FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: Commission File Number:
May 31, 1999 0-15588
CANTERBURY INFORMATION TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2170505
(State of Incorporation) (I.R.S. Employer Identification No.)
1600 Medford Plaza
Route 70 & Hartford Road
Medford, New Jersey 08055
(Address of principal executive office)
Telephone Number: (609) 953-0044
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
--- ---
The number of shares outstanding of the registrant's common
stock as of the date of the filing of this report: 8,698,022
shares.
FORM 10-Q
PART 1 - FINANCIAL INFORMATION
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Item 1. Financial Statements
CANTERBURY INFORMATION TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
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ASSETS
May 31,
1999 November 30,
(Unaudited) 1998
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Current Assets:
Cash and cash equivalents $ 587,479 $ 287,274
Accounts receivable, net 1,509,216 1,141,544
Notes receivable 349,765 341,268
Prepaid expenses and
other assets 1,550,598 1,494,001
Deferred income tax benefit 150,000 150,000
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Total Current Assets 4,147,058 3,414,087
Property and equipment
at cost, net of accumulated
depreciation and amortization
of $4,296,000 and $3,993,000 2,125,735 2,323,996
Goodwill net of accumulated amortization
of $2,128,000 and $1,910,000 8,775,120 8,993,805
Deferred income tax benefit 2,712,919 2,712,919
Notes receivable 7,821,318 7,994,641
Other assets 313,040 260,967
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Total Assets $25,895,190 $25,700,415
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See Accompanying Notes
FORM 10-Q
CANTERBURY INFORMATION TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
May 31,
1999 November 30,
(Unaudited) 1998
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Current Liabilities:
Accounts payable - trade $ 228,665 $ 357,100
Accrued expenses 247,764 231,743
Income taxes payable - 63,217
Unearned tuition income 1,033,405 954,128
Current portion, long-term
debt 976,877 1,738,565
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Total Current Liabilities 2,486,711 3,344,753
Long-term debt 2,640,075 2,640,075
Deferred income tax liability 2,964,369 3,115,801
Common stock, $.001 par value,
50,000,000 shares authorized;
8,698,000 and 6,421,000 issued 8,698 6,421
Additional paid in capital 18,712,836 17,580,522
Unrealized loss on securities
available for sale (343,507) (143,757)
Deficit (166,692) (436,100)
Less treasury shares, at cost (407,300) (407,300)
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Total Shareholders' Equity 17,804,035 16,599,786
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Total Liabilities and
Shareholders' Equity $25,015,190 $25,700,415
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See Accompanying Notes
FORM 10-Q
CANTERBURY INFORMATION TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income for the three-
month and six month periods ended May 31, 1999, and May 31, 1998,
are unaudited, but the Company believes that all adjustments
(which consist only of normal recurring accruals) necessary for a
fair presentation of the results of operations for the respective
periods have been included. Quarterly results of operations are
not necessarily indicative of results for the full year.
Three months ended Six months ended
May 31, May 31,
(Unaudited) (Unaudited)
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1999 1998 1999 1998
---- ---- ---- ----
Net revenues $3,518,806 $3,437,546 $6,320,936 $6,221,450
Costs and expenses 1,897,870 1,901,386 3,418,182 3,156,435
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Gross profit 1,620,936 1,536,160 2,902,754 3,065,015
Selling 458,528 487,391 876,414 1,007,562
General and
administrative 1,004,232 993,763 1,912,003 1,941,693
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Total operating
expenses 1,462,760 1,481,154 2,788,417 2,949,255
Other (income)/expenses
Interest income (169,473) (354,022) (340,422) (498,570)
Interest expense 92,870 104,086 183,498 196,927
Other (11,751) (16,701) (28,867) (104,261)
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Income before provision
for income taxes 246,530 321,643 300,128 521,664
Provision for income
taxes 20,000 80,411 30,720 130,416
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Net income $ 226,530 $241,232 $ 269,408 $391,248
========== ========= ========= =========
Basic earnings per share:
Basic
Net income per share $ .03 $ .04 $ .04 $ .07
======= ======= ======= ========
Weighted average
shares outstanding:
Basic 8,000,600 6,031,000 7,212,400 5,890,000
See Accompanying Notes
FORM 10-Q
CANTERBURY INFORMATION TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTHS ENDED MAY 31, 1999 AND MAY 31, 1998
May 31,1999 May 31,1998
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Operating activities:
Net income $ 269,408 $391,248
Adjustments to reconcile
net income to net cash provided
by/(used in) operating activities:
Depreciation and amortization 521,888 498,670
Provision for losses on
accounts receivable 5,610 9,000
Deferred income taxes (151,432) 66,945
Other noncash items, net (151,558) 62,307
Changes in operating assets
Accounts receivable (373,282) (254,107)
Prepaid expenses and
other assets (108,670) (296,595)
Income taxes (63,217) -
Accounts payable (128,435) (68,094)
Accrued expenses 16,021 (553,689)
Unearned tuition income 79,277 137,121
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Net cash used in
operating activities (84,390) (7,194)
Investing activities:
Capital expenditures, net (104,942) (207,609)
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Net cash used in
investing activities (104,942) (207,609)
Financing activities:
Proceeds from issuance
of common stock, net 1,086,399 -
Proceeds from long term debt - 143,982
Principal payments on long
term debt (761,688) (295,030)
Proceeds from payments
on notes receivable 164,826 189,775
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Net cash provided by
financing activities 489,537 38,727
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Net increase/(decrease) in cash 300,205 (176,076)
Cash, beginning of period 287,274 295,936
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Cash, end of period $ 587,479 $ 119,860
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See Accompanying Notes
CANTERBURY INFORMATION TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations and Summary of Significant Accounting Policies
Description of Business
Canterbury Information Technology, Inc. ("the Company")
provides information technology services through two wholly owned
subsidiaries. These services include computer training and software
development. The Company also offers management training through a
separate subsidiary.
Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and all of its subsidiaries. All material
intercompany transactions have been eliminated.
Stock Based Compensation
The Company has adopted SFAS No. 123- Accounting for Stock
Based Compensation. As provided by SFAS No. 123, the Company
accounts for stock options under Accounting Principles Board
(APB) Opinion No. 25-Accounting for Stock Issued to Employees.
The Company discloses the pro forma net income and earnings per
share effect as if the Company had used the fair value method
prescribed under SFAS No.123 (see Note 11).
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. The ultimate
outcome and actual results could differ from the estimates and
assumptions used.
Revenue Recognition
The Company records revenue at the time services are
performed or product is shipped.
Statement of Cash Flows
For purposes of the Statement of Cash Flows, cash refers
solely to demand deposits with banks and cash on hand.
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 5 years
Furniture and fixture 5 to 7 years
Intangible Assets
Goodwill is being amortized over twenty-five years using the
straight-line method.
The Company periodically evaluates whether the remaining
estimated useful life of intangibles may warrant revision or the
remaining balance of intangibles may require adjustment generally
based upon expectations of nondiscounted cash flows and operating
income.
Deferred Income Taxes
The Company utilizes the liability method to account for
income taxes. This method gives consideration to the future tax
consequences associated with the differences between financial
accounting and tax bases of assets and liabilities.
Earnings Per Share
Basic earnings per share is computed using the weighted
average common shares outstanding during the year. Diluted
earnings per share considers the dilutive effect, if any, of
common stock equivalents (options).
Recent Accounting Pronouncements
In fiscal 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130 "Reporting Comprehensive Income,"
which requires that an enterprise report, by major component and
as a single total, the change in its net assets during the period
from nonowner sources, the adoption of this statement in fiscal
1999 is not expected to have an impact on the Company's net
income or Stockholders' Equity. The FASB also issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related
Information," which establishes annual and interim reporting
standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and
major customers. Management has not completed its review of SFAS
No. 131, but does not anticipate that the adoption of this
statement will have a significant effect on the Company's
disclosures upon adoption in fiscal 1999.
Reverse Stock Split
On April 2, 1998, the Company's Board of Director approved a
one-for-three 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-3 reverse stock
split effected April 14, 1998.
Concentration of Risk
As previously discussed, the Company is in the business of
providing information technology services. These services are
provided to a large number of customers in various industries in
the United States. The Company's trade accounts receivable are
exposed to credit risk, but the risk is limited due to the
diversity of the customer base and the customers wide geographic
dispersion. The Company performs ongoing credit evaluations of
its customer's financial condition. The Company maintains
reserves for potential bad debt losses and such bad debt losses
have been within the Company's expectations.
The Company maintains cash balances at several large
creditworthy banks located in the United States. Accounts at
each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company does not believe that it
has significant credit risk related to its cash balance.
2. Property and Equipment
Property and equipment consists of the following:
May 31, November 30,
1999 1998
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Land, buildings and improvements $ 725,910 $ 725,910
Equipment 3,191,264 3,185,632
Furniture and fixtures 1,386,377 1,287,067
Leased property under capital
leases and leasehold improvements 1,118,495 1,118,495
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6,422,046 6,317,104
Less: accumulated depreciation (4,296,311) (3,993,108)
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Net property and equipment $ 2,125,735 $2,323,996
=========== ===========
Depreciation expense for 1999 and 1998 was $302,000 and
$279,000, respectively.
3. Long-Term Debt
May 31, November 30,
1999 1998
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Long-term obligations consist of:
Term loan $ 591,000 $1,221,000
Revolving credit line 2,774,620 2,774,620
Capital lease obligations 251,332 383,020
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3,616,952 4,378,640
Less: Current maturities (976,877) (1,738,565)
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$ 2,640,075 $2,640,075
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Outstanding amounts owed under the Company's term loan and credit line
facilities with its primary lender were due and payable at December 31,
1998. The Company and its lender have agreed to an extension of these
agreements through December 1, 1999, subject to reasonable legal fees. The
Company will continue to use its best efforts to replace its primary lender
prior to that time.
Subsequent to May 31, 1999 the Company has set aside $205,875 to further
reduce and prepay its bank term debt to $385,125. Based upon the terms of the
restructuring agreement executed on March 11, 1999 with its lender apprixmately
$220,000 of additional monies, received as proceeds from an April, 1999 Private
Placement, have also been set aside to reduce term debt. Once these payments
are applied, the total term debt outstanding as of July 15, 1999 would be
$165,125. The balance of the outstanding term debt and revolver are due on
December 1, 1999. The term debt and the revolving credit line accrue interest
at the prime rate plus 2.5% per annum.
The long term debt is secured by substantially all of the assets of the
Company and requires continued compliance with previously established
convenants which include: limits on capital expenditures, certain pre-
payments from excess cash flow as defined and the maintenance of certain
financial ratios and amounts. The Company is restricted by its primary lender
from paying cash dividends on its common stock.
Aggregate maturities on long-term debt, exclusive of obligations under
capital leases, are approximately $895,000 in 1999 and $2,470,000 in 2000.
The carrying value of the long-term debt approximates its
fair value.
4. Capital Leases
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 10.5% to 14.3% at their inception, as of May 1,
1995 and May 1, 1997 are as follows:
Year ending November 30, 1999 $128,989
Year ending November 30, 2000 72,619
Year ending November 30, 2001 43,055
Year ending November 30, 2002 and thereafter 37,969
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Total minimum lease payments 282,632
Less amount representing interest (31,300)
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Present value of long-term obligations
under capital leases $ 251,332
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5. Securities Available for Sale
At May 31, 1999 and November 30, 1998, the Company held
investment securities in a public company. Certain officers and
directors of the Company have an ownership interest in the public
company. Management has estimated the fair value of the
investment at May 31, 1999 at $117,500 based on discounted market
values due to the stock being thinly traded and volatile and has
classified the investment as available for sale. The investment
is included in prepaid expenses and other assets in the
accompanying balance sheet. The investment has a gross carrying
value of $461,007 and an unrealized loss of $343,507 at May 31,
1999. The Company did not sell any available for sale securities
during 1998.
6. Stockholder's Equity
On March 10, 1999 the Company completed a Private Placement
Offering for the issuance of 1,000,000 shares of common stock.
The Company has received proceeds of $600,000. The Company used
$500,000 in proceeds to repay amounts under the term loan as
discussed in Note 3. The remaining amounts are intended to be
used for further paydown of debt, general corporate purposes and
for working capital. In connection with the Private Placement
Offering described above, an independent third party received
200,000 shares of common stock as a finders fee. On April 20,
1999 the Company completed another Private Placement Offering for
the issuance of 850,000 shares of common stock. The Company has
received proceeds of $603,500. In conjunction with this second
Private Placement, an independent, third party received 150,000
shares of common stock as a finders fee.
Item 2. Management's Discussion of Financial Condition and
Results of Operations
Liquidity and Capital Resources
Working capital at May 31, 1999 was $1,660,000. This was an
increase of $1,590,000 over November 30, 1998, due primarily to
the two Private Placement Offerings completed during the second
quarter of the year.
Oustanding amounts owed under the Company's term loan and credit line
facilities with its primary lender were due and payable at December 31, 1998.
The Company and its lender have agreed to an extension of these agreements
through December 1, 1999, subject to reasonable legal fees. The Company will
continue to use its best efforts to replace its primary lender prior to that
time.
Subsequent to May 31, 1999, the Company has set aside $205,875 to further
reduce and prepay its bank term debt to $385,125. Based upon the terms of the
restructuring agreement executed on March 11, 1999 with is lender approximately
$220,000 of additional monies, received as proceeds from an April, 1999 Private
Placement have also been set aside to reduce term debt. Once these payments
are applied, the total term debt outstanding as of July 15, 1999 would be
$165,125. The balance of the outstanding term debt and revolver are due on
December 1, 1999. The term debt and the revolving credit accrue interest
at the prime rate plus 2.5% per annum.
During March and April 1999 the Company completed two
Private Placement Offerings with non-affiliates for the issuance
of 1,850,000 shares of common stock and the issuance of 350,000
shares as a finders fee, all with registration rights. The
Company has received total gross proceeds of $1,203,500. The
Company used $500,000 in proceeds to repay amounts under the term
loan. The remaining amounts are intended to be used for further
paydown of debt, general corporate purposes and for working
capital.
Management believes that positive cash flow contributions
from the Company's operating subsidiaries will be sufficient to
cover cash flow requirements for fiscal 1999. There was no
material commitment for capital expenditures as of May 31, 1999.
Inflation was not a significant factor in the Company's financial
statements.
Cash flow from continuing operations for the six months
ended May 31, 1999 was ($254,000). As is the case historically,
the Company believes that this trend will reverse itself before
year end.
General Description Of The Year 2000 Issue And The Nature
And Effects Of The Year 2000 On Information Technology (IT) And
Non-IT Systems
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have
date-sensitive software or embedded chips may recognize a date
using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in
similar normal business practices.
The Company began addressing the Year 2000 Issue in 1997 on
a decentralized basis at each of its subsidiaries. In 1998, the
Company began monitoring progress on a corporate level. Based on
assessments made since 1997, the Company determined that
modifications to or in limited cases replacement of computer
software and hardware was necessary to enable those systems to
operate properly after December 31, 1999. The Company presently
believes that with modifications to and replacement of existing
software and hardware, the Year 2000 Issue can be mitigated.
However, if such modifications and replacements are not made, or
are not completed timely, the Year 2000 Issue may have a material
impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves
the following four phases: assessment, remediation, testing, and
implementation. To date, the Company has completed its assessment
of all systems that could be significantly affected by the Year
2000. The assessment indicated that most of the Company's
significant information technology systems could be affected,
particularly the Company's registration/scheduling and accounting
systems. The assessment also indicated that software and hardware
(embedded chips) used in these applications were also at risk.
The software developed and distributed by ATM/Canterbury is Y2K
compliant. The Company's other training services are not at
risk.
Status Of Progress In Becoming Year 2000 Compliant, Including
Timetable For Completion Of Each Remaining Phase
The following estimates of completion percentages and dates are based
on the Company's best estimates. However, there can be no guarantee that
these dates can be achieved and actual results may differ. For its information
technology exposures, to date the Company is approximately 95% complete on the
remediation phase and completed its software reprogramming and replacement by
June 30, 1999. Once software is reprogrammed or replaced for a system, the
Company begins testing and implementation. These phases run concurrently
for different systems. To date, the Company has completed 100% of its testing
and has implemented 95% of its remediated systems. Completion of the testing
phase for all significant operating systems was completed by April 30, 1999,
with all remediated systems fully tested and implemented by September 1, 1999.
Nature And Level Of Importance Of Third Parties And Their
Exposure To The Year 2000
The Company has surveyed its significant vendors as to their Year 2000
compliance. Based on the nature of their responses, the Company does not need
to develop contingency plans.
Costs
The Company has utilized and will continue to utilize both
internal and external resources to reprogram, or replace, test,
and implement the software and operating equipment for Year 2000
modifications. Many of the program fixes were completed in
conjunction with other projects and had little incremental cost.
The Company estimates that incremental costs relating to Year
2000 projects to date approximate $25,000. These costs have been
expensed as incurred. The Company expects to spend less than
$50,000 on Year 2000 projects in fiscal 1999. Year 2000 costs are
difficult to estimate accurately and the projected cost could
change due to unanticipated technical difficulties, project
delays, and third party non-compliance, among other things.
Risks
Management of the Company believes that it has an effective
program in place to resolve the Year 2000 Issue in a timely
manner. As noted above, the Company has not yet completed all
necessary phases of its Year 2000 plan. Because of the range of
possible issues and the large number of variables involved, it is
impossible to quantify the potential cost of problems should the
Company or its trading partners not properly complete their Year
2000 plans and become Year 2000 compliant. Such costs and any
failure of compliance efforts could have a material adverse
effect on the Company. The Company believes that the most likely
risks of serious Year 2000 business disruption are external in
nature, including continuity of utility, telecommunication and
transportation services, and the potential failure of the
Company's customers due to their own non-compliance or the non-
compliance of their business partners. In the event the Company
does not properly complete its Year 2000 efforts or is affected
by the disruption of outside services, the Company could be
unable to take orders, distribute goods, invoice customers or
collect payments. In addition, disruptions in the economy
generally resulting from Year 2000 could have a material adverse
effect on the Company. The Company could be subject to litigation
for computer systems failure. The amount of potential liability
and lost revenue cannot be reasonably estimated at this time.
Contingency Plans
The Company is currently in process of developing contingency plans
to address the above Year 2000 risks as necessary. The Company plans to
evaluate the status of completion of its Year 2000 efforts by September 1,
1999 and to determine what contingency plans are necessary at that time. In
the normal course of business, the Company has contingency plans for
disruption of business events and intends to augment those plans
with specific Year 2000 considerations.
Results of Operations
Revenues
Revenues for the three months ended May 31, 1999 increased
by $82,000 (2%) over the comparable three-month period in fiscal
1998, due to increased sales of technical training products. For
the six months ended May 31, 1999, revenues increased by $100,000
(1%) over the same six-month period in 1998.
Costs and Expenses
Costs and expenses for the six months ended May 31, 1999
increased by $262,000 (8%) due primarily to an increase in labor. Costs
at CALC/Canterbury attributed to the higher cost of delivering technical
training products, plus research and development costs associated with the
creation of alternative delivery methods for the current instructor-led
training model.
Selling expenses for the six months ended May 31, 1999
decreased by $131,000 (13%) over the same quarter in fiscal 1998.
The decrease was due primarily to a reduction in marketing
expenses at CALC/Canterbury attributable to more cost effective
and efficient production and distribution of their monthly
training schedule.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings - No additional legal proceedings
were either initiated or brought against the Company
during the first fiscal quarter.
Item 2 Changes in Securities - None
Item 3 Defaults Upon Senior Securities - None
Item 4 Submission of Matters to a Vote of Security Holders -
None
Item 5 Other Information - Management Contracts - Extension
of employment contracts of Stanton M. Pikus and Kevin
J. McAndrew from 2001 to 2003 in order to provide continuity of
senior management as well as consideration for their waiver of
contractual bonus opportunity and salary increases in Fiscal 1998.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934,the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CANTERBURY INFORMATION TECHNOLOGY, INC.
--------------------------------------
(Registrant)
By/s/ Stanton M. Pikus
------------------------------------
Stanton M. Pikus
President
(Chief Executive Officer and duly
authorized signer)
By/s/ Kevin J. McAndrew
------------------------------------
Kevin J. McAndrew, C.P.A.
Chief Operating Officer,
Executive Vice President
(Chief Financial Officer and
duly authorized signer)
Dated: July 15, 1999