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 four operating subsidiaries with offices located in New Jersey, New York and Maryland. 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 * management training programs * customized learning solutions for ERP and CRM * web development * systems engineering and training consulting * technical and desktop applications * 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 is organized into two operating segments and the corporate office. The operating segments are: training and consulting and value added hardware reseller. A third segment, software development, was discontinued during 2004 and a fourth segment, technical staffing, was discontinued during 2003.
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.
During October, 2004 a group of investors (including officers and some outside board members) formed a private company (CCG Group, Inc.) with the intent of merging with the Company, purchasing all common stock from unaffiliated shareholders and then operating the business as a private company. CCG Group offered to buy the unaffiliated shares at $.40 per share, which represented a premium over the then current average closing price of Canterbury's common stock.
Since five of Canterbury's existing board members were going to be part of the CCG group, the board of directors determined that it would be appropriate to appoint a special committee to protect the interests of Canterbury's unaffiliated shareholders. The special committee was composed of two board members who were not employees of the company, who were not participants in the buyout proposal and who had no financial interest in the proposed merger different from Canterbury's unaffiliated shareholders generally. The special committee was authorized to exercise all of the powers of the board of directors with respect to the CCG merger offer and to investigate the terms of any proposed transaction, including the power to select and retain its own legal counsel and an independent financial advisor.
On October 29, 2004, the special committee recommended that Canterbury accept the proposal from CCG under the terms presented to it. Canterbury's board of directors ratified that action and authorized the preparation of necessary documentation for the transactions. On November 1, 2004, Canterbury publicly announced the proposed transaction.
In a meeting on November 16, 2004, the special committee and the Board of Directors of Canterbury unanimously (i) adopted and approved the Merger Agreement and the transactions contemplated thereby, including the merger, and (ii) recommended that the shareholders vote to approve the Merger Agreement.
Thus, Canterbury entered into a Merger Agreement, dated November 18, 2004, with CCG Group, Inc. Under the Agreement and Plan of Merger, Canterbury and CCG would merge if the holders of at least a majority of Canterbury's outstanding shares of common stock approved the Merger Agreement. The outstanding shares of Canterbury's common stock not owned by affiliates of CCG Group would have been converted into the right to receive an amount equal to $0.40 per share for Canterbury shares owned on the date the merger occurred, in cash, without interest. Persons associated with CCG Group, who held approximately 1,562,766 shares of Canterbury as of December 17, 2004, would not be entitled to convert their shares to cash or receive any consideration. After the merger, Canterbury would have been the surviving corporation under Pennsylvania law and would be privately held.
At the close of business on March 15, 2005, the Agreement and Plan of Merger of CCG Group, Inc. and Canterbury Consulting Group, Inc. dated November 18, 2004 was terminated due to the fact that it was not consummated by March 15, 2005. Canterbury Consulting Group, Inc. was delayed in obtaining shareholder approval of the merger on or prior to March 15, 2005, as was called for in the Merger Agreement.
The Agreement and Plan of Merger provided that, if it terminated due to Canterbury Consulting Group's inability to obtain shareholder approval, Canterbury Consulting Group would be responsible for the fees and expenses incurred by CCG Group, Inc. in connection with the transactions contemplated by the Agreement and Plan of Merger. Canterbury has paid CCG Group's claim for reimbursement of its fees and expenses as specified in the Agreement and Plan of Merger, which amounted to approximately $17,000.
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 Manager 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 purchased a Client Relationship Management (CRM) product to coordinate, track and measure the sales and marketing efforts of the entire sales staff.
The Company continually is searching for additional sales talent to help reverse the recent downward trend in training and consulting revenues. Through May, 2005 we have been modestly successful in this search. There is currently several sales positions that are vacant. One of our top priorities is to have these positions filled in order to take full advantage of the fall training season.
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 seven. 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 efforts with select channel partners.
CUSTOMIZED ERP AND CRM LEARNING SOLUTIONS
In September, 2001 the Company acquired User Technology Services, Inc. (Usertech), a twenty-five 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. The Company is currently negotiating a settlement with the former President of Usertech/Canterbury.
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. Canterbury anticipated that it would need to make a cash payment in settlement of certain claims and, on October 4, 2004 Canterbury wired $912,000 in cash to Ceridian Corporation in anticipation of a settlement of all claims. On October 27, 2004 Canterbury withdrew all of its claims in arbitration against Ceridian. The companies exchanged mutual releases.
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 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 - 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.
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 attempting to expand 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.
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, 2004, the Company, including all subsidiaries, had 139 employees: 53 full-time employees and 86 part-time employees. The Company believes that the relationship with its employees is satisfactory.
ITEM 2.
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 $440,000 in Fiscal 2005.
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
CALC/Canterbury Corp. 3,500 November 2006 200 Lanidex Plaza Parsippany, NJ 07054
CALC/Canterbury Corp. 2,300 November 2006 300 Lanidex Plaza Parsippany, NJ 07054 (classrooms only)
CALC/Canterbury Corp. 4,500 90-day notice (mutual) 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.
ITEM 3. LEGAL PROCEEDINGS ==========================
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. Canterbury anticipated that it would need to make a cash payment in settlement of certain claims and, on October 4, 2004 Canterbury wired $912,000 in cash to Ceridian Corporation in anticipation of a settlement of all claims. On October 27, 2004 Canterbury withdrew all of its claims in arbitration against Ceridian. The companies exchanged mutual releases.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS ========================================================
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ===============================================================================
MARKET FOR EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Canterbury's common stock was listed for trading on the Nasdaq SmallCap Market until its delisting on December 10, 2004. Since that time, Canterbury's common stock has been quoted on the electronic Pink Sheets. The closing price (adjusted to reflect the 1 for 7 reverse stock split effective January 24, 2003) of Canterbury's common stock from December 1, 2002 through April 29, 2005, according to these sources, are listed below. The reported bid quotations reflect inter-dealer prices without retail markup, markdown or commissions, and may not necessarily represent actual transactions.
============================================================================= 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 ============================================================================= 2004 | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ----------- | ----------- | ----------- | ------------ | High Low | High Low | High Low | High Low Common | ---- --- | ---- --- | ---- --- | ---- --- Stock | $1.35 $.94 | $2.05 $.71 | $1.00 $.52 | $.60 $.26 ============================================================================= 2005 | 1st Quarter | 2nd Quarter* || | ----------- | ----------- || | High Low | High Low || Common | ---- --- | ---- --- || Stock | $.44 $.35 | $.39 $.16 || ============================================ * through April 29, 2005.
(b) Shareholders
Our shareholders list contains the names of 255 registered stockholders of record of the Company's Common Stock as of May 27, 2005. Because of the low number of shareholders, the Company intends to file a notice of termination of its registration with the Securities and Exchange Commission during June 2005.
(c) Dividends
Canterbury has never declared a dividend on its common stock and does not plan to do so in the near future.
(d) Sale of Unregistered Securities
The Company did not effect any unregistered sales of equity securities during the fourth quarter of Fiscal 2004.
(e) Repurchase of Equity Securities
The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Act during the 4th quarter of Fiscal 2004.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA =================================
The above presented financial data has been reclassified to properly reflect the discontinued operations for ATM/Canterbury and DMI/Canterbury.
ITEM 7.
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 2004. 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 2005 over Fiscal 2004 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.
The Company experienced significant pretax operating losses for the first six months of Fiscal 2004 ($994,000). During the second half of the year the Company's operating performance improved to approximately breakeven. There were several significant non-cash asset valuation charges taken during the last six months of 2004. A goodwill impairment charge of $645,000 was taken against training division goodwill and a $750,000 tax asset reserve was also recorded. These charges along with the operating loss for the first half of the fiscal year accounted for the $(2,434,000) loss from continuing operations for 2004.
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 consolidated revenue is service oriented (34% in Fiscal 2004). 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 (94% of this segments total revenue in Fiscal 2004). 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.
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 from a party owned in part by members of the Company's management. 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 adversely 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 The Sarbanes-Oxley Act.
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 four years the Company has experienced significant pretax losses from continuing operations totaling $14,334,000. Of this amount, $8,362,000 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 four years by accelerating collection on several long-term notes receivable and generating net operating cash flow of $396,000. The Company significantly reduced its operating costs and restructured its sales team for Fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
Working capital at November 30, 2004 was $1,226,000, a decrease of $555,000 from the previous year end. While the entire balance sheet has contracted during Fiscal 2004, the most significant reductions occurred in the cash and current portion of long term debt. During September, 2004 the Company paid $912,000 to Ceridian Corp. as the final installment for the purchase of Usertech/Canterbury. This amount included $800,000 in debt and $112,000 in accrued interest.
The Company also reduced its accounts payable by $384,000 and accounts receivable were reduced by $668,000. These reductions were the result of expedited collection of receivables from several large customers and subsequent reduction in payables related to these sales.
As of November 30, 2004, the Company had $200,000 outstanding on its revolving line of credit with Commerce Bank. As of that date, the Company was in compliance with all of the financial covenants of its loan agreement. The Company, however, was within $11,000 of violating its cumulative pretax loss covenant as of November 30, 2004 (limit per covenant is $1,050,000 cumulative loss from December 1, 2003). The actual pretax loss from continuing operations plus any non-cash charge (goodwill impairment).
As a subsequent event, during the first quarter of Fiscal 2005, the Company breached the cumulative pretax loss covenant. As a result of this occurrence, the Company and Commerce Bank executed a forbearance agreement and an amendment to the loan agreement. The maximum revolving credit was reduced to $750,000 and it was agreed that the outstanding revolver balance would be paid in full by April 30, 2005 out of the proceeds from the $800,000 the Company received in conjunction with a refinancing of a long term note receivable with a related party. The loan ($550,000) was paid off on April 14, 2005 and the loan agreement with the bank has been terminated. The bank has released all liens on the Company's balance sheet.
During the second quarter of Fiscal 2005 the Company negotiated a refinancing of its long term notes receivable with a related party. The Company received an $800,000 payment and the two existing notes were combined into one. As of May 1, 2005 the new note had a balance of $2,469,585 with an eight-year term and an 8% interest rate. Monthly payments on the new note are $34,912. From the $800,000 received as part of the refinancing, $550,000 was used to pay off the revolving line of credit with the Company's primary lender.
Cash flow used in operating activities for the year ended November 30, 2004 was ($860,000), an improvement of $211,000 from the previous year. While these results were slightly better than Fiscal 2003, it marked the second consecutive year of negative cash flow from operations and only the second year in the past ten, where the Company failed to generate positive operating cash flow. Total assets declined by $3,849,000, while total liabilities were reduced by $1,316,000. The Company's current ratio was 1.79:1.00 versus 1.62:1.00 at November 30, 2003.
Management believes that the Company should have sufficient funds to cover cash flow requirement for Fiscal 2005 based on the refinancing of the long term note receivable with a related party and the ability to finance seasonal increases in sales volume (May-August) for its Hardware Reseller segment using alternative non-traditional sources (lock box, floor planning, etc.). Since the Company terminated its borrowing relationship with Commerce Bank during April 2005, the alternative lending capabilities are critical to support the business. While the cost of money will be higher than traditional revolving credit from a bank, the Company will have more flexibility in managing the business. The Company has continued to reduce fixed costs (primarily support personnel). These cost reductions, if coupled with increased sales activity, could permit the Company to return to a positive operating cash flow position for the third and fourth quarters of Fiscal 2005. These were no material commitments for capital expenditures as of November 30, 2004. 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, 2004:
*As a subsequent event, this debt was converted to common stock.
RESULTS OF OPERATIONS =======================
Fiscal 2004 Compared to Fiscal 2003 - -----------------------------------
Revenues Consolidated revenues decreased by $2,029,000 (9%) in Fiscal 2004 as compared to Fiscal 2003. This decrease is the net result of a decrease in service revenue of $3,612,000 ($35%) and an increase in product revenue of $1,583,000 (14%). The training and consulting segment again experienced an across the board decline in revenues which has been the trend over the past three years as indicated by the following table.
Fiscal 2004 Fiscal 2003 Fiscal 2002 ----------- ----------- ----------- Usertech/Canterbury $3,647,000 $5,018,000 $9,053,000 CALC/Canterbury 2,202,000 4,093,000 4,804,000 MSI/Canterbury 732,000 955,000 1,161,000 USC/Canterbury 120,000 247,000 362,000 ----------- ----------- ----------- Total $6,701,000 $10,313,000 $15,380,000 =========== =========== ===========
The increase in product revenues for Fiscal 2004 was the result of an increased purchase from a major customer in Virginia. This municipality (school system) had several new school openings during 2004 which needed to be outfitted for PC's, printers and servers. It is anticipated that the revenue from this client in 2005 will be lower.
Costs and Expenses Total costs and expenses decreased by $1,616,000 (9%) in Fiscal 2004 versus 2003. The decrease was due to reduced sales volume and cost reductions in the training and consulting segment ($3,391,000) offset by an increase in the hardware reseller segment of $1,775,000 due to higher sales volume. Overall gross profit decreased to 16% from 16.4% in Fiscal 2003. Service gross profit increased to 32% in Fiscal 2004 from 23% in the previous year. This increase was the result of the cost saving initiative undertaken in late 2003 for this segment. This increase in gross profit percentage is impressive in light of the 35% reduction in 2004 sales volume for the training and consulting segment as compared to 2003. The hardware reseller segment experienced a further decline in gross profit from approximately 10% in Fiscal 2003 to 8% in Fiscal 2004.
Product margins continue to be negatively effected by several factors. Continued weakness in technology spending forced margins lower as many suppliers compete for the same business. Hardware manufacturers continued to eliminate incentives to their resellers as the products they are offering have became more commoditized. The Company continues to partner with new hardware manufactures who have specialized products that command higher profit margins. However, the sales volume from these specialized products has not been sufficient to counteract the lower margin on personal computers and printers. Management anticipates that gross margin for product sales will remain in the 7%-8% range for Fiscal 2005.
Selling expense decreased by $328,000 (19%) in Fiscal 2004 as compared to the previous year. Personnel expense (salaries, bonuses, commissions and payroll burden) accounts for the entire decrease. A smaller sales staff and less commissions on lower revenue and gross profit were the two most significant reasons for the reduction in selling expense for Fiscal 2004.
General and administrative expense was reduced by $1,322,000 (30%) due primarily to cost savings as a result of the reduction in workforce in the training and consulting segment in late 2003 ($875,000). Other major costs reductions in Fiscal 2004 which contributed to the overall decrease were health insurance ($211,000); public company expense ($81,000); life insurance ($52,000); and bank charges ($39,000).
Interest income decreased by $180,000 (39%) in Fiscal 2004 as compared to the previous year. The prepayment of the note receivable from the sale of a former subsidiary in September 2003 and the reduction in the interest rate on a note receivable with a related party were the primary reasons for the decrease.
Interest expense was reduced by $15,000 (12%) in Fiscal 2004 versus Fiscal 2003. Payment of $800,000 note payable for an acquisition made in September 2004 was the primary reason for the reduction in interest expense.
Critical Accounting Policies
Goodwill The Company recorded a total of $645,000 of goodwill impairment in our training and consulting segment ($610,000 for MSI/Canterbury and $35,000 for Usertech/Canterbury) at November 30, 2004. The economic downturn for MSI/Canterbury continued for a fourth consecutive year. The fair value of MSI/Canterbury and Usertech/Canterbury were estimated based upon our recent earnings history and our future earnings expectations.
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. The Company has recorded a valuation allowance of $4,449,000 and $3,788,000 as of November 30, 2004 and 2003, respectively. The valuation allowance was increased as of November 30, 2004 and 2003 due to the Company falling short of budgeted 2004 and 2003 revenues and earnings and the resulting changes in our earnings forecasts for Fiscal 2005 and beyond. This resulted in a $759,000 expense in Fiscal 2004 and a $780,000 expense in Fiscal 2003 related to an adjustment to our beginning of the year estimate for the valuation allowance.
At November 30, 2004, the Company had loss carryforwards of $11,050,000 for federal 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, $3,045,000 in 2023 and $1,455,000 in 2024.
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 2003 Compared to Fiscal 2002 =====================================
Revenues
Consolidated revenues decreased by $7,459,000 (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 $2,392,000 (17%). 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 $2,392,000 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 $4,678,000 (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 16% from 22% in Fiscal 2002. Service gross profit declined to 23% in Fiscal 2003 from 31% in the previous year. Product gross profit also declined from 12% in Fiscal 2002 to 10% 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 $673,000 (28%) in Fiscal 2003 as compared to the previous year. Personnel expense (salaries, bonuses, commissions and payroll burden) decrease of $498,000 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 $1,115,000 (20%) due primarily to significant reductions in administrative and support staff as part of the workforce reduction discussed previously ($595,000). 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 $181,000 (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 $72,000 (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.
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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ====================================================================
We are not exposed to market risk from changes in interest rates. Currently, we have $200,000 invested in short term certificates of deposit and $100,000 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ====================================================
The financial statements and supplementary data are as set forth in the Index on page 27.
ITEM 9.
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.
ITEM 9A. CONTROLS AND PROCEDURES =================================
Our principal executive officer and principal financial officer participated in and supervised the evaluation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed by us in the reports that we file is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our principal executive officer or officers and principal financial officer, to allow timely decisions regarding required disclosure. The Company's chief executive officer and chief financial officer determined that, as of the end of the period covered by this report, these controls and procedures are adequate and effective in alerting them in a timely manner to material information relating to the Company required to be included in the Company's periodic SEC filings.
There were no significant changes, including any corrective actions with regard to significant deficiencies and material weaknesses, in our internal controls or in other factors that could significantly affect internal controls since the date of the most recent evaluation of these controls by the Company's chief executive officer and chief financial officer.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT =============================================================
The directors, executive officers and control persons of the Company as of the date of this report were as follows: Director Principal Name Age Since Occupation - ----------------------------------------------------------------------------- Stanton M. Pikus 64 1981 Chairman of the Board of Directors Kevin J. McAndrew 47 1990 President, Chief Executive Officer, Chief Financial Officer, and Treasurer Jean Zwerlein Pikus 51 1984 Vice President, Secretary Alan B. Manin(1)(2)(4) 68 1981 President, Atlantis, Inc. Stephen M. Vineberg(1)(2)(3)(5) 63 1988 President, CMQ, Inc. Paul L. Shapiro(1)(2)(3)(4) 53 1992 Manager, McKesson Drug Co. Frank A. Cappiello(1)(4)(6)(7) 79 1995 Managing Director of Montgomery Brothers, Cappiello, L.L.C. (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 as CNBC. 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.
ITEM 11. EXECUTIVE COMPENSATION
CASH COMPENSATION
(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 year ended November 30, 2004.
There were no stock options granted to Executive Officers during Fiscal 2004.
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. A charge of $77,000 was made during the third quarter of Fiscal 2003 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 April 29, 2005.
(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.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
There has been no change in control of the Company.
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 seven years. In addition, there are no compensation committee interlocks with other entities with respect to any such member.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT =========================================================================
The following table shows the amount of Canterbury's common stock of beneficially owned (unless otherwise indicated) by each shareholder who beneficially owns over 5% of Canterbury's outstanding common stock, by each of Canterbury's directors and by the directors and executive officers of Canterbury as a group.
1. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, Canterbury believes that the persons named in the table have sole voting and investment power with respect to all shares of common stock. Total outstanding shares of common stock is 2,769,393. 2. This percentage was calculated based upon the assumption that only the individual shareholder would be converting his/her options to Company shares. 3. The business address of all officers and directors listed above is in care of Canterbury Consulting Group, Inc. 352 Stokes Road, Suite 200, Medford, NJ 08055. Aaron Alter's address is 7920 Avenida Diestro, Carlsbad, CA 92009. 4. All stock options are out-of-the-money and are exercisable at greater than $0.40 per share. Stock Options are delineated in the table labeled Shares Acquirable Within 60 Days By Option Exercise. 5. Included in Stanton M. Pikus' common stock are 95 shares owned with Jean Z. Pikus JTWROS. These shares are not included in Jean Z. Pikus' common stock. 6. 10,286 shares of Canterbury common stock owned in the name of Matthew Zane Pikus Trust are not included in Stanton M. Pikus' or Jean Z. Pikus' shares currently owned total.
The following table summarizes certain information regarding the Company's equity compensation plans at November 30, 2004.
(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 13 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 were issued on May 23, 2002.
CHANGE IN CONTROL
There are no arrangements known to the Company that could result in a change in control of the Company.
As a subsequent event, during December 2004, $355,000 in senior convertible debt was converted into 1,000,000 shares of Canterbury restricted common stock in contemplation of the potential pending merger with CCG Group, Inc. See Footnote 2 for a full discussion of this proposed merger transaction.
After the conversion of the senior subordinated debt in December 2004, the officers, directors and investors who comprised CCG Group, Inc. owned approximately 52.7% of the total outstanding shares of the Company. At the close of business on March 15, 2005, the Agreement and Plan of Merger of CCG Group, Inc. and Canterbury Consulting Group, Inc. dated November 18, 2004 was terminated due to the fact that it was not consummated by March 15, 2005. Canterbury Consulting Group, Inc. was delayed in obtaining shareholder approval of the merger on or prior to March 15, 2005, as was called for in the Merger Agreement.
ITEM 13.
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
During Fiscal 2001, certain officers and directors of the Company purchased 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 $3,472,253 from this corporation of which $3,382,000 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 $261,000 and $322,000 of interest income from these notes in Fiscal 2004 and 2003, 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, 2004 and 2003, the total notes receivable plus accrued interest for issuances of Company common stock to corporate officers, corporate counsel and certain consultants totaled $2,150,000 and $3,595,000, 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%.
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.
As a subsequent event, during the first quarter of Fiscal 2005, $1,489,500 of notes receivable for common stock - related parties were cancelled in return for 196,429 shares of Company common stock in full satisfaction of the liability.
ITEM 14.
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, 2004, 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 $79,500 for 2004 $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, 2004, November 30, 2003 and November 30, 2002 were $7,000, $500 and $0, respectively. During 2004 and 2003, these services included proxy disclosure review.
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, 2004, November 30, 2003 and November 30, 2002 were $26,000, $24,000 and $23,000, respectively. During 2004, 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, 2004, 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.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES - ----------------------------------------------------
Consolidated Financial Statements filed here include: Balance Sheets at November 30, 2004 and 2003 and Statements of Operations, Stockholders' Equity and Cash Flows for the years ended November 30, 2004, 2003, and 2002. 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, 2004 and 2003 F- 2 Consolidated Statements of Operations - Years ended November 30, 2004, 2003, and 2002 F- 4 Consolidated Statements of Stockholders' Equity/Years ended November 30, 2004, 2003, and 2002 F- 6 Consolidated Statements of Cash Flows - Years ended November 30, 2004, 2003, and 2002 F- 8 Notes to Consolidated Financial Statements F- 9 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 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) 10.2 Stanton M. Pikus' Employment Agreement (incorporated by reference from Exhibit 99.13 to Form 8-K filed with the SEC on June 11, 2001) 10.3 The Amended Audit Committee Charter (incorporated by reference from Appendix A to the Annual Report and Definitive Proxy Materials filed with the SEC on October 24, 2003) 10.4 Code of Ethics for Senior Financial Officers (incorporated by reference from the Annual Report for Fiscal 2004 filed with the SEC on March 1, 2004) 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)
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: 6/3/05 By /s/ Kevin J. McAndrew ------- --------------------- Kevin J. McAndrew, President; Chief Executive Officer; Treasurer
Dated: 6/3/05 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: 6/3/05 By /s/ Stanton M. Pikus ------- -------------------- Stanton M. Pikus, Director; Chairman of the Board of Directors
Dated: 6/3/05 By /s/ Kevin J. McAndrew ------- --------------------- Kevin J. McAndrew, President, Chief Executive Officer; Executive Vice President; Chief Financial Officer; Director
Dated: 6/3/05 By /s/ Jean Zwerlein Pikus ------- ----------------------- Jean Zwerlein Pikus, Vice President - Operations; Secretary; Director
Dated: 6/3/05 By /s/ Alan Manin ------- -------------- Alan Manin, Director
Dated: 6/3/05 By /s/ Stephen M. Vineberg ------- --------------------- Stephen M. Vineberg, Director
Dated: 6/3/05 By /s/ Paul L. Shapiro ------- ------------------- Paul L. Shapiro, Director
Dated: 6/3/05 By /s/ Frank A. Cappiello ------- --------------------- Frank A. Cappiello, Director
Report of Independent Auditors - 2004, 2003 and 2002 ------------------------------------------------------
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, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended November 30, 2004. Our audits also included the financial statement schedule referenced as page 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 the standards of the Public Company Accounting Oversight Board (United States). 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. as of November 30, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 2004, 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, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
Baratz & Associates, P.A. Marlton, New Jersey April 29, 2005
CONSOLIDATED BALANCE SHEETS November 30, 2004 and 2003
ASSETS 2004 2003 ---- ---- Current Assets:
Cash and cash equivalents $319,757 $1,385,824 Marketable securities 100,000 300,000 Accounts receivable, net of allowance for doubtful accounts of $168,000 and $271,000 1,809,230 2,477,060 Notes receivable - current portion 310,602 287,845 Prepaid expenses and other assets 92,079 93,311 Inventory, principally finished goods, at cost 144,702 92,599 ---------- ---------- Total Current Assets 2,776,370 4,636,639
Property and equipment at cost, net of accumulated depreciation of $1,234,000 and $1,093,000 310,431 604,449 Goodwill 1,788,381 2,433,381 Deferred tax assets - 759,000 Notes receivable 3,161,651 3,472,253 Other assets 52,780 32,821 ---------- ----------- Total Assets $ 8,089,613 $11,938,543 ========== ===========
Continued See Accompanying Notes
CONSOLIDATED BALANCE SHEETS November 30, 2004 and 2003 Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2003 ------------- ------------
Current Liabilities: Accounts payable - trade 579,638 $ 963,588 Accrued expenses 404,126 532,597 Unearned revenue 332,434 470,107 Current portion, long-term debt 233,989 889,490 ---------- ---------- Total Current Liabilities 1,550,187 2,855,782
Long-term debt 52,418 62,934 Subordinated convertible debt 355,000 355,000 ---------- ---------- Total Liabilities 1,957,605 3,273,716 ---------- ----------
Commitments and Contingencies
Stockholders' Equity: Common stock, $.001 par value, 50,000,000 shares authorized; 1,965,822 and 2,097,251 issued and outstanding 1,966 2,097
Additional paid-in capital 22,751,620 24,248,039 Accumulated deficit (14,471,384) (11,989,817) Notes receivable for common stock - related parties (2,150,194) (3,595,492) ---------- ----------
Total Stockholders' Equity 6,132,008 8,664,827 ---------- ----------
Total Liabilities and Stockholders' Equity $ 8,089,613 $11,938,543 =========== ===========
See Accompanying Notes
CONSOLIDATED STATEMENTS OF OPERATIONS Years ended November 30, 2004, 2003 and 2002
2004 2003 2002 ---- ---- ----
Service revenue $6,701,125 $10,312,933 15,379,821 Product revenue 13,291,356 11,708,158 14,100,228 ---------- ----------- ---------- Total net revenue 19,992,481 22,021,091 29,480,049
Service costs and expenses 4,528,372 7,917,643 10,656,433 Product costs and expenses 12,268,396 10,501,099 12,441,006 ---------- ----------- ---------- Total costs and expenses 16,796,768 18,418,742 23,097,439
Gross profit 3,195,713 3,602,349 6,382,610 ---------- ----------- ----------
Selling 1,390,875 1,718,811 2,392,216 General and administrative 3,132,900 4,455,008 5,570,171 Goodwill impairment 645,000 1,175,000 583,723 ---------- ----------- ----------
Total operating expenses 5,168,775 7,348,819 8,546,110
Other income/(expenses) Interest income 284,180 463,856 644,796 Interest expense (107,589) (122,751) (194,936) Other 112,832 (16,498) 89,336 ---------- ----------- ---------- Total other income/(expenses) 289,423 324,607 539,196
Loss from continuing operations before income taxes (1,683,639) (3,421,863) (1,624,304)
Provision for income taxes 750,030 456,324 225,738 ---------- ----------- ----------
Loss from continuing operations (2,433,669) (3,878,187) (1,850,042) Loss from discontinued operations (net of income taxes of $0, $26,089 and $20,462) (47,898) (176,807) (167,809) ---------- ----------- ----------
Net loss (2,481,567) (4,054,994) (2,017,851) ========== =========== ==========
See Accompanying Notes
CONSOLIDATED STATEMENTS OF OPERATIONS Years ended November 30, 2004, 2003 and 2002 Continued
2004 2003 2002 ---- ---- ----
Net loss per share and common share equivalents
Basic and diluted:
Loss from continuing operations before cumulative effect of change in accounting principle $(1.20) $(2.07) (1.06)
Loss from discontinued operations (.02) (.09) (.10) ---------- ----------- -------- Net loss $(1.22) $(2.16) $(1.16) ========== =========== ========
Weighted average number of common shares - basic and diluted 2,041,500 1,876,300 1,742,500 ========= =========== ==========
See Accompanying Notes
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended November 30, 2004, 2003 and 2002
See Accompanying Notes
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended November 30, 2004, 2003 and 2002
2004 2003 2002 ----- ----- ------
Operating activities: Net loss $(2,481,567) $(4,054,994) $(2,017,851) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 265,073 370,088 485,924 Provision for losses on accounts receivable (34,000) (111,765) 130,887 Goodwill impairment 645,000 1,175,000 583,723 Deferred income taxes 759,000 465,185 323,000 Loss on sale of land and disposal of assets 9,194 38,513 - 401(k) contributions issued in stock - 211,030 82,099 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 701,829 485,639 2,640,644 Inventory (52,103) 80,519 653,733 Prepaid expenses and other assets 1,232 228,515 (75,725) Other assets - non current (19,959) 174,089 637 Income taxes - - (18,540) Accounts payable (383,950) 345,464 (1,158,202) Accrued expenses (131,754) (288,701) (193,004) Unearned revenue (137,673) (422,142) (1,050,991) ------------ ---------- ----------- Net cash (used in)/provided by operating activities (859,678) (1,070,906) 386,334 ------------ ---------- -----------
Investing activities: Purchase of marketable securities - (300,000) - Proceeds from redemption of marketable securities 200,000 - - Capital expenditures, net (28,216) (28,755) (55,284) Proceeds from payments on notes receivable 287,845 3,206,545 459,129 Other - - (29,500) ------------ ---------- ----------- Net cash provided by investing activities 459,629 2,877,790 374,345 ------------ ---------- -----------
Financing activities: Purchase of treasury shares - - (250,323) Proceeds from issuance of common stock - - 15,000 Proceeds from revolving line of credit 200,000 - 300,000 Proceeds from long term debt 38,824 - - Proceeds from payments on notes receivable for common stock - related parties - 45,316 48,724 Principal payments on long term debt (904,842) (1,216,853) (1,143,453) Proceeds from subordinated convertible debt - 355,000 - ------------ ---------- ----------- Net cash used in financing activities (666,018) (816,537) (1,030,052) ------------ ---------- -----------
Net (decrease)/increase in cash (1,066,067) 990,347 (269,373) Cash, beginning of year 1,385,824 395,477 664,850 ------------ ---------- ----------- Cash, end of year $ 319,757 $1,385,824 $ 395,477 ============ ========== ===========
Continued -See Accompanying Notes
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended November 30, 2004 and 2003 (Continued)
Supplemental schedule of noncash investing and financing activities:
As a subsequent event, during the first quarter of Fiscal 2005, $1,489,500 of notes receivable for common stock - related parties were cancelled in return for 196,429 shares of Company common stock in full satisfaction of the liability.
As a subsequent event, in December 2004 the Company issued 1,000,000 shares of restricted common stock for the conversion of the 7 3/4% $355,000 Senior Convertible Promissory Notes.
In July 2004, 106,429 shares of Company stock was returned in full cancellation of non-recourse notes totaling $1,445,000. These shares were retired upon receipt by the Company.
In June 2004, the Company entered into a $38,824 capital lease obligation in exchange for new equipment.
In May 2004 the Company received and retired 25,000 shares of its common stock in exchange for 100% of the common stock of ATM/Canterbury.
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.
The income taxes paid for Fiscal 2004, 2003 and 2002 were as follows: $22,000, $17,000 and $76,600, respectively.
Interest paid during Fiscal 2004, 2003 and 2002 were as follows: $107,589, $125,422 and 198,725, respectively.
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 four operating subsidiaries with offices located in New Jersey, New York and Maryland. 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 * management training programs * customized learning solutions for ERP and CRM * web development * systems engineering and training consulting * technical and desktop applications * hardware sales and 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.
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 and consulting services provided to customers under separate consulting and service contracts. Revenues from these contracts are recognized as services are rendered.
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, 2004 and November 30, 2003, the Company held marketable securities totaling $100,000 and $300,000, respectively, in a long-term tax- exempt bond fund. At November 30, 2004, 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, 2004 and 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, 2004 and 2003. 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
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 (see Note 6).
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 and convertible debt. US GAAP requires all anti- dilutive securities, including stock options, to be excluded from the diluted per share computation. For Fiscal 2004, 2003 and 2002, due to our net losses, all of our outstanding options and convertible shares (see Notes 10 and 13) 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, 2004 that would have had a dilutive effect on earnings per share had the Company generated a net income during the year ended November 30, 2004. 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, 2004 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 (converted in December 2004)
Shares issuable from stock options 50,000
In addition, there were another 123,230 stock options outstanding at November 30, 2004 with exercise prices above the average market price of Company stock during the year ended November 30, 2004.
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 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.
All four of the 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, 2004, 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 from the City under this contract represented 38% of this segment's revenue and 24% of consolidated revenue. Purchases from other local governments allowed to use the contract accounted for 56% of the revenues in the reseller segment and 37% of consolidated revenues for the year. In this segment one vendor represented 48% of the product cost and 35% of consolidated costs. A second major vendor represented 21% and 16% of segment and consolidated costs and expenses, respectively. During April, 2004 the City of Baltimore contract was again awarded to USC/Canterbury for three years with five, one-year extension options (at the City's option). In the training and consulting segment, one customer accounted for 21% of the revenue in the segment and 7% of consolidated revenues for Fiscal 2004.
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 from the City under this contract represented 38% of this segment's revenue and 20% of consolidated revenue. Purchases from other local governments allowed to use the contract accounted for 43% of the revenues in the reseller segment and 23% of consolidated revenues for the year. In this segment one vendor represents 54% of the product cost and 31% of consolidated costs. A second 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 from the City under this contract represented 45% of this segment's revenue and 21% of consolidated revenue. Purchases from other local governments allowed to use the contract accounted for 38% of revenues in the reseller segment and 18% of consolidated revenues for the year. In this segment one
vendor represented 49% of the product cost and 26% of consolidated costs. A second major vendor represented 24% and 13% of segment and consolidated costs and expenses, respectively.
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.
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 13).
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.
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R), "Share-Based Payment", ("SFAS No. 123(R)") which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25 regarding stock-based employee compensation plans. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. The Company will adopt the provisions of SFAS No. 123(R) as of December 1, 2005. Compensation expense will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. The Company is currently assessing the impact of adopting SFAS No. 123(R) on consolidated results of operations. However, the Company does not expect such impact to be material upon adoption in Fiscal 2006.
2. Going Private Transaction =============================
During October, 2004 a group of investors (including officers and some outside board members) formed a private company (CCG Group, Inc.) with the intent of merging with the Company, purchasing all common stock from unaffiliated shareholders and then operating the business as a private company. CCG Group offered to buy the unaffiliated shares at $.40 per share, which represented a premium over the then current average closing price of Canterbury's common stock.
Since five of Canterbury's existing board members were going to be part of the CCG group, the board of directors determined that it would be appropriate to appoint a special committee to protect the interests of Canterbury's unaffiliated shareholders. The special committee was composed of two board members who were not employees of the company, who were not participants in the buyout proposal and who had no financial interest in the proposed merger different from Canterbury's unaffiliated shareholders generally. The special committee was authorized to exercise all of the powers of the board of directors with respect to the CCG merger offer and to investigate the terms of any proposed transaction, including the power to select and retain its own legal counsel and an independent financial advisor.
On October 29, 2004, the special committee recommended that Canterbury accept the proposal from CCG under the terms presented to it. Canterbury's board of directors ratified that action and authorized the preparation of necessary documentation for the transactions. On November 1, 2004, Canterbury publicly announced the proposed transaction.
In a meeting on November 16, 2004, the special committee and the Board of Directors of Canterbury unanimously (i) adopted and approved the Merger Agreement and the transactions contemplated thereby, including the merger, and (ii) recommended that the shareholders vote to approve the Merger Agreement.
Thus, Canterbury entered into a Merger Agreement, dated November 18, 2004, with CCG Group, Inc. Under the Agreement and Plan of Merger, Canterbury and CCG would merge if the holders of at least a majority of Canterbury's outstanding shares of common stock approved the Merger Agreement. The outstanding shares of Canterbury's common stock not owned by affiliates of CCG Group would have been converted into the right to receive an amount equal to $0.40 per share for Canterbury shares owned on the date the merger occurred, in cash, without interest. Persons associated with CCG Group, who held approximately 1,562,766 shares of Canterbury as of December 17, 2004, would not be entitled to convert their shares to cash or receive any consideration. After the merger, Canterbury would have been the surviving corporation under Pennsylvania law and would be privately held.
At the close of business on March 15, 2005, the Agreement and Plan of Merger of CCG Group, Inc. and Canterbury Consulting Group, Inc. dated November 18, 2004 was terminated due to the fact that it was not consummated by March 15, 2005. Canterbury Consulting Group, Inc. was delayed in obtaining shareholder approval of the merger on or prior to March 15, 2005, as was called for in the Merger Agreement.
The Agreement and Plan of Merger provided that, if it terminated due to Canterbury Consulting Group's inability to obtain shareholder approval, Canterbury Consulting Group would be responsible for the fees and expenses incurred by CCG Group, Inc. in connection with the transactions contemplated by the Agreement and Plan of Merger. Canterbury has paid CCG Group's claim for reimbursement of its fees and expenses as specified in the Agreement and Plan of Merger, which amounted to approximately $17,000.
3. Segment Reporting ======================
The Company is organized into two operating segments and the corporate office. The operating segments are: training and consulting and value added hardware reseller. A third segment, software development, was discontinued during 2004 and a fourth segment, technical staffing, was discontinued during 2003. All historical information for the software development and technical staffing segments have 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 2004 and Fiscal 2003, goodwill has been assigned to reporting units for purposes of impairment testing and segment reporting as required by SFAS 142. Summarized financial information for each segment is as follows:
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 $3,472,253 at November 30, 2004. These notes had interest terms that average 7.3% per year and were 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, 2004 and November 30, 2003.
The company has received all scheduled monthly installments for notes receivable outstanding as of November 30, 2004 and 2003.
As a subsequent event, during April, 2005 the Company renegotiated a refinancing of the note receivable from a related party. The demand note and the acquisition notes were combined and totaled $3,270,000 as of April 15, 2004. The Company received an $800,000 paydown on the combined note and agreed to term out the balance of $2,470,000 over the next eight years at 8%.
5. Property and Equipment ==========================
Property and equipment, which is recorded at cost, consists of the following:
2004 2003 -------- ----------- Machinery and equipment $1,243,587 $1,434,874 Furniture and fixtures 224,895 225,230 Leased property under capital leases and leasehold improvements 76,066 37,242 ----------- ----------- 1,544,548 1,697,346 Less: Accumulated depreciation (1,234,117) (1,092,897) ----------- ---------- Net property and equipment $ 310,431 $ 604,449 =========== ===========
Accumulated depreciation of leased property under capital leases totaled $19,000 and $6,000 at November 30, 2004 and 2003, respectively. Depreciation expense for 2004 and 2003 was $265,000 and $371,000, respectively.
During Fiscal 2003, the Company retired approximately $600,000 worth of fully depreciated fixed assets.
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, 2004.
The Company recorded $610,000 of goodwill impairment charges related to MSI/Canterbury at November 30, 2004. Revenues and profits continued their downward trend during Fiscal 2004. The fair value of MSI/Canterbury was again estimated based upon our recent earnings history and our future earnings expectations for this business as of November 30, 2004. The Company also recorded a $35,000 goodwill impairment charge related to Usertech/Canterbury at November 30, 2004.
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 changes in the carrying amount of goodwill for the years ended November 30, 2004 and 2003, by reportable segment, are as follows:
Training Value Added and Hardware Consulting Reseller Total - - ---- ---------- ----------- -----------
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
Impairment losses for 2004 (645,000) - (645,000) Balance as of November 30, 2004 $1,429,629 $ 358,752 $1,788,381
7. Income Taxes ================
The provision/(benefit) for income taxes for the years ended November 30, 2004, 2003 and 2002 is as follows:
2004 2003 2002 ---- ---- ---- Current: Federal $ - $ - $(41,000) State (9,000) - (36,000) ------ --------- ------ Total current provision/(benefit) (9,000) - (77,000) ------ --------- ------
Deferred: Federal - (272,000) (269,000) State - (26,000) (50,000) -------- --------- ---------- - (298,000) (319,000) Beginning balance adjustment- valuation allowance 759,000 780,000 642,000 ------ --------- -------
Total deferred provision 759,000 482,000 246,000 ------ --------- -----------
Total income tax provision/(benefit) 750,000 482,000 246,000
Less: income tax provision/(benefit) from discontinued operations - 26,000 20,000 ------ --------- -------
Income tax provision/ (benefit) from continuing operations $750,000 $ 456,000 $ 226,000 ======== ========= ===========
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 realization 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, 2004, 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 2004 of $759,000 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 2003 and 2002 years and recorded non-cash charges of $780,000 and $642,000, respectively.
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, 2004, 2003 and 2002 is as follows:
2004 2003 2002 --------- --------- --------- Expected tax (benefit) at statutory rates $(572,000) $(1,215,000) $(602,000) Effect of state taxes, net (9,000) (26,000) (74,000) Permanent differences 25,000 207,000 - Valuation allowances 1,306,000 1,516,000 922,000 ----------- --------- ----------- Total $750,000 $482,000 $ 246,000 ========= ======== =========
Significant components of the Company's tax assets and liabilities as of November 30, 2004 and 2003 are as follows:
2004 2003 ---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 67,000 $ 109,000 Expenses deferred for tax reporting purposes 61,000 85,000 Deferred tax depreciation 24,000 - Deferred tax amortization of goodwill 917,000 935,000 Loss carryovers 4,420,000 4,627,000 ----------- -----------
Deferred tax assets before valuation allowance 5,489,000 5,756,000 Valuation allowance (4,448,777) (3,788,000) ----------- ----------- Deferred tax assets (net of valuation allowance) $1,040,223 $1,968,000 =========== ===========
2004 2003 ---- ---- Deferred tax liabilities:
Gain recognized in financial statements deferred for income tax purposes $1,008,766 $1,118,000 Tax depreciation in excess of book depreciation - 16,000 Tax amortization in excess of book amortization 31,457 75,000 ----------- ----------- Total deferred tax liabilities 1,040,223 1,209,000 ----------- ----------- Net deferred tax assets $ - $ 759,000 =========== ===========
At November 30, 2004, the Company had loss carryforwards of $11,050,000 for federal 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 $3,045,000 in 2023 and $1,455,000 in 2024.
8. Long-Term Debt ==================
November 30, ------------- Long-term obligations consist of: 2004 2003 ----------- ------------ Revolving line of credit $ 200,000 $ - Note payable for acquisition - 800,000 Capital lease obligations 58,405 34,589 Notes payable - equipment 28,002 117,835 ----------- ---------- 286,407 952,424 ----------- ---------- Less: Current maturities (233,989) (889,490) ----------- ---------- 52,418 $ 62,934 =========== ==========
The Bank's debt was 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 was restricted by its bank from paying cash dividends on its common stock. As of November 30, 2004, the Company was in compliance with all of the financial covenants of its revised loan agreement. The Company, however, is within $11,000 of violating its cumulative pretax loss covenant as of November 30, 2004 (limit per covenant is $1,050,000 cumulative loss from December 1, 2003). The actual pretax loss amount is calculated as loss from continuing operations exclusive of goodwill impairment charges.
As a subsequent event, during the first quarter of Fiscal 2005, the Company breached the cumulative pretax loss covenant. As a result of this occurrence the Company and its primary lender executed a forbearance agreement and an amendment to the loan agreement during March 2005. The maximum revolving credit was reduced to $750,000 and it was agreed that the outstanding revolver balance would be paid in full by April 30, 2005. The loan was paid off on April 14, 2004 and the loan agreement with the bank has been terminated. The bank has released all liens of the Company's balance sheet. The Company is presently pursuing alternative financing sources to support its value added hardware reseller segment.
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. Canterbury anticipated that it would need to make a cash payment in settlement of certain claims and, on October 4, 2004 Canterbury wired $912,000 in cash to Ceridian Corporation in anticipation of a settlement of all claims. On October 27, 2004 Canterbury withdrew all of its claims in arbitration against Ceridian. The companies exchanged mutual releases.
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, and as of November 30,2004 the note was paid in full.
Aggregate fiscal maturities on long-term debt, exclusive of obligations under capital leases, are $210,000 in 2005; $10,000 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 2007. 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, 2004:
Total minimum lease payments through November 30, 2005 $34,837 Total minimum lease payments through November 30, 2006 30,728 Total minimum lease payments through November 30, 2007 9,200 ------- Total minimum lease payments 74,765 Less amount representing interest (16,360) ------- Present value of long-term obligations under capital leases 58,405 =======
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: $440,000 in 2005; $200,000 in 2006; and $0 beyond 2006. Rent expense for the years ended November 30, 2004 and 2003 was $443,000 and $1,363,000, 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: $30,000 in 2005; $30,000 in 2006 and $30,000 in 2007, and $20,000 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 of Fiscal 2003 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 was making various claims ranging from breach of contract/warranty to actual/legal fraud, fraudulent concealment, constructive/equitable fraud, and negligent/misrepresentation. Ceridian Corporation denied the allegations set forth by the Company and instituted a counterclaim in the arbitration proceedings. Ceridian was 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. On October 4, 2004 Canterbury wired $912,000 in cash to Ceridian Corporation in anticipation of a settlement of all claims. On October 27, 2004 Canterbury withdrew all of its claims in arbitration against Ceridian. The companies exchanged mutual releases.
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 73/4% 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). As a subsequent event, during December 2004 the notes were converted into 1,000,000 shares of Canterbury restricted common stock. The number of shares outstanding of Canterbury's common stock as of April 29, 2005 was 2,965,822.
11. Stock Listing ==================
As a subsequent event, on December 8, 2004 the Nasdaq Stock Market ("Nasdaq") notified Canterbury that "The Company has not regained compliance in accordance with Marketplace Rule 4310(c)(8)(B). Accordingly, its securities will be delisted from The Nasdaq SmallCap Market at the opening of business on December 17, 2004."
On September 8, 2004, Nasdaq had notified the Company that "its common stock had not maintained a minimum market value of publicly held shares ("MVPHS") of $1,000,000 over the previous 30 consecutive trading days, and, as a result, did not comply with Marketplace Rule 4310(c)(7) (the "Rule"). Therefore, in accordance with Marketplace Rule 4310(c)(8)(B), the Company was provided 90 calendar days, or until December 7, 2004, to regain compliance with the Rule."
At the time of the receipt of the December 8, 2004 delisting letter, the Board of Directors of Canterbury was in process of deciding to respond to a delisting letter received after the close of business on December 1, 2004. On December 1, 2004 the Nasdaq Stock Market notified Canterbury that:
"Accordingly, the Company does not comply with Marketplace Rule 4350(e) and 4350(g) ("the Rules") and Staff has determined to delist the Company's securities from The Nasdaq Stock Market at the opening of business on December 10, 2004."
These Rules relate to the requirement to hold an annual meeting of shareholders.
Based upon the letter of December 8, 2004, the Company determined that an appeal of the December 1, 2004 delisting letter would be a pointless waste of its shareholders' resources.
An additional determining factor in the Company's decision was a third delisting letter received on June 23, 2004 which stated: "For the last 30 consecutive business days, the bid price of the Company's common stock has closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4) (the "Rule"). Therefore, in accordance with Marketplace Rule 4310(c)(8)(D), the Company will be provided 180 calendar days, or until December 20, 2004, to regain compliance. If, at anytime before December 20, 2004, the bid price of the Company's common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, Staff will provide written notification that it complies with the Rule."
12. 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 2004 and 2003 plan years]. The value of the employee match expensed in 2004, 2003 and 2002 was $0, $211,030 and $82,099, respectively (for the previous plan year).
13. Stock Options and Awards ==============================
The Company has one stock option plan, the 1995 Non-Qualified Stock Option Plan, covering 511,906 shares of common stock ("1995 Plan"). As of November 30, 2004, the Company had 166,800 options outstanding under the 1995 Plan. In addition, the Company granted 23,000 stock options outside the plan during Fiscal 2002 of which 6,430 were still outstanding as of November 30, 2004. There were 345,106 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:
2004 2003 2002 ---- ---- ---- Number of shares under stock options:
Outstanding at beginning of year 318,599 302,607 306,833 Granted - 50,000 23,000 Exercised - - - Canceled (145,369) (34,008) (27,226) Outstanding and exercisable at end of year 173,230 318,599 302,607
Weighted average exercise price: Granted $ - $.75 $6.32 Exercised $ - $ - $ - Canceled $9.95 $9.85 $17.43 Outstanding and exercisable at end of year $7.77 $8.76 $10.21
Information with respect to stock options outstanding and exercisable at November 30, 2004, is as follows:
Options Outstanding and Exercisable Range of Number Outstanding Weighted Average Weighted Average Exercise Price at 11/30/04 Remaining Life in Years Exercise Price - --------------- ----------- ----------------------- ---------------- $.75 50,000 3.70 $.75 $4.83 - $10.50 87,295 1.59 $6.60 $19.46 - $27.93 35,935 .84 $20.38
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:
2004 2003 2002 ---- ---- ----
Estimated fair value of options granted $ - $24,990 $79,432 ========= ======= ======= Principal assumptions in applying the Black-Scholes valuation model: Expected life, in years - 2.50 2.50 Risk-free interest rate - 1.86% 3.30% Expected volatility - 1.00 .99 Expected dividend yield - 0.00% 0.00%
The estimated weighted-average fair values at the grant date for stock option awards during Fiscal 2004, 2003 and 2002 were $0, $.50 and $3.45 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:
2004 2003 2002 ---- ---- ---- Pro forma net loss: Net loss as reported $(2,481,567) $(4,054,994) $(2,017,851) 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) - ----------- ----------- ------------ Pro forma net loss $(2,481,567) $(4,032,668) $(2,017,851) =========== =========== ============
Pro forma net loss per common share - basic and diluted
Pro forma net loss per common share $(1.22) $(2.15) $(1.16) Net loss per common share - as reported (1.22) (2.16) (1.16) Pro forma shares unused in calculation of pro forma loss per common share 2,041,500 (1,876,300) (1,742,500)
There were no stock options granted during the year ended November 30, 2004. 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.
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 $3,472,253 from this corporation of which $3,382,000 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 $261,000 and $322,000 of interest income from these notes in Fiscal 2004 and 2003, respectively. During the fourth quarter of Fiscal 2003, a 22% owner of this related party corporation passed away. After his death, the related party 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 related party corporation.
As a subsequent event, during April, 2005 the Company renegotiated a refinancing of the notes receivable from a related party. The demand note and the acquisition notes were combined and totaled $3,270,000 as of April 15, 2004. The Company received an $800,000 paydown on the combined note and agreed to term out the balance of $2,470,000 over the next eight years at 8%.
At November 30, 2004 and 2003, total notes receivable plus accrued interest for issuances of Company common stock to corporate officers, corporate counsel and certain consultants totaled $2,150,000 and $3,595,000, 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%.
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.
As a subsequent event, during the first quarter of Fiscal 2005, $1,489,500 of notes receivable for common stock - related parties were cancelled in return for 196,429 shares of Company common stock in full satisfaction of the liability.
15. Advertising ================
The Company expenses advertising as incurred. Total advertising expenses included in the results of operations were $11,000, $86,000 and $201,000 for 2004, 2003 and 2002, respectively.
16. Discontinued Operations =============================
During March 2004, the Company entered into negotiations to sell ATM/Canterbury back to the original owner. The transaction was finalized in April, 2004. Canterbury sold 100% of the stock in ATM/Canterbury in exchange for 25,000 shares of Canterbury common stock (which have been retired), that the owner had retained from the original transaction in 1997. The transaction was effective as of March 3, 2004. As a result of the transaction the Company recorded a $9,194 loss on the sale of discontinued operation in the second quarter of Fiscal 2004.
The Company's decision to sell ATM/Canterbury was based on the lack of demand for ATM/Canterbury's products and services by existing customers; the inability to increase sales to new customers and the Company's desire to focus on its training and consulting segment and its value added reseller segment.
Historical financial data for ATM/Canterbury for the fiscal years ended November 30:
2004 2003 2002 ---------- -------- --------- Revenues $58,866 $363,203 $552,598 Pretax loss (38,704) (168,626) (82,471)
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 -------- --------- Revenues $398,850 $916,774 Pretax income (loss) 17,908 (64,877)
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
17. Unaudited Quarterly Data =============================
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS (in thousands)