10-K 1 ccg10k03.txt FORM 10-K FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2003 United States Securities And Exchange Commission Washington, D.C. 20549 ----------------------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: November 30, 2003 Commission File Number: 0-15588 CANTERBURY CONSULTING GROUP, INC. ------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-2170505 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 352 Stokes Road, Suite 200 Medford, New Jersey 08055 (Address of principal executive offices) (Zip Code) Registrant's telephone number (609) 953-0044 Securities registered under Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $.001 par value 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this 10-K. X ---- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES __ -- NO _X_ The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price of such stock on The Nasdaq SmallCap Market for May 30, 2003 was $1,319,992. The number of shares outstanding of the issuer's class of common equity, as of February 19, 2004 was 2,097,251. PART I ITEM 1. BUSINESS INTRODUCTION ------------- 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, services and training to both commercial and government clients. Canterbury is comprised of five operating subsidiaries with offices located in New Jersey, New York, Maryland, 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, services and training to help them achieve a competitive advantage by helping their employees to succeed. Our subsidiaries offer the following technology and training solutions: * distance learning solutions * software development * customized learning solutions * web development for ERP and CRM * technical and desktop applications * systems engineering and training consulting * records and asset management systems * management training programs * help desk and service center support * hardware sales and support The Company was incorporated in the Commonwealth of Pennsylvania on March 19, 1981 and later qualified to do business in the State of New Jersey in April, 1985. The Company became a Registrant by filing and registering with the Securities and Exchange Commission under Form S-18 which became effective on August 20, 1986. The Company was organized into four operating segments and the corporate office. The operating segments were: training and consulting, value added hardware reseller, technical staffing and software development. The technical staffing segment discontinued operations during 2003. For Fiscal 2004, the Company will have three operating segments. On April 30, 2001, the Company amended its Certificate of Incorporation to change the name of the Company from Canterbury Information Technology, Inc. to Canterbury Consulting Group, Inc. which better describes the Company's current and future business activities and allows for a more synergistic approach to offering all of its subsidiaries under one umbrella. Effective January 24, 2003, the Board of Directors declared a one for seven reverse stock split of the Registrant's common stock in order to remain in compliance with Nasdaq's minimum price requirement. All share and per share information has been restated to account for the one for seven reverse stock split. NARRATIVE DESCRIPTION OF BUSINESS - TRAINING AND CONSULTING ------------------------------------------------------------ During the fourth quarter of Fiscal 2003, the Company formed a new, wholly owned subsidiary, Canterbury Corporate University, Inc. ("CCU") for the purpose of consolidating and leveraging the sales and marketing efforts of its training and consulting operations. Although the Company has been advocating and promoting cross-marketing of all of its products and services, the results to date were not satisfactory. This was due to several factors: lack of centralized sales management, varying compensation plans, lack of product and services training information as well as poor sales infrastructure and reporting. All of these shortcomings have been addressed through the formation of CCU. First, a Corporate Sales Manger was hired to spearhead this consolidated sales organization. All sales and marketing personnel in the training and consulting segment now report to this manager. The various compensation plans were unified into one performance driven plan. Sales and product training are occurring monthly for the entire sales team. Finally, the Company is currently researching the purchase or development of a Client Relationship Management (CRM) product to coordinate, track and measure the sales and marketing efforts of the entire sales staff. COMPUTER SOFTWARE TRAINING/SERVICES ----------------------------------- In June 1994, the Company acquired Computer Applications Learning Center (CALC), a New Jersey based computer software training company. Since 1983, CALC has trained corporate workers and managers at its training centers in New York and New Jersey and on site at Fortune 1000 corporations. During 1995, the Company changed the name of CALC to CALC/Canterbury Corp. to more appropriately reflect Canterbury's role in the corporate training industry. CALC/Canterbury is a Microsoft Certified Technical Education Center, Lotus Authorized Education Center and an authorized center for CISCO certified training as well as CAT and VUE testing. CALC/Canterbury is authorized to provide continuing education units (CEU's) and is an approved sponsor of Continuing Professional Education (CPE) for CPA's in New York, New Jersey and Pennsylvania. CALC/Canterbury's technical services division offers technology project management, software development, hardware and software installations, web and industry specific web site development. CALC/Canterbury also offers e-commerce enabled, Internet-based training through Canterbury's Online University as well as custom designed web delivered courses and instruction. Future Plans CALC/Canterbury has experienced a significant downturn in the demand for scheduled public desktop and technical training over the past several years. The fixed costs associated with the delivery of this type of computer training are very high. Rent, equipment, personnel, registration, scheduling and technical support are all fixed costs necessary to offer this training. The Company has decided that it can no longer deliver its services in this fashion to the degree it has in the past. During the fourth quarter of Fiscal 2003, the Company closed two training facilities (Wall Street, New York and Woodbridge, New Jersey) and downsized two other training locations. The number of classrooms was reduced from twenty-nine to six. These classrooms will be used for room rentals, private training and general admission classes. CALC/Canterbury will no longer offer a robust public schedule as it has in the past. The demand for these classes does not justify the cost. Semi-private and general admission training will be offered to our corporate clients for our most popular courses. CALC/Canterbury is repositioning its training skills and capabilities toward private training at the customer facility and at our reduced Company training facilities, as well as developing and selling distance learning products, providing various technical services along with cooperative selling effects with select channel partners. During February, 2003, CALC/Canterbury executed a limited licensing agreement with ExecuTrain, an international learning solutions provider, whereby it would become part of ExecuTrain's global training network on a joint venture basis. After ten months of the relationship it was mutually agreed by the parties that there was very little incremental business being generated. The licensing agreement was terminated in December 2003. Both parties agreed to remain open to future business possibilities with no formal agreements binding the relationship. CUSTOMIZED ERP AND CRM LEARNING SOLUTIONS In September, 2001 the Company acquired User Technology Services, Inc. (Usertech), a twenty-three year old technology consulting organization specializing in custom learning solutions for major domestic corporations. The business is headquartered in the Northeast, but Usertech has consultants and account managers throughout the United States. Usertech designs, develops and delivers customized employee training programs in support of client systems implementations using a blend of traditional (instructor-led) and electronic (WBT and CBT) delivery modes. The Company's primary expertise is in Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) application systems. Customized training for PeopleSoft, Oracle, SAP and Seibel software installations are the cornerstone of the business. Usertech's consultants are also proficient in various proprietary software applications that their clients deploy. Usertech's alliance relationships are an important component of the company's sales and marketing program. Product and software manufacturer alliances could increase the rate of target market penetration, improve competitive position and generate new sales leads. With Usertech's significant human and intellectual resources and expertise in e-learning delivery platforms, Canterbury's goal is to increase its distance learning offerings in all of its corporate training businesses. In 2001, after the acquisition, the Company changed the name of User Technology Services, Inc. to Usertech/Canterbury Corp. to properly reflect its role in the Canterbury family of training and technology businesses. Due to a significant breach of his Employment Agreement, the President of Usertech/Canterbury was terminated from his employment on March 18, 2003. Accordingly, Canterbury ceased paying the balance of compensation due to the President of Usertech under this Employment Agreement which exceeded $700,000. When Canterbury purchased Usertech from Ceridian Corporation, Canterbury was led to believe that this President was essential to the continued success of the company. Ceridian failed to disclose that this President played an active role with a vendor of Ceridian which was not only a conflict, but in essence, precluded this President from giving his undivided attention to Usertech. Thus, Canterbury is holding Ceridian Corporation liable for the undisclosed actions of the President, misrepresentations in the acquisition of Usertech and other claims related to Canterbury's purchase of Usertech and consummation of an Employment Agreement with this President. It has not yet been determined if any claims will be brought against any other individuals or other entities related to the claims arising from Canterbury's acquisition of Usertech and the employment of its president. Based on the aforesaid claims, on August 4, 2003, Canterbury initiated mandatory binding arbitration proceedings against Ceridian Corporation as required in the Stock Purchase Agreement. The Company's claims arise from the September, 2001 purchase of User Technology Services, Inc., from Ceridian. Canterbury's causes of action set forth in this arbitration include but are not limited to breach of contract/warranty, actual/legal fraud, fraudulent concealment, constructive/equitable fraud and negligent misrepresentation. Ceridian has denied the allegations set forth by the Company and has instituted a counterclaim in the arbitration proceedings. Ceridian claims Canterbury breached a sublease for space located at East Norwalk, Connecticut. Ceridian is alleging that Canterbury owes $76,000 together with taxes, operating expenses, utility expenses as well as attorneys' fees and costs. Aside from this counterclaim, Ceridian also contends that Canterbury owes them $800,000 plus interest on a Promissory Note executed in conjunction with the purchase of Usertech. In order to pursue its claims as well as to defend any counterclaim or set-off alleged by Ceridian, Canterbury continues to incur legal fees and costs and there is no assurance that pending arbitration will result in a favorable outcome to Canterbury. Future Plans The Company desires to expand this segment of the business in a number of ways. First, additional sales personnel may be deployed in selected key markets throughout the country where there is currently no Usertech/Canterbury representation. Also, if e-learning and blended training solutions continue to grow in popularity, Usertech/Canterbury will work to stay ahead of the curve in its ability to design and deliver such training to its customers. In conjunction with the expansion plans outlined above, the Company intends to attempt to leverage its consolidated sales efforts by use of Canterbury Corporate University, Inc. to cross-market Usertech/Canterbury's services to the entire client base of the Company. New product focus, such as distance learning for client proprietary systems, is also being expanded in existing markets. MANAGEMENT TRAINING ------------------- In September of 1993, the Company acquired Motivational Systems, Inc., a New Jersey-based management and sales training company. Since 1970, Motivational Systems has trained managers and sales professionals from many Fortune 1000 companies, on a national and international basis. Motivational Systems conducts a wide variety of seminars in management and team development, selling and negotiating, interpersonal communication, executive development, organizational problem solving and project management. During 1995, the Company changed the name of Motivational Systems, Inc. to MSI/Canterbury Corp. to more appropriately reflect Canterbury's presence and role in the corporate training industry. Future Plans This division's planned expansion may occur by extending its current sales effort into contiguous markets adjacent to its corporate headquarters in Northern New Jersey. Although MSI/Canterbury's revenues and profits are subject to the ebb and flow of the economy, it could benefit eventually from the consolidation within its training segment. MSI/Canterbury is developing, internally, new product offerings, both consultative and on-line, for existing and potential customers, based on their specific needs. With several consultants who are professional course developers on staff, this process has already resulted in additional product revenue streams. The Company also intends to attempt to leverage the consolidated sales efforts of Canterbury Corporate University, Inc. to cross-market MSI/Canterbury's services to the entire client base of the Company. NARRATIVE DESCRIPTION OF BUSINESS - SOFTWARE DEVELOPMENT --------------------------------------------------------- In May of 1997, the Company acquired ATM Technologies, Inc. ("ATM"), a Texas-based software consulting and development company, serving clients in national and international markets. ATM has been in business since 1984, specializing in PC-based tracking systems. The Company changed the name of ATM Technologies, Inc. to ATM/Canterbury Corp. to more appropriately reflect Canterbury's presence and role in the information technology industry. Future Plans Acceptance of its product has been slower than anticipated. ATM plans to attempt to grow by promoting and selling its document imaging and PC-based retrieval program integrated into its MasterTrak(TM) document tracking program using barcoding as well as rolling out Radio Frequency Identification (RFID) software technology. ATM is also working to expand its base of national and international dealers and to facilitate increased awareness of the tracking system's new imaging software. NARRATIVE DESCRIPTION OF BUSINESS - VALUE ADDED HARDWARE RESELLER ----------------------------------------------------------------- In October, 1999, the Company acquired U.S. Communications, Inc. (USC), an Annapolis, Maryland based value added reseller of desktop and server computer systems to state and local governments as well as commercial private sector companies in the mid-Atlantic market. USC provides a broad range of information technology services other than hardware procurement and installation. Other products and services include software, consulting and network design and management. After the acquisition, the Company changed the name of U.S. Communications to USC/Canterbury Corp. to more appropriately reflect Canterbury's presence and role in the information technology industry. The Company predominately resells Hewlett-Packard personal computers and servers as stand-alone desktops, workstations and complete networks. Virtually no inventory is maintained on site as most equipment is drop shipped to the customer location. The consulting and network design services are becoming a more important value added product to the customer base, as they look for a complete solution to their information technology needs. USC/Canterbury's future revenue may be greatly reduced if Hewlett Packard and Compaq move toward an agency relationship, with USC/Canterbury being paid an agent fee which would approximate the current gross profit from each sale. The manufacturer would record the revenue and hold the accounts receivable with the customer. This possible change in business flow has not happened to date, but it is possible that the migration to an agency model will begin in the second quarter of Fiscal 2004, and may then become more significant during the second half of the year. Future Plans This subsidiary's expansion planning includes additional penetration into existing governmental installations as well as pursuing governmental municipalities in other states. USC has also expanded its sales focus to include commercial clients. The Company is introducing other subsidiary products and services into its existing client base. USC/Canterbury is also expanding its reseller relationship to manufacturers other than Hewlett Packard and Compaq in order to provide its customers with more purchasing options as well as to reduce its dependence on a sole source for product. NARRATIVE DESCRIPTION OF BUSINESS - TECHNICAL STAFFING In August, 2000, the Company acquired DataMosaic International, Inc., an Atlanta, Georgia based management and systems consulting company, which provides staffing augmentation solutions and consulting services to the information technology industry. Short-term and long-term contracting along with permanent placement and project management of IT professionals is provided to mid-sized and Fortune 1000 corporations for: technical leaders and specialists, senior programming analysts, programmers, systems support and administration specialists experienced in networking, data communications, LAN/WAN, SQA/testing and technical writing. After the acquisition, the Company changed the name of DataMosaic International to DMI/Canterbury Corp. (DMI). DMI has closed its office in Parsippany, New Jersey and ceased operations during the fourth quarter of Fiscal 2003. With the surplus of technology workers due to the economic downturn during the past several years, DMI/Canterbury could no longer sustain itself as a viable business entity. Results of operations have been presented as discontinued operations in the Statement of Operations for each of the three years in the period ended November 30, 2003, 2002 and 2001. MERGER/ACQUISITION PROGRAM --------------------------- Canterbury is not currently seeking acquisitions of other training or technology companies due to its desire to focus on rebuilding its existing infrastructure and returning to profitability. EMPLOYEES --------- As of November 30, 2003, the Company, including all subsidiaries, had 146 employees: 78 full-time employees and 68 part-time employees. The Company believes that the relationship with its employees is satisfactory. ITEM 2. PROPERTIES ------------------- All facilities, including its administrative offices, branch locations and sales offices, are leased. The aggregate annual rental payments under leases will approximate $426,000 in Fiscal 2004. The following table sets forth the locations of the Company including square footage: Location Square Footage Lease Expiration ------------------------------------ -------------- ---------------- Canterbury Consulting Group, Inc. 3,000 August 2005 352 Stokes Road, Suite 200 Medford, NJ 08055 ATM/Canterbury Corp. 3,700 February 2005 16840 Barker Springs, Suite C300 Houston, TX 77084 CALC/Canterbury Corp. 3,500 November 2006 200 Lanidex Plaza Parsippany, NJ 07054 CALC/Canterbury Corp. 4,500 November 2004 780 Third Avenue Concourse Level One New York, NY 10017 MSI/Canterbury Corp. 1,000 November 2006 200 Lanidex Plaza Parsippany, NJ 07054 USC/Canterbury Corp. 2,500 December 2005 532 Baltimore-Annapolis Blvd. Severna Park, MD 21146 Usertech/Canterbury Corp. 2,000 November 2006 200 Lanidex Plaza Parsippany, NJ 07054 The Company believes that all of its properties are maintained in good operating condition and are suitable and adequate for our operational needs. ITEM 3. LEGAL PROCEEDINGS --------------------------- On August 4, 2003, Canterbury initiated mandatory binding arbitration proceedings against Ceridian Corporation as required in the Stock Purchase Agreement. The Company's claims arise from the September, 2001 purchase of User Technology Services, Inc., from Ceridian. Canterbury's causes of action set forth in this arbitration include but are not limited to breach of contract/warranty, actual/legal fraud, fraudulent concealment, constructive/equitable fraud and negligent misrepresentation. Ceridian has denied the allegations set forth by the Company and has instituted a counterclaim in the arbitration proceedings. Ceridian claims Canterbury breached a sublease for space located at East Norwalk, Connecticut. Ceridian is alleging that Canterbury owes $76,000 together with taxes, operating expenses, utility expenses as well as attorneys' fees and costs. Aside from this counterclaim, Ceridian also contends that Canterbury owes them $800,000 plus interest on a Promissory Note executed in conjunction with the purchase of Usertech. In order to pursue its claims as well as to defend any counterclaim or set-off alleged by Ceridian, Canterbury continues to incur legal fees and costs and there is no assurance that pending arbitration will result in a favorable outcome to Canterbury. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS -------------------------------------------------------- The Company's Annual Meeting was held on November 24, 2003, at which time three matters were submitted to the Company's stockholders for a vote. The majority of the stockholders who voted ratified the appointment of Baratz & Associates, P.A. as the Company's independent auditors, as well as the issuance of 7 3/4% senior convertible promissory notes and the election of the following Directors: Stanton M. Pikus, Kevin J. McAndrew, Alan Manin, Jean Zwerlein Pikus, Stephen M. Vineberg, Paul L. Shapiro and Frank A. Cappiello. On September 26, 2003, the shareholder of record date, the number of shares outstanding was 2,097,251. Proposal one was for the slate of directors, listed below are the vote results: For Withheld -------------------------------------------------------------------- Stanton M. Pikus 1,791,029 142,182 Kevin J. McAndrew 1,790,141 143,070 Jean Z. Pikus 1,790,013 143,198 Alan Manin 1,791,133 142,078 Stephen Vineberg 1,791,109 142,102 Paul Shapiro 1,791,109 142,102 Frank Cappiello 1,791,133 142,078 Proposal two was the ratification of our independent public auditors, Baratz and Associates, P.A., listed below are the vote results: For Against Abstain ---------------------------------------------------------------------- 1,885,171 47,149 892 Proposal three was the ratification of the issuance of the 7 3/4% Senior Convertible Promissory Notes issued for working capital on June 3, 2003, listed below are the vote results: For Against Abstain Non-Votes -------------------------------------------------------------------------------- 1,183,660 58,289 1,288 689,975 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ---------------------------------------------------------- The Company's common stock trades on the Nasdaq SmallCap Market. The high and low closing prices (adjusted to reflect the 1 for 7 reverse stock split effective January 24, 2003) of the Company's common stock from December 1, 2001 through November 30, 2003 were as follows: MARKET FOR EQUITY AND RELATED STOCKHOLDER MATTERS ================================================================================ 2002 | 1st Quarter* | 2nd Quarter* | 3rd Quarter* | 4th Quarter | ----------- | ----------- | ----------- | ----------- | High Low | High Low | High Low | High Low Common | ---- --- | ---- --- | ---- --- | ---- --- Stock | $5.74 $3.50 | $7.70 $3.50 | $7.21 $3.36 | $4.20 $1.75 ================================================================================ 2003 | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ----------- | ----------- | ----------- | ----------- | High Low | High Low | High Low | High Low Common | ---- --- | ---- --- | ---- --- | ---- --- Stock | $2.73 $1.27 | $1.36 $.68 | $1.25 $.71 | $1.50 $.95 ================================================================================ * Prior to July 31, 2002 the Company's stock traded on the Nasdaq National Market. The approximate number of record holders of the Company's common stock as of November 30, 2003 as determined from the Company's transfer agent's list of record holders was 384. Such list does not include beneficial owners of securities whose shares are held in the names of various dealers and clearing agencies. The Company believes that there are in excess of 2,000 beneficial holders. 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 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 the National Market. The Company appealed Nasdaq's 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. On May 8, 2003 Canterbury received a written notification from the Nasdaq Listing Qualifications Section. The letter stated that because the closing bid price of Canterbury's common stock for the previous 30 consecutive trading days was less than the required $1.00 per share, the Company had until November 4, 2003 to trade at a closing bid price of $1.00 per share or more for a minimum of 10 consecutive trading days, or be delisted. In addition, even if the 10 consecutive trading days are achieved, there is no assurance that Canterbury would automatically remain on Nasdaq. As per the Nasdaq Notice Letter of Deficiency, "In determining whether to monitor the bid price beyond 10 business days, Nasdaq will consider the following four factors: (i) margin of compliance; (ii) trading volume; (iii) the market maker montage; and, (iv) the trend of the stock price." On September 10, 2003 the Company received the following letter from the Nasdaq Listing Qualifications Section. "On May 8, 2003, Staff notified the Company that its common stock failed to maintain a minimum bid price of $1.00 over the previous 30 consecutive trading days as required by The Nasdaq SmallCap Market set forth in Marketplace Rule 4310(c)(4) (the "Rule"). In accordance with Marketplace Rule 4310(c)(8)(D), the Company was provided 180 calendar days, or until November 4, 2003, to regain compliance with the Rule. Since then, the closing bid price of the Company's common stock has been at $1.00 per share or greater for at least 10 consecutive trading days. Accordingly, the Company has regained compliance with the Rule and this matter is now closed." The Company has never declared a dividend on its common stock and does not plan to do so in the near future. ITEM 6. SELECTED FINANCIAL DATA > 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Operating data: Net revenues $22,384,294 $30,032,647 $27,568,987 $28,782,236 $14,209,526 (Loss) income from continuing operations (4,066,813) (1,943,962) (6,747,877) 1,022,924 620,768 Income (loss) from discontinued operations 11,819 (73,889) (198,890) 35,291 - Net (loss) income (4,054,994) (2,017,851) (7,159,855) 1,058,215 620,768 Basic per share data: (Loss) income from continuing operations $(2.17) $(1.12) $(4.01) $.72 $.54 Income (loss) from discontinued operations .01 (.04) (.12) .02 - Cumulative effect of change in accounting principle - - ( .12) - - ------- ----- ----- ------ ----- Net (loss) income $(2.16) $(1.16) $(4.25) $.74 $.54 ====== ====== ====== ====== ==== Balance sheet data: Total assets $11,938,543 $16,632,776 $25,044,122 $31,184,412 $27,811,971 Long-term debt $62,934 $1,209,625 $2,145,183 $678,303 $1,989,031 Subordinated convertible debt $355,000 $ - $ - $ - $ -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- Cautionary Statement -------------------- When used in this Report on Form 10-K and in other public statements, both oral and written, by the Company and Company officers, the word "estimates," "project," "intend," "believe," "anticipate," and similar expressions, are intended to identify forward-looking statements regarding events and financial trends that may affect the Company's future operating results and financial position. Such statements are subject to risks and uncertainties that could cause the Company's actual results and financial position to differ materially. Such factors include, among others: (1) the Company's success in attracting new business; (2) the competition in the industry in which the Company competes; (3) the sensitivity of the Company's business to general economic conditions; and (4) other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. The Company undertakes no obligations to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. RISK FACTORS THAT RELATE TO OUR BUSINESS ---------------------------------------------- Uncertain economic conditions continue to affect many of our customers' businesses and many clients continue to delay and reduce their purchases of training services, software, hardware and consulting. The Company's recovery from the past several years of economic downturn continues to lag behind the current economic recovery. Delay Or Inability To Return To Positive Operating Cash Flow While the Company has taken significant steps to reduce fixed costs and increase revenue, a significant delay in returning to positive operating cash flow could adversely effect our liquidity and ability to conduct business. The Company reduced payroll expense and facility leases significantly during Fiscal 2003. Four facilities were closed and two more were greatly downsized, as management introduced a more flexible cost model into the business. Annual rent and occupancy expense were reduced by over $1,000,000 from the beginning of Fiscal 2003 to the beginning of Fiscal 2004. Over sixty employees were eliminated in several workforce reductions during the year. Even with these cost reductions, revenues must increase in Fiscal 2004 over Fiscal 2003 in order to achieve positive operating profit and cash flows. The newly formed sales subsidiary, Canterbury Corporate University must increase sales pipeline activity in the near term to positively impact reported revenues for the training and consulting segment. If this does not occur it could negatively effect our operating cash flow. Downturn In Economy If the economy does not continue to recover and our clients continue to decrease or eliminate spending for technology and training, our ability to continue operating at our current reduced level of revenues will be greatly tested. The Company cannot generate profits or positive cash flow at recent revenue levels. Many clients have considered certain training to be discretionary in these uncertain economic times. Technology expenditures are being delayed by many of them in an attempt to balance their own budget objectives. These factors can cause significant financial disruption to small vendors such as Canterbury and could have a material adverse effect on our consolidated operating results. Competition If our customers choose to purchase goods and or services from new or existing competitors, it could have a material adverse effect on our operating results and stock price. The various operating segments of the Company have relatively low barriers to entry. New and existing organizations are constantly attempting to penetrate our customer base. Larger, more financially seasoned competitors have the ability to overwhelm our markets and customers though more aggressive sales tactics. Internal training departments within our current and potential client base are also a primary competitor. There is also increasing competition from computer hardware and software vendors as they attempt to capture more of the technology services market. Finally, low cost providers in the training and consulting market are attempting to buy business through their low cost, value proposition. Dependency on Key Personnel If we are unable to recruit and retain qualified personnel, it could have a material adverse effect on our operating results. Our success depends on the continued employment of our senior executives and managers and other key personnel. The loss of these people, especially without advance notice, could have a material adverse effect on our operations. Sales and delivery staff are vital to ongoing customer relations and satisfaction. A significant portion of our consolidate revenue is service oriented (47% in Fiscal 2003). As such the loss of key personnel could have a negative impact on our ability to deliver and service our clients. As the economy improves, it will become more difficult to retain existing employees and attract new recruits due to the fact that they have more employment options available to them. Municipal Budget Constraints USC/Canterbury, our value added hardware reseller, does a significant amount of business with the states of Maryland and Virginia (81% of this segments total revenue). Lower tax revenues in these states have reduced the amount of funding for technology purchases recently and this trend could continue. If this trend does continue, it could have a material adverse effect on this segment's operating results. This segment has been the most profitable segment for the Company since Fiscal 2000, and its ongoing contribution to revenue and profits is vital to the Company's future. Pending City of Baltimore Contract USC/Canterbury is a bidder on an eight-year hardware procurement contract with the City of Baltimore. The decision by the City is currently pending and is expected during March 2004. If USC/Canterbury, the incumbent vendor, is not awarded this contract it could have a material adverse effect on the operating results of the value added hardware reseller segment and the Company. Shifts in Technology and Training Platforms In the training and consulting segment, much of our success depends upon the introduction and adoption of new technology. Our customers tend to increase their demand for training at times when new technology or software is being introduced. When there are delays in the introduction of these new products demand for training may decrease, and it could have a material adverse effect on our operating results. Also as our customers move toward new distance learning platforms to replace instructor-led training, our ability to retain our customers by providing these new electronic training services introduces a potential risk in client retention, which could have a material adverse effect on our operating results. Ongoing Collection of Notes Receivable With A Related Party A significant portion of the Company's assets and tangible net worth is represented by notes receivable with a related party. To date there have been no collection issues with the notes. However, if the related party experiences a significant downturn in operating cash flow or becomes insolvent the collectibility of the note would be in jeopardy and could have a material adverse effect on the Company's asset base and tangible net worth. Acts of Terrorism The majority of revenue recorded by the Company is generated in both the New York City and Washington D.C. areas. Both of these locations were targets of the terrorist attacks in 2001. If there is a repeat of those events in either one of these markets, our clients there will be distracted from their normal course of business and as such will most likely delay or cancel projects with the Company. This could have a material adverse effect on our operating results. Other Factors Other factors that may affect our operating results include: * reduced reliance on reseller channel by hardware manufacturers * ability to secure sufficient contractor resources to met short-term customer demand * insufficient training facilities to met client demand for instructor-led technology training * loss of key clients through merger, sale or divestiture * ongoing cost of compliance with provisions of Sarbanes-Oxley OVERVIEW --------- The Company is engaged in the business of providing information technology products, services and training to both commercial and government clients. The focus of Canterbury is to become an integral part of our clients' IT solution, designing and applying the best products, services and training to help them achieve competitive advantage by helping their employees to succeed. The two primary business units for the Company are training and consulting and value added hardware reseller. In the training and consulting segment we provide a variety of technical and management training. Our training encompasses a wide spectrum of hardware and software products as well as many important business skill topics. These training products are delivered in a variety of ways: at our classroom facilities in New Jersey and New York; at our clients' location; or electronically via the Internet; or on the end users computer. Many of these training products are custom developed for our clients and contain a blended training solution combining both instructor-led training in the classroom with distance learning products to complete the education process. The Company also provides various technical consulting services to our clients including programming, systems integration, network security and network management. The value added reseller segment provides hardware and software solutions to the Mid-Atlantic market. Its primary focus is on state and local government clients who have an ongoing need for technology products and services. In the past three years the Company has experienced significant pretax losses from continuing operations totaling $14,065,000. Of this amount, $7,717,000, represents goodwill impairment on several acquisitions made over the past eleven years. The Company has managed to remain financially viable through these recent losses during the last three years by accelerating collection on several long-term notes receivable and generating net operating cash of $1,256,000. The Company has significantly reduced its operating costs and restructured its sales team for Fiscal 2004. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Working capital at November 30, 2003 was $1,781,000, representing an increase of $489,000 over the previous year. Unearned revenue decreased by $422,000 primarily due to the fact that CALC/Canterbury slowed down sales of prepaid training vouchers for scheduled open enrollment, public computer training as it began exiting that training delivery methodology during the fourth quarter of Fiscal 2003. CALC/Canterbury will continue to honor all outstanding training vouchers through their contractual expiration by applying these vouchers to all training products offered by Canterbury. Accounts payable and accrued expenses increased by $56,000 over the previous year end due primarily to timing of payments to vendors and employees at year end. Prepaid expenses decreased by $228,000 due to a reduction in income tax prepayments ($105,000) and accrued interest on a note receivable from a related party ($58,000) and the write off of unamortized debt issuance costs raised by the pay off of bank debt during the fourth quarter ($34,000). Also a $273,000 current deferred tax asset was written off as part of a $763,000 income tax valuation adjustment at year end. Cash and marketable securities balances at November 30, 2003 increased by $1,290,000 over the previous year end. There were three significant financing transactions which caused this increase in liquidity. In the second quarter the Company received a $500,000 payment on a long-term note receivable from a related party. In the third quarter, $355,000 was received as the proceeds of a private placement of senior convertible notes and in the fourth quarter, the Company received $2,295,327 as a payoff of a long-term note receivable plus accrued interest. From the proceeds of this payoff, the Company repaid the remaining $800,000 term loan with its lender. As of November 30, 2003, the Company had no bank debt and began the process of renegotiating its lending relationship with Commerce Bank. While renegotiating the current loan agreement, the Company incurred no bank fees and was precluded from borrowing under the existing revolving loan agreement. As a subsequent event, in February, 2004 the Company and Commerce Bank agreed to an amended loan agreement. The new agreement calls for a two-year, $1,500,000 revolving working capital line of credit collateralized by trade accounts receivable and inventory. The loan carries an interest rate of the prime rate plus one half of one percent (1/2%) and matures on May 1, 2005. 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 of November 30, 2003, the Company was in breach of the minimum tangible net worth covenant of its loan agreement, but has received a waiver of default from the Bank. As part of the purchase price paid for the acquisition of Usertech in September, 2001, the Company agreed to pay $1,200,000 to the seller over three years at an annual amount of $400,000 plus accrued interest at 7% per annum on the outstanding balance. On August 4, 2003, the Company initiated mandatory binding arbitration proceedings against Ceridian Corporation, the previous owner of Usertech/Canterbury, as required in the Stock Purchase Agreement between the parties. The Company's claims arise from the September 2001 purchase of User Technology Services, Inc. from Ceridian. Canterbury is making various claims ranging from breach of contract/warranty to actual/legal fraud, fraudulent concealment, constructive/equitable fraud, and negligent/misrepresentation. Ceridian Corporation has denied the allegations set forth by the Company and has instituted a counterclaim in the arbitration proceedings. Ceridian is claiming breach of a sublease agreement by Canterbury for office space ($76,000) and acceleration of a note payable of $800,000. Canterbury had denied the allegations set forth in the counterclaim. In order to pursue its claims, Canterbury will sustain ongoing legal and filing fees and there is no assurance that the aforementioned arbitration will result in a favorable outcome for Canterbury. As a result of this pending arbitration and the extent of the damages claimed, the Company has withheld the scheduled $400,000 principal payment of the note to payable to Ceridian, as well as accrued interest of $56,000 due on September 28, 2003, as the damages sought far outweigh the note payable to them. The disputed $800,000 still owed plus accrued interest are classified as part of the current portion of long-term debt as of November 30, 2003. Cash flow used in operating activities for the year ended November 30, 2003 was $(1,071,000) a decrease of $1,457,000 over Fiscal 2002. For the first time in the past nine years, the Company failed to generate positive cash flow from operations. Significant revenue declines in all operating segments contributed to the loss. Total assets declined by $4,694,000 while total liabilities were reduced by $1,150,000. The Company's current ratio was 1.62:1.00 versus 1.40:1.00 at November 30, 2002. Management believes that the Company will have sufficient funds to cover cash flow requirements for Fiscal 2004 as a result of significant reductions in fixed operating costs, its satisfactory balance sheet, its ability to borrow from its revolving line of credit and ongoing collection from its note receivable. Management anticipates that the recent significant reduction in fixed expenses if coupled with substantially improved sales activity could permit the Company to return to a positive operating cash flow position in the second half of Fiscal 2004. There was no material commitment for capital expenditures as of November 30, 2003. Inflation was not a significant factor in the Company's financial statements. The following table summarizes the Company's contractual obligations for long-term debt and lease obligations as of November 30, 2003: Payments Due By Period > Less Than More Than Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years -------------------------------------------------------------------------------------------- Long-term notes payable $917,834 $877,755 $ 40,079 $ - $ - Capital lease obligations 34,589 11,735 22,854 - - Subordinated convertible debt 355,000 - 355,000 - - Operating leases 853,502 367,119 469,351 17,032 - ---------- ---------- --------- -------- -------- Total $2,160,925 $1,256,609 $ 887,284 $ 17,032 - =========== ========== ========= ======== ===========
RESULTS OF OPERATIONS ---------------------- Fiscal 2003 Compared to Fiscal 2002 ------------------------------------ Revenues Consolidated revenues decreased by $7,648,000 (25%) in Fiscal 2003 as compared to 2002. This overall reduction was the result of an across the board revenue decease in all operating segments of the Company. The training and consulting segment recorded a decline in revenues of $5,066,000 (33%). The value added hardware reseller segment saw revenues decline by $2,582,000 (18%). Software development revenues for Fiscal 2003 were approximately the same as in Fiscal 2002. Technical staffing revenues are no longer being reported due to its classification as a discontinued operating segment effective in 2003. The downward trend in consolidated revenues accelerated during Fiscal 2003. Technology spending by many customers was reduced, delayed or eliminated. The significant reduction in Company revenues forced drastic changes to the cost structure of the organization. While delivery and support costs were greatly reduced through consolidation of facilities and elimination of under-utilized personnel, the Company will attempt to invest further into sales and marketing in order to take advantage of sales opportunities as the economy begins to improve. During the fourth quarter of 2003, the Company restructured its sales department. A Corporate Sales Manager was hired to consolidate the three separate sales teams in the training and consulting segment. Canterbury Corporate University, Inc. ("CCU"), a wholly owned subsidiary of the Company, was formed to market and sell all of Canterbury's training products and services in one comprehensive training unit. The Company has always attempted to promote cross selling of our products and services between subsidiaries. Some of our largest clients are purchasers of the various training products we offer. Under previous subsidiary management, the sharing of business leads did not occur at an acceptable level, and many potential sales opportunities were lost before they were ever attempted. The Corporate Sales Manager and the Company have initiated several key sales strategies in order to overcome the shortcomings of the past including the lack of attention to marketing, sales and more by the former President of Usertech. All training and consulting sales representatives are being compensated and measured using the same plan. Quota attainment is now a benchmark for continued employment. Quotas are set up with goals for selling all of the Company's training and consulting products, not just what was sold in the past on a subsidiary-by-subsidiary basis. A Customer Relationship Management ("CRM") system is being installed to better consolidate, track and manage the pipeline of sales activity. Also based upon feedback from our customers, the Company is developing new products utilizing both instructor-led and distance-learning delivery platforms. We have also formalized reseller relationships with several high quality channel partners, whereby the sales team introduces the various products from this program to our client base and the Company receives a negotiated share of any sales generated. The Company has taken several steps to increase lead generation. The formation of an inside sales team; contracting with an outside telemarketing firm; increasing the amount of marketing information to our clients through e-mail announcements; pilot program events and more informative web sites are all contributing to new lead flow. During the fourth quarter of Fiscal 2003, the Company made the decision to exit the open enrollment public computer training segment that was part of CALC/Canterbury's offerings for the past twenty years. The high fixed cost of delivery was too much to sustain in relationship to the amount of revenue being generated. By exiting this training delivery methodology, there will be an anticipated decline in instructor-led computer training revenues for Fiscal 2004. Reduced capacity, reduced marketing emphasis, and alternative delivery options will all contribute to the projected decline. CALC/Canterbury will continue to offer private and general admission classes at their two training facilities (New York City and Parsippany, New Jersey) as well as room rentals. There will be more emphasis on offering private training at the clients' locations. This planned exit from the scheduled open enrollment public training segment was done in order to reduce the high fixed cost associated with its delivery and introduce more variability to the cost structure of our training business. It is management's belief that a smaller, more flexible training model can return the computer training business to profitability. In the value added hardware reseller segment, budget constraints in state and local municipalities had a negative impact on technology spending during 2003. While this segment was among the last to feel the impact of the recent economic downturn, it will also take longer to recover based on projected tax revenues flowing into state and local budgets and then finally into capital expenditures. The $2,582,000 reduction in revenues from Fiscal 2002 to 2003 is due primarily to reduced pricing for most computer hardware products. While it is difficult to pinpoint the precise decline in the cost and sales price of the specific computer hardware sold by this segment over the past year, it is safe to estimate that prices have dropped anywhere from 20% to 30%. If this is the case, most, if not all of the decline in revenue for Fiscal 2003 can be attributed to a lower sales price on approximately the same unit volume. This trend will continue into Fiscal 2004 as well. It is management's intent to more fully integrate the sales team from the training and consulting segment with the value added hardware reseller segment. Product profiles are being shared between the two groups and the Company anticipates the efforts of these two sales organizations will become more integrated in Fiscal 2004. It is projected that the majority of product to be sold in Fiscal 2004 may be Hewlett Packard/Compaq hardware. If they move toward an agent model with their resellers, USC/Canterbury would be paid an agent fee which approximates the current gross profit from each sale. This may greatly reduce the reported revenue in this segment. The manufacturer would record the revenue and hold the accounts receivable with the client. This possible change in business flow has not happened to date, but it is possible that the migration to the agent model will begin in the second quarter of Fiscal 2004, and may then become more significant during the second half of the year. This business segment has always had very high client revenue concentration. In Fiscal 2003 two groups of clients accounted for 81% of the revenue in the value added hardware reseller segment. There is obvious risk associated with this very high customer concentration. See Footnote 1, Concentration of Risk, for more details on this topic. In Fiscal 2004 USC/Canterbury is making a concerted effort to diversify its revenue mix. Certain sales representatives have been given responsibility, through quotas, to penetrate the commercial market in the Baltimore/Washington area. New strategic relationships have been formed with several manufacturers to increase product offerings and reduce dependency on Hewlett Packard/Compaq. Management believes that there is still a significant amount of uncertainty regarding future revenues from the value added hardware reseller segment for Fiscal 2004. Technology spending appears to be recovering slightly in the early part of 2004, but the duration of the recovery is not yet known. More clients are engaging us in conversations and proposals about new projects and training requirements. The sales pipeline is fuller now than it was in the last half of Fiscal 2003. One of the biggest challenges that faces the Company is the timing of customers decisions to begin project work that has already been sold. The delays that were experienced late in Fiscal 2003 have continued into the early part of 2004. These delays add to the uncertainty in revenue projections for Fiscal 2004. It is management's belief that by the middle of the year we will have a much better understanding of our client's schedule and requirements. Costs and Expenses Total costs and expenses decreased by $4,684,000 (20%) in Fiscal 2003 versus 2002. The decrease was due to reduced sales volume in both product and service revenues. Overall gross profit decreased to 17% from 23% in Fiscal 2002. Service gross profit declined to 24% in Fiscal 2003 from 31% in the previous year. Product gross profit also declined from 13% in Fiscal 2002 to 11% in Fiscal 2003. Product margins were negatively effected by several factors. Continued weakness in technology spending forced margins lower as many suppliers competed for the same business. Manufacturers continued to eliminate reseller incentives as the products they were offering became more commoditized. Weak or non-existing sales management at our training subsidiaries. The Company is currently partnering with several new hardware and software manufacturers who have specialized products that command higher profit margins. These types of relationships could become more important for the future as downward pressure continues on margins for personal computers, printers and servers. Management anticipates that gross margins for product sales will remain in the 10% range for Fiscal 2004. When the Company decided to exit the scheduled open enrollment public computer training business during the fourth quarter of Fiscal 2003, there were many obstacles that had to be overcome. The biggest challenge was the need to terminate four facility leases which housed twenty-nine classrooms, sales and support office space, production and storage. As of October, 2003 the contractual lease obligations including utilities, insurance and taxes, totaled approximately $4,100,000 over the next five years. The Company successfully negotiated the termination of all four leases by surrendering the security deposits to the respective landlords. $190,000 in security deposits were expensed to cost of sales during the fourth quarter of Fiscal 2003. At the same time the four existing facility leases were being terminated, the Company was able to successfully negotiate a new three-year lease in the same office complex in Parsippany, New Jersey where the previous facility was located. CALC/Canterbury, Usertech/Canterbury, MSI/Canterbury and Canterbury Corporate University have their sales and administrative headquarters in this new space. There is also three classrooms in the facility to provide general admission and private training as well as room rentals to our clients. The Company also negotiated a short-term rental agreement (with a mutual 90-day cancellation provision) with its existing landlord at its facility on the East Side of New York City. Three classrooms and two sales offices were retained in the space. The Company is exploring the availability of more permanent space in the same vicinity. The major cause for much of the deterioration in gross profit for services revenue in Fiscal 2003 was excess capacity - both in facility and personnel. These were addressed by management during the year through two significant workforce reductions, the elimination and consolidation of office facilities and the closing or downsizing of training facilities. Through a series of workforce reductions during Fiscal 2003, the employee count in the training and consulting segment was reduced by a total of 60 staff members. Thirty-three were consultants and/or trainers and twenty-seven were sales and administrative staff. Many support functions were combined in this segment and some were eliminated. Excess training and consulting capacity was reduced and a variable cost model was introduced to provide more flexibility in managing fluctuations in revenue delivery. The following chart summarize the annual run rate savings in both facility and personnel expenses from the beginning of Fiscal 2003 to the beginning of Fiscal 2004 for the training and consulting segment. For purposes of calculating the labor savings, a 20% burden rate of annual salaries (employer taxes and benefits) was assumed. Also, only the salaries of employees who were no longer with the Company as of December 1, 2003, but were employed at the beginning of Fiscal 2003 were included. The Company does not expect to fill these positions that are vacant as of December 1, 2003 during the Fiscal 2004 year. Therefore, the following chart reflects no Fiscal 2004 personnel costs related to the eliminated positions. As of As of Annual December 1, 2002 December 1, 2003 Savings ---------------- ---------------- ------------- Annual rent expense $1,218,000 $312,000 $ 906,000 Facility expenses 170,000 18,000 152,000 Consultant/trainer salaries 2,628,000 - 2,628,000 Administrative and sales salaries 1,368,000 - 1,368,000 ---------- --------- ---------- Totals $5,384,000 $330,000 $5,054,000 ========== ======== ========== It should be noted that the Company began realizing some of the annual labor savings during Fiscal 2003 as a result of the ongoing personnel reductions during the year. Based upon these savings, the Company significantly reduced its monthly fixed cost burn rate and allowed the business time to recover from the past several years of poor operating performance, while at the same time reducing the monthly breakeven point and allowing for profitability at much lower revenue levels. Now the financial leverage shifts in favor of the Company. When, and if, revenues increase, more profit is attainable due to the fact that the fixed cost component has been drastically reduced and a larger portion of the delivery expense will be variable in nature. However, if sales increase significantly in the short term, the Company risks having insufficient resources to deliver services due to reduced manpower and facility capacity. The Company would need to contract for part-time consultants and acquire additional space through short-term rentals in order to meet client demand which is possible but would be more expensive to implement. Selling expense decreased by $737,000 (30%) in Fiscal 2003 as compared to the previous year. Personnel expense (salaries, bonuses, commissions and payroll burden) decrease of $562,000 was the biggest component of the reduction. There were less sales and marketing staff during Fiscal 2003 as non-productive sales representatives were terminated during the year. There were also less commissions and bonuses paid due to the lower revenue and profit in Fiscal 2003 ($68,000). Advertising expense decreased by $115,000 due primarily to the elimination of the production and distribution of a public training schedule for CALC/Canterbury. General and administrative expense was reduced by $1,151,000 (19%) due primarily to significant reductions in administrative and support staff as part of the workforce reduction discussed previously ($631,000). Other major cost reductions in Fiscal 2003 which contributed to the overall decrease were: bad debt expense ($237,000); equipment rental ($111,000); public company expense ($96,000) and phone expense ($57,000). Interest income decreased by $183,000 (28%) in Fiscal 2003 as compared to the previous year. The prepayment of the note receivable from the sale of a former subsidiary in September 2003 and the $500,000 reduction in the demand note and accompanying reduction in the interest rate with a related party were the primary reasons for the decrease. Total notes receivable decreased by approximately $3,200,000 during the year. Interest expense was reduced by $74,000 (37%) in Fiscal 2003 versus Fiscal 2002. Reduced borrowings on the revolving line of credit and the payoff of the remaining term debt ($800,000) with the primary lender were the major reasons for the reduction. 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 a periodic basis. The Company recorded a total of $1,175,000 of goodwill impairment in our training and consulting segment ($675,000 for MSI/Canterbury and $500,000 for Usertech/Canterbury) at November 30, 2003. The economic downturn which MSI/Canterbury experienced in 2002 continued and worsened in 2003. Revenues and operating income declined for the third year in a row. Usertech/Canterbury also experienced a significant operating decline in Fiscal 2003. The President of the Usertech subsidiary was terminated for major breaches of his Employment Agreement. Due to the failure of the President to fulfill the obligations of his Employment Agreement, many projects that were anticipated to be delivered during the year based on projections were not consummated. There were several rounds of layoffs as well as a decline of business that are attributable to the failure of the President to perform under the terms of his Employment Agreement. The fair value of MSI/Canterbury and Usertech/Canterbury were estimated based upon our recent earnings history and our future earnings expectations for these businesses as of November 30, 2003. In Fiscal 2002, the Company recorded $584,000 in goodwill impairment charges related to its MSI/Canterbury subsidiary as a result of the continued reduction in demand for sales and management training during the current economic downturn. This charge was recorded in the fourth quarter of the year and is reported under Training and Consulting in the segment reporting footnote for Fiscal 2002. In Fiscal 2001 the Company recorded $5,958,000 of goodwill impairment charges. $500,000 of this charge was reflected in the second quarter of the year and the balance was recorded in the fourth quarter. DMI/Canterbury goodwill was written down to $0 (total charge of $843,000) due to the uncertainty in the technical staffing marketplace caused by the dot com bust and the softening of spending in this business segment. The net goodwill related to the 1994 acquisition of CALC/Canterbury (Training and Consulting Segment) totaling $4,397,000 was also written off. The lingering current effects of September 11, as well as the uncertainty of future business growth due to the change in business climate surrounding New York City are the major reasons for this impairment charge. Finally, the net goodwill of $718,000 resulting from the 1997 acquisition of ATM/Canterbury (Software Development Segment) was also written off. 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 earnings expectations. If actual results are significantly lower, the likelihood is that these estimates would change, resulting in future impairment charges. Revenue Recognition As discussed in Note 1 to our Consolidated Financial Statements, the Securities and Exchange Commission (SEC) recently issued 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 Company has recorded a valuation allowance of $3,788,000 and $1,883,000 as of November 30, 2003 and 2002, respectively. The valuation allowance was increased as of November 30, 2003 and 2002 due to the Company falling short of budgeted 2003 and 2002 revenues and earnings and the resulting changes in our earnings forecasts for Fiscal 2004 and beyond. This resulted in a $763,000 expense in Fiscal 2003 and a $642,000 expense in Fiscal 2002 related to an adjustment to our beginning of the year estimate for the valuation allowance. At November 30, 2003, the Company had loss carryforwards of $9,610,000 for federal income tax reporting purposes and $14,315,000 for state income tax reporting purposes. Future expiration dates of federal loss carryforwards are as follows: $835,000 in 2007, $3,665,000 in 2012, $335,000 in 2021 and $1,715,000 in 2022 and $3,060,000 in 2023. State loss carryforwards expire between 2007 and 2010. 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. Fiscal 2002 Compared to Fiscal 2001 ----------------------------------- Revenues All amounts discussed in this section pertain to continuing operations. Overall revenues increased by $2,464,000 (8%) in Fiscal 2002 over 2001. This net increase is the result of the increased revenue contribution from Usertech/Canterbury ($6,438,000) which operated for a full twelve months in Fiscal 2002 versus only three months in Fiscal 2001. The business was acquired in September, 2001. Offsetting the increase caused by the acquisition of Usertech/Canterbury were reductions in revenues from the other operating segments. The value added hardware reseller segment saw revenues decline by $1,890,000 (12%). Training and consulting revenues exclusive of Usertech/Canterbury declined by $2,038,000 (24%) from Fiscal 2001 levels. Software development revenues experienced a reduction of $46,000 (21%) during Fiscal 2002. 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. As a subsequent event, 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, the Usertech/Canterbury's organization was restructured and streamlined resulting in additional savings. Usertech/Canterbury is also searching for two additional account executives in order to reach more potential customers on a national basis. Usertech/Canterbury also plans to offer its learning solutions through the ExecuTrain national franchise network as a result of the 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. 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 its toll on revenues and gross profit. Margins in Fiscal 2002 were 12% compared to approximately 19% in Fiscal 2001. 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. 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 their software as an integral component in a packaged solution for asset tracking or document tracking and retrieval. 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 increased by $3,518,000 (18%) in Fiscal 2002 versus 2001. This increase is the result of owning Usertech/Canterbury for a full twelve months in Fiscal 2002 versus only three months in 2001. Gross profit on service revenue declined from 39% in Fiscal 2001 to 31% in 2002 due to the effects of the revenue decline from training and consulting coupled with a fairly high fixed cost delivery component. Product margins, which include hardware and software sales of the Company decreased to 13% in 2002 from 21% in Fiscal 2001. This reduction in gross profit is the result of several factors. First, many of the manufacturer's 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. Many clients are seeking out lowest price instead of best overall solution value. Consolidated gross margins for the Company decreased to 23% in 2002 versus 29% in Fiscal 2001. Reduced consultant utilization in the training and consulting business segment and significantly reduced margins on hardware as a by-product of the Hewlett Packard/Compaq merger contributed to the overall margin decline. Selling expense increased by $45,000 (2%) in Fiscal 2002 versus 2001. This increase was the result of several factors. First, Usertech/Canterbury's selling expense increased by $632,000 because it was owned by Canterbury for a full twelve months in Fiscal 2002 versus only three months in Fiscal 2001. Offsetting this increase were reductions in commission expense of $225,000 in USC/Canterbury due to a much lower gross profit level in Fiscal 2002. Reductions in staff at CALC/Canterbury during Fiscal 2002 resulted in approximately $200,000 in savings and more efficient direct marketing expenditures saved over $62,000 in Fiscal 2002 over 2001. Various other cost reductions in marketing expense and personnel in the other operating units accounted for additional savings of approximately $100,000. General and administrative expense increased by $133,000 (2%) in Fiscal 2002 as compared to Fiscal 2001. This relatively small change is again the result of various significant factors. First, Usertech/Canterbury's general and administrative expense increased by $1,220,000 due to the fact it was part of Canterbury for the full year in Fiscal 2002 as compared to only three months in Fiscal 2001. Offsetting this increase was a $463,000 reduction in goodwill amortization expense in Fiscal 2002 based on the change in accounting predicated by SFAS 142. Bad debt expense was reduced by $300,000 in Fiscal 2002 over Fiscal 2001, based on the reduced requirements for additional reserves on lower accounts receivable balances. Lower expenses for accounting and other public company expenses saved $97,000 in Fiscal 2002 over 2001. CALC/Canterbury reduced personnel costs by approximately $190,000 in Fiscal 2002 by consolidating functions and streamlining other administrative processes. Various other reductions in personnel related expenses totaled $37,000. As a subsequent event, on March 1, 2003 Canterbury's corporate management team, inclusive of the Chairman, President and Vice President, voluntarily reduced their present salaries by 8%. This is in line with a previously instituted 8% salary reduction at one of the Company's largest subsidiaries. The corporate management team continues to receive its reduced rate of pay as of the date of this filing. Other income for Fiscal 2002 represents the $85,000 in insurance proceeds paid to the Company, related to business interruption caused by terrorist attacks on September 11, 2001. In Fiscal 2001 the charge to other expense of ($251,000) was due mainly to a loss of $324,000 related to the sale of real estate during the second quarter of Fiscal 2001. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------------------------------------- We are not exposed to market risk from changes in interest rates. Currently, we have $900,000 invested in short term certificates of deposit and $300,000 invested in a municipal bond mutual fund. We account for these investments in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." These investments are treated as available-for-sale under SFAS No. 115. The carrying value of these investments approximates fair market value. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------------------ The financial statements and supplementary data are as set forth in the Index on page 31. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures -------------------------------------------------------------------------- There were no disagreements with the Company's independent auditors on matters of accounting or financial disclosure. ITEM 9A. CONTROLS AND PROCEDURES -------------------------------- 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/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/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. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ---------------------------------------------------------------------------- The directors, executive officers and control persons of the Company as of November 30, 2003 were as follows: Director Principal Name Age Since Occupation - ------------------------------------------------------------------------- Stanton M. Pikus 63 1981 Chairman of the Board of Directors Kevin J. McAndrew 45 1990 President, Chief Executive Officer, Chief Financial Officer, and Treasurer Jean Zwerlein Pikus 50 1984 Vice President, Secretary Alan B. Manin(1)(2)(4) 66 1981 President, Atlantis, Inc. Stephen M. Vineberg(1)(2)(3)(5) 62 1988 President, CMQ, Inc. Paul L. Shapiro(1)(2)(3)(4) 52 1992 Manager, McKesson Drug Co. Frank A. Cappiello(1)(4)(6)(7) 77 1995 Managing Director of Montgomery Brothers, Cappiello, L.L.C. Independent Board of Directors Member (1) Independent Board of Directors Member (2) Member of the Compensation Committee of the Board of Directors. (3) Member of the Audit Committee of the Board of Directors. (4) Member of the Corporate Governance and Nominating Committee of the Board of Directors (5) Chairman and Member of the Corporate Governance and Nominating Committee of the Board of Directors (6) Chairman and Member of the Audit and Compensation Committees of the Board of Directors. (7) Financial expert of the Audit Committee of the Board of Directors. BIOGRAPHIES OF THE NOMINEES FOR DIRECTORS ----------------------------------------- KEVIN J. McANDREW, President, Chief Executive Officer, Chief Financial Officer and Treasurer, has been with the Company since June 1987. He has been a Director since 1990. He has held the positions of Chief Operating Officer; Executive Vice President, and Vice President of Finance during his employment with Canterbury. He is a graduate of the University of Delaware (B.S. Accounting, 1980) and has been a Certified Public Accountant since 1982. From 1980 to 1983 he was an Auditor with the public accounting firm of Coopers & Lybrand in Philadelphia. From 1984 to 1986 Mr. McAndrew was employed as a Controller for a New Jersey based division of Allied Signal, Inc. STANTON M. PIKUS, Chairman of the Board of Directors, was a founder of Canterbury (1981). In June 2001 he resigned as President and Chief Executive Officer of Canterbury Consulting Group, Inc. but remains an employee of the Company. He graduated from The Wharton School of the University of Pennsylvania (B.S., Economics and Accounting) in 1962. From 1968 until 1984 he worked full-time as President and majority stockholder of Brown, Bailey and Pikus, Inc., a mergers and acquisitions consulting firm that had completed more than twenty transactions. In addition, Mr. Pikus has been retained in the past by various small to medium-sized public and private companies in the capacity of an independent financial consultant. Mr. Pikus is the spouse of Jean Z. Pikus, who is a Director, a Vice President and the Secretary of Canterbury Consulting Group, Inc. JEAN ZWERLEIN PIKUS, Vice President, Secretary, and a Director since December 1, 1984. She was employed by J. B. Lippincott Company, a publishing company, from 1974 to 1983, where she was Assistant Personnel Manager and also created its word processing center, and was responsible for the day-to-day control of word processing and graphic services. In 1984, Ms. Pikus graduated from The Wharton School of the University of Pennsylvania (B.S., Accounting and Management, cum laude). Ms. Pikus is the spouse of Stanton M. Pikus, who is the Chairman of the Board of Directors and an employee of Canterbury Consulting Group, Inc. ALAN B. MANIN, Founder and a Director of Canterbury since its inception in 1981. He is currently the President of Atlantis, Inc., a company which provides motivational training to employees of Fortune 1000 companies. He is a graduate of Temple University (B.S., 1960; M.Ed., 1966). He was a teacher and Department Chairman in the Philadelphia School System (1960-1966); a former Vice President and Director of Education for Evelyn Wood Reading Dynamics (1966-1972); a former Director of Northeast Preparatory School (1973); and President, Chief Operating Officer and founder of Health Careers Academy, a federally accredited (National Association of Trade and Technical Schools) vocational school (1974-1979). STEPHEN M. VINEBERG, a Director since 1988, is currently the President and Chief Executive Officer of CMQ, Inc. Previously he was a Vice President of Fidelity Bank, Philadelphia, where he was Chief Operating Officer of the Data Processing, Systems and Programming Divisions. Mr. Vineberg also directed a wholly owned subsidiary of the bank that developed and marketed computer software, operated a service bureau and coordinated all electronic funds transfer activities. PAUL L. SHAPIRO, a Director since December, 1992, has worked for McKesson Drug Company for the past 26 years. Recipient of the McKesson President's Award for 2002. From 1973 through 1975 he was Director of the Pennsylvania Security Officers' Training Academy. In 1973, he graduated from York College of Pennsylvania with a B.S. Degree in Police Administration. FRANK A. CAPPIELLO, a Director since 1995, Frank Cappiello is one of the country's leading financial analysts. He is an expert on the national economy and a recognized authority on investments. Mr. Cappiello's background in economics is extensive. For more than 12 years, he was chief investment officer for an insurance holding company with overall responsibility for managing assets of $800 million. Prior to that, Mr. Cappiello was research director of a major stock brokerage firm. Subsequently, he was president of an investment counseling firm, McCullough, Andrews & Cappiello, Inc., providing asset management to individual and institutional investors. Mr. Cappiello is currently Chairman and a Managing Director of Montgomery Brothers, Cappiello, LLC, an investment advisor with offices in Washington, D.C. and New York. Mr. Cappiello was a regular panelist on the award winning television program Wall $treet Week With Louis Rukeyser, where he was a member of its Hall of Fame since 1991. He continues his panelist role on Louis Rukeyser's Wall Street on CNBC. He is also a frequent guest on CNN as well asCNBC. He is the author of four books, including Finding the Next Superstock. Mr. Cappiello is a graduate of the University of Notre Dame and Harvard University's Graduate School of Business Administration. Mr. Cappiello serves as the Chairman of the Compensation Committee and the Chairman of the Audit Committee and is the financial expert of the Audit Committee of the Board of Directors. He is also a member of the Corporate Governance and Nominating Committee. In performing these duties Mr. Cappiello operates independent from the management of the Company. Messrs. Shapiro and Vineberg serve on the Audit Committee, the Compensation Committee and the Corporate Governance and Nominating Committee as Independent Directors. Mr. Vineberg is the Chairman of the Corporate Governance and Nominating Committee. Mr. Manin is a member of the Compensation and Corporate Governance and Nominating Committees as an Independent Director. AUDIT COMMITTEE The Audit Committee assists the Board of Directors in fulfilling the Board's oversight responsibility to the shareholders relating to the integrity of the Company's financial statements, the Company's compliance with legal and regulatory requirements, the qualifications, independence and performance of the Company's independent auditor and the performance of the internal audit function. The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditor engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attestation services for the Corporation. The Board of Directors adopted a written charter for the Audit Committee which was included as an exhibit to the Proxy Statement filed with the Securities and Exchange Commission on October 4, 2001 for the fiscal year ended November 30, 2000. The Audit Committee re-examined and revised its charter in 2003, in light of the expanded responsibilities imposed under the Sarbanes-Oxley Act of 2002 and related SEC rules. The Audit Committee submitted the amended charter to the Board of Directors for approval and the approved, amended charter was filed with the SEC on October 24, 2003 as Appendix A to the Definitive Proxy Statement and is available on the internet directly from the Securities and Exchange Commission's website (www.sec.gov) or upon written request to the Canterbury Investor Relations Department at the address listed below. The members of the Audit Committee are Frank Cappiello, Chairman, Stephen Vineberg and Paul Shapiro, all of whom the Board in its business judgment has determined are independent as defined by SEC regulations and Nasdaq's listing standards. The Board of Directors also has determined that all of the members of the Audit Committee have sufficient knowledge in financial and auditing matters to serve on the Audit Committee and that Frank Cappiello qualifies as an audit committee financial expert as defined by SEC regulations. CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS The Company has adopted a Code of Ethics for Senior Financial Officers. A copy of this document can be obtained upon written request to Canterbury's Investor Relations Department at 352 Stokes Road, Suite 200, Medford, NJ 08055. ITEM 11. EXECUTIVE COMPENSATION ------------------------------- CASH COMPENSATION ------------------ The Company had 78 full-time employees as of November 30, 2003. SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Award Payouts ----------------------------- ------------------------------------------- Other Securities All other Name and Annual Restricted Underlying Compen- Principal Salary Bonus Compen- Stock Options/ LTIP sation Position Year ($) ($) sation($) Award($) SAR(#)* Payouts($) ($) - ------------------------------------------------------------------------------------------------ Stanton M. Pikus 2003 $233,000 $30,000(1) $- $15,000 - $- $- Chairman 2002 247,000 - - - - - - 2001 254,000 - - - 25,001 - - Kevin J. McAndrew 2003 $233,000 $20,000(1) $- $15,000 - $- $- President, Chief 2002 247,000 - - - - - - Executive Officer, and 2001 218,000 - - - 21,429 - - Chief Financial Officer Jean Z. Pikus 2003 $143,000 $11,700(1) $- $ 9,000 - $- $- Vice President 2002 150,000 - - - - - - 2001 112,000 - - - 12,144 - -
(1) Awarded in Fiscal 2002 and paid in Fiscal 2003 No other Executive Officer received in excess of $100,000 in total annual compensation for the three-year period. There were no stock options granted to Executive Officers during Fiscal 2003. +--------------------------------------------------------------------------------------+ | Number of Securities Value of Unexercised | | Underlying Unexercised In-The-Money Options | | Options at Year End at Year End 2003 | | 2003 (#) ($) | | Name Exercisable Unexercisable Exercisable Unexercisable | |---------------------+-------------+---------------+------------+---------------------+ | | | | | | | Stanton M. Pikus | 73,575 | 0 | $0 | $0 | |-------------------- +-------------+---------------+------------+---------------------+ | Kevin J. McAndrew | 57,146 | 0 | $0 | $0 | |---------------------+-------------+---------------+------------+---------------------+ | Jean Z. Pikus | 33,289 | 0 | $0 | $0 | |-------------------- +-------------+---------------+------------+---------------------+
Option holders have five years from the date of grant to exercise any or all of their options, and upon leaving Canterbury the option holders must exercise within 30 days or lose their options. These options exercise into Canterbury restricted common shares of company stock. The Company executed employment agreements dated June 1, 2001 between the Company and Mr. Kevin J. McAndrew and the Company and Mr. Stanton M. Pikus. Each employment agreement is for a period of five years. Each sets forth various services to be performed. Each employee shall receive an annual salary of $245,000 with annual cost of living increases tied to a nationally recognized index, as set forth by the Board of Directors from time to time. These employment agreements supercede and replace the prior employment agreements, including the cancellation of bonus opportunities which were to be payable through December 1, 2003. These agreements also include a non- competition prohibition for a period of three years after employment has been terminated. On December 1, 2001 the Company executed a five-year employment agreement between the Company and Ms. Jean Pikus. Ms. Pikus shall receive an annual salary of $150,000 with annual cost of living increases tied to a nationally recognized index, as set forth by the Board of Directors from time to time. The agreement also includes a non-competition prohibition for a period of three years after employment has been terminated. On March 1, 2003 Canterbury's corporate management team, inclusive of the Chairman, President and Vice President, voluntarily reduced their present salaries by 8%. This is in line with a previously instituted 8% salary reduction at one of the Company's largest subsidiaries. On August 18, 2003, on the recommendation of Mr. Frank Cappiello, the Chairman of the Compensation Committee of the Board of Directors, the Chairman, President and Vice President agreed to continue their voluntary 8% salary cuts through November 30, 2003 even though they have employment contracts in place. In lieu of the cash lost they were offered a block of restricted common stock on which they must be personally responsible for the applicable federal and state income taxes. Due to the restrictions on the sale of the stock, the stock was valued at 50% of the closing price on Nasdaq on the day prior to this Board Resolution and its acceptance by the three aforementioned individuals. Due to this discount, the Company has agreed with Nasdaq's requirement to "lock-up" these 103,338 shares until the shareholders have given their approval to the issuance. They cannot be sold, voted or be entitled to dividends until that time. However, if at any time prior to the issuance of the aforementioned Proxy, 51,669 of the 103,338 shares are returned to the Company, then no Proxy or shareholder approval will be required, and this matter will be resolved. Or in the alternative, if the 51,669 shares are paid for at the higher of the closing bid price at the date of issuance or the closing bid price on December 16, 2003, then this matter will also be resolved and no Proxy or shareholder approval will be required. A charge of $77,000 was made during the third quarter to reflect the cost of this stock. The corporate management team continues to receive its reduced rate of cash pay as of the date of this filing. COMPENSATION PURSUANT TO PLAN The following qualified and non-qualified stock options were granted at 100% of the market value on date of grant to executive officers and directors of the Company as of February 19, 2003. Name of Individual Capacity in Which Served Date Granted Exercise Price Options - ---------------------------------------------------------------------------------------------- Stanton M. Pikus Chairman of the Board of 8/27/99 $10.92 5,715 Directors 11/4/99 $16.80 14,286 8/2/00 $21.00 3,572 11/28/00 $19.46 10,715(1) 1/9/01 $10.50 10,715(1) 11/12/01 $4.83 14,286(1) - ---------------------------------------------------------------------------------------------- Kevin J. McAndrew President, Chief Executive 8/27/99 $10.92 4,286 Officer, Chief Financial 11/4/99 $16.80 10,715 Officer, Treasurer, Director 8/2/00 $21.00 2,858 11/28/00 $19.46 7,143(1) 1/9/01 $10.50 7,143(1) 11/12/01 $4.83 14,286(1) - ---------------------------------------------------------------------------------------------- Jean Z. Pikus Vice President, Secretary, 8/27/99 $10.92 2,572 Director 11/4/99 $16.80 6,429 8/2/00 $21.00 2,143 11/28/00 $19.46 3,572(1) 1/9/01 $10.50 3,572(1) 11/12/01 $4.83 8,572(1) - ---------------------------------------------------------------------------------------------- Alan Manin Director 8/27/99 $10.92 1,000 11/4/99 $16.80 2,500 1/11/00 $25.70 1,429 8/2/00 $21.00 715 11/12/01 $4.83 2,858 08/18/03 $.75 10,000 - ---------------------------------------------------------------------------------------------- Stephen Vineberg Director 8/27/99 $10.92 1,000 11/4/99 $16.80 2,500 8/2/00 $21.00 715 11/12/01 $4.83 2,858 08/18/03 $.75 10,000 - ---------------------------------------------------------------------------------------------- Paul Shapiro Director 8/27/99 $10.92 1,000 11/4/99 $16.80 2,500 8/2/00 $21.00 715 11/12/01 $4.83 2,858 08/18/03 $.75 10,000 - ---------------------------------------------------------------------------------------------- Frank Cappiello Director 8/27/99 $10.92 2,000 11/4/99 $16.80 5,000 8/2/00 $21.00 1,786 11/12/01 $4.83 5,715 08/18/03 $.75 20,000 - ----------------------------------------------------------------------------------------------
(1) These options are part of the 1995 Employee Stock Option Plan; however they are incentive stock options. All other options issued as part of the 1995 Stock Option Plan are non-qualified stock options. Employee stock option holders have five years from the date of grant to exercise any or all of their options, and upon leaving the Company the option holders (but not consultants) must exercise within 30 days. These options exercise into restricted shares of Company common stock and absent registration, or any exemption from registration, must be held for the applicable Rule 144 holding period before the restriction can be removed. OTHER COMPENSATION -------------------- See "Certain Relationships and Related Transactions" for key-man life insurance arrangements. COMPENSATION OF DIRECTORS -------------------------- In an effort to maintain its current independent directors and if it decides to do so in the future attract additional qualified directors to serve on the Board, Management and the Board of Directors decided on July 29, 2002 that beginning on September 1, 2002 and quarterly thereafter, all independent directors would be paid $2,000 each per quarter as Director's compensation. 50,000 Company stock options were issued at 100% of market value to all Directors who are not otherwise salaried employees on August 18, 2003. These options had an estimated Black-Scholes value of $25,000 at date of grant. Stock Options are delineated in the Compensation Pursuant To Plan table in Item 11. TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS -------------------------------------------------------------- Due to a significant breach of his Employment Agreement, the President of Usertech/Canterbury was terminated from his employment on March 18, 2003. Accordingly, Canterbury ceased paying the balance of compensation due to the President of Usertech under this Employment Agreement which exceeded $700,000. When Canterbury purchased Usertech from Ceridian Corporation, Canterbury was led to believe that this President was essential to the continued success of the company. Ceridian failed to disclose that this President played an active role with a vendor of Ceridian which was not only a conflict, but in essence, precluded this President from giving his undivided attention to Usertech. Thus, Canterbury is holding Ceridian Corporation liable for the undisclosed actions of the President, misrepresentations in the acquisition of Usertech and other claims related to Canterbury's purchase of Usertech and consummation of an Employment Agreement with this President. It has not yet been determined if any claims will be brought against any other individuals or other entities related to the claims arising from Canterbury's acquisition of Usertech and employment of the president. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION ------------------------------------------------------------ No member of the Compensation Committee is a current officer or has been an officer of the Company or any of its subsidiaries during the past six years. In addition, there are no compensation committee interlocks with other entities with respect to any such member. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --------------------------------------------------------------------------- (A)(B) The following table sets forth as of February 19, 2004 certain information with regard to the record and beneficial ownership of the Company's common stock by (i) each shareholder, owner of record or beneficial owner of 5% or more of the Company's common stock (ii) each Director individually and (iii) all Officers and Directors of the Company as a group. Addresses for the individuals listed below are c/o Canterbury Consulting Group, Inc. at 352 Stokes Road, Suite 200, Medford, NJ 08055: Amount and Nature of Beneficial Ownership Shares Shares Acquirable Shares Acquirable % Owned of Name of Currently Within 60 Days By Within 60 Days By Company's Beneficial Owner Owned Option Exercise Note Conversion Shares - -------------------------------------------------------------------------------- Stanton M. Pikus (1)(2) 220,493 59,289 100,000 13.98% Kevin J. McAndrew 112,355 46,431 100,000 9.52% Jean Zwerlein Pikus (1) 68,737 26,860 - 3.52% Alan Manin (3) 29,152 18,502 100,000 5.43% Stephen M. Vineberg 15,519 17,073 - 1.20% Paul L. Shapiro 3,668 17,073 - .76% Frank A. Cappiello 45,953 34,501 100,000 6.64% -------- ------- ------ ----- - ----------------------- All Officers, Directors and 5% Stockholders as a group (7 in number) 495,877 219,729 400,000 41.06% ========= ======== ======= ======= - -----------------------------------------------------------------------------------
Stock Options are delineated in the Compensation Pursuant To Plan table in Item 11. (1) Stanton M. Pikus and Jean Zwerlein Pikus are married to each other and, therefore, are deemed to have beneficial ownership in each other's shares. (2) 10,288 shares of Canterbury common stock owned in the name of Matthew Zane Pikus Trust are included in Stanton M. Pikus' shares currently owned total. (3) 10,462 shares owned by Atlantis Family L.C. of which Mr. Manin is the sole beneficiary, are included in his total. The following table summarizes certain information regarding the Company's equity compensation plans. ( a ) ( b ) ( c ) Number of Securities Weighted-average Number of to be issued upon exercise exercise price of securities remaining of outstanding options, outstanding options, available for future warrants and rights warrants and rights issuance under equity compensation plans (excluding securities Plan Category reflected in column (a)) - ------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders (1) 295,599 $8.95 144,878 Equity compensation plans not approved by security holders(2) 23,002 $6.32 -- --------- ----- ------- Total 318,601 $8.76 144,878 ========= ===== ========
(1) 1995 Employee Stock Option Plan was approved by the shareholders on July 21, 1995 with an amendment approved by shareholders on August 26, 1996. See Note 12 of Notes to Consolidated Financial Statements, Stock Option Plans for a description of stock option plans. (2) Options and Warrants issued to consultants outside of the shareholder approved stock option plan issued between March 7, 2002 and May 23, 2002. CHANGE IN CONTROL ----------------- There has been no change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS --------------------------------------------------------- The Company has secured key-person life insurance policies for its Corporate Officers. The amount and beneficiary of the key-person life insurance policies are as follows: Corporate Officers Amount of Policy Beneficiary ------------------ ---------------- ----------- Kevin J. McAndrew $1,000,000 Company Jean Z. Pikus $500,000 Company The Company has secured a $1,000,000 key-person life insurance policy on the President of USC/Canterbury Corp., Patricia Bednarik. During Fiscal 2001, certain officers and directors of the Company purchased a 33% stock ownership in a corporation that was previously a subsidiary of the Company prior to the November 1996 sale by the Company of its 100% stock ownership in this corporation to an outside group. The Company holds note receivables in the amount of $3,760,098 from this corporation of which $3,636,000 pertains to notes originating on the November 1996 date of sale (see Note 4). The Company maintained the same level of security interest protection and the same debt amortization schedule. The Company earned $322,000, $395,000 and $408,000 of interest income from these notes in Fiscal 2003, 2002 and 2001, respectively. During the fourth quarter of Fiscal 2003, a 22% owner of this corporation passed away. After his death, that corporation purchased and retired his shares from his estate. As a result of this purchase and retirement of his shares, certain officers and directors of the Company now own 44% of this corporation. At November 30, 2003 and 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 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 then current low prices. Also by reducing the term of the notes the Compensation Committee believed that management would have a further inducement to accelerate their efforts to increase shareholder value or risk the loss of their shares. On June 3, 2003 the Board of Directors of Canterbury approved a private placement for the Company in the form of a 7 3/4% Senior Convertible Promissory Note which was overwhelmingly ratified by 95.21% of the shareholders who voted on the proposal on November 24, 2003. The net proceeds of this private placement were used for working capital to operate the Company in order to offset the operating cash flow shortfall in the fourth quarter of Fiscal 2002, and the first quarter of Fiscal 2003, and to partially replace the $1,000,000 reduction in the Company's credit facility by its bank which occurred in the first quarter of Fiscal 2003. This note is convertible into Canterbury restricted common stock at $.355 per share. The notes, if not converted into restricted common stock before then, mature in 36 months and the entire loan amount of $355,000 must be repaid at that time. The ten convertible note units represent total potential dilution of one million shares if all of the notes are converted into common stock. Ten units at $35,500 each were sold. Four units were purchased by affiliates of the Company and six units were purchased by non-affiliates. This debt is subordinate to all current and future bank debt, but is senior to all other current and future Company indebtedness. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ------------------------------------------------ Fees of Independent Public Accountants Audit Fees ----------- The aggregate fees billed by Baratz & Associates, P.A. for professional services rendered for the audit of the Company's annual financial statements for the fiscal years ended November 30, 2003 and 2002, and for the review of the financial statements included in the Company's Quarterly Reports on Form 10-Q, and services that are normally provided in connection with statutory and regulatory filings and engagements, for those fiscal years were $83,500 for 2003 and $73,000 for 2002. Audit Related Fees ------------------- The aggregate fees billed by Baratz & Associates, P.A for professional services for assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements and not reported under the heading "Audit Fees" above for the fiscal years ended November 30, 2003 and November 30, 2002 were $500 and $0, respectively. During 2003, these services included proxy disclosure review. The aggregate fees billed for professional services rendered by Ernst & Young for the review of information contained in the Form 10-K for the fiscal year ended November 30, 2002 and for the re-issuance of their audit report for the Form 10-K for the fiscal year ended November 30, 2000 were $7,500 Tax Fees -------- The aggregate fees billed by Baratz & Associates, P.A for professional services for tax compliance, tax advice and tax planning for the fiscal years ended November 30, 2003 and November 30, 2002 were $24,000 and $23,000, respectively. During 2003 and 2002, these services generally included federal and state tax return preparation services. All Other Fees -------------- There were no additional aggregate fees billed by Baratz & Associates, P.A for other services rendered to the Company for the fiscal years ended November 30, 2003 and 2002. Pre-Approved Services ---------------------- All audit related services, tax services and other services were pre- approved by the Audit Committee, which concluded that the provision of such services by Baratz & Associates, P.A was compatible with the maintenance of that firms' independence in the conduct of their auditing functions. The Audit Committee's Charter provides for pre-approval of audit, audit-related and tax services. The Charter authorizes the Audit Committee to delegate to one or more of its members pre-approval authority with respect to permitted services. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K --------------------------------------------------------------------------- Consolidated Financial Statements filed here include: Balance Sheets at November 30, 2003 and 2002 and Statements of Operations, Stockholders' Equity and Cash Flows for the years ended November 30, 2003, 2002, and 2001. All other schedules for which provision is made in Regulation S-K of the Commission are not required under the related instruction or are not applicable and therefore have been omitted. Consolidated Financial Statements Page No. -------- Report of Independent Auditors F- 1 Consolidated Balance Sheets - November 30, 2003 and 2002 F- 3 Consolidated Statements of Operations - Years ended November 30, 2003, 2002, and 2001 F- 5 Consolidated Statements of Stockholders' Equity/Years ended November 30, 2003, 2002, and 2001 F- 7 Consolidated Statements of Cash Flows - Years ended November 30, 2003, 2002, and 2001 F- 8 Notes to Consolidated Financial Statements F- 10 Valuation and Qualifying Accounts F- 25 Certain of the exhibits to this Annual Report are hereby incorporated by reference, as specified: Exhibit No. Description ------------------------------------------------------------------------------ 3(a) Articles of Incorporation of Canterbury Press, Inc (incorporated by reference from the like-numbered exhibit to Form S-3 Registration Statement, SEC. File No. 33-77066 filed on March 30, 1994) 3(b) By-Laws of the Registrant (incorporated by reference from the like- numbered exhibit to Form S-3 Registration Statement, SEC. File No. 33- 77066 filed on March 30, 1994) 3(c) Certificate of Amendment to Articles of Incorporation changing the name to Canterbury Education Services, Inc. (incorporated by reference from the like-numbered exhibit to Form S-3 Registration Statement, SEC. File No. 33-77066 filed on March 30, 1994) 3(d) Certificate of Amendment to Articles of Incorporation changing the name to Canterbury Corporate Services, Inc. (incorporated by reference from the like-numbered exhibit to Form S-3 Registration Statement, SEC. File No. 33-77066 filed on March 30, 1994) 3(e) Certificate of Amendment to Articles of Incorporation changing the name to Canterbury Information Technology, Inc. (incorporated by reference from the Annual Report and Definitive Proxy Materials filed with the SEC on May 2, 1997) 3(f) Certificate of Amendment to Articles of Incorporation changing the name to Canterbury Consulting Group, Inc incorporated by reference from the Annual Report and Definitive Proxy Materials filed with the SEC on March 6, 2001 10.1 Asset Purchase Agreement between Ceridian Corporation and the Registrant (incorporated by reference from Exhibit 99.4 of Form 8-K filed with the SEC on October 11, 2001) 10.2 Kevin J. McAndrew's Employment Agreement (incorporated by reference from Exhibit 99.13 to Form 8-K filed with the SEC on June 11, 2001) 10.3 Stanton M. Pikus' Employment Agreement (incorporated by reference from Exhibit 99.13 to Form 8-K filed with the SEC on June 11, 2001) 21 Subsidiaries of Registrant (filed herewith) 31.2 Rule 13a-14(a) Certification pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 (filed herewith). 32 Certifications pursuant to 18 U.S.C. Section 1330, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) Reports on Form 8-K filed during the last quarter of the period covered by this report are as follows: None SIGNATURES ----------- Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Canterbury Consulting Group, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CANTERBURY CONSULTING GROUP, INC. --------------------------------- Dated: 2/27/04 By /s/ Kevin J. McAndrew ------- --------------------- Kevin J. McAndrew, President; Chief Executive Officer; Treasurer Dated: 2/27/04 By /s/ Kevin J. McAndrew ------- --------------------- Kevin J. McAndrew, Chief Financial Officer Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, this report has been signed on behalf of Canterbury Consulting Group, Inc. and in the capacities and on the dates indicated. Dated: 2/27/04 By /s/ Stanton M. Pikus ------- -------------------- Stanton M. Pikus, Director; Chairman of the Board of Directors Dated: 2/27/04 By /s/ Kevin J. McAndrew ------- --------------------- Kevin J. McAndrew, President, Chief Executive Officer; Executive Vice President; Chief Financial Officer; Director Dated: 2/27/04 By /s/ Jean Zwerlein Pikus ------- ----------------------- Jean Zwerlein Pikus, Vice President - Operations; Secretary; Director Dated: 2/27/04 By /s/ Alan Manin ------- -------------- Alan Manin, Director Dated: 2/27/04 By /s/ Stephen M. Vineberg ------- --------------------- Stephen M. Vineberg, Director Dated: 2/27/04 By /s/ Paul L. Shapiro ------- ------------------- Paul L. Shapiro, Director Dated: 2/27/04 By /s/ Frank A. Cappiello ------- --------------------- Frank A. Cappiello, Director Canterbury Consulting Group, Inc. - FORM 10-K 2003 Report of Independent Auditors - 2003, 2002 and 2001 To the Board of Directors and Stockholders Canterbury Consulting Group, Inc. Medford, New Jersey We have audited the accompanying consolidated balance sheets of Canterbury Consulting Group, Inc. as of November 30, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended November 30, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Canterbury Consulting Group, Inc. at November 30, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, effective December 1, 2000, the Company changed its method of accounting for revenue recognition in accordance with guidance provided in SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." Also, as discussed in Note 1 to the consolidated financial statements, effective December 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Baratz & Associates, P.A. Marlton, New Jersey February 3, 2004 except for the first paragraph of Note 8, as to which the date is February 19, 2004 F-1 CONSOLIDATED BALANCE SHEETS November 30, 2003 and 2002 ASSETS 2003 2002 ---- ---- Current Assets: Cash and cash equivalents $1,385,824 $395,477 Marketable securities 300,000 - Accounts receivable, net of allowance for doubtful accounts of $271,000 and $383,000 2,477,060 2,850,934 Notes receivable - current portion 287,845 492,377 Prepaid expenses and other assets 93,311 321,826 Inventory, principally finished goods, at cost 92,599 173,118 Deferred tax assets - 272,660 ----------- ---------- Total Current Assets 4,636,639 4,506,392 Property and equipment at cost, net of accumulated depreciation of $1,093,000 and $1,349,000 604,449 885,302 Goodwill 2,433,381 3,608,381 Deferred tax assets 759,000 951,525 Notes receivable 3,472,253 6,474,266 Other assets 32,821 206,910 ----------- ---------- Total Assets $11,938,543 $16,632,776 =========== =========== Continued See Accompanying Notes F-2 CONSOLIDATED BALANCE SHEETS November 30, 2003 and 2002 Continued LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002 ---------- -------- Current Liabilities: Accounts payable - trade $ 963,588 $ 618,124 Accrued expenses 532,597 821,298 Unearned revenue 470,107 892,249 Current portion, long-term debt 889,490 882,880 ---------- --------- Total Current Liabilities 2,855,782 3,214,551 Long-term debt 62,934 1,209,625 Subordinated convertible debt 355,000 - ---------- --------- Total Liabilities 3,273,716 4,424,176 ---------- --------- Commitments and Contingencies Stockholders' Equity: Common stock, $.001 par value, 50,000,000 shares authorized; 2,097,251 and 1,732,959 issued and outstanding 2,097 1,733 Additional paid-in capital 24,248,039 23,782,498 Accumulated deficit (11,989,817) (7,934,823) Notes receivable for common stock - related parties (3,595,492) (3,640,808) ---------- --------- Total Stockholders' Equity 8,664,827 12,208,600 ---------- --------- Total Liabilities and Stockholders' Equity $11,938,543 $16,632,776 =========== =========== See Accompanying Notes F-3 CONSOLIDATED STATEMENTS OF OPERATIONS Years ended November 30, 2003, 2002 and 2001 2003 2002 2001 ---- ---- ---- Service revenue $10,476,835 $15,543,062 $11,143,355 Product revenue 11,907,459 14,489,585 16,425,632 ----------- ----------- ----------- Total net revenue 22,384,294 30,032,647 27,568,987 Service costs and expenses 7,934,227 10,656,433 6,816,328 Product costs and expenses 10,609,910 12,571,259 12,892,888 ----------- ----------- ----------- Total costs and expenses 18,544,137 23,227,692 19,709,216 Gross profit 3,840,157 6,804,955 7,859,771 ----------- ----------- ----------- Selling 1,761,477 2,498,163 2,452,170 General and administrative 4,816,105 5,967,299 5,833,718 Goodwill impairment 1,175,000 583,723 5,957,753 ----------- ----------- ----------- Total operating expenses 7,752,582 9,049,185 14,243,641 Other income/(expenses) Interest income 463,856 646,845 689,723 Interest expense (125,422) (198,725) (185,235) Other (16,498) 89,336 (251,538) Investment impairment - - (2,637,285) ----------- ----------- ----------- Total other income/(expenses) 321,936 537,456 (2,384,335) Loss from continuing operations before income taxes and cumulative effect of change in accounting principle (3,590,489) (1,706,774) (8,768,205) Provision (benefit) for income taxes 476,324 237,188 (2,020,328) ----------- ----------- ----------- Loss from continuing operations before cumulative effect of change in accounting principle (4,066,813) (1,943,962) (6,747,877) Income (loss) from discontinued operations (net of income taxes of $6,089, $9,012 and $(59,548)) 11,819 (73,889) (198,890) Cumulative effect of change in accounting principle - - (213,088) ----------- ----------- ----------- Net loss $(4,054,994) $(2,017,851) $(7,159,855) ============ ============ ============ See Accompanying Notes F-4 CONSOLIDATED STATEMENTS OF OPERATIONS Years ended November 30, 2003, 2002 and 2001 Continued 2003 2002 2001 ---- ---- ---- Net (loss) income per share and common share equivalents Basic and diluted: Loss from continuing operations before cumulative effect of change in accounting principle $(2.17) $(1.12) $(4.01) Income (loss) from discontinued operations .01 (.04) (.12) Cumulative effect of change in accounting principle - - (.12) -------- ------- ------- Net loss $(2.16) $(1.16) $(4.25) ====== ====== ====== Weighted average number of common shares - basic and diluted 1,876,300 1,742,500 1,682,800 ========= ========= ========= See Accompanying Notes F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended November 30, 2003, 2002 and 2001 (Accumulated Accumulated Note Total Common Common Additional Deficit) Other Receivable Stock- Stock Stock Paid-in Retained Treasury Comprehensive for Common holders' Shares Amount Capital Earnings Stock Income/(loss) Stock Equity -------------------------------------------------------------------------------------------------------------------------- Balance, November 30, 2000 1,526,531 $1,526 $22,465,890 $1,242,883 $(407,300) $779,244 $(2,002,142) $22,080,101 Net loss for the year ended November 30, 2001 (7,159,855) (7,159,855) Unrealized loss on available for sale securities (779,244) (779,244) ---------- Total comprehensive loss (7,939,099) 401(k) Company match 5,808 6 83,357 83,363 Issuance of common shares to employees, directors and consultants for notes 253,928 254 2,101,471 (2,101,725) - Retirement of treasury shares (5,045) (5) (407,295) 407,300 - Reserve for interest on notes receivable for capital stock 101,596 101,596 --------- ------ ----------- ------------ ---------- ------------ ----------- ----------- Balance, November 30, 2001 1,781,222 $1,781 $24,243,423 $(5,916,972) $ - $ - $(4,002,271) $14,325,961 ========= ====== =========== ============ ========== ============ =========== =========== Net loss for the year ended November 30,2002 (2,017,851) (2,017,851) 401(k) Company match 16,755 17 82,082 82,099 Retirement of Promissory Notes (36,430) (37) (364,913) 364,950 - Purchase and retirement of treasury shares (35,285) (35) (250,288) (250,323) Additional issuance of common stock for capital 6,697 7 14,993 15,000 Issuance of stock options to consultants 57,201 57,201 Notes receivable for capital stock (3,487) (3,487) --------- ------ ----------- ------------ ---------- ------------ ----------- ----------- Balance, November 30, 2002 1,732,959 $1,733 $23,782,498 $(7,934,823) $ - $ - $(3,640,808) $12,208,600 ========= ====== =========== ============ ========== ============ =========== =========== Net loss for the year ended November 30,2003 (4,054,994) (4,054,994) 401(k) Company match 115,950 116 210,914 211,030 Issuance of common stock to officers in lieu of salary 103,342 103 77,536 77,639 Issuance of common stock to consultants for services 145,000 145 154,870 155,015 Issuance of stock options to consultants 22,221 22,221 Receipt of accrued interest on notes receivable 45,316 45,316 --------- ------ ----------- ------------ ---------- ------------ ----------- ----------- Balance, November 30, 2003 2,097,251 $2,097 $24,248,039$(11,989,817) $ - $ - $(3,595,492) $8,664,827 ========= ====== =========== ============ ========== ============ =========== =========== F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended November 30, 2003, 2002 and 2001 2003 2002 2001 ----- ----- ------ Operating activities: Net loss $(4,054,994) $(2,017,851) $(7,159,855) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 370,088 485,924 969,959 Provision for losses on accounts receivable (111,765) 130,887 433,214 Goodwill impairment 1,175,000 583,723 5,957,753 Investment impairment - - 2,562,284 Deferred income taxes 465,185 323,000 (2,162,905) Loss on sale of land and disposal of assets 38,513 - 326,176 401(k) contributions issued in stock 211,030 82,099 83,363 Receipt of stock for services - - (793,240) Issuance of common stock to consultants for services 155,015 - - Issuance of common stock to officers in lieu of salary 77,639 - - Changes in operating assets, net of acquisitions Accounts receivable 485,639 2,640,644 1,221,448 Inventory 80,519 653,733 (624,820) Prepaid expenses and other assets 228,515 (75,725) 495,255 Other assets - non current 174,089 637 288,337 Income taxes - (18,540) (111,293) Accounts payable 345,464 (1,158,202) (501,120) Accrued expenses (288,701) (193,004) (73,142) Unearned revenue (422,142) (1,050,991) 1,029,565 ----------- ------------ --------- Net cash (used in)/provided by operating activities (1,070,906) 386,334 1,940,979 ----------- ------------ --------- Investing activities: Purchase of marketable securities (300,000) - - Proceeds from sale of land - - 399,734 Cash paid for acquisition - - (2,350,334) Capital expenditures, net (28,755) (55,284) (75,920) Proceeds from payments on notes receivable 3,206,545 459,129 405,064 Other - (29,500) - ----------- --------- --------- Net cash provided by/(used in) investing activities 2,877,790 374,345 (1,621,456) ----------- ---------- --------- Financing activities: Purchase of treasury shares - (250,323) - Proceeds from issuance of common stock - 15,000 - Proceeds from revolving line of credit - 300,000 1,500,000 Proceeds from long term debt - - 1,500,000 Proceeds from payments on notes receivable for common stock - related parties 45,316 48,724 - Principal payments on long term debt (1,216,853) (1,143,453) (3,540,152) Proceeds from subordinated convertible debt 355,000 - - ----------- ----------- --------- Net cash used in financing activities (816,537) (1,030,052) (540,152) ----------- ---------- --------- Net increase/(decrease) in cash 990,347 (269,373) (220,629) Cash, beginning of year 395,477 664,850 885,479 ----------- ---------- --------- Cash, end of year $ 1,385,824 $ 395,477 $ 664,850 ============ ========== ========= Continued See Accompanying Notes F-7 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended November 30, 2003, 2002 and 2001 (Continued) Supplemental schedule of noncash investing and financing activities: In September 2003, the Company signed a $39,532 note payable in exchange for new equipment. In September 2003 the Company issued 145,000 shares of restricted common stock to consultants for services performed in conjunction with the early payoff of a long-term note receivable at fair market value. In August 2003 the Company issued 103,338 shares of restricted common stock to corporate officers in lieu of cash for services performed under their respective Employment Agreements at fair market value. In June 2003, the Company entered into a $37,242 capital lease obligation in exchange for new equipment. In February 2003 the Company issued 115,950 shares of restricted common stock to its defined contribution plan to fulfill its matching contribution requirement at fair market value. In September 2002 the Company offset $106,505 of uncollected, guaranteed accounts receivable against the first $400,000 note payment to the seller of Usertech/Canterbury. In July 2002 the Company issued 16,755 shares of restricted common stock to its defined contribution plan to fulfill its matching contribution requirement at fair market value. Also in July 2002 10,715 shares of restricted stock tied to the stock issued in February and April 2001 were cancelled and then added to the authorized but unissued stock total. In December, 2001 25,715 shares of restricted stock tied to the stock issued in February and April 2001 were cancelled and then added to the authorized but unissued stock total. In November, 2001 the Company issued 7,143 shares of restricted common stock to a consultant of the Company for a note receivable at fair market value. In September 2001, the Company issued a $1,200,000 note payable to the seller as part of the purchase price of Usertech as described in Note 2. In September 2001, 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. In July, 2001 the Company cancelled 3,314 shares of restricted common stock and then added that amount to the authorized but unissued shares total at fair market value. In May, 2001 the Company received 421,684 shares of common stock from an affiliated third party valued at a fair market value of $793,240 for services provided. In May, 2001 the Company issued 107,143 shares of restricted common stock to Officers, Directors and consultants of the Company for notes receivable at fair market value. In May, 2001 the Company converted a $200,000 miscellaneous receivable from a related party into a six-year term note with interest accruing at 4.8% on the unpaid balance. In April, 2001 the Company issued 97,858 shares of restricted common stock to Officers, Directors and consultants of the Company for notes receivable at fair market value. In February, 2001 the Company issued 41,786 shares of restricted common stock to Officers, Directors and consultants of the Company for notes receivable at fair market value. During February and March 2001 the Company issued 36 and 5,774 shares of restricted common stock, respectively, to its defined contribution plan to fulfill its matching contribution requirement at fair market value. The income taxes paid for Fiscal 2003, 2002, and 2001 were as follows: $17,100, $76,600, $194,300, respectively. Interest paid during Fiscal 2003, 2002, and 2001 were as follows: $125,422, $198,725, and $186,348, respectively. F-7 1. Operations and Summary of Significant Accounting Policies 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, services and training to both commercial and government clients. Canterbury is comprised of five operating subsidiaries with offices located in New Jersey, New York, Maryland, 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, services and training to help them achieve a competitive advantage by helping their employees to succeed. Our subsidiaries offer the following technology and training solutions: * distance learning solutions * software development * customized learning solutions * web development for ERP and CRM * technical and desktop applications * systems engineering and training consulting * records and asset management systems * management training programs * help desk and service center support * hardware sales and support For information about the Company's revenues, profit or loss, and assets by segment, see Note 3 of the Notes to Consolidated Financial Statements starting on page F-13. 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, consulting and technical staffing services provided to customers under separate consulting and service contracts. Revenues from these contracts are recognized as services are rendered. Change in Accounting --------------------- The Securities and Exchange Commission (SEC) issued 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. The Company implemented the provisions of SAB 101 in the fourth quarter of Fiscal 2001, retroactive to December 1, 2000. The implementation of SAB 101 resulted in a change in accounting for certain product shipments where title did not transfer to the customer until delivery occurred. The cumulative effect of the change for implementation of SAB101 resulted in a charge to the first quarter of Fiscal 2001 income of $213,088 (net of income taxes of $109,773). For the first quarter ended February 28, 2001, the Company recognized $1,560,000 of revenue which was included in the cumulative effect adjustment. The effect of that revenue on Fiscal 2001 was to increase income by $213,088 (net of income taxes of $109,773) during that period. 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 a periodic basis (see Note 6). 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 November 30, 2003, the Company held marketable securities comprised of a $300,000 investment in a long-term tax-exempt bond fund. At November 30, 2003, the Company's marketable securities were classified as available-for-sale and were carried at fair market value. There were no unrealized gains or losses on marketable securities for the year ended November 30, 2003. 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 November 30, 2003 and 2002. 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 fixture 5 to 7 years Capitalized Software -------------------- Costs related to internally-developed software and software purchased for internal use, which are required to be capitalized pursuant to Statement of Position (SOP) No. 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use," are included in property, plant and equipment under machinery and equipment. Long-lived Assets (Other than Goodwill) --------------------------------------- The company reviews its long-lived assets (other than goodwill) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We assess the recoverability of long-lived assets (other than goodwill) by comparing the estimated undiscounted cash flows associated with the related asset or group of assets against their respective carrying amounts. The amount of an impairment, if any, is calculated based on the excess of the carrying amount over the fair value of those assets. 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. Net (Loss) Income Per Share ---------------------------- Basic net (loss) income per share is computed using the weighted average number of shares outstanding during the period. Diluted net (loss) income per share is computed using the weighted average number of shares and dilutive equivalent shares outstanding during the period. Dilutive equivalent shares consist of stock options. US GAAP requires all anti-dilutive securities, including stock options, to be excluded from the diluted per share computation. For Fiscal 2003, 2002 and 2001, due to our net losses, all of our outstanding options and convertible shares (see Notes 10 and 12) were excluded from the diluted loss per share calculation because their inclusion would have been anti-dilutive. The Company has convertible debt and stock options outstanding as of November 30, 2003 that would have had a dilutive effect on earnings per share had the Company generated a net income during the year ended November 30, 2003. Shares issuable from these securities that could potentially dilute earnings per share in the future that were not included in the computation for the year ended November 30, 2003 because their effect was anti-dilutive due to the net loss reported by the Company were as follows: Shares issuable from subordinated convertible debt 1,000,000 Shares issuable from stock options 50,000 In addition, there were another 268,599 stock options outstanding at November 30, 2003 with exercise prices above the average market price of Company stock during the year ended November 30, 2003. Reverse Stock Split ------------------- On January 24, 2003, the Company's Board of Directors approved a one for seven reverse stock split of the Company's common shares. All share and per share information contained in these financial statements gives retroactive effect to the 1 for 7 reverse stock split. Concentration of Risk --------------------- The Company maintains cash balances at a creditworthy bank located in the United States. Accounts at the institution are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company does not believe that it has significant credit risk related to its cash balance. The Company holds marketable securities in the form of mutual fund shares with a highly reputable mutual fund company located in the United States. As previously discussed, the Company is in the business of providing management and information technology services and training. These services are provided to a large number of customers in various industries in the United States. The Company's trade accounts receivable are exposed to credit risk, but the risk is limited due to the diversity of the customer base and the customers wide geographic dispersion. The Company performs ongoing credit evaluations of its customers' financial condition. The Company maintains reserves for potential bad debt losses and such bad debt losses have been within the Company's expectations. Four of the five Canterbury operating subsidiaries are headquartered in the Mid Atlantic and Northeast region of the country. As such, the majority of revenues were generated in these two geographic regions. For the year ended November 30, 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 38% of this segment's revenue and 20% of consolidated revenue. If this contract is not renegotiated or extended in 2004, USC/Canterbury would not have access to sell into the City of Baltimore. A decision from the City is expected in March 2004. A second group of customers, from a county in Virginia, accounted for 43% of the revenues in the reseller segment and 23% of consolidated revenues for the year. This group of over 80 customers purchased equipment from USC/Canterbury under the City of Baltimore contract as well. Approximately 70% of this revenue could be purchased under the Virginia state contract if the Baltimore contract is not renewed in 2004. Also in this segment one vendor represented 54% of the product cost in this segment and 31% of consolidated costs. Another major vendor represented 25% and 15% of segment and consolidated costs and expenses, respectively. For the year ended November 30, 2002, 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 45% of this segment's revenue and 21% of consolidated revenue. A second group of customers, from a county in Virginia, accounted for 38% of revenues in the reseller segment and 18% of consolidated revenues. This group of over 80 customers purchased equipment from USC/Canterbury under the City of Baltimore contract as well. Also in this segment one vendor represented 49% of the product cost in this segment and 26% of consolidated costs. Another major vendor represented 24% and 13% of segment and consolidated costs and expenses, respectively. During Fiscal 2001, the Company had one customer who accounted for 32% of the revenue in the Value Added Hardware Reseller segment, and 18% of consolidated revenues for the year. Also during 2001, the Company had one vendor who accounted for approximately 64% of product purchases in the Value Added Hardware Reseller segment. Fair Value of Financial Instruments ------------------------------------ The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Management believes that there are no material differences between the recorded book values of its financial instruments and their estimated fair value. Reclassifications ----------------- Certain reclassifications have been made to prior years balances in order to conform to current presentations. Comprehensive Loss ------------------ For the years ended November 30, 2003, 2002 and 2001, net comprehensive loss amounted to $(4,054,994), ($2,017,851) and ($7,939,099), respectively. Comprehensive loss consists of net loss and net unrealized gains and losses on securities available for sale, and is adjusted quarterly to reflect current market value of these securities. Stock Based Compensation -------------------------- The Company accounts for stock options under Accounting Principles Board (APB) Opinion No. 25- Accounting for Stock Issued to Employees. In general, as the exercise price of all options granted under these plans is equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation cost is recognized in net income (loss). 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 (see Note 12). Restricted stock awards are charged to compensation expense based upon the quoted market price of Company stock at date of grant under the intrinsic value method of APB Opinion 25. 2. Acquisitions ================ SFAS 141 "Business Combinations," eliminated the pooling of interests method of accounting for all business combinations initiated after July 1, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. 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; $116,000 for direct cost of acquisition; $1,200,000 in notes payable over three years, plus the assumption of $851,000 in liabilities. The Company recorded goodwill of approximately $1,316,000 related to this acquisition. The allocation of the purchase price is as follows: Accounts receivable $2,550,000 Other current assets 129,000 Fixed assets, net 494,000 Deferred tax asset 28,000 Goodwill 1,316,000 --------- Total $4,517,000 ========== Usertech provides e-learning support, Enterprise Resource Planning (ERP) and Customer Relationship 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. 3. Segment Reporting ===================== The Company is organized into three operating segments and the corporate office. The operating segments are: training and consulting, value added hardware reseller, and software development. A fourth segment, technical staffing, was discontinued during 2003. All historical information for the technical staffing segment has been omitted from the segment presentation below. 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 and Fiscal 2002, goodwill has been assigned to reporting units for purposes of impairment testing and segment reporting as required by SFAS 142. Summarized financial information for each segment is as follows: Training Value Added and Hardware Software 2003 Consulting Reseller Development Corporate Total ---- ---------- ----------- ------------ --------- ------------- Revenues $10,476,835 $11,734,717 $172,742 $ - $22,384,294 (Loss) income before taxes (2,861,152) 520,843 (31,684) (1,218,496) (3,590,489) Assets 4,091,650 1,548,136 41,739 6,257,018 11,938,543 Interest income 219 - - 463,637 463,856 Interest expense 64,051 1,078 2,671 57,622 125,422 Depreciation and amortization 316,636 19,006 7,206 24,595 367,443
Training Value Added and Hardware Software 2002 Consulting Reseller Development Corporate Total ---- ---------- ----------- ------------ --------- ------------- Revenues $15,543,062 $14,317,134 $172,451 $ - $30,032,647 (Loss) income before taxes (1,243,897) 752,165 (24,612) (1,190,430) (1,706,774) Assets 6,020,944 1,236,699 64,770 11,199,188 18,521,601 Interest income 469 - 2,049 644,327 646,845 Interest expense 97,611 2,849 3,789 94,476 198,725 Depreciation and amortization 415,561 19,993 22,799 17,963 476,316
Training Value Added and Hardware Software 2001 Consulting Reseller Development Corporate Total ---- ---------- ----------- ------------ --------- ------------- Revenues $11,143,355 $16,207,436 $218,196 $ - $27,568,987 (Loss) income before taxes 72,513 2,009,880 (9,209) (10,841,389) (8,768,205) Assets 5,008,116 2,720,190 101,028 16,983,512 24,812,846 Interest income - 7,244 - 682,479 689,723 Interest expense 37,188 691 2,078 145,278 185,235 Depreciation and amortization 388,944 67,535 19,949 471,364 947,792
4. Notes Receivable ===================== During September, 2003, the Company received $2,295,327 representing the remaining principal balance plus accrued interest for a note which was received in November 1995 as part of the consideration for the sale of a former subsidiary. The Company was scheduled to receive monthly payments of $33,975 inclusive of interest at 7.79% per year through November 2005 and a balloon payment of $1,707,000 in December 2005. In conjunction with this prepayment, the Company issued 145,000 shares of restricted common stock to consultants for services rendered in this transaction valued at fair market. In addition, the Company held notes receivable assets from a related party in the aggregate amount of $3,760,098 at November 30, 2003. These notes have interest terms that average 7.3% per year and are scheduled to mature at various dates through November 2006, with a balloon payment of $1,948,000 in December, 2006. The aggregate amount includes an $860,000 demand note. During April, 2003, in order to fortify the liquidity of the balance sheet, the Company negotiated a $500,000 paydown of the demand note (from $1,360,000 to $860,000). On April 3, 2003 the independent directors, who are a majority of the Board of Directors of Canterbury, voted to reduce the annual interest rate on the note from 10% to 5% per annum in exchange for the principal payment of $500,000 which was received by the Company during April, 2003. The demand note is included in the non-current portion of notes receivable at November 30, 2003 and November 30, 2002. The company has received all scheduled monthly installments for notes receivable outstanding as of November 30, 2003 and 2002. 5. Property and Equipment ========================== Property and equipment, which is recorded at cost, consists of the following: 2003 2002 ---- ---- Machinery and equipment $1,434,874 $1,630,274 Furniture and fixtures 225,230 454,407 Leased property under capital leases and leasehold improvements 37,242 149,345 ----------- ---------- 1,697,346 2,234,026 Less: Accumulated depreciation (1,092,897) (1,348,724) ----------- ---------- Net property and equipment $ 604,449 $ 885,302 =========== ========= Accumulated depreciation of leased property under capital leases totaled $6,000 and $120,000 at November 30, 2003 and 2002, respectively. Depreciation expense for 2003, 2002, and 2001 was $371,000, $486,000, and $471,000, respectively. During Fiscal 2003, the Company retired approximately $600,000 worth of fully depreciated fixed assets. During 2001, the Company sold non-operating land and a building with a carrying value of $725,910. The net proceeds from the sale were $399,734. The loss on the sale totaling $326,176 was recorded in other expenses on the income statement for Fiscal 2001. 6. Goodwill 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 a periodic basis. We completed our annual goodwill impairment tests as of November 30, 2003. The Company recorded a total of $1,175,000 of goodwill impairment at ($675,000 for MSI/Canterbury and $500,000 for Usertech/Canterbury) at November 30, 2003. The economic downturn which MSI/Canterbury experienced in 2002 continued and worsened in 2003. Revenues and operating income declined for the third year in a row. Usertech/Canterbury also experienced a significant operating decline in Fiscal 2003. The President of the Usertech subsidiary was terminated for major breaches of his Employment Agreement. Due to the failure of the President to fulfill the obligations of his Employment Agreement, many projects that were anticipated to be delivered during the year based on projections were not consummated. There were several rounds of layoffs as well as a decline of business that are attributable to the failure of the President to perform under the terms of his Employment Agreement. The fair value of MSI/Canterbury and Usertech/Canterbury were estimated based upon our recent earnings history and our future earnings expectations for these businesses as of November 30, 2003 The Company recorded $584,000 of goodwill impairment charges related to MSI/Canterbury (Training and Consulting Segment) at November 30, 2002. The continuing economic downturn had caused a significant reduction in MSI/Canterbury revenues and operating income over the previous two years. This fair value of MSI/Canterbury was estimated based upon our recent earnings history and our future earnings expectations for this business as of November 30, 2002. No other goodwill impairment was found at November 30, 2002. Prior to the adoption of SFAS 142 for Fiscal 2002, goodwill was amortized over periods ranging from twenty to twenty-five years using the straight-line method. In addition, goodwill was tested for impairment when events or changes in circumstances indicated that its carrying amount may not be recoverable. During Fiscal 2001 the Company recorded $5,958,000 of goodwill impairment charges. $500,000 of this charge was reflected in the second quarter of the year and the balance was recorded in the fourth quarter. DMI/Canterbury goodwill was written down to $0 (total charge of $843,000) due to the uncertainty in the technical staffing marketplace caused by the dot com bust and the softening of spending in this business segment. The net goodwill related to the 1994 acquisition of CALC/Canterbury (Training and Consulting Segment) totaling $4,397,000 was also written off. The lingering current effects of September 11, as well as the uncertainty of future business growth due to the change in business climate surrounding New York City are the major reasons for this impairment charge. Finally, the net goodwill of $718,000 resulting from the 1997 acquisition of ATM/Canterbury (Software Development Segment) was also written off. 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 2002, goodwill has been assigned to reporting units for purposes of impairment testing and segment reporting as required by SFAS 142. A reconciliation of previously reported net (loss) income and the per share amounts, to the amounts adjusted for the exclusion of goodwill amortization, net of the related income tax effect, follows: For the Year Ended November 30, 2003 2002 2001 ---- ---- ---- Reported net loss $(4,054,994) $(2,017,851) $(7,159,855) Add back: goodwill amortization, net of tax effect - - 357,207 ----------- ----------- ----------- Adjusted net loss $(4,054,994) $(2,017,851) $(6,802,648) =========== =========== =========== Basic and diluted loss per share: Reported net loss $(2.16) $(1.16) $(4.25) Goodwill amortization - - .21 ------ ------ ------ Adjusted net loss $(2.16) $(1.16) $(4.04) ====== ====== ====== The changes in the carrying amount of goodwill for the years ended November 30, 2003 and 2002, by reportable segment, are as follows: Training Value Added and Hardware Software Consulting Reseller Development Corporate Total ---- ---------- ----------- ------------ --------- ------------- Balance as of December 1, 2001 $ - $ - $ - $4,162,604 $4,162,604 Reassigned per SFAS 142 3,803,852 358,752 - (4,162,604) - Goodwill acquired during year 29,500 - - - 29,500 Impairment losses for 2002 (583,723) - - - (583,723) ---------- ---------- ------------ ----------- --------- Balance as of November 30, 2002 $3,249,629 $ 358,752 $ - $ - $3,608,381 Impairment losses for 2003 (1,175,000) - - - (1,175,000) ---------- ---------- ------------ ----------- ---------- Balance as of November 30, 2003 $2,074,629 $ 358,752 $ - $ - $2,433,381 =========== ========== ============= ========== -=========
7. Income Taxes ================= The provision/(benefit) for income taxes for the years ended November 30, 2003, 2002, and 2001 is as follows: 2003 2002 2001 ---- ---- ---- Current: Federal $ - $ (41,000) $ - State 17,000 (36,000) 83,000 ------ --------- ------ Total current provision/(benefit) 17,000 (77,000) 83,000 ------ --------- ------ Deferred: Federal (272,000) (269,000) (2,099,000) State (26,000) (50,000) (64,000) -------- --------- ---------- (298,000) (319,000) (2,163,000) Beginning balance adjustment- valuation allowance 763,000 642,000 - ------ --------- ------ Total deferred provision/(benefit) 465,000 323,000 (2,163,000) ------ --------- ----------- Total income tax provision/(benefit) 482,000 246,000 (2,080,000) Less: income tax provision/(benefit) from discontinued operations 6,000 9,000 (60,000) ------ --------- ------- Income tax provision/ (benefit) from continuing operations $476,000 $ 237,000 $(2,020,000) ======== ========= ============ In conjunction with the filing of our annual report on Form 10-K, we were required to reassess all significant estimates and judgments made in our financial statements. In performing our updated analysis of the realizability of our deferred tax assets, we considered continuing market uncertainties and our failure to meet budgeted revenues and operating results for the years ended November 30, 2003 and 2002. After considering all available evidence, we concluded that an increase to our valuation allowance for deferred tax assets was required. Accordingly, based upon our best estimate, we have recorded a non-cash charge in the fourth quarter of Fiscal 2003 of $763,000 to increase our valuation allowance for our deferred tax assets. We went through this same reassessment process in conjunction with the filing of Form 10-K for the prior Fiscal 2002 year and recorded a non-cash charge in the fourth quarter of Fiscal 2002 of $642,000. The reconciliation of the expected provision/(benefit) at the U.S. Federal statutory tax rate to the actual provision (benefit) recorded for the years ended November 30, 2003, 2002 and 2001 is as follows: 2003 2002 2001 --------- --------- --------- Expected tax (benefit) at statutory rates $(1,215,000) $(602,000) $(3,069,000) Effect of state taxes, net (9,000) (74,000) (566,000) Permanent differences 207,000 - 788,000 Valuation allowances 1,499,000 922,000 767,000 ----------- --------- ----------- Total $482,000 $246,000 $(2,080,000) ========= ======== =========== Significant components of the Company's tax assets and liabilities as of November 30, 2003 and 2002 are as follows: 2003 2002 ---- ---- Deferred tax assets: Allowance for doubtful accounts $ 109,000 $ 154,000 Expenses deferred for tax reporting purposes 85,000 185,000 Deferred tax depreciation - 74,000 Deferred tax amortization of goodwill 935,000 1,021,000 Loss carryovers 4,627,000 3,709,000 --------- --------- Deferred tax assets before valuation allowance 5,756,000 5,143,000 Valuation allowance (3,788,000) (1,883,000) ---------- --------- Deferred tax assets (net of valuation allowance) $1,968,000 $3,260,000 ---------- --------- 2003 2002 ---- ---- Deferred tax liabilities: Gain recognized in financial statements deferred for income tax purposes $1,118,000 $1,935,000 Tax depreciation in excess of book depreciation 16,000 - Tax amortization in excess of book amortization 75,000 101,000 ---------- --------- Total deferred tax liabilities 1,209,000 2,036,000 ---------- --------- Net deferred tax assets $ 759,000 $1,224,000 ========== ========== At November 30, 2003, the Company had loss carryforwards of $9,610,000 for federal income tax reporting purposes and $14,315,000 for state income tax reporting purposes. Future expiration dates of federal loss carryforwards are as follows: $835,000 in 2007, $3,665,000 in 2012, $335,000 in 2021 and $1,715,000 in 2022 and $3,060,000 in 2023. State loss carryforwards expire between 2007 and 2010. 8. Long-Term Debt =================== November 30, Long-term obligations consist of: 2003 2002 ---- ---- Term loan $ - $1,025,000 Note payable for acquisition 800,000 800,000 Capital lease obligations 34,589 23,841 Notes payable - equipment 117,835 243,664 -------- ---------- 952,424 2,092,505 Less: Current maturities (889,490) (882,880) -------- ---------- $ 62,934 $1,209,625 ========= ========== As of November 30, 2003, the Company had no bank debt and began the process of renegotiating its lending relationship with Commerce Bank. While renegotiating the current loan agreement, the Company incurred no bank fees and was precluded from borrowing under the existing revolving loan agreement. As a subsequent event, in February, 2004 the Company and Commerce Bank agreed to an amended loan agreement. The new agreement calls for a two-year, $1,500,000 revolving working capital line of credit collateralized by trade accounts receivable and inventory. The loan carries an interest rate of the prime rate plus one half of one percent (1/2%) and matures on May 1, 2005. The Bank's debt is secured by substantially all of the assets of the Company and requires compliance with covenants which include the maintenance of certain financial ratios and amounts. The Company is restricted by its bank from paying cash dividends on its common stock. As of November 30, 2003, the Company was in breach of the minimum tangible net worth covenant of its loan agreement, but has received a waiver of default from the Bank. As part of the purchase price paid for the acquisition of Usertech in September, 2001, the Company agreed to pay $1,200,000 to the seller over three years at an annual amount of $400,000 plus accrued interest at 7% per annum on the outstanding balance. On August 4, 2003, the Company initiated mandatory binding arbitration proceedings against Ceridian Corporation, the previous owner of Usertech/Canterbury, as required in the Stock Purchase Agreement between the parties. As a result of this pending arbitration and the extent of the damages claimed, the Company has withheld the scheduled $400,000 principal payment of the note to payable to Ceridian, as well as accrued interest of $56,000 due on September 28, 2003, as the damages sought far outweigh the note payable to them. The disputed $800,000 still owed plus accrued interest are classified as part of the current portion of long-term debt as of November 30, 2003 (see Note 9). 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 November 30, 2003, the note payable had an outstanding balance of $61,235. Aggregate fiscal maturities on long-term debt, exclusive of obligations under capital leases, are $878,000 in 2004; $17,000 in 2005; and $15,000 in 2006, and $8,000 in 2007. The carrying value of the long-term debt approximates its fair value. Capital lease obligations are for certain equipment leases which expire through fiscal year 2004. 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 November 30, 2003: Total minimum lease payments through November 30, 2004 $16,436 Total minimum lease payments through November 30, 2005 16,436 Total minimum lease payments through November 30, 2006 9,588 ------- Total minimum lease payments 42,460 Less amount representing interest (7,871) ------- Present value of long-term obligations under capital leases $34,589 ======= 9. Commitments and Contingencies ================================== The Company leases office space for training center locations and administration purposes under various noncancelable operating leases at five different locations. All of the leases have options to renew. Future minimum rental payments under the leases are: $298,000 in 2004; $220,000 in 2005; $144,000 in 2006; and $0 beyond 2006. Rent expense for the years ended November 30, 2003, 2002 and 2001 was $1,363,000, $1,449,000, and $1,303,000, respectively. During the fourth quarter of Fiscal 2003, the Company surrendered $190,000 in security deposits for four facility leases in conjunction with the simultaneous lease termination of these leases. The Company was able to reduce long-term facility lease obligations, including common area maintenance, utilities, insurance and taxes, commitments by approximately $4,100,000 as a result of these lease termination agreements. The Company leases equipment for training and administrative purposes under various non-cancelable operating leases. Future minimum rental payments under lease are: $69,000 in 2004; $42,000 in 2005; $38,000 in 2006 and $25,000 in 2007, and $17,000 in 2008. The Company executed employment agreements dated June 1, 2001 between the Company and Mr. Kevin J. McAndrew and the Company and Mr. Stanton M. Pikus. Each employment agreement is for a period of five years. Each sets forth various services to be performed. Each employee shall receive an annual salary of $245,000 with annual cost of living increases tied to a nationally recognized index, as set forth by the Board of Directors from time to time. These employment agreements supercede and replace the prior employment agreements, including the cancellation of bonus opportunities which were to be payable through December 1, 2003. These agreements also include a non- competition prohibition for a period of three years after employment has been terminated. On December 1, 2001 the Company executed a five-year employment agreement between the Company and Ms. Jean Pikus. Ms. Pikus shall receive an annual salary of $150,000 with annual cost of living increases tied to a nationally recognized index, as set forth by the Board of Directors from time to time. The agreement also includes a non-competition prohibition for a period of three years after employment has been terminated. On March 1, 2003 Canterbury's corporate management team, inclusive of the Chairman, President and Vice President, voluntarily reduced their present salaries by 8%. This is in line with a previously instituted 8% salary reduction at one of the Company's largest subsidiaries. On August 18, 2003, on the recommendation of Mr. Frank Cappiello, the Chairman of the Compensation Committee of the Board of Directors, the Chairman, President and Vice President agreed to continue their voluntary 8% salary cuts through November 30, 2003 even though they have employment contracts in place. In lieu of the cash lost they were offered a block of restricted common stock on which they must be personally responsible for the applicable federal and state income taxes. Due to the restrictions on the sale of the stock, the stock was valued at 50% of the closing price on Nasdaq on the day prior to this Board Resolution and its acceptance by the three aforementioned individuals. Due to this discount, the Company has agreed with Nasdaq's requirement to "lock-up" these 103,338 shares until the shareholders have given their approval to the issuance. They cannot be sold, voted or be entitled to dividends until that time. However, if at any time prior to the issuance of the aforementioned Proxy, 51,669 of the 103,338 shares are returned to the Company, then no Proxy or shareholder approval will be required, and this matter will be resolved. Or in the alternative, if the 51,669 shares are paid for at the higher of the closing bid price at the date of issuance or the closing bid price on December 16, 2003, then this matter will also be resolved and no Proxy or shareholder approval will be required. A charge of $77,000 was made during the third quarter to reflect the cost of this stock. The corporate management team continues to receive its reduced rate of cash pay as of the date of this filing. On August 4, 2003, the Company initiated mandatory binding arbitration proceedings against Ceridian Corporation, the previous owner of Usertech/Canterbury, as required in the Stock Purchase Agreement between the parties. The Company's claims arise from the September 2001 purchase of User Technology Services, Inc. from Ceridian. Canterbury is making various claims ranging from breach of contract/warranty to actual/legal fraud, fraudulent concealment, constructive/equitable fraud, and negligent/misrepresentation. Ceridian Corporation has denied the allegations set forth by the Company and has instituted a counterclaim in the arbitration proceedings. Ceridian is claiming breach of a sublease agreement by Canterbury for office space ($76,000) and acceleration of a note payable of $800,000. Canterbury had denied the allegations set forth in the counterclaim. In order to pursue its claims, Canterbury will sustain ongoing legal and filing fees and there is no assurance that the aforementioned arbitration will result in a favorable outcome for Canterbury. 10. Senior Convertible Debt ============================ On June 3, 2003 the Board of Directors of Canterbury approved a private placement for the Company which was overwhelmingly ratified by 95.21% of the shareholders who voted on the proposal on November 24, 2003. Ten units of 7 3/4% Subordinated Convertible Promissory Notes at $35,500 each were issued representing total proceeds to the Company of $355,000. The notes are convertible into Canterbury restricted stock at $.355 per share. The notes, if not converted into restricted stock before then, mature at June 2, 2006 and the entire loan amount must be repaid at that time. These notes were subordinate to our $1,500,000 revolving working capital line of credit with Commerce Bank (seen Note 8). 11. Defined Contribution Plan =============================== In 1993, the Company established a 401(k) Plan for its participating employees to supplement their retirement income. Participation in the plan is open to all employees who have completed one year of service (twelve consecutive months). One thousand hours of service is required during the first year of service. By payroll deduction, employees can contribute to the Plan from 1% to 15% of their total gross compensation. The Company had matched 50% of the first 8% of employee salary deferrals through 2002. This match was made in restricted Company common stock based upon the value of the stock each December 31st. The employer match is completely discretionary and can be changed by the employer in subsequent years to be higher or lower. No match was made for the 2003 plan year. The value of the employee match expensed in 2003, 2002, and 2001 was: $211,030, $82,099, and $83,363, respectively (for the previous plan year). 12. Stock Options and Awards ============================= The Company has one stock option plan, the 1995 Non-Qualified Stock Option Plan, covering 440,477 shares of common stock ("1995 Plan"). As of November 30, 2003, the Company had issued 295,599 shares under the 1995 Plan. In addition, the Company granted 23,000 stock options outside the plan during Fiscal 2002. There were 144,878 shares remaining for issuance in connection with future stock options that may be granted. Options granted inside the plan are exercisable immediately and are issued at market price. A summary of Canterbury's stock option activity and related information for the years ended November 30 is as follows: 2003 2002 2001 ---- ---- ---- Number of shares under stock options: Outstanding at beginning of year 302,607 306,833 311,265 Granted 50,000 23,000 86,786 Exercised - - - Canceled (34,008) (27,226) (91,218) Outstanding and exercisable at end of year 318,599 302,607 306,833 Weighted average exercise price: Granted $ .75 $ 6.32 $ 7.77 Exercised $ - $ - $ - Canceled $9.85 $17.43 $25.06 Outstanding and exercisable at end of year $8.76 $10.21 $13.72 Information with respect to stock options outstanding and exercisable at November 30, 2003, is as follows: Options Outstanding and Exercisable Range of Number Outstanding Weighted Average Weighted Average Exercise Price at 11/30/03 Remaining Life in Years Exercise Price -------------- ----------- ----------------------- ---------------- $.75 50,000 4.70 $.75 $3.72 - $10.50 158,228 1.48 $5.59 $10.92 - $27.93 110,373 1.19 $1.94 SFAS No. 123, amended by SFAS Statement No. 148, requires pro forma disclosure under the fair value method of net income and income per share when stock options are granted to employees and directors. An expense charge to earnings is required under the fair value method when stock options are granted to independent contractors. The fair value for options was estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because Canterbury's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. The fair weighted average value of options granted in each year and assumptions used in estimating fair value under the Black-Scholes model are as follows: 2003 2002 2001 ---- ---- ---- Estimated fair value of options granted $24,990 $79,432 $372,590 ======= ======= ======== Principal assumptions in applying the Black-Scholes valuation model: Expected life, in years 2.50 2.50 2.50 Risk-free interest rate 1.86% 3.30% 3.55% Expected volatility 1.00 .99 1.19 Expected dividend yield 0.00% 0.00% 0.00% The estimated weighted-average fair values at the grant date for stock option awards during Fiscal 2003, 2002 and 2001 were $0.50, $3.45, and $4.29 per option, respectively. For purposes of pro forma disclosures, the estimated fair value of options granted to employees and directors is amortized to expense over the options' vesting period. As discussed in Note 10, the executive officers of the Company received stock awards of 103,342 shares in Fiscal 2003. These stock awards had an estimated grant-date fair value of $39,000. An expense of $77,000 was recorded and charged to general and administrative expense in Fiscal 2003 based upon the intrinsic value of the stock awards under APB Opinion 25. Had compensation cost been determined based upon the fair value of stock and stock option awards at grant date consistent with SFAS No. 123, Canterbury's net income and income per share would have been reduced to the pro forma amounts indicated below: 2003 2002 2001 ---- ---- ---- Pro forma net loss: Net loss as reported $(4,054,994) $(2,017,851) $(7,159,855) Add: stock-based compensation costs included in reported net loss (net of tax effects of $13,199 for 2003) 64,440 - - Deduct: stock-based compensation costs under SFAS 123 (net of tax effects of $21,695, $0, and $149,036, respectively) (42,114) - (223,554) ----------- ----------- ----------- Pro forma net loss $(4,032,668) $(2,017,851) $(7,383,409) =========== =========== =========== Pro forma net loss per common share - basic and diluted Pro forma net loss per common share $(2.15) $(1.16) $(4.39) Net loss per common share - as reported (2.16) (1.16) (4.25) Pro forma shares unsed in calculation of pro forma loss per common share 1,876,300 1,742,500 1,682,800 The Company granted 50,000 stock options to directors during the year ended November 30, 2003. There were no stock options granted to employees or directors during the year ended November 30, 2002. Therefore, no pro forma adjustment to earnings is reported for the year. The Company granted 23,000 stock options to independent contractors during the year ended November 30, 2002. This resulted in a $57,201 charge to general and administrative expense for the year ended November 30, 2002 based upon the Black Scholes estimated fair value of these grants that vested through year end. An additional $22,221 charge to general and administrative expense was recorded in Fiscal 2003 through the completion of the one-year vesting period. 13. Stockholders' Equity ============================= In January 2002 the Company sold 6,697 shares of restricted common stock in a private placement to a non-affiliate. Total net proceeds were $15,000. During April and May 2002, the Company purchased 35,285 shares of its outstanding common stock for $250,323 and subsequently retired the purchased shares. 14. Related Party Transactions =============================== During Fiscal 2001, certain officers and directors of the Company purchased a 33% stock ownership in a corporation that was previously a subsidiary of the Company prior to the November 1996 sale by the Company of its 100% stock ownership in this corporation to an outside group. The Company holds note receivables in the amount of $3,760,098 from this corporation of which $3,636,000 pertains to notes originating on the November 1996 date of sale (see Note 4). The Company maintained the same level of security interest protection and the same debt amortization schedule. The Company earned $322,000, $395,000 and $408,000 of interest income from these notes in Fiscal 2003, 2002 and 2001, respectively. During the fourth quarter of Fiscal 2003, a 22% owner of this corporation passed away. After his death, that corporation purchased and retired his shares from his estate. As a result of this purchase and retirement of his shares, certain officers and directors of the Company now own 44% of this corporation. At November 30, 2003 and 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 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. 15. Advertising =================== The Company expenses advertising as incurred. Total advertising expenses included in the results of operations were $86,000, $201,000, and $287,000 for 2003, 2002, and 2001, respectively. 16. Investment Impairment ============================= At November 30, 2001, the Company held investment securities in public companies. For one of the public companies certain officers and directors of the Company have an ownership interest in the aggregate of approximately 18%. Management has estimated the fair value of this investment at November 30, 2001 at $0, and the cost at November 30, 2001 of $0 after impairment write down. During the fourth quarter of Fiscal 2001 the Company recorded an impairment charge of $2,562,000 related to the carrying value of the shares previously received from the public company. The Company's valuation of this investment was based upon the public company's two consecutive years of operating losses and its current lack of liquidity. This impairment charge is recorded in other expenses on the statement of operations. Other equity securities had a fair value of $0 at November 30, 2001, after impairment writedown. During the second quarter of Fiscal 2001, the Company recorded an impairment charge of $75,000 to writedown the value of these securities to $0. The Company did not realize any recovery of investment value in Fiscal 2003 and 2002 pertaining to the aforementioned Fiscal 2001 impairments. 17. Discontinued Operations ============================= During the fourth quarter of Fiscal 2003, the Company discontinued the operation of its technical staffing segment (DMI/Canterbury). The significant decline in demand for contract, full and part-time technical employees due to the economic downturn in the technology sector over the past several years was the major cause for this action. There was no gain or loss realized on the abandonment of this business segment. Historical financial data for the fiscal years ended November 30: 2003 2002 2001 ---- ---- ---- Revenues $398,850 $916,774 $1,474,855 Pretax income (loss) 17,908 (64,877) (258,438) Assets and liabilities as of November 30, 2003 included in consolidated balance sheet: Net receivable $7,290 Other assets 162 Accounts payable and accrued expenses 1,710 18. Unaudited Quarterly Financial Information ------------------------------------------------ 2003 First Second Third Fourth Total ----- ------ ----- ------- ----- Revenues $4,517,682 $5,296,470 $8,242,226 $4,327,916 $22,384,294 Gross profit 562,594 1,457,261 1,217,582 602,720 3,840,157 Income (loss) from continuing operations (987,279) 39,141 (217,970) (2,900,705) (4,066,813) Income (loss) from discontinued operations (14,740) 1,314 22,465 2,780 11,819 Net income (loss) (1,002,019) 40,455 (195,505) (2,897,925) (4,054,994) Earnings per share: Basic and diluted: Income (loss) from continuing operations $(.57) $.02 $(.12) $(1.41) $(2.17) Income (loss) from discontinued operations (.01) - .01 - .01 ------ ------ ------ ------- ------ Net income (loss) $(.58) $.02 $(.11) $(1.41) $(2.16) ======= ====== ===== ======= ====== Weighted average shares Basic and diluted 1,734,000 1,849,000 1,852,700 2,062,200 1,876,300
2002 First Second Third Fourth Total ----- ------ ----- ------- ----- Revenues $6,425,112 $9,384,925 $8,649,426 $5,573,184 $30,032,647 Gross profit 1,726,616 2,561,817 1,409,623 1,106,899 6,804,955 Income (loss) from continuing operations 100,948 375,985 (485,459) (1,935,436) (1,943,962) Loss from discontinued operations (25,717) (20,280) (596) (27,296) (73,889) Net income (loss) 75,231 355,705 (486,055) (1,962,732) (2,017,851) Earnings per share: Basic and diluted: Income (loss) from continuing operations $.06 $.21 $(.28) $(1.11) $(1.12) Loss from discontinued operations (.02) (.01) - (.01) (.04) ----- ---- ------- --------- ------- Net income (loss) per share $.04 $.20 $(.28) $(1.12) $(1.16) ====== ===== ====== ====== ======= Weighted average shares Basic 1,766,500 1,752,300 1,726,300 1,733,000 1,742,500 Diluted 1,774,500 1,772,100 1,726,300 1,733,000 1,742,500
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance at Charged to Beginning of Costs and Deduction/ Balance at Description Period Expenses Write-off End of Period ------------------------------ ------------ ---------- ----------- -------------- Year ended November 30, 2001: $194 $433 $175 $452 Accounts receivable allowances Year ended November 30, 2002: $452 $131 $200 $383 Accounts receivable allowances Year ended November 30, 2003: $383 $(106) $6 $271 Accounts receivable allowances