FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: Commission File Number:
May 31, 2000 0-15588
CANTERBURY INFORMATION TECHNOLOGY, INC.
----------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2170505
(State of Incorporation) (I.R.S. Employer Identification No.)
1600 Medford Plaza
Route 70 & Hartford Road
Medford, New Jersey 08055
(Address of principal executive office)
Telephone Number: (609) 953-0044
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
X Yes No
--- ---
The number of shares outstanding of the registrant's common stock
as of the date of the filing of this report 10,514,287 shares.
FORM 10-Q
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
CANTERBURY INFORMATION TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
------
May 31,
2000 November 30,
(Unaudited) 1999
----------- -----------
Current Assets:
Cash and cash equivalents $1,170,597 $1,060,434
Accounts receivable, net 3,368,125 2,676,889
Notes receivable - current portion 377,403 363,805
Prepaid expenses and
other assets 807,564 849,107
Inventory, principally finished goods, at cost 285,317 101,533
Deferred income tax benefit 99,448 99,448
--------- ---------
Total Current Assets 6,108,454 5,151,216
Property and equipment
at cost, net of accumulated
depreciation and amortization
of $4,896,000 and $4,593,000 2,215,768 2,383,829
Goodwill net of accumulated amortization
of $2,573,000 and $2,348,000 8,693,433 8,885,170
Deferred income tax benefit 2,296,997 2,706,888
Notes receivable 7,445,037 7,630,836
Other assets 1,031,848 1,054,033
---------- ----------
Total Assets $27,791,537 $27,811,972
=========== ==========
See Accompanying Notes
FORM 10-Q
CANTERBURY INFORMATION TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
May 31,
2000 November 30,
(Unaudited) 1999
----------- -----------
Current Liabilities:
Accounts payable - trade $ 1,817,690 $ 1,144,922
Accrued expenses 512,338 387,660
Unearned revenue 947,675 1,111,330
Current portion, long-term
debt 1,434,301 1,246,997
----------- ----------
Total Current Liabilities 4,712,004 3,890,909
Long-term debt 1,259,620 1,989,031
Deferred income tax liability 2,993,845 3,059,219
Stockholder's Equity:
Common stock, $.001 par value, 50,000,000
shares authorized; 9,714,000
and 9,508,000 issued 9,714 9,508
Additional paid in capital 19,989,939 19,946,848
Accumulated other comprehensive income (1,090,105) (472,215)
Retained earnings 712,516 184,668
Notes receivable for capital stock (388,696) (388,696)
Less treasury shares, at cost (407,300) (407,300)
------------ ------------
Total Shareholders' Equity 18,826,068 18,872,813
------------ ------------
Total Liabilities and Shareholders' Equity $ 27,791,537 $ 27,811,972
============ ============
See Accompanying Notes
FORM 10-Q
CANTERBURY INFORMATION TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended Six months ended
May 31, May 31,
------------------ ----------------
(Unaudited) (Unaudited)
2000 1999 2000 1999
---- ---- ---- ----
Service revenue $3,001,272 $3,284,597 $5,693,674 $5,860,299
Product revenue 3,007,862 234,209 6,269,051 460,637
---------- ---------- ---------- ----------
Total net revenue 6,009,134 3,518,806 11,962,725 6,320,936
Service cost and expenses $1,752,941 $1,805,650 $3,357,672 $3,226,048
Product cost and expenses 2,600,564 92,220 5,312,342 192,134
---------- ---------- ---------- ----------
Total cost and expenses 4,353,505 1,897,870 8,670,014 3,418,182
Gross profit 1,655,629 1,620,936 3,292,711 2,902,754
Selling 482,948 458,528 1,031,815 876,414
General and
administrative 1,109,678 1,004,232 2,052,606 1,912,003
---------- ---------- ---------- ----------
Total operating expenses 1,592,626 1,462,760 3,084,421 2,788,417
Other income/(expenses)
Interest income 165,115 169,473 331,268 340,422
Interest expense (87,294) (92,870) (162,274) (183,498)
Other 472,423 11,751 488,564 28,867
---------- ---------- ---------- ----------
Income before income taxes 613,247 246,530 865,848 300,128
Provision for income taxes 242,000 20,000 338,000 30,720
---------- ---------- ---------- ----------
Net income $ 371,247 $ 226,530 $ 527,848 $ 269,408
========== ========== ========== ==========
Net income per share and
common share equivalents:
Basic net income per share $ .04 $ .03 $ .06 $ .04
========== ========== ========== ==========
Diluted net income per share $ .04 $ .03 $ .05 $ .04
========== ========== ========== ==========
Weighted average number of common
shares - basic 9,655,500 8,000,600 9,582,200 7,212,400
========== ========== ========== ==========
Weighted average number of common
shares - diluted 10,418,200 6,031,000 10,356,000 5,890,000
========== ========== ========== ==========
See Accompanying Notes
FORM 10-Q
CANTERBURY INFORMATION TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTHS ENDED MAY 31, 2000 AND MAY 31, 1999
May 31, May 31,
2000 1999
------ ------
Operating activities:
Net income $ 527,848 $ 269,408
Adjustments to reconcile net income to net cash provided
by/(used in) operating activities:
Depreciation and amortization 528,745 521,888
Provision for losses on accounts receivable 47,674 5,610
Deferred income taxes 344,517 (151,432)
401(k) contribution 59,498 48,192
Other assets (595,705) (199,750)
Changes in operating assets, net of acquisitions
Accounts receivable (738,910) (373,282)
Inventory (183,784) -
Prepaid expenses and other assets 41,543 (108,670)
Income taxes - (63,217)
Accounts payable 672,768 (128,435)
Accrued expenses 124,678 16,021
Unearned revenue (163,655) 79,277
--------- --------
Net cash provided by/(used in) operating activities 665,217 (84,390)
--------- --------
Investing activities:
Capital expenditures, net (135,147) (104,942)
--------- --------
Net cash used in investing activities (135,147) (104,942)
--------- --------
Financing activities:
Proceeds from issuance of common stock, net - 1,086,399
Principal payments on long term debt (580,407) (761,688)
Other (50,001) -
Proceeds from long term debt 38,300 -
Proceeds from payments on notes receivable 172,201 164,826
--------- --------
Net cash provided by/(used in) financing activities (419,907) 489,537
--------- --------
Net increase in cash 110,163 300,205
Cash, beginning of period 1,060,434 287,274
--------- --------
Cash, end of period $1,170,597 $ 587,479
========== ==========
See Accompanying Notes
CANTERBURY INFORMATION TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
1. Operations and Summary of Significant Accounting Policies
---------------------------------------------------------
Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to those rules and regulations. It is suggested that these
unaudited consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's 10-K
for the year ended November 30. 1999. In the opinion of management, all
adjustments (which consist only of normal recurring accruals) necessary to
present fairly the financial position, results of operations and cash flows
of all periods presented have been made. Quarterly results are not
necessarily indicative of results for the full year.
Description of Business
-----------------------
Canterbury Information Technology, Inc. ("the Company") is engaged in
the business of providing information technology services which includes
operating computer software training companies, a management training
company, developing and selling software, designing and installing computer
networks, and reselling computer hardware to corporations and state and
local governments in the United States.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All material intercompany transactions have
been eliminated.
Stock Based Compensation
------------------------
The Company accounts for stock options under Accounting Principles Board
(APB) Opinion No. 25- Accounting for Stock Issued to Employees. The Company
discloses the pro forma net income and earnings per share effect as if the
Company had used the fair value method prescribed under SFAS No.123-
Accounting for Stock Based Compensation.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The ultimate outcome and actual results could differ
from the estimates and assumptions used.
Revenue Recognition
-------------------
The Company records training and consulting revenue at the time the class
is completed or the consulting services are performed. Hardware revenue is
recorded when the goods are shipped to the customer. Revenue for software is
recognized when the software is shipped to the customer.
Statement of Cash Flows
-----------------------
For purposes of the Statement of Cash Flows, cash refers solely to demand
deposits with banks and cash on hand.
Depreciation and Amortization
-----------------------------
The Company depreciates and amortizes its property and equipment for
financial statement purposes using the straight-line method over the
estimated useful lives of the property and equipment (useful lives of leases
or lives of leasehold improvements and leased property under capital leases,
whichever is shorter). For income tax purposes, the Company uses
accelerated methods of depreciation.
The following estimated useful lives are used:
Building and improvements 7 years
Equipment 5 years
Furniture and fixture 5 to 7 years
Intangible Assets
Goodwill is being amortized over periods ranging from twenty to
twenty-five years using the straight-line method.
The Company periodically evaluates whether the remaining estimated useful
life of intangibles may warrant revision or the remaining balance of
intangibles may require adjustment generally based upon expectations of
nondiscounted cash flows and operating income.
Inventories
-----------
Inventories are stated at the lower of cost or market utilizing a first-
in, first-out method of determining cost.
Earnings Per Share
------------------
Basic earnings per share is computed using the weighted average common
shares outstanding during the year. Diluted earnings per share considers the
dilutive effect, if any, of common stock equivalents (options).
Recent Accounting Pronouncements
--------------------------------
The Company plans to adopt Statement of Financial Accounting Standards
"(SFAS)" No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, effective at the beginning of fiscal 2001. This
statement will require derivative positions to be recognized in the balance
sheet at fair value. The Company believes that there will be no impact upon
adoption on results of operations or financial position.
Concentration of Risk
---------------------
As previously discussed, the Company is in the business of providing
information technology services. These services are provided to a large
number of customers in various industries in the United States. The
Company's trade accounts receivable are exposed to credit risk, but the risk
is limited due to the diversity of the customer base and the customers wide
geographic dispersion. The Company performs ongoing credit evaluations of
its customer's financial condition. The Company maintains reserves for
potential bad debt losses and such bad debt losses have been within the
Company's expectations.
The Company maintains cash balances at several large creditworthy banks
located in the United States. Accounts at each institution are insured by
the Federal Deposit Insurance Corporation up to $100,000. The Company does
not believe that it has significant credit risk related to its cash balance.
Comprehensive Income
--------------------
During the three months ended May 31, 2000 and May 31, 1999, total
comprehensive income (loss) amounted to ($526,000) and $0, respectively.
For the six months ended May 31, 2000 and May 31, 1999, total comprehensive
income (loss) amounted to ($618,000) and ($199,700) respectively.
Comprehensive income consists of net income and unrealized gains and losses
on securities available for sale, and is adjusted quarterly to reflect current
market value of these securities.
2. Acquisition
-----------
On October 20, 1999, the Company acquired certain assets and assumed
certain liabilities of U.S. Communications, Inc. (USC) from Condor
Technology Solutions, Inc. for 292,000 shares of Canterbury restricted
common stock valued at $850,000. USC, based in Maryland, is a 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 wide range of information technology services as well. They
include training, software, consulting and network design. After the
acquisition, the Company changed the name of U.S. Communications to
USC/Canterbury Corp. The acquisition was accounted for using the purchase
method of accounting. The purchase price was allocated as follows:
receivables - $308,000; inventory - $209,000; other current assets -
$21,000; non-current assets - $49,000; and current liabilities - $66,000.
The excess cost over the fair value of net assets acquired was approximately
$362,000. Goodwill is being amortized over 20 years on a straight line
basis. The consolidated results of operations for 1999 include USC since
the date of the acquisition.
3. Segment Reporting
-----------------
The Company is organized into three operating segments and the corporate
office. The operating segments are: training and consulting, hardware
sales and software sales. Summarized financial information for the three
months ended May 31, 2000 and May 31, 1999, for each segment, is as follows:
For the six months ended May 31,
Training and
2000 Consulting Hardware Software Corporate Total
---- ---------- -------- -------- --------- -----
Revenues $5,693,674 $6,154,486 $114,565 $ - $11,962,725
Income before
taxes 546,458 427,685 2,354 (110,649) 865,848
Interest income - - - 331,268 331,268
Interest expense - 37 - 162,237 162,274
Depreciation
and amortization 272,631 20,732 10,733 224,649 528,745
Training and
1999 Consulting Hardware Software Corporate Total
---- ---------- -------- -------- --------- -----
Revenues $5,860,299 $ 298,894 $161,743 $ - $6,320,936
Income before
taxes 696,283 52,097 27,845 (476,097) 300,128
Interest income - - - 340,422 340,422
Interest expense - - - 183,498 183,498
Depreciation
and amortization 286,390 11,334 6,058 218,106 521,888
For the three months ended May 31,
Training and
2000 Consulting Hardware Software Corporate Total
---- ---------- -------- -------- --------- -----
Revenues $2,684,272 $3,262,774 $62,088 $ - $6,009,134
Income before
taxes 345,673 141,355 (29,268) 155,487 613,247
Interest income - - - 165,115 165,115
Interest expense - 18 - 87,276 87,294
Depreciation
and amortization 137,947 12,580 6,233 118,803 275,563
Training and
1999 Consulting Hardware Software Corporate Total
---- ---------- -------- -------- --------- -----
Revenues $3,284,597 $ 132,345 $101,864 $ - $3,518,806
Income before
taxes 387,841 11,722 7,470 (160,503) 246,530
Interest income - - - 169,473 169,473
Interest expense - - - 92,870 92,870
Depreciation
and amortization 144,764 4,802 3,709 108,413 261,688
4. Property and Equipment
----------------------
Property and equipment consists of the following:
May 31, November 30,
2000 1999
---- ----
Land, buildings and improvements $ 725,910 $ 725,910
Machinery and equipment 4,239,939 4,116,383
Furniture and fixtures 1,413,287 1,401,696
Leased property under capital
leases and leasehold improvements 732,197 732,197
---------- -----------
7,111,333 6,976,186
Less: accumulated depreciation (4,895,565) (4,592,357)
---------- -----------
Net property and equipment $ 2,215,768 $ 2,383,829
========== ==========
Depreciation expense for 2000 and 1999 was $303,000 and $302,000,
respectively.
5. Long-Term Debt
--------------
May 31, November 30,
2000 1999
---- ----
Long-term obligations consist of:
Term loan $ - $ 200,436
Revolving credit line 2,514,620 2,774,620
Capital lease obligations 179,301 260,972
---------- ----------
2,693,921 3,236,028
Less: Current maturities (1,434,301) (1,246,997)
---------- ----------
$ 1,259,620 $1,989,031
========== ==========
The Company's outstanding amounts owed under the term loan and credit
line with Chase Bank were refinanced in December, 1999. Under the new
agreement, the Company paid off the remaining term debt of $200,436 and
agreed to term out the $2,774,620 credit line. Monthly payments began in
March of 2000, and continue until December of 2001 when the final balloon
payment of $640,000 is due and payable. Scheduled payments for fiscal 2000
total $915,000.
The long term debt is secured by substantially all of the assets of the
Company and requires compliance with covenants which include: limits on
capital expenditures, certain prepayments from excess cash flow as defined
and the maintenance of certain financial ratios and amounts. The Company is
restricted by its primary lender from paying cash dividends on its common
stock.
Aggregate maturities on long-term debt, exclusive of obligations under
capital leases, are approximately $655,000 in 2000, $1,220,000 in 2001, and
$639,620 thereafter.
The carrying value of the long-term debt approximates its fair value.
6. Capital Leases
--------------
Capital lease obligations are for certain equipment leases which expire
through fiscal year 2003. Future required payments under capitalized leases
together with the present value, calculated at the respective leases'
implicit interest rate of approximately 10.5% to 14.3% at their inception.
Year ending November 30, 2000 $ 62,232
Year ending November 30, 2001 80,764
Year ending November 30, 2002 44,560
Year ending November 30, 2003 8,934
---------
Total minimum lease payments 196,490
Less amount representing interest (17,189)
---------
Present value of long-term
obligations under capital leases $179,301
=========
7. Securities Available for Sale
-----------------------------
At May 31, 2000 and November 30, 1999, the Company held investment
securities in public companies. For one of the public companies certain
officers and directors of the Company have an ownership interest in the
aggregate of approximately 15%. Management has estimated the fair value of
this investment at May 31, 2000 and November 30, 1999 at $515,621 and
$202,355, respectively, based on discounted market values due to the stock
being thinly traded and volatile. Other equity securities have a fair value
of $81,081 and $26,437 at May 31, 2000 and November 30, 1999, respectively.
Management has classified these investments as "available for sale" and are
included in non-current other assets in the accompanying balance sheet. The
Company did not sell any available for sale securities during 2000 or 1999.
8. Related Party Transactions
--------------------------
During 1999, the Company performed consulting and web development
services for a start-up, non-public company in which certain officers are
members of the Board of Directors and shareholders. The services billed
during the year totaled $521,500. The receivable for these services is
included in other assets on the accompanying balance sheet at May 31, 2000
and November 30, 1999. In March, 2000 the Company received approximately
278,000 shares of restricted common stock in the publicly traded parent
company in satisfaction of the receivable.
During 2000, the Company also assisted in raising capital for the same
start-up company, which is now a public company. For these services, the
Company earned 250,000 shares of restricted common stock which were issued
subsequent to May 31, 2000. The discounted value of these shares was
$461,250. This amount has been recorded in Other Income on the income
statement during the quarter ended May 31, 2000.
9. Subsequent Event
----------------
In June, 2000 the Board of Directors voted to allow officers, directors,
certain advisors and individuals valuable to Canterbury the opportunity to
increase their equity positions in the Company, as an incentive to continue
and increase their efforts on behalf of the Company. A total of 800,000
shares of restricted common stock were purchased at market with interest
bearing, non-recourse notes to the Company. The notes carry an interest rate
of 6.5% and are due and payable on or before June, 2004. The notes and accrued
interest are collateralized by the shares being issued. Each recipient also
has granted the Company a 15-day right of first refusal, in any sale of
these shares.
Item 2. Management's Discussion of Financial Condition and
Results of Operations
Liquidity and Capital Resources
-------------------------------
Working capital at May 31, 2000 was $1,396,000. This was an increase
of $136,000 over November 30, 1999. The increase was caused by an increase
in receivables and inventory, offset by an increase in accounts payable of
USC/Canterbury.
The Company's outstanding amounts owed under the term loan and credit
line with Chase Bank were refinanced in December, 1999. Under the new
agreement, the Company paid off the remaining term debt of $200,436 and
agreed to term out the $2,774,620 credit line. Monthly payments began in
March of 2000, and continue until December of 2001 when the final balloon
payment of $640,000 is due and payable. Scheduled payments for fiscal 2000
total $915,000. As of July 1, 2000 the Company has made $430,000 in
principal payments to Chase Bank.
The long term debt is secured by substantially all of the assets of the
Company and requires compliance with covenants which include: limits on
capital expenditures, certain prepayments from excess cash flow as defined
and the maintenance of certain financial ratios and amounts. The Company is
restricted by its primary lender from paying cash dividends on its common
stock.
Management believes that positive cash flow contributions from the
Company's operating subsidiaries will be sufficient to cover cash flow
requirements for fiscal 2000. There was no material commitment for capital
expenditures as of May 31, 2000. Inflation was not a significant factor in
the Company's financial statements.
Cash flow from continuing operations for the six months ended May 31,
2000 was $570,000. This represents an increase of $654,000 over the prior
year. The increase is mainly attributable to the additional cash flow
provided by the USC/Canterbury acquisition, as well as an overall
improvement from existing subsidiaries.
Results of Operations
---------------------
Revenues
--------
Revenues for the three months ended May 31, 2000 increased by $2,490,000
(71%) over the comparable three-month period in fiscal 1999, due primarily to
the revenue contribution of USC/Canterbury in fiscal 2000. For the six
months ended May 31, 2000, revenues increased by $5,642,000 (89%) due again
primarily to the USC/Canterbury acquisition.
Costs and Expenses
------------------
Costs and expenses for the three months ended May 31, 2000 increased by
$2,456,000 (129%) due again to the costs associated with the USC/Canterbury
operations. The $5,252,000 (154%) increase for the six months ended May 31,
2000 was also due to the USC/Canterbury operations.
Selling expenses for the quarter and six months ended May 31, 2000
increased by $24,000 (5%) and $155,000 (18%) respectively, over the same
period in fiscal 1999. The increase was due primarily to the selling costs
associated with USC/Canterbury for the three months ended May 31, 2000.
Other Income
------------
Other income for the three months ended May 31, 2000 increased by
$461,000 due to the receipt of stock for assisting in raising capital for
a related party during the quarter.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
------
No additional legal proceedings were either initiated or brought
against the Company during the second fiscal quarter.
Item 2 Changes in Securities
------
None
Item 3 Defaults Upon Senior Securities
------
None
Item 4 Submission of Matters to a Vote of Security Holders
------
None
Item 5 Other Information
------
None
Item 6 Exhibits and Reports on Form 8-K
------
(a) Exhibits: None
(b) Reports on Form 8-K: None
FORM 10-Q
CANTERBURY INFORMATION TECHNOLOGY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANTERBURY INFORMATION TECHNOLOGY, INC.
(Registrant)
By/s/ Stanton M. Pikus
Stanton M. Pikus
President
(Chief Executive Officer and
duly authorized signer)
By/s/ Kevin J. McAndrew
Kevin J. McAndrew, C.P.A.
Chief Operating Officer, Executive
Vice President
(Chief Financial Officer and
duly authorized signer)
July 14, 2000
