual amount of $400,000 plus accrued interest at 7% per annum on the outstanding balance. In conjunction with the purchase of 100% of the stock of Usertech, the Company purchased computer equipment from the seller valued at $364,000 through issuance of a note payable over three years with interest at an annual rate of 3.75%. At February 28, 2003, the note payable had an outstanding balance of $169,079. Aggregate fiscal maturities on long-term debt, exclusive of obligations under capital leases, are approximately $744,000 in 2003; $773,000 in 2004; $307,000 in 2005; and $130,000 in 2006. The carrying value of the long-term debt approximates its fair value. 6. Capital Leases ------------------ Capital lease obligations are for certain equipment leases which expire through fiscal year 2003. Future required payments under capitalized leases together with the present value, calculated at the respective leases' implicit interest rate of approximately 10.5% to 14.3% at their inception is as follows at February 28, 2003: Total minimum lease payments through November 30, 2003 $ 12,119 Less amount representing interest (423) --------- Present value of long-term obligations under capital leases $ 11,696 ========= 7. Related Party Transactions -------------------------------- During Fiscal 2001, certain officers and directors of the Company purchased a 33% ownership interest in a corporation which owns 100% of the stock of a corporation from an outside group who purchased the business from the Company in 1996 which has notes payable to the Company in the amount of $4,462,242 at February 28, 2003. The Company maintained the same level of security interest protection and the same debt amortization schedule. At February 28, 2003 and November 30, 2002, the total notes receivable plus accrued interest for issuances of Company common stock to corporate officers, corporate counsel and certain consultants totaled $3,595,000 and $3,641,000, respectively. These non-recourse notes are collateralized by common stock of the Company and are reported as a contra-equity account. Interest rates range from 4% to 6.6%. Prior to July 17, 2002, $1,739,000 of these notes were recourse notes. On July 17, 2002 the Compensation Committee recommended, and the Board of Directors approved a modification of the April 10, 2001 and the May 16, 2001 notes. The notes became non-recourse as to principal and interest as of September 1, 2002 with the issued shares continuing to collateralize the notes. All accrued interest on the notes as of September 1, 2002 has been paid to the Company. Principal and interest must be paid by each recipient before they are entitled to sell their respective shares. If principal and interest have not been paid by the maturity date of the recipient notes, then recipients' sole obligation shall be that any shares relating to this nonpayment will be forfeited and returned to the Company. If this event were to occur, both the underlying shares and the notes receivable would be cancelled with no effect on the net worth of the Company. In consideration for this modification the term of these notes was reduced and shortened from April and May, 2006 to December 31, 2004. The Board also prohibited the issuance of any stock options, stock or any other form of equity for all of Fiscal 2002 to the recipients. In the past, the Board has issued and/or granted significant amounts of equity (in the form of stock options or stock purchases) to these recipients on an annual basis. The Compensation Committee did not wish any additional dilution of Company stock at the current low prices. Also by reducing the term of the notes the Compensation Committee believes that management would have a further inducement to accelerate their efforts to increase shareholder value or risk the loss of their shares. 8. Stock Listing ----------------- On February 15, 2002 the Company was notified by Nasdaq that it had until May 15, 2002 to come into compliance with their minimum $1.00 per share requirement for continued inclusion on their National Market listing. The Company was and is in full compliance with the remaining listing requirements of Nasdaq's Maintenance Standard #1. The Company complied with the minimum price requirements by closing at a $1.00 per share for a period of 11 consecutive trading days before May 15, 2002. The minimum requirement was that the Company's common stock close at a $1.00 bid or better for 10 consecutive days. Even though the Company met the minimum price requirement, Nasdaq considered intra day trading activity below $1.00 during the 11-day period and did not approve the Company's continued listing on their National Market listing. The Company appealed Nasdaq's initial decision and appeared before an appeal panel on June 21, 2002. The appeal was denied and on July 31, 2002 the Company's common stock began trading on the Nasdaq SmallCap Market. In order to stay listed on the Nasdaq SmallCap Market, the Company's stock needed to close above a $1 bid price for at least 10 consecutive trading days by February 10, 2003. In order to remain in compliance with the Nasdaq minimum price requirement, the Board of Directors voted for a one for seven reverse split effective January 24, 2003. On February 13, 2003 the Company received a letter from Nasdaq stating that Canterbury had evidenced compliance with all requirements necessary for continued listing on the Nasdaq SmallCap Market. Accordingly, Nasdaq determined to continue the listing of the Company's securities on the Nasdaq SmallCap Market. Item 2. Management's Discussion of Financial Condition and Results of Operations ------------------------------------------------------------------------ Cautionary Statement --------------------- When used in this Report on Form 10-Q and in other public statements, both oral and written, by the Company and Company officers, the word "estimates," "project," "intend," "believe," "anticipate," and similar expressions, are intended to identify forward-looking statements regarding events and financial trends that may affect the Company's future operating results and financial position. Such statements are subject to risks and uncertainties that could cause the Company's actual results and financial position to differ materially. Such factors include, among others: (1) the Company's success in attracting new business and success of its mergers and acquisitions program; (2) the competition in the industry in which the Company competes; (3) the sensitivity of the Company's business to general economic conditions; and (4) other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. The Company undertakes no obligations to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. Procedures and Controls ------------------------ Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Liquidity and Capital Resources -------------------------------- Working capital at February 28, 2003, was $461,000. This was a decrease of $831,000 since November 30, 2002. Accounts receivable decreased by $395,000, due primarily to the reduction in revenue during the first quarter of Fiscal 2003. This decline in revenue from the prior quarter amounted to $1,094,000 as a result of the overall decline in spending in the technology sector. Technology and training expenditures by the Company's clients have slowed or been delayed in light of various factors affecting their businesses such as the uncertain economy, the threat of terrorism, the war in Iraq and other international conflicts. The Company's outstanding amount owed under the revolving credit line with Chase Bank was refinanced in May 2001 by establishing a commercial lending relationship with Commerce Bank, N.A. (the Bank). As of the date of the refinancing, approximately $883,000 was paid to Chase in full satisfaction of the Company's outstanding obligations, from the proceeds of a $1,500,000 five-year term loan from Commerce. As of February 28, 2003, $550,000 of this loan has been repaid. As part of the refinancing, the Company also secured a two-year $2,500,000 working capital line of credit with the Bank collateralized by trade accounts receivable and inventory. $1,500,000 was borrowed in conjunction with the acquisition of User Technology Services, Inc. ("Usertech") on September 28, 2001. This $1,500,000 has been repaid in full. Both loans carry an interest rate of the prime rate plus 1%. The credit facility with Commerce Bank was structured so that as the original term loan of $1,500,000 is paid down, the borrowing cap on the revolver increases so that the total maximum outstanding revolver debt is $2,500,000, subject to receivable and inventory levels. During May, 2002 the Bank extended the term on the revolving line of credit until May 1, 2004. The Bank's long term debt is secured by substantially all of the assets of the Company and requires compliance with covenants which include the maintenance of certain financial ratios and amounts. The Company is restricted by its bank from paying cash dividends on its common stock. As a result of recent losses, the Company was in breach of the minimum tangible net worth covenant in the loan agreement with the Bank. At February 28, 2003 the covenant calls for a minimum tangible net worth of $8,000,000. The Company reported a tangible net worth of $7,868,000, a shortfall of $132,000. The Company has requested, and was granted, a waiver from the Bank for the quarter ended February 28, 2003 related to this covenant breach. The waiver was granted in conjunction with an amendment to the existing loan agreement related to total availability under the facility. Effective April 8, 2003, the maximum amount available under the credit facility has been reduced from $2,500,000 to $1,500,000 less the principal balance outstanding under the Commerce Bank term loan, subject to receivable and inventory levels. Had this amendment been effective at February 28, 2003, the total available line at that date would have been $550,000. The Company remains in compliance with all other financial covenants in the loan agreement as of February 28, 2003. As part of the purchase price paid for the acquisition of Usertech in September, 2001, the Company agreed to pay $1,200,000 to the seller over the next three years at an annual amount of $400,000 plus accrued interest at 7% per annum on the outstanding balance. Management believes that anticipated positive cash flow contributions from the Company's operating subsidiaries and the availability to borrow from its revolving line of credit should be sufficient to cover cash flow requirements for Fiscal 2003. There was no material commitment for capital expenditures as of February 28, 2003. Inflation was not a significant factor in the Company's financial statements. Cash flow from operating activities for the quarter ended February 28, 2003 was $(176,000), a decrease of $999,000 over the first quarter of Fiscal 2002. The reduction in operating cash flow from 2002 was due in large part to the reduced levels of operating profitability from each of the subsidiaries. The balance sheet has continued to shrink during the first quarter of Fiscal 2003 as business has continued to slow. The Company's February 28, 2003 current ratio was 1.13:1.00 versus 1.40:1.0 at November 30, 2002. As a subsequent event, in order to fortify the liquidity of the balance sheet, the Company has negotiated a $500,000 paydown of the $1,360,000 demand note, with a related party. On April 3, 2003 the independent directors, who are a majority of the Board of Directors of Canterbury, voted to reduce the annual interest rate on the note from 10% to 5% per annum in exchange for a principal payment of $500,000 to be received by the Company on or before April 30, 2003. The $1,360,000 demand note is included in the non-current portion of notes receivable at February 28, 2003 and November 30, 2002. RESULTS OF OPERATIONS ---------------------- Revenues -------- Total revenues for the three months ended February 28, 2003 decreased by $2,081,000 (31%) from the same three-month period in Fiscal 2002. Service revenue decreased by $1,177,000 (29%) and product revenue decreased by $904,000 (33%) during the first quarter of Fiscal 2003 as compared to the first quarter of Fiscal 2002. All four operating segments experienced a revenue downturn during the quarter. The declining revenue in all of the operating segments is the result of reduced client spending in all phases of information technology and training. Budgets have been reduced or eliminated. Projects have been delayed or reduced in scope. Many businesses are attempting to use internal resources instead of outsourcing in an attempt to save money during these difficult economic times. The Company is dealing with this business downturn in a number of ways. Facility consolidations, workforce reductions in areas other than sales, salary freezes and reductions, and the hiring of more sales personnel are all being utilized as a means to preserve cash and to increase revenues and cash flow. CALC/Canterbury has reduced its fixed overhead by sharing its Parsippany, New Jersey facility with both DMI/Canterbury and Usertech/Canterbury. During February, 2003 CALC/Canterbury executed a licensing agreement with ExecuTrain, an international learning solutions provider, whereby it will become part of their global training network. As a result, CALC/Canterbury can now offer national and international training delivery to its existing clients with multiple locations. The alliance will also allow CALC/Canterbury to market itself to new clients who have not used them in the past due to its lack of national training capability. CALC/Canterbury is currently in search of qualified sales personnel to help expand its presence in the metro New York City marketplace. Usertech/Canterbury experienced a significant downturn in revenues during the last quarter of Fiscal 2002. Several large projects ended during the quarter and were not replaced with new business. Many clients delayed or cancelled large-scale training projects due to their own poor operating results. Many of Usertech/Canterbury's consultants were under utilized during the quarter. As the softness in revenue has continued into the early part of Fiscal 2003, the Company has taken several significant steps to preserve cash flow. First, the Saddlebrook, New Jersey office was closed in December, 2002 and those employees were relocated to Parsippany, New Jersey to share office space with CALC/Canterbury. The Company saved approximately $175,000 annually by not renewing the Saddlebrook lease. There was also a significant workforce reduction during the first quarter of 2003. Twenty-seven (27) employees have been laid off resulting in annual salary and benefits savings of approximately $2,200,000. As a result of this staff reduction, Usertech/Canterbury's organization was restructured and streamlined resulting in additional savings. Usertech/Canterbury is also searching for additional account executives in order to reach more potential customers on a national basis. In addition, Usertech/Canterbury plans to offer its learning solutions through the ExecuTrain national franchise network as a result of the licensing agreement between CALC/Canterbury and ExecuTrain. ExecuTrain has been planning to expand its product offerings in the ERP market and Usertech/Canterbury can now provide quality delivery and service to the client base that ExecuTrain currently services through its network of training centers. USC/Canterbury has been dealing with a number of business issues as a result of the Hewlett-Packard/Compaq merger. Lower margins, more competition and delays in product availability have all taken their toll on revenues and gross profit. Margins in Fiscal 2002 were 12% compared to approximately 10% in the first quarter of Fiscal 2003. Many manufacturer rebate programs have been discontinued. USC/Canterbury is attempting to expand its reseller relationships to manufacturers other than Hewlett Packard and Compaq in order to provide customers with more purchasing options as well as to reduce its dependence on a sole source for product. The majority of USC/Canterbury's clients are municipalities in state and local government. With many state budgets running at a deficit, there is less money being allocated to information technology spending. USC/Canterbury continues to focus on expanding its business to commercial clients to reduce its overall dependence on government clients. The pending change with Hewlett Packard to an agent model from the current system of recording gross revenues and costs did not have a material impact on revenues for the quarter. MSI/Canterbury's management and sales training tends to be a more discretionary expenditure by its clients during difficult economic times. Many clients have reduced or eliminated certain programs for the time being. Over the past thirty years of its existence MSI/Canterbury has experienced the ebb and flow caused by current economic conditions. While dealing with the current downturn, this subsidiary has taken several steps to address the situation. First, MSI/Canterbury has expanded its reach by entering into several alliance programs with local chambers of commerce. There have been reductions in support staff and consultants, while at the same time an ongoing search for qualified sales personnel is being conducted. MSI/Canterbury also plans to offer its services through the ExecuTrain national network in conjunction with the agreement between CALC/Canterbury and ExecuTrain. MSI/Canterbury is also developing distance learning products to complement its live delivery platform. ATM/Canterbury has also experienced declining revenues caused in large part to the downturn in spending for information technology products as a result of poor economic conditions in the country. New products are being developed in an effort to penetrate markets that were previously not addressed. Lower priced versions of various software packages are being introduced to new clients who have less demanding performance requirements. ATM/Canterbury continues to search for strategic partners who will use its software as an integral component in a packaged solution for asset tracking or document tracking and retrieval. DMI/Canterbury's revenues have been adversely affected by the poor economic condition of many of the industries that it serves. A lack of information technology job openings coupled with a surplus of IT professionals has resulted in a reduction in revenue. In order to combat this difficult operating environment, DMI/Canterbury has established various strategic alliances with major staffing providers who have significant relationships with large customers who are still utilizing outsourced labor. As the economy improves, it is the Company's belief that DMI/Canterbury will be among the first subsidiaries to experience an increase in revenues as the pool of qualified available labor diminishes and job requirements increase. The Company continues to advocate and promote cross marketing between all of its operating subsidiaries. During the current economic downturn, the number of opportunities for Canterbury to provide an all- inclusive technology or training solution to its substantial customer list has been limited. All of the subsidiaries continue to present the full complement of Canterbury products and services to their clients. It is management's belief that when business conditions improve, the Company will inherit markets that have been abandoned by competitors who have gone out of business, or who do not have sufficient working capital to take advantage of future opportunities. Costs and Expenses ------------------ Total costs and expenses decreased by $903,000 (18%) during the first quarter of Fiscal 2003 as compared to the first quarter of Fiscal 2002. Service costs declined by $370,000 (13%), while product costs decreased by $533,000 (25%). The decreases are a direct result of the lower revenues recognized during the quarter and aggressive cost cutting by Company management. The service cost reduction is the result of lower personnel related costs $315,000, lower repair, maintenance and support costs of $181,000, offset by the 401(k) match for trainers and consultants of $126,000 made in the first quarter of Fiscal 2003. In Fiscal 2002, this match was not made until the third quarter of the year. These cost reductions were not sufficient to offset the revenue decrease resulting in a much lower gross profit. The consolidated gross profit margin declined from 27% for the first quarter of Fiscal 2002 to 13% in the first quarter of Fiscal 2003. The significant cost reductions outlined previously should have a positive impact on future gross margins as the overall breakeven point for the business has been greatly reduced. Gross profit on services declined from 30% in Fiscal 2002 to 15% in Fiscal 2003 due primarily to the underutilization of consultants and relatively high fixed costs for training. Product margins declined to 12% from 21% in the previous year's first quarter. Many manufacturers rebate programs have been eliminated as competitive pricing pressures have forced them to be more cost efficient. Also, in the economy's current state, pricing to customers has become much more competitive. Selling expense declined by $137,000 (23%) due primarily to reductions in personnel related expenses including reduced commissions on lower reported revenues and gross profit. General and administrative expenses were increased by $190,000 (14%) during the first quarter of Fiscal 2003 as compared to the same three- month period in the previous year. There were several reasons for the increase. The 401(k) match in Company stock ($80,000) for administrative employees occurred during the first quarter of Fiscal 2003. In 2002 this match was not made until the third quarter. Public company expenses (accounting, legal, public relations, etc.) increased by $78,000 in 2003 reflecting the increased cost of operating as a public company in today's business environment. The balance of the increase ($32,000) is related to non-recurring personnel related expenses. As a subsequent event, on March 1, 2003 Canterbury's corporate management team, inclusive of the Chairman, President and Vice President, has voluntarily reduced their present salaries by 8%. This is in line with a recently instituted 8% salary reduction at one of the Company's largest subsidiaries. Other income for Fiscal 2003 declined by $113,000 over the previous year's first quarter. The most significant portion of the decrease was the result of the Company receiving $85,000 in insurance proceeds in 2002, related to business interruption caused by the terrorist attacks on September 11, 2001. There was no activity in this account classification for Fiscal 2003. Critical Accounting Policies ---------------------------- Goodwill -------- As previously stated, the Company adopted SFAS 142, "Goodwill and Other Intangible Assets" as of December 1, 2001. This standard requires that goodwill no longer be amortized, but instead, be tested for impairment on an annual basis. The Company's earnings forecasts for purposes of these impairment tests are consistent with forecasts and budgets currently used in the management of these businesses. The estimated fair value of the goodwill amounts are based upon future expectations, and if actual results are significantly lower, the likelihood is that these estimates would change, resulting in future impairment charges. Revenue Recognition -------------------- The Company's revenue recognition policies are in accordance with Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," which provides additional guidance in applying generally accepted accounting principles for revenue recognition. SAB 101 states that revenue is recognized when there is persuasive evidence of an arrangement, the product has been delivered, the sales price is fixed or determinable, and collectibility is reasonably assured. The vast majority of our revenue transactions contain standard business terms and conditions that result in a clear determination of when revenues should be recognized. Our revenue recognition policy requires an assessment as to whether collectibility is probable, which inherently requires us to evaluate the creditworthiness of our customers and their acceptance of our delivered products and services. Valuation Allowance-Deferred Tax Assets ---------------------------------------- The Company records valuation allowances to reduce deferred tax assets to amounts that are more likely than not to be realized. This process involves forecasting the future profitability of our businesses to determine whether the company is expecting to generate sufficient taxable income to fully utilize our existing tax loss carryforwards and other tax assets that become future tax deductions. The determination of the valuation allowance is based upon our earnings forecasts that we use in the management of our businesses. Therefore, we are required to make estimates and judgments based upon historical experience and the best information available to us. However, future events are subject to change and we may have to adjust the valuation allowance in future periods, accordingly. PART II - OTHER INFORMATION Item 1 Legal Proceedings None Item 2 Changes in Securities None Item 3 Defaults Upon Senior Securities None Item 4 Submission of Matters to a Vote of Stock Holders None Item 5 Other Information None Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: None (b)Reports on Form 8-K: A Form 8-K was filed with the SEC on January 24, 2003 - The Registrant declared a one for seven reverse split of its common stock. As a subsequent event, A Form 8-K was filed with the SEC on March 18, 2003 - The Employment of the President of its wholly owned subsidiary, Usertech/Canterbury Corp. has been terminated, and he has been removed as an officer and director of that subsidiary. CANTERBURY CONSULTING GROUP, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CANTERBURY CONSULTING GROUP, INC. -------------------------------------- (Registrant) By/s/ Kevin J. McAndrew -------------------------------------- Kevin J. McAndrew President and Chief Executive Officer By/s/ Kevin J. McAndrew -------------------------------------- Kevin J. McAndrew Chief Financial Officer April 11, 2003 CERTIFICATION OF KEVIN J. MCANDREW AS PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14 I, Kevin J. McAndrew, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Canterbury Consulting Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 11, 2003 /s/ Kevin J. McAndrew Kevin J. McAndrew President and Chief Executive Officer CERTIFICATION OF KEVIN J. MCANDREW AS CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES EXCHANGE ACT RULE 13A-14 I, Kevin J. McAndrew, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Canterbury Consulting Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 11, 2003 /s/ Kevin J. McAndrew ---------------------------- Kevin J. McAndrew Chief Financial Officer CANTERBURY CONSULTING GROUP, INC. ------------------------------------ EXHIBIT INDEX ------------- Exhibit No. Document ------------------ 99.1 Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 99.2 Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350