SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 000-18887
COLONIAL TRUST COMPANY
(Exact name of registrant as specified in its charter)
Arizona 75-2294862
------- ----------
(State of Incorporation) (IRS Employer identification Number)
5336 N. 19th Avenue
Phoenix, Arizona 85015
----------------------
(Address of principal executive offices)
602-242-5507
------------
(Registrant's telephone number)
NONE
(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X______ No __________
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15 (d) of the Exchange Act
after the distribution of securities under a plan confirmed by
court.
Yes __________ No __________
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date:730,202
Transitional Small Business Disclosure Format (check one):
Yes _________ No ___X______
1
COLONIAL TRUST COMPANY
INDEX
Page
Part I. Financial Information:
Item 1: Financial Statements 3
Condensed Balance Sheets 3
Condensed Statements of Earnings (loss) 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis or
Plan of Operation 10
Part II. Other Information
Item 1: Legal Proceedings 15
Item 2: Changes in Securities 16
Item 3: Default Upon Senior Securities 16
Item 4: Submission of Matters to a Vote of Security Holders 17
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 17
SIGNATURES 17
2
COLONIAL TRUST COMPANY
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
ASSETS December 31, 2001 March 31, 2001
Cash and cash equivalents $136,410 $319,204
Receivables 935,493 824,111
Note receivable 321,136 381,507
Income taxes receivable 92,547 22,536
Property, furniture and equipment, net 708,413 796,036
Excess of cost over fair value acquired, net 107,776 116,911
Restricted cash 517,776 515,831
Other assets 113,924 74,942
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$2,933,475 $3,051,078
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $173,980 $304,797
Deferred income taxes 12,193 12,193
------ ------
Total Liabilities 186,173 316,990
------- -------
Stockholders' equity:
Common stock, no par value;
25,000,000 shares authorized, 730,505
issued and outstanding at December
31, 2001 and 720,843 issued and
outstanding at March 31, 2001 614,286 578,911
Additional paid-in 506,208 506,208
Retained earnings 1,626,808 1,648,969
--------- ---------
Total Stockholders' Equity 2,747,302 2,734,088
--------- ---------
$2,933,475 $3,051,078
========== ==========
See accompanying notes to condensed financial statements.
3
COLONIAL TRUST COMPANY
Condensed Statements of Earnings (Loss)
Three-month periods Nine-month periods
Ended December 31 Ended December 31
Revenues: 2001 2000 2001 2000
Bond servicing income $465,569 $597,996 $1,562,514 $1,903,533
IRA servicing fees-corporate 144,765 128,763 455,531 427,905
IRA servicing fees-personal trust 67,005 68,562 198,292 218,136
Trust fee income 223,681 212,809 694,484 607,860
Interest & other income 28,296 26,137 64,496 65,251
------ ------ ------ ------
Total revenue 929,316 1,034,267 2,975,317 3,222,685
General and administrative
expenses 967,549 943,628 2,996,128 2,725,296
------- ------- --------- ---------
Earnings (loss) before income
taxes (38,233) 90,639 (20,811) 497,389
Income taxes (benefit) (15,655) 37,162 (8,512) 209,291
------- ------ ------ -------
Net earnings (loss) ($22,578) $53,477 ($12,299) $288,098
======== ======= ======== ========
Basic net earnings per
common share ($.03) $.07 ($.02) $.40
----- ---- ----- ----
Diluted net earnings per
common share ($.03) $.07 ($.02) $.39
----- ---- ----- ----
Weighted average shares
outstanding -basic 731,618 719,328 731,270 723,515
======= ======= ======= =======
Weighted average shares
outstanding -diluted 731,618 748,265 731,270 747,789
======= ======= ======= =======
See accompanying notes to condensed financial statements.
4
COLONIAL TRUST COMPANY
Condensed Statements of Cash Flows
Nine-month periods
Ended December 31,
2001 2000
Cash flows from operating activities:
Net earnings (loss) ($12,299) $288,098
Adjustments to reconcile net earnings (loss) to
Net cash provided by (used in) operating
activities:
Depreciation and amortization 118,709 114,514
Decrease (increase) in receivables (111,382) 15,255
Increase in income taxes receivable (70,011) -
Increase in other assets (38,982) (4,767)
Increase (decrease) in accounts payable and
accrued liabilities (130,817) 27,258
Decrease in income taxes payable - (46,301)
--------- --------
Net cash provided by (used in) operating activities (244,782) 394,057
Cash flows from investing activities:
Purchase of property, furniture and equipment (21,951) (56,719)
Additions to note receivable (239,629) -
Payments received on note receivable 300,000 4,409
Increase in restricted cash (1,945) (7,295)
------- -------
Net cash provided by (used in) investing activities 36,475 (59,605)
Cash flows from financing activities:
Proceeds from issuance of common stock under
stock option plan 35,375 24,595
Purchase and retirement of common stock (9,862) (142,491)
------- ---------
Net cash provided by (used in) financing activities 25,513 (117,896)
Increase (decrease) in cash and cash equivalents (182,794) 216,556
Cash and cash equivalents at beginning of period 319,204 9,260
-------- --------
Cash and cash equivalents at end of period $136,410 $225,816
======== ========
See accompanying notes to condensed financial statements.
5
COLONIAL TRUST COMPANY
Notes to Condensed Financial Statements
1. Significant Accounting Policies
-------------------------------
In the opinion of Colonial Trust Company (the "Company" or "Colonial"),
the accompanying unaudited condensed financial statements contain all
adjustments necessary to present fairly the financial position, results
of operations and cash flows for the periods presented. The results for
the three and nine months ended December 31, 2001 are not necessarily
indicative of the results for the full fiscal year. The accompanying
condensed financial statements do not include all disclosures
considered necessary for a fair presentation in conformity with
generally accepted accounting principles. Therefore, it is recommended
that these accompanying statements be read in conjunction with the
financial statements appearing in the Company's Annual Report on Form
10-KSB as of and for the year ended March 31, 2001.
(a) Nature of Business
------------------
The Company was incorporated on August 15, 1989, in the State
of Arizona for the purpose of engaging in the business of
acting as a fiduciary. The Company's common stock is
registered under the Securities Exchange Act of 1934.
The Company serves as trustee under various bond indentures
for issuers of bonds in 39 states, the District of Columbia
and 2 Canadian Provinces. The issuers are primarily churches
and other non-profit organizations. From time to time, the
Company serves as trustee and/or paying agent on bond
offerings of for-profit organizations. However the Company's
Board of Directors adopted a policy on October 8, 2001
pursuant to which the Company will not serve as indenture
trustee on for-profit issuances without a unanimous consent of
the Company's Trust & Investments Committee and the Board of
Directors. Since this policy was adopted, the Company has not
agreed to serve as indenture trustee on any new bond issues of
for-profit entities. As trustee, the Company receives, holds,
invests and disburses the bond proceeds as directed by the
applicable trust indenture and receives weekly or monthly
sinking fund payments from the issuer of bonds, and, as paying
agent, pays the semi-annual principal and interest payments to
the bondholder.
The Company also serves as trustee of self-directed individual
retirement accounts for certain bondholders or employees of
religious organizations.
The Company's Personal Trust segment provides investment
management, administration and custodial services for
customers with various securities held in trust or in
investment agency accounts.
(b) Revenue Recognition
-------------------
Under the trust indentures with organizations issuing bonds,
Colonial, for its services, principally earns revenues based
on three fee structures. The first fee structure allows
Colonial to invest trust funds held for disbursement and
retain the gains and earnings therefrom. The second fee
structure requires the issuing institution to pay a percentage
of the bond proceeds to the Company for set-up and printing
costs during the first year. The third fee structure entitles
Colonial to interest earnings up to 2.5% of daily trust funds
held in bond program fund accounts in lieu of a set-up fee.
Annual maintenance fees and bond printing costs are charged as
a percentage of the related bond issuance. Colonial also
receives fees for services provided as custodian for
self-directed individual retirement accounts.
6
In connection with providing investment management,
administration and custodial services, Colonial earns revenue
based on two fee structures. The first fee structure is
established as a percentage of the fiduciary assets which
Colonial holds as trustee or agent. Fees are assessed on a
monthly basis to individual accounts according to the prior
month's end fair market value of each account. The second fee
structure is an annual fee that is set up to cover the
maintenance of fiduciary assets Colonial holds in both trust
and self-directed IRA accounts. Minimum fees are assessed
monthly, based on 1/12th of the published annual minimum.
(c) Computation of Basic and Diluted Net Earnings Per Common Share
--------------------------------------------------------------
Basic EPS is computed based on weighted average shares
outstanding and excludes any potential dilution from stock
options, warrants and other common stock equivalents. Diluted
EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other
contracts to issue common stock.
(d) Reclassification
----------------
Certain amounts in the December 31, 2001 condensed financial
statements have been reclassified to conform to the December
31, 2001 financial statement presentation.
2. Note receivable
---------------
On December 1, 1990, the Company entered into a Master Note and Letter
Agreement with Church Loans and Investment Trust, Inc., its former
parent corporation. The Master Note, in the maximum amount of
$1,000,000, is due on demand, bears interest payable monthly at 1% less
than the prime rate and is unsecured. Amounts advanced from time to
time may be prepaid and re-borrowed.
3. Earnings (Loss) Per Share
-------------------------
A reconciliation from basic earnings (loss) per share to diluted
earnings (loss) per share for the three-month and nine-month periods
ended December 31, 2001, and December 31, 2000 follows:
Three-month periods Nine-month periods
Ended December 31, Ended December 31,
------------------ ------------------
2001 2000 2001 2000
Net earnings(loss) ($22,578) $53,477 ($12,299) $288,098
--------- ------- --------- --------
Basic EPS
-weighted average
shares outstanding 731,618 719,328 731,270 723,515
======= ======= ======= =======
Basic EPS ($.03) $.07 ($.02) $.40
----- ---- ----- ----
7
Basic EPS
-weighted average
shares outstanding 731,618 719,328 731,270 723,515
Effect of dilutive
securities:
Stock options - 28,937 - 24,274
------- ------ ------- ------
Diluted EPS
-weighted average
shares outstanding 731,618 748,265 731,270 747,789
======= ======= ======= =======
Diluted EPS ($.03) $.07 ($.02) $.39
----- ---- ----- ----
Stock options not
included in Diluted
EPS since anti-dilutive 114,374 - 114,374 -
======= ======= ======= =======
4. Business Segments
-----------------
Operating results and other financial data are presented for the
principal business segments of the Company for the three-month and
nine-month periods ended December 31, 2001 and December 31, 2000. The
Company has two distinct business segments consisting of Corporate
Trust services and Personal Trust services.
In computing operating profit by business segment, interest and other
income, portions of administrative expenses and other items not
considered direct operating expenses were considered to be in the Other
category.
Three-month periods: Corporate Personal Other Total
Trust Trust
--------- -------- ------- --------
December 31, 2001
Bond Servicing Income $465,569 - - $465,569
IRA Servicing Fees 144,765 $67,005 - 211,770
Trust Fee Income - 223,681 - 223,681
Interest & Other Income - - $28,296 28,296
-------- -------- ------- --------
$610,334 $290,686 $28,296 $929,316
======== ======== ======= ========
General & Administrative
Expenses $405,332 $258,394 $303,823 $967,549
-------- -------- -------- --------
December 31, 2000
Bond Servicing Income $597,996 - - $597,996
IRA Servicing Fees 128,763 $68,562 - 197,325
Trust Fee Income - 212,809 - 212,809
Interest & Other Income - - $26,137 26,137
-------- -------- ------- --------
$726,759 $281,371 $26,137 $1,034,267
======== ======== ======= ==========
General & Administrative
Expenses $414,197 $211,766 $317,665 $943,628
-------- -------- -------- --------
Nine-month periods: Corporate Personal Other Total
Trust Trust
December 31, 2001
Bond Servicing Income $1,562,514 - - $1,562,514
IRA Servicing Fees 455,531 $198,292 - 653,823
Trust Fee Income - 694,484 - 694,484
Interest & Other Income - - $64,496 64,496
---------- -------- ------- ----------
$2,018,045 $892,776 $64,496 $2,975,317
========== ======== ======= ==========
8
General & Administrative
Expenses $1,336,410 $767,707 $892,011 $2,996,128
---------- -------- -------- ----------
December 31, 2000
Bond Servicing Income $1,903,533 - - $1,903,533
IRA Servicing Fees 427,905 $218,136 - 646,041
Trust Fee Income - 607,860 - 607,860
Interest & Other Income - - $65,251 65,251
---------- -------- ------- ----------
$2,331,438 $825,996 $65,251 $3,222,685
========== ======== ======= ==========
General & Administrative
Expenses $1,155,102 $602,125 $968,069 $2,725,296
---------- -------- -------- ----------
5. Legal Proceedings
-----------------
The Company is a party to various legal proceedings arising in the
ordinary course of business. While it is not feasible to predict the
ultimate disposition of these matters, in the opinion of management
their outcome, with the possible exception of the event described
below, will not have a material adverse effect on the financial
condition or results of operations of the Company.
On March 19, 2001, Stevens Financial Group, Inc. ("Stevens") filed a
Voluntary Petition under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of Arizona
(Case No. 01-03108-ECF-RTB) (the "Stevens Bankruptcy Proceeding"). The
Company serves as Trustee under seven Trust Indentures (the "Stevens
Trust Indentures") which secure obligations of Stevens under certain
Time Certificates and Fixed Rate Investments. Stevens has defaulted on
all outstanding debt instruments.
On February 1, 2002, a Complaint (Adv. No. 01-1319) was filed against
the Company and other third parties in the Stevens Bankruptcy
Proceeding by the Trustee for the Estate of Stevens. In its Complaint,
the Trustee alleged that Colonial failed to perform its duties as
Trustee under the Stevens Trust Indentures and that Colonial breached
its fiduciary duties to the Stevens investors. The Complaint seeks a
judgment against Colonial in the amount of $40 million for its alleged
failure to perform its contractual duties under the Trust Indentures
and a judgment in an amount equal to the amount invested in Time
Certificates and Fixed Rate Investments for Colonial's alleged breach
of fiduciary duties; the Trustee alleges in the Complaint that a total
of approximately $92.6 million in Time Certificates and Fixed Rate
Investments were purchased in the aggregate by the Stevens investors.
To date, the Company has not filed an Answer or other responsive
pleading in the above matter.
Colonial has submitted a claim to its E&O insurance carrier based on
the demand letters which preceded the above Complaint. The Company has
also provided its E&O carrier with the above Complaint. The Company's
E&O carrier has not notified the Company whether it will assume
coverage for the above claim, and the Company is presently unable to
determine whether it will incur any liability in excess of its E&O
coverage as a result of such claim.
The successful denial by the Company's E&O carrier of coverage for the
claims asserted in the above Complaint, or the recovery of amounts in
excess of the policy limits of the Company's E&O Policy, could have a
material and adverse effect on the Company's financial condition and
results of operations, could result in revocation of the Company's
certificate by the Arizona Banking Department, and could result in the
Company being forced to file a petition under the federal bankruptcy
laws, to attempt to enter into a sale or other business combination, or
to discontinue its business operations. Additionally, the Company's
failure to recover the costs it incurs in the Stevens Bankruptcy
Proceeding or to have its E&O carrier pay or reimburse the Company for
the defense costs described above could also have a material and
adverse effect on the Company's financial condition and results of
operations.
9
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations-Three-Month Periods Ended December 31, 2001 and
---------------------------------------------------------------------
December 31, 2000.
------------------
The Company had a net loss of $22,578, or $.03 per diluted share, for
the period ended December 31, 2001, compared to net earnings of
$53,477, or $.07 per diluted share, for the period ended December 31,
2000, a decrease in net earnings of 142%. The Company had total revenue
of $929,316 for the period ended December 31, 2001, compared to total
revenue of $1,034,267 for the period ended December 31, 2000, a
decrease of 10%.
The Corporate Trust segment's revenue decreased to $610,334 for the
period ended December 31, 2001, compared to $726,759 for the period
ended December 31, 2000, a decrease of 16%. The Personal Trust
segment's revenue increased to $290,686 for the period ended December
31, 2001, compared to $281,371 for the period ended December 31, 2000,
an increase of 3%.
The Corporate Trust segment's bond servicing income decreased to
$465,569 for the period ended December 31, 2001, compared to $597,996
for the period ended December 31, 2000, a decrease of 22%. The decrease
in bond servicing income was primarily attributable to the following
factors. First, trust set-up and bond printing fees in the current
quarter decreased approximately $23,000 compared to the prior period,
due primarily to a decrease in new non-profit bond issuances originated
for which the Company was serving as trustee and paying agent. Second,
municipal bond servicing fee income in the current quarter decreased
approximately $49,000 compared to income from such activities in the
prior period due to no new issues in the current quarter, and two
issues in default in the current quarter. It is anticipated the Company
will service no new municipal bond issues in the foreseeable future.
Third, interest earnings on trust investment balances decreased
approximately $92,000 in the current period compared to the prior
period reflecting reduced interest rates and lower investment balances
in the current period compared to the prior period. The following
factors partially offset this decrease in bond servicing income. First,
annual maintenance fee income in the current quarter increased
approximately $24,000 compared to the prior period primarily due to the
receipt of several months of delinquent fees on a bond issue
reorganization. Second, late fee income in the current quarter
increased approximately $19,000 compared to the prior period, due to a
higher number of payoffs and the collection of outstanding fees. The
Company anticipates that revenues from the Corporate Trust segment's
non-profit bond servicing activities will continue to be negatively
impacted for at least the next fiscal quarter by the Company's reduced
share of the market for non-profit bonds and by an anticipated decrease
in new non-profit issuances originated by broker/dealers with whom the
Company has a relationship, compared to market share and issuances in
the comparable prior period. At December 31, 2001, the Company was
serving as trustee and paying agent on 453 bond offerings totaling
approximately $454,600,000 in original principal amount; at December
31, 2000, the Company was serving as trustee and paying agent on 462
bond offerings totaling approximately $461,700,000 in original
principal amount.
Revenue from the Corporate Trust segment's IRA servicing activities
increased to $144,765 for the period ended December 31, 2001, compared
to $128,763 for the period ended December 31, 2000, an increase of 12%.
This increase was due to an increase in the number of IRA's being
serviced. Revenue from the Personal Trust segment's IRA servicing
activities decreased to $67,005 for the period ended December 31, 2001,
compared to $68,562 for the period ended December 31, 2000, a decrease
of 2%. At December 31, 2001, the Corporate Trust segment was servicing
9,778 IRA's with an aggregate value of approximately $184,104,000, and
the Personal Trust segment was servicing 245 IRA's with an aggregate
value of approximately $47,729,000. At December 31, 2000, the Corporate
Trust segment was servicing 9,576 IRA's with an aggregate value of
approximately $167,200,000, and the Personal Trust segment was
servicing 291 accounts with an aggregate value of approximately
$46,076,000.
10
The Personal Trust segment's trust fee income increased to $223,681 for
the period ended December 31, 2001, compared to $212,809 for the period
ended December 31, 2000, an increase of 5%. The increase in trust fee
income was primarily due to the increase in the number of trust or
other accounts serviced by the Company, partially offset by
proportionately lower fees per account in the current period compared
to the prior period, due to a decline in the market values of the
underlying securities comprising the portfolios. At December 31, 2001,
the Personal Trust segment was serving as trustee or agent for 679
trust, investment, or other accounts with a fair market value of
approximately $122,296,000. At December 31, 2000, the Personal Trust
segment was serving as trustee or agent for 508 trust, investment, or
other accounts with a fair market value of approximately $160,086,000.
Interest and other income increased to $28,296 for the period ended
December 31, 2001, compared to $26,137 for interest and other income in
the period ended December 31, 2000, an increase of 8%. The net increase
was primarily attributable to a one-time systems conversion fee
attributable to a new registrar & disbursing agency account, partially
offset by falling interest rates on investments.
The Corporate Trust segment's general and administrative expenses
decreased in the aggregate to $405,332 for the period ended December
31, 2001, compared to $414,197 for the period ended December 31, 2000,
but increased to 66% of segment revenues for the period ended December
31, 2001, from 57% of segment revenues for the period ended December
31, 2000. The Personal Trust segment's general and administrative
expenses increased in the aggregate to $258,394 for the period ending
December 31, 2001, compared to $211,766 for the period ended December
31, 2000, an increase of 22%, and increased to 89% of segment revenues
for the period ended December 31, 2001, compared to 75% of segment
revenues for the period ended December 31, 2000. The Corporate Trust
segment's general and administrative expenses as a percentage of
revenues increased primarily as a result of decreased revenues due to a
reduction in new Corporate Trust Bonds and Municipal Bonds issued. The
increase in Personal Trust segment's general and administrative
expenses were due primarily to an increase in personnel including a new
business development officer and support staff, as well as additional
expenses involved in administering the Company's increased trust
servicing business.
The Company's effective income tax rate was 41.0 % for the three-month
periods ended December 31, 2001 and 2000.
Results of Operations-Nine-Month Periods Ended December 31, 2001 and
--------------------------------------------------------------------
December 31, 2000.
------------------
The Company had a net loss of $12,299, or $.02 per diluted share, for
the period ended December 31, 2001, compared to net earnings of
$288,098, or $.39 per diluted share, for the period ended December 31,
2000, a decrease in net earnings of 104%. The Company had total revenue
of $2,975,317 for the period ended December 31, 2001, compared to total
revenue of $3,222,685 for the period ended December 31, 2000, a
decrease of 8%.
The Corporate Trust segment's revenue decreased to $2,018,045 for the
period ended December 31, 2001, compared to $2,331,438 for the period
ended December 31, 2000, a decrease of 13%. The Personal Trust
segment's revenue increased to $892,776 for the period ended December
31, 2001, compared to $825,996 for the period ended December 31, 2000,
an increase of 8%.
The Corporate Trust segment's bond servicing income decreased to
$1,562,514 for the period ended December 31, 2001, compared to
$1,903,533 for the period ended December 31, 2000, a decrease of 18%.
The decrease in bond servicing income was primarily attributable to the
following factors. First, trust set-up and bond printing fees in the
current period decreased approximately $125,000 compared to the prior
period, due primarily to a decrease in new non-profit bond issuances
originated for which the Company was serving as trustee and paying
agent. Second, municipal bond servicing fee income in the current
period decreased approximately $122,000 compared to income from such
activities in the prior period due to no new issues in the current
period, and three issues in default in the current period. It is
anticipated the Company will service no new municipal bond issues in
the foreseeable future. Third, interest earnings on non fee-based trust
investment balances decreased approximately $62,000 in the current
period compared to the prior period reflecting reduced interest rates
compared to the prior period. Fourth, interest earnings on fee-based
trust investment balances decreased approximately $106,000 in the
current period compared to the prior period reflecting reduced interest
rates and lower investment balances in the current period compared to
the prior period. The following factors partially offset this decrease
in bond servicing income. First, annual maintenance fee income in the
current period increased approximately $41,000 compared to the prior
period primarily due to the receipt of several months of delinquent
fees on a bond issue reorganization. Second, late fee income in the
current period increased approximately $65,000 compared to the prior
period, due to a higher number of payoffs and the collection of
outstanding fees. The Company anticipates that revenues from the
Corporate Trust segment's non-profit bond servicing activities will
continue to be negatively impacted for at least the next fiscal quarter
by the Company's reduced share of the market for non-profit bonds and
by an anticipated decrease in new non-profit issuances originated by
broker/dealers with whom the Company has a relationship, compared to
market share and issuances in the comparable prior period.
11
Revenue from the Corporate Trust segment's IRA servicing activities
increased to $455,531 for the period ended December 31, 2001, compared
to $427,905 for the period ended December 31, 2000, an increase of 6%.
The increase in Corporate Trust segment's IRA revenues was primarily
due to an increase in the number of accounts serviced by the Company.
Revenue from the Personal Trust segment's IRA servicing activities
decreased to $198,292 for the period ended December 31, 2001, compared
to $218,136 for the period ended December 31, 2000, a decrease of 9%.
The decrease in the Personal Trust segment's IRA revenue was primarily
due to a reduction in the number of accounts serviced by the Company.
The Personal Trust segment's trust income increased to $694,484 for the
period ended December 31, 2001, compared to $607,860 for the period
ended December 31, 2000, an increase of 14%. The increase in trust
income was primarily due to the increase in the number of trust or
other accounts serviced by the Company, partially offset by
proportionately lower fees per account in the current period compared
to the prior period, due to a decline in the market values of the
underlying securities comprising the portfolios.
Interest and other income decreased to $64,496 for the period ended
December 31, 2001, compared to $65,251 for interest and other income in
the period ended December 31, 2000, a decrease of 1%. The net decrease
was primarily attributable to a decline in interest rates on
investments partially offset by a one time systems conversion fee
attributable to a new registrar and disbursing agency account.
The Corporate Trust segment's general and administrative expenses
increased in the aggregate to $1,336,410 for the period ended December
31, 2001, compared to $1,155,102 for the prior period, an increase of
16%, and increased to 66% of segment revenues for the period ended
December 31, 2001, compared to 50% for the period ended December 31,
2000. The Personal Trust segment's general and administrative expenses
increased in the aggregate to $767,707 for the period ended December
31, 2001, compared to $602,125 for the period ended December 31, 2000,
an increase of 27%, and increased to 86% of segment revenues for the
period ended December 31, 2001, compared to 73% of segment revenues for
the period ended December 31, 2000. The Corporate Trust segment's
general and administrative expenses increased in the aggregate
primarily as a result of expenses of approximately $285,000 incurred in
the Stevens Bankruptcy Proceeding (see Part II-Item 1: Legal
Proceedings, and Exhibit 99(b) to this Form 10-QSB) and increased as a
percentage of revenues as a result of the above factor and a reduction
in the number of new non-profit bond issuances for which the Company is
serving as trustee and paying agent, offset in part by a reduction of
approximately $104,000 in other general and administrative expenses as
compared with the prior nine month period. The increase in Personal
Trust segment's general and administrative expenses were due primarily
to an increase in personnel including a new business development
officer and support staff, as well as additional expenses involved in
administering the Company's increased trust servicing business.
The Company's effective income tax rate was 40.9% for the nine-month
period ended December 31, 2001, and 42.1 % for the nine-month period
ended December 31, 2000.
12
Liquidity and Capital Resources
-------------------------------
Under legislation effective on July 20, 1996, the Company is required
to maintain net capital of at least $500,000; the Company's net capital
was $2,747,302 on December 31, 2001. Arizona law also requires that the
Company's net capital meet certain liquidity requirements.
Specifically, $500,000 of such net capital must meet the Arizona
Banking Department's liquidity requirements. Additional capital
requirements may be imposed upon the Company in the future as a result
of Arizona legislation which became effective on August 9, 2001 and to
which the Company will become subject on December 31, 2002. For further
discussion of possible future additional capital requirements, see
"Item 1: Regulation, Licensing and Supervision" of the Company's 10-KSB
for fiscal year ended March 31, 2001 and Exhibit 99(b) -"Regulation,
Licensing and Supervision - Net Capital Requirements." At December 31,
2001, $517,776 of the Company's net capital met the Department's
liquidity requirements. The Company believes that it will be able to
satisfy its working capital and capital expenditure requirements for
the foreseeable future from existing cash balances, from anticipated
cash flow from operating activities, and from funds available under the
Company's Master Demand Note with its former parent, Church Loans and
Investments Trust.
The Company's cash and cash equivalents decreased from $319,204 on
March 31, 2001, to $136,410 on December 31, 2001, while the note
receivable decreased from $381,507 on March 31, 2001, to $321,136 on
December 31, 2001. The decrease in the cash and cash equivalents was
primarily due to an increase in receivables consisting of payments by
the Company, in its capacity as Trustee, of legal fees and other
expenses pertaining to bond issuances in default. These receivables do
not include expenses pertaining to the Stevens Bankruptcy Proceeding
(see "Part II - Other Information-Item 1: Legal Proceedings" and
Exhibit 99(b)). Based on past experience, the Company believes it will
fully recover these receivables. The decrease in the note receivable
was due to the receipt of net payments totaling $60,371. The Company's
net property and equipment decreased from $796,036 on March 31, 2001,
to $708,413 on December 31, 2001. The decrease was primarily due to
depreciation of property and equipment exceeding the purchase of
replacement computer equipment and software for employees. The Company
believes that existing cash reserves will cover capital expenditure
requirements for the foreseeable future.
Impact of Recently Issued Accounting Standards
----------------------------------------------
In July 2001, the FASB issued Statement No. 141, Business Combinations
("Statement 141"), and Statement No. 142, Goodwill and Other Intangible
Assets ("Statement 142"). Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all business combinations completed
after June 30, 2001. Statement 141 also specifies criteria that
intangible assets acquired in a business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead
tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately and Statement 142 effective April 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite
useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue
to be evaluated for impairment in accordance with the appropriate
pre-Statement 142 accounting literature. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
13
Statement 141 will require upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were
acquired in a prior purchase business combination, and to make any
necessary reclassifications in order to conform with the new criteria
in Statement 141 for recognition apart from goodwill. Upon adoption of
Statement 142, the Company will be required to reassess the useful
lives and residual values of all intangible assets acquired in purchase
business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In
addition, to the extent an intangible asset is identified as having an
indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of
Statement 142 within the first interim period. Any impairment loss will
be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date
of adoption. To accomplish this the Company must identify its reporting
units and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of the date of
adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carrying amount. To the extent a reporting
unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and the Company must
perform the second step of the transitional impairment test. In the
second step, the Company must compare the implied fair value of the
reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of its assets (recognized and unrecognized)
and liabilities in a manner similar to a purchase price allocation in
accordance with Statement 141, to its carrying amount, both of which
would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end
of the year of adoption. Any transitional impairment loss will be
recognized as the cumulative effect of a change in accounting principle
in the Company's statement of earnings.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $104,729, which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense
related to goodwill was $12,170 and $9,135 for the year ended March 31,
2001 and the 9 months ended December 31, 2001, respectively. Because of
the extensive effort needed to comply with adopting Statements 141 and
142, it is not practicable to reasonably estimate the impact of
adopting these Statements on the Company's financial statements at the
date of this report, including whether any transitional impairment
losses will be required to be recognized as the cumulative effect of a
change in accounting principle.
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("Statement 144"), which supersedes both FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of ("Statement 121") and the
accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions ("Opinion 30"), for the disposal of a
segment of a business (as previously defined in that Opinion).
Statement 144 retains the fundamental provisions in Statement 121 for
recognizing and measuring impairment losses on long-lived assets held
for use and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with Statement
121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for
impairment, establishes criteria for when a long-lived asset is held
for sale, and prescribes the accounting for a long-lived asset that
will be disposed of other than by sale. Statement 144 retains the basic
provisions of Opinion 30 on how to present discontinued operations in
the income statement but broadens that presentation to include a
component of an entity (rather than a segment of a business). Unlike
Statement 121, an impairment assessment under Statement 144 will never
result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement No. 142, Goodwill and Other Intangible
Assets.
The Company is required to adopt Statement 144 no later than the year
beginning after December 15, 2001, and plans to adopt its provisions
for the quarter ending June 31, 2002. Management does not expect the
adoption of Statement 144 for long-lived assets held for use to have a
material impact on the Company's financial statements because the
impairment assessment under Statement 144 is largely unchanged from
Statement 121. The provisions of the Statement for assets held for sale
or other disposal generally are required to be applied prospectively
after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that
adoption of Statement 144 will have on the Company's financial
statements.
14
Market Risk
-----------
In the opinion of management, our market risk factors have not changed
materially from those set forth in the Company's 10-KSB for the year
ended March 31, 2001.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995.
This Form 10-QSB contains one or more forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and is subject to the safe harbors created thereby. These
forward-looking statements involve risks and uncertainties, including,
but not limited to: the Company's continued employment of key
management; the success of the company in its business development
efforts; the Company's success with the investment advisory agreements
with Hackett Investment Advisors ("HIA"), Feldman Securities Group LLP
(FSG) and Wright Investors' Services (WIS), pursuant to which HIA, FSG
and WIS provide investment advisory services for the majority of the
trust and investment agency accounts of the Company, and the success of
HIA, FSG and WIS in managing such accounts; increased competition for
the Company's services; competitive pressures on prices for the
Company's services; increased staffing or office needs not currently
anticipated; the Company's ability to recover the costs it has incurred
and will incur in the future in connection with the Stevens Bankruptcy
Proceeding, which costs totaled approximately $285,000 through December
31, 2001; the Company's ability to successfully defend the litigation
filed against it by the Trustee of the Stevens Financial Group Estate
(see "Part II - Other Information-Item 1: Legal Proceedings"); new
rules or regulations not currently anticipated which adversely affect
the Company; an increase in interest rates or other economic factors
having an adverse impact on the Company; and other risks detailed from
time to time in the Company's Securities and Exchange Commission
filings. See also the Company's Form 10-KSB for the fiscal year ended
March 31, 2001 and Exhibit 99(a) to this Form 10-QSB for a more
detailed discussion of the risks and uncertainties associated with the
Company's future operations.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
The Company is a party to various legal proceedings arising in the
ordinary course of business. While it is not feasible to predict the
ultimate disposition of these matters, in the opinion of management
their outcome, with the possible exception of the event described
below, will not have a material adverse effect on the financial
condition or results of operations of the Company.
On March 19, 2001, Stevens Financial Group, Inc. ("Stevens") filed a
Voluntary Petition under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of Arizona
(Case No. 01-03108-ECF-RTB) (the "Stevens Bankruptcy Proceeding"). The
Company serves as Trustee under seven Trust Indentures (the "Stevens
Trust Indentures") which secure obligations of Stevens under certain
Time Certificates and Fixed Rate Investments. Stevens has defaulted on
all outstanding debt instruments.
15
On February 1, 2002, a Complaint (Adv. No. 01-1319) was filed against
the Company and other third parties in the Stevens Bankruptcy
Proceeding by the Trustee for the Estate of Stevens. A copy of the
Complaint is attached hereto as Exhibit 99(b). In its Complaint, the
Trustee alleged that Colonial failed to perform its duties as Trustee
under the Stevens Trust Indentures by allegedly failing to (a)
establish and maintain separate trusts under each Indenture, (b) take
appropriate action upon the occurrence of defaults under the
Indentures, and (c) prepare and deliver appropriate reports to the
Stevens investors. In the Complaint, the Trustee also alleged that
Colonial breached its fiduciary duties to the Stevens investors by
allegedly failing to (i) apply the collateral standards set forth in
the Indentures, (ii) establish and maintain separate trusts, (iii)
obtain and perfect security interests in the collateral described in
the Indentures, (iv) declare defaults under the Indentures because of
the lack of adequate collateral, (v) prohibit unauthorized transfers of
the collateral in violation of the Indentures, (vi) advise the
investors of Stevens' defaults under the Time Certificates and
Indentures, and (vii) properly report to investors. The Complaint seeks
a judgment against Colonial in the amount of $40 million for its
alleged failure to perform its contractual duties under the Trust
Indentures and a judgment in an amount equal to the amount invested in
Time Certificates and Fixed Rate Investments for Colonial's alleged
breach of fiduciary duties; the Trustee alleges in the Complaint that a
total of approximately $92.6 million in Time Certificates and Fixed
Rate Investments were purchased in the aggregate by the Stevens
investors. To date, the Company has not filed an Answer or other
responsive pleading in the above matter.
Colonial has submitted a claim to its E&O insurance carrier based on
the demand letters which preceded the above Complaint. The Company has
also provided its E&O carrier with the above Complaint. The Company's
E&O carrier has not notified the Company whether it will assume
coverage for the above claim, and the Company is presently unable to
determine whether it will incur any liability in excess of its E&O
coverage as a result of such claim. However, the Company has incurred
costs of approximately $285,000 through December 31, 2001 in connection
with the Stevens Bankruptcy Proceeding, which costs have been recorded
as a general and administrative expense. The Company will incur
additional costs in the future related to the Stevens Bankruptcy
Proceeding and the above Complaint. Although the Company has submitted
its defense costs incurred in connection with the above Complaint and
the claim which preceded it to its E&O carrier for reimbursement (and
will submit future defense costs to its E&O carrier for payment or
reimbursement), there may be no assurance that the Company's E&O
carrier will pay or reimburse the Company for any portion of such
costs. In such event, the portion of the costs which are not paid or
reimbursed by the E&O carrier will be recorded as general and
administrative expenses in the quarter in which they are incurred.
The Company also intends to attempt to recover a portion of the costs
it has incurred as an administrative expense in the Stevens Bankruptcy
Proceeding. There may be no assurance that any portion of such costs
will be recoverable in the Stevens Bankruptcy Proceeding.
The successful denial by the Company's E&O carrier of coverage for the
claims asserted in the above Complaint, or the recovery of amounts in
excess of the policy limits of the Company's E&O Policy, could have a
material and adverse effect on the Company's financial condition and
results of operations, could result in revocation of the Company's
certificate by the Arizona Banking Department, and could result in the
Company being forced to file a petition under the federal bankruptcy
laws, to attempt to enter into a sale or other business combination, or
to discontinue its business operations. Additionally, the Company's
failure to recover the costs it incurs in the Stevens Bankruptcy
Proceeding or to have its E&O carrier pay or reimburse the Company for
the defense costs described above could also have a material and
adverse effect on the Company's financial condition and results of
operations.
Item 2: Changes in Securities
None.
Item 3: Default Upon Senior Securities
None.
16
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) Exhibit No Description
---------- -----------
99(a) Risk factors
99(b) Adversary Complaint in Stevens Bankruptcy Proceeding
(b) Reports on Form 8-K: None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
COLONIAL TRUST COMPANY
DATE: February 14, 2002 BY: /s/ John K. Johnson
-------------------
John K. Johnson
Its: President
DATE: February 14, 2002 BY: /s/ Ian B. Currie
-----------------
Ian B. Currie
Its: Controller & Treasurer