FORM 10-Q
---------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 OR 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: Commission File Number:
February 28, 2002 0-15588
CANTERBURY CONSULTING GROUP, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2170505
(State of Incorporation) (IRS Employer Identification Number)
1600 Medford Plaza
128 Route 70
Medford, New Jersey 08055
(Address of principal executive offices)
Telephone Number: (609) 953-0044
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
X Yes No
---- ----
The number of shares outstanding of the registrant's common stock
as of the date of the filing of this report:
12,335,424 shares.
FORM 10-Q
PART 1 - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- -----------------------------
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
- ------
February 28, November 30,
2002 2001
----------- ------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 1,314,659 $ 664,850
Accounts receivable, net of allowance for
doubtful accounts of $432,000 and $452,000 3,960,071 5,728,970
Notes receivable - current portion 447,628 459,029
Prepaid expenses and other assets 316,478 239,470
Inventory, principally finished goods, at cost 240,662 826,851
Deferred income tax benefit 149,011 149,011
---------- ----------
Total Current Assets 6,428,509 8,068,181
Property and equipment at cost, net of
accumulated depreciation of $2,177,000 and
$2,038,000 1,222,250 1,315,942
Goodwill, net of accumulated amortization of
$1,234,000 4,192,104 4,162,604
Deferred income tax benefit 4,323,105 4,323,105
Notes receivable 6,864,392 6,966,743
Other assets 205,749 207,547
---------- ----------
Total Assets $23,236,109 $25,044,122
=========== ===========
See Accompanying Notes
2
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
February 28,
2002 November 30,
(Unaudited) 2001
----------- ------------
Current Liabilities:
Accounts payable - trade $ 856,067 $ 1,776,326
Accrued expenses 996,796 1,014,302
Unearned revenue 1,189,318 1,943,240
Income taxes payable 40,205 18,540
Current portion, long-term debt 844,578 873,439
----------- -----------
Total Current Liabilities 3,926,964 5,625,847
Long-term debt 1,945,799 2,145,183
Deferred income tax 2,947,131 2,947,131
----------- -----------
Total Liabilities 8,819,894 10,718,161
Commitments and contingencies
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000 shares
authorized; 12,335,000 and 12,469,000 issued 12,335 12,469
Additional paid-in capital 23,966,409 24,232,735
Retained earnings (deficit) (5,841,741) (5,916,972)
Notes receivable for capital stock - related
parties (3,720,788) (4,002,271)
----------- -----------
Total Stockholders' Equity 14,416,215 14,325,961
----------- -----------
Total Liabilities and Stockholders' Equity $23,236,109 $25,044,122
=========== ===========
See Accompanying Notes
3
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three-Months Ended February 28,
2002 2001
----------- ------------
(Unaudited) (Unaudited)
Service revenue $4,019,695 $2,757,856
Product revenue 2,729,299 3,139,446
---------- ----------
Total net revenue 6,748,994 5,897,302
Service costs and expenses 2,797,442 1,506,907
Product costs and expenses 2,144,662 2,442,531
---------- ----------
Total costs and expenses 4,942,104 3,949,438
Gross profit 1,806,890 1,947,864
Selling 597,509 651,342
General and administrative 1,323,391 1,215,856
---------- ----------
Total operating expenses 1,920,900 1,867,198
Other income/(expenses)
Interest income 169,744 176,616
Interest expense (47,681) (51,815)
Other 113,178 92,859
---------- ----------
Total other income 235,241 217,660
Income before income taxes and cumulative
effect of change in accounting principle 121,231 298,326
Income tax provision 46,000 127,000
---------- ----------
Income before cumulative effect of change
in accounting principle 75,231 171,326
Cumulative effect of change in accounting
principle - (213,088)
---------- ----------
Net income (loss) $ 75,231 $ (41,762)
========== ==========
See Accompanying Notes
4
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three-Months Ended February 28,
2002 2001
----------- ------------
(Unaudited) (Unaudited)
Net income (loss) per share and
common share equivalents
Net income (loss) $75,231 $(41,762)
Basic:
Income (loss) before cumulative
effect of change in accounting
principle $.01 $ .02
Cumulative effect of change in
accounting principle - (.02)
---- -----
Net income (loss) $.01 $ -
==== =====
Diluted:
Income (loss) before cumulative
effect of change in accounting
principle $.01 $ .02
Cumulative effect of change in
accounting principle - (.02)
---- -----
Net income (loss) $.01 $ -
==== =====
Weighted average number of common
shares - basic 12,366,000 10,685,700
========== ==========
Weighted average number of common
shares -diluted 12,422,000 11,097,200
========== ==========
See Accompanying Notes
5
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 2002 AND FEBRUARY 28, 2001
February 28, February 28,
2002 2001
----------- ------------
(Unaudited) (Unaudited)
Operating activities:
Net income (loss) $ 75,231 $ (41,762)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 138,370 255,804
Provision for losses on accounts receivable (12,042) 36,555
Cumulative effect of accounting change - 213,088
Deferred income taxes - 127,000
Receipt of stock for services - (372,000)
Other assets 1,798 (72,972)
Changes in operating assets, net of
acquisitions
Accounts receivable 1,780,965 1,601,983
Inventory 586,189 41,801
Prepaid expenses and other assets (77,008) (2,739)
Income taxes 21,665 (45,064)
Accounts payable (920,259) (1,359,147)
Accrued expenses (17,507) (181,284)
Unearned revenue (753,922) 138,140
----------- ----------
Net cash provided by operating activities 823,480 339,403
----------- ----------
Investing activities:
Capital expenditures, net (44,678) (18,131)
Other (29,500) -
----------- ----------
Net cash used in investing activities (74,178) (18,131)
----------- ----------
Financing activities:
Proceeds from issuance of common stock 15,000 -
Principal payments on long term debt (228,245) (366,525)
Proceeds from payments on notes receivable 113,752 95,514
----------- ----------
Net cash used in financing activities (99,493) (271,011)
----------- ----------
Net increase in cash 649,809 50,261
Cash, beginning of period 664,850 885,479
----------- ----------
Cash, end of period $1,314,659 $ 935,740
=========== ==========
See Accompanying Notes
6
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. Operations and Summary of Significant Accounting Policies
---------------------------------------------------------
Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant
to those rules and regulations. It is suggested that these unaudited
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's 10-K for the year
ended November 30, 2001. In the opinion of management, all adjustments (which
consist only of normal recurring accruals) necessary to present fairly the
financial position, results of operations and cash flows of all periods
presented have been made. Quarterly results are not necessarily indicative of
results for the full year.
Description of Business
-----------------------
Canterbury Consulting Group, Inc., formerly Canterbury Information
Technology, Inc., (hereinafter referred to as "the Registrant" or "the Company")
is engaged in the business of providing information technology products and
services to both commercial and government clients. Canterbury is comprised of
six operating subsidiaries with offices located in New Jersey, New York,
Connecticut, Maryland, Ohio, Minnesota, Georgia and Texas. The focus of the
Canterbury companies is to become an integral part of our clients IT solution,
designing and applying the best products and services to help them achieve a
competitive advantage and helping their employees to succeed. Our subsidiaries
offer the following technology solutions:
* distance learning solutions * hardware sales and support
* customized learning solutions * software development
for ERP and CRM * web development
* systems engineering and * technical and desktop applications
consulting training
* IT contractors and permanent * records and asset management systems
staffing * industry specific portals
* management training programs * help desk and service center support
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.
7
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(continued)
Stock Based Compensation
------------------------
The Company accounts for stock options under Accounting Principles Board
(APB) Opinion No. 25- Accounting for Stock Issued to Employees. The Company
discloses the pro forma net income and earnings per share effect as if the
Company had used the fair value method prescribed under SFAS No.123-Accounting
for Stock Based Compensation.
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
-------------------
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) 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. 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
8
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(continued)
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.
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
-----------------
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.
Inventories
-----------
Inventories are stated at the lower of cost or market utilizing a first-
in, first-out method of determining cost.
Earnings Per Share
------------------
Basic earnings per share is computed using the weighted average common
shares outstanding during the year. Diluted earnings per share considers the
dilutive effect, if any, of common stock equivalents (options).
Concentration of Risk
---------------------
As previously discussed, the Company is in the business of providing
information technology services. These services are provided to a large number
9
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(continued)
of customers in various industries in the United States. The Company's trade
accounts receivable are exposed to credit risk, but the risk is limited due to
the diversity of the customer base and the customers wide geographic dispersion.
The Company performs ongoing credit evaluations of its customers' financial
condition. The Company maintains reserves for potential bad debt losses and such
bad debt losses have been within the Company's expectations.
The Company maintains cash balances at a creditworthy bank located in the
United States. Accounts at the institution are insured by the Federal Deposit
Insurance Corporation up to $100,000. The Company does not believe that it has
significant credit risk related to its cash balance.
Reclassifications
-----------------
Certain reclassifications have been made to prior years balances in order
to conform to current presentations.
Recent Accounting Pronouncement
-------------------------------
The Financial Accounting Standards Board ("FASB") recently issued
Statement of Financial Accounting Standard No. 141 ("SFAS 141"), "Business
Combinations", and Statement of Financial Accounting Standard No. 142 ("SFAS No.
142"), "Goodwill and Intangible Assets". SFAS No. 141 is effective for all
business combinations completed after June 30, 2001. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001 with early adoption permitted
for fiscal years beginning after March 15, 2001. However, certain provisions of
SFAS 142 apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. Major provisions of these Statements
are as follows:
1. All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before July 1,
2001.
2. Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented, or exchanged, either individually or as
part of a related contract, asset, or liability.
3. Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective with the adoption
of SFAS 142, all previously recognized goodwill and intangible assets with
indefinite lives will no longer be subject to amortization.
4. Effective with the adoption of SFAS 142, goodwill and intangible assets
with indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.
5. All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
10
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(continued)
The Company has adopted SFAS 142 effective at December 1, 2001. Goodwill
has been amortized at approximately $480,000 annually (or $120,000 quarterly) in
prior periods. Therefore no goodwill amortization was recorded in the quarter
ended February 28, 2002 and none will be recorded in future periods.
The Company will complete the transition impairment test in accordance
with SFAS 142 during the next fiscal quarter. Currently it is Management's
expectation that the testing will not result in any impairment charges.
2. Acquisitions
------------
On September 28, 2001, the Company completed the acquisition of User
Technology Services, Inc. ("Usertech") with an effective date of September 1,
2001. The purchase of 100% of the outstanding shares of Usertech common stock
was accounted for using the purchase method of accounting. The Company paid
$2,350,000 in cash; $1,200,000 in notes payable over three years, plus the
assumption of $851,000 in liabilities.
Usertech provides e-learning support, Enterprise Resource Planning (ERP)
and Customer 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 four operating segments and the corporate
office. The operating segments are: training and consulting, value added
hardware reseller, technical staffing and software development. Summarized
financial information for the three months ended February 28, 2002 and February
28, 2001, for each segment, is as follows:
Value
Training Added
and Hardware Technical Software
2002 Consulting Reseller Staffing Development Corporate Total
- ---- ---------- -------- -------- ----------- --------- -----
Revenues $3,695,813 $2,639,049 $323,882 $90,250 $ - $6,748,994
Income before
taxes (83,059) 274,595 58,771 13,189 (142,265) 121,231
Assets 7,241,272 1,199,945 308,415 167,322 14,319,155 23,236,109
Interest income 460 - - - 169,284 169,744
Interest expense 26,602 23 - 1,059 19,997 47,681
Depreciation and
amortization 118,594 5,081 5,274 3,893 5,528 138,370
11
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(continued)
Value
Training Added
and Hardware Technical Software
2001 Consulting Reseller Staffing Development Corporate Total
- ---- ---------- -------- -------- ----------- --------- -----
Revenues $2,278,268 $3,076,403 $479,588 $63,043 $ - $ 5,897,302
Income before
taxes 201,612 393,164 (51,043) 4,749 (250,156) 298,326
Assets 8,784,263 4,392,131 1,171,235 292,809 14,290,061 28,930,499
Interest income - 4 - - 176,612 176,616
Interest expense - 33 - - 51,782 51,815
Depreciation and
amortization 111,103 9,402 5,682 5,852 123,765 255,804
4. Property and Equipment
----------------------
Property and equipment consists of the following:
February 28, November 30,
2002 2001
----------- -----------
Machinery and equipment $2,298,465 $2,253,787
Furniture and fixtures 566,576 566,576
Leased property under capital leases
and leasehold improvements 533,834 533,834
---------- ----------
3,398,875 3,354,197
Less: Accumulated depreciation (2,176,625) (2,038,255)
---------- ----------
Net property and equipment $1,222,250 $1,315,942
========== ==========
Depreciation expense for the period ended February 28, 2002 and February
28, 2001 was $138,000 and $132,000, respectively.
5. Notes Receivable
----------------
The Company holds a note receivable with a remaining balance in the amount
of $2,597,826 at February 28, 2002. This note was received in November 1995 as
part of the consideration for the sale of a former subsidiary. The Company is
scheduled to receive monthly payments of $33,975 inclusive of interest at 7.79%
per year through November 2005 and a balloon payment of $1,707,000 in December
2005.
In addition, the Company held notes receivable assets from related parties
in the aggregate amount of $4,713,093 at February 28, 2002. These notes have
12
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(continued)
interest terms that average 8.5% per year and are scheduled to mature at various
dates through December 2006.
6. Long-Term Debt
--------------
February 28, November 30,
2002 2001
----------- -----------
Long-term obligations consist of:
Term loan $1,250,000 $1,325,000
Revolving credit line - 100,000
Note payable for acquisition 1,169,656 1,169,656
Capital lease obligations 66,343 81,743
Notes payable - equipment 304,378 342,223
---------- ----------
2,790,377 3,018,622
Less: Current maturities (844,578) (873,439)
---------- ----------
$1,945,799 $2,145,183
========== ==========
The Company's outstanding amount owed under the revolving credit line with
Chase Bank was refinanced in May, 2001 by establishing a commercial lending
relationship with Commerce Bank, N.A. (the Bank). As of the date of the
refinancing, approximately $883,000 was paid to Chase in full satisfaction of
the Company's outstanding obligations, out of the proceeds of a $1,500,000 five-
year term loan from Commerce.
As part of the refinancing, the Company also secured a two-year $2,500,000
working capital line of credit with the Bank collateralized by trade accounts
receivable and inventory. $1,500,000 was borrowed in conjunction with the
acquisition of User Technology Services, Inc. ("Usertech") on September 28, 2001
and through the date of this filing has been repaid in full. Both loans carry
an interest rate of the prime rate plus 1%.
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. The Company remains in full
compliance with all of the financial covenants of its loan agreement with 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 the
next three years at an annual amount of $400,000 plus accrued interest at 7% per
annum on the outstanding balance. Also as part of the purchase agreement, the
seller agreed to guarantee the collection of the acquired accounts receivable
13
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(continued)
with a 10% risk sharing threshold by Canterbury. The Company has the right in
the first year after the acquisition to offset the guaranteed portion of any
uncollectible receivable against the first $400,000 payment scheduled to be made
during September, 2002. As of April 15, 2002 the Company has notified the
seller and put back $30,344 against the note payment. The Company originally
had until March 26, 2002 to put the uncollected accounts receivable back to the
seller. During April, 2002 the Company and seller mutually agreed to extend the
deadline to May 26, 2002.
In conjunction with the purchase of 100% of the stock of Usertech, the
Company purchased computer equipment from the seller valued at $364,000 through
issuance of a note payable over three years with interest at an annual rate of
3.75%.
At February 28, 2002, the note payable had an outstanding balance of
$304,378.
Aggregate fiscal maturities on long-term debt, exclusive of obligations
under capital leases, are approximately $695,000 in 2002; $843,000 in 2003;
$761,000 in 2004; $300,000 in 2005; and $125,000 thereafter.
The carrying value of the long-term debt approximates its fair value.
7. 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.
Year ending November 30, 2002 $50,581
Year ending November 30, 2003 and thereafter 21,377
-------
Total minimum lease payments 71,958
Less amount representing interest (5,615)
-------
Present value of long-term obligations under capital leases $66,343
=======
8. Related Party Transactions
--------------------------
At February 28, 2002 and November 30, 2001, the total notes receivable
plus accrued interest for the sale of Company common stock to corporate
officers, corporate counsel and certain consultants totaled $3,721,000 and
$4,002,000, respectively. The 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%. At February 28, 2002, $1,719,000 of the notes are recourse and
$2,002,000 are non-recourse.
14
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(continued)
During Fiscal 2001, certain officers and directors of the Company
purchased a 33% ownership interest in a corporation which owns 100% of the stock
of a corporation which has notes payable to the Company in the amount of
$4,713,093 at February 28, 2002 from an owner group who purchased the business
from the Company in 1996. The Company maintained the same level of security
interest protection and the same debt amortization schedule. The Company earned
$408,000 of interest income from these notes in Fiscal 2001, and $106,000 of
interest income in the three months ended February 28, 2002.
9. Stock Listing
-------------
On February 15, 2002 the Company was notified by Nasdaq that it had until
May 15, 2002 to come into compliance with their minimum $1.00 per share
requirement for continued inclusion on their National Market listing. The
Company is in full compliance with the remaining listing requirements of
Nasdaq's Maintenance Standard #1. If the Company fails to comply with the
minimum price requirements by not trading at a $1.00 per share for a minimum of
10 consecutive trading days before May 15, 2002, the Company will either file an
appeal or will apply to transfer its securities to the Nasdaq Small Cap Market.
Item 2. Management's Discussion of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
Working capital at February 28, 2002 was $2,501,000 an increase of
$59,000 since November 30, 2001. The Company's cash position increased by
$650,000 during the first quarter due primarily to the liquidation of accounts
receivable. Receivables decreased by approximately $1,800,000 from year end due
to strong collection efforts and a reduced level of revenue in the quarter as
compared to the fourth quarter of Fiscal 2001. Inventory reduced by $586,000
from year end due to the fact that several significant hardware orders that were
in transit at November 30, 2001 were shipped during December 2001. The amount
of inventory related to these shipments totaled $653,000. In conjunction with
these transactions, approximately $775,000 in deferred revenue was also
recorded.
The Company's outstanding amount owed under the revolving credit line with
Chase Bank was refinanced in May, 2001 by establishing a commercial lending
relationship with Commerce Bank, N.A. (the Bank). As of the date of the
refinancing, approximately $883,000 was paid to Chase in full satisfaction of
the Company's outstanding obligations, out of the proceeds of a $1,500,000 five-
year term loan from Commerce.
As part of the refinancing, the Company also secured a two-year $2,500,000
working capital line of credit with the Bank collateralized by trade accounts
receivable and inventory. $1,500,000 was borrowed from this line in conjunction
15
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(continued)
with the acquisition of User Technology Services, Inc. ("Usertech") on September
28, 2001, and through the date of this filing has been repaid in full. Both
loans carry an interest rate of the prime rate plus 1%.
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. The Company remains in full
compliance with all of the financial covenants of its loan agreement with 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 the
next three years at an annual amount of $400,000 plus accrued interest at 7% per
annum on the outstanding balance. Also as part of the purchase agreement, the
seller agreed to guarantee the collection of the acquired accounts receivable
with a 10% risk sharing threshold by Canterbury. The Company has the right in
the first year after the acquisition to offset the guaranteed portion of any
uncollectible receivable against the first $400,000 payment scheduled to be made
during September, 2002. As of April 15, 2002 the Company has notified the
seller and put back $30,344 against the note payment. The Company originally
had until March 26, 2002 to put the uncollected accounts receivable back to the
seller. During April, 2002 the Company and seller mutually agreed to extend the
deadline to May 26, 2002.
Management believes that continued positive cash flow contributions from
the Company's operating subsidiaries will be sufficient to cover cash flow
requirements for Fiscal 2002. There was no material commitment for capital
expenditures as of February 28, 2002. Inflation was not a significant factor in
the Company's financial statements.
Cash flow from operating activities for the quarter ended February 28,
2002 was $823,000. This represents an increase of $484,000 over the same period
from the prior year. The cumulative cash flow from operating activities for the
six months ended February 28, 2002 has been approximately $1,800,000. Strong
collections and company-wide cost containment measures contributed to the solid
cash flow results. The Company's February 28, 2002 current ratio improved to
1.64:1.00 versus 1.43:1.00 at November 30, 2001. As of the date of this report,
the Company has $2,500,000 availability on its revolving line of credit, subject
to its receivable and inventory levels.
With anticipated strong operating cash results, the Company intends to
continue to reduce long term bank debt, help fund acquisitions and invest in
secure interest bearing investments.
16
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(continued)
Results of Operations
- ---------------------
Revenues
--------
Total revenues for the three months ended February 28, 2002 increased by
$852,000 (14%) over the comparable three-month period in Fiscal 2001. Service
revenue increased by $1,262,000 (46%) in Fiscal 2002 versus Fiscal 2001. The
increase is the net result of the additional revenue of Usertech/Canterbury of
approximately $2,300,000 recorded in the first quarter of Fiscal 2002 and a
reduction of revenues from existing businesses of approximately $1,000,000.
Usertech/Canterbury was acquired in September, 2001 and hence no revenue was
reflected during the first quarter of Fiscal 2001. The reduction in revenue
from existing businesses was due to the negative impact that the terrorist
attacks of September 11 had on our training business in the Metro New York City
area. Many classes were cancelled, and there was very little sales activity for
the five months following. Several of our largest customers were located at
Ground Zero. Consulting assignments were delayed or cancelled due to the chaos
in and around New York City. The Company's business interruption insurance
policy provided limited relief to the economic impact of the terrorist attacks.
Proceeds from the policy netted the Company approximately $85,000, which was
received in the first quarter of Fiscal 2002 and recorded as Other Income.
Even prior to September 11, 2001, the economic downturn in the technology
sector had softened demand for certain training and consulting products during
2001. Several large clients had reduced their training budgets in the second
half of the year in response to their own fiscal situations. New software
rollouts were delayed and application and technical training revenues suffered
during the year as a result. As the second quarter of Fiscal 2002 progresses,
the Company is seeing continuing signs that the level of activity by our
customers is beginning to improve. The New York City client base is regrouping
and the amount of training and consulting opportunities are increasing. The
Company is working to expand its sales presence in this market to capture the
apparent pent up demand caused by the soft fourth quarter of Fiscal 2001 and
first quarter of Fiscal 2002. Also, the acquisition of Usertech/Canterbury
provides the Company with even more expertise in distance learning. All of the
Company's training subsidiaries are beginning to work together to blend existing
course content with e-learning delivery capabilities. For clients in and around
New York City, as well as the rest of the world, the Company will have the
capacity to provide a distance learning solution to those who may choose not to
attend classroom training in the future.
Product revenue also declined in the first quarter of Fiscal 2002 by
$410,000 (13%) as compared to the three months ended February 28, 2001. Part of
the reason for the decline can also be traced to the terrorist attacks of
September 11, 2001. The Baltimore-Washington, D.C. market is the hub for much
of the Company's product sales. Again, like New York, many of our clients
delayed scheduled purchases while dealing with other pressing concerns such as
security. The indications are that purchasing patterns are beginning to return
17
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
(continued)
to normal, and some of the early revenue shortfall may be recaptured in future
quarters.
Costs and Expenses
------------------
Total costs and expenses increased by $993,000 (25%) during the three
months ended February 28, 2002 as compared to the same period of Fiscal 2001.
Again the increase is the net result of the additional delivery costs associated
with the addition of Usertech ($1,574,000) offset by reduced products costs of
$300,000 and cost reductions in the services segment of approximately $280,000.
Overall gross profit percentage was 27% for the first quarter of Fiscal
2002 as compared to 33% in the first quarter of Fiscal 2001. The most
significant reason for the decline in margins was caused by the reduction in
training revenues (primarily in the Metro New York City area) coupled with the
relatively high fixed cost of delivery (classrooms, computers, instructors,
etc.). Service revenue margins for the three months ended February 28, 2002
were 30% as compared to 45% for the same period in Fiscal 2001. As training
revenue volume increases during the course of the year, these service margins
should improve.
Selling expenses for the three months ended February 28, 2002 decreased by
$54,000 (8%). Contributing to this net decrease was cost reductions in existing
businesses of $218,000 offset by the additional costs of Usertech/Canterbury for
the first quarter of Fiscal 2002 of $164,000. Reduction in sales staff for
DMI/Canterbury ($124,000) and CALC/Canterbury ($58,000) represented the largest
components of the cost reduction for existing businesses.
General and administrative expenses increased by $107,000 (9%) in Fiscal
2002 as compared to Fiscal 2001. Again the net increase is the result of the
additional costs of Usertech/Canterbury in Fiscal 2002 of $390,000 offset by
cost reductions in the other operating subsidiaries, comprised primarily of
staff related expenses ($90,000), reduced amortization expense ($120,000) and
lower bad debt expense ($49,000).
18
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings
- ------
None
Item 2 Changes in Securities
- ------
None
Item 3 Defaults Upon Senior Securities
- ------
None
Item 4 Submission of Matters to a Vote of Stock Holders
- ------
None
Item 5 Other Information
- ------
None
Item 6 Exhibits and Reports on Form 8-K
- ------ (a) Exhibits: None
(b) Reports on Form 8-K: None
19
FORM 10-Q
CANTERBURY CONSULTING GROUP, INC.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANTERBURY CONSULTING GROUP, INC.
---------------------------------
(Registrant)
By:/s/ Kevin J. McAndrew
---------------------------------
Kevin J. McAndrew
President and Chief Executive Officer
By:/s/ Kevin J. McAndrew
---------------------------------
Kevin J. McAndrew
Chief Financial Officer
April 15, 2002
20