EXHIBIT 99(a)
There are various risks in purchasing our securities and investing in our
business, including those described below. You should carefully consider
these factors together with all other information included in this Form
10-QSB.
Lack of Liquidity of the Company's Common Stock
The Company's Common Stock is not listed on the Nasdaq Stock Market
("Nasdaq") or on any national or regional securities exchange, and there is
no established trading market for the Company's Common Stock. The Company
will continue to attempt to match stockholders who wish to sell Company
Common Stock with persons who wish to buy such Common Stock. However,
annual trading volume in the Company's Common Stock has averaged only
approximately 92,000 shares in the last two years. Therefore, a stockholder
who owns a substantial number of shares of Company Common Stock will likely
be unable to sell his shares in a short period of time should he or she
need or wish to do so.
Dependence on Key Personnel and Management of Growth
The Company's future success will depend upon the continued services of the
Company's senior management. The unexpected loss of the services of any of
the Company's senior management personnel could have a material adverse
effect upon the Company. The Company has entered into employment agreements
with certain of its senior management. The Company's future success will
depend in part upon its continuing ability to attract and retain highly
qualified personnel to manage the future growth of the Company. There may
be no assurance that the Company will be successful in attracting and
retaining such personnel. Further, the Company's ability to manage growth
successfully will require the Company to continue to improve its
management, financial and operational controls. Failure to do so could have
a material adverse effect upon the Company's operating results and
financial condition.
Non-Profit Bond Servicing Market; Ability to Increase Bond Servicing
Revenues
The Company's future financial performance will depend in significant part
upon the size of the non-profit bond market. The market for bonds issued by
non-profit organizations is subject to fluctuation due to a number of
factors beyond the control of the Company. Moreover, the Company estimates
that its revenues from bond servicing activities will decrease
significantly in the fiscal year ending March 31, 2002 and perhaps for
future periods compared to its revenues from such activities in the
recently completed fiscal year as a result of a decrease in the Company's
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. The Company's ability to continue to maintain
or increase its market share will be dependent upon a number of factors,
including the Company's ability to develop and maintain relationships with
the broker/dealers who are primarily responsible for the sale of such
non-profit bonds. See "-Dependence Upon Certain Business Relationships"
below. Revenues from the Company's bond servicing activities accounted for
approximately 58% of the Company's total revenues in the fiscal year ended
March 31, 2001 and approximately 53% of the Company's total revenues in the
nine month period ended December 31, 2001.
Market for Personal Trust Services; Ability to Increase Personal Trust
Service Revenues
The Company intends for the foreseeable future to limit the activities of
its Personal Trust segment to the metropolitan Phoenix area. Therefore, the
Company's future financial performance will depend in part upon the size of
the market for personal trust services in the metropolitan Phoenix area.
Revenues from such activities accounted for approximately 27% of the
Company's total revenues in the fiscal year ended March 31, 2001 and
approximately 30% of the Company's total revenues in the nine month period
ended December 31, 2001. The Company's ability to continue to increase its
revenues from personal trust services will be dependent upon a number of
factors, including the Company's ability to develop and maintain
relationships with professionals (such as attorneys and accountants) who
serve as a referral source for these services and the Company's continuing
ability to service personal trust accounts. Additionally, at March 31,
2001, 10% of the Company's Personal Trust account assets were held in trust
for members of one family, and such accounts accounted for 8% of the
Company's Personal Trust revenues in the fiscal year ended March 31, 2001.
Loss of such revenues could have a material adverse effect on the Personal
Trust segment and/or the Company's results of operations.
Dependence Upon Certain Business Relationships
The Company depends to a significant extent on its relationships with
broker/dealers who are involved in the sale of bonds for non-profit
organizations to refer business to the Company for bond servicing duties
associated with such offerings. As of March 31, 2001, all bond programs for
which the Company had served as trustee and paying agent had been
originated by twenty broker/dealers, and four of those broker/dealers had
originated bonds representing approximately 77% of the aggregate principal
amount of all bonds issued for which the Company served as trustee and
paying agent. The loss of or damage to any one of these relationships, or
the failure or inability of any one of these broker/dealers to initiate a
similar number of non-profit bond offerings in the future, could have a
material adverse impact on the Company and its operations. The Company also
depends, to a great extent, upon its relationships with trust professionals
(such as attorneys and accountants) in the metropolitan Phoenix area to
refer opportunities to the Company to provide personal trust services. The
loss of or damage to existing relationships, or the Company's inability to
continue to develop additional relationships with trust professionals,
could have a material adverse impact on the Company and its operations.
Competition
The principal business segments in which the Company is involved are highly
competitive. The Company currently competes with a number of other trust
companies to serve as trustee and paying agent for non-profit bond
financings, including Reliance Trust Company, Herring National Bank,
American Church Trust Company, and Trust Management, Inc. The Company also
competes with large banks and other financial institutions for these
services. Other companies that do not currently provide these services may
enter this business. The Company also competes with large banks and other
financial institutions, including other trust companies, located in the
metropolitan Phoenix area for the business of providing personal trust
services. Other companies that do not currently provide these services may
enter this business.
Regulation, Licensing and Supervision; Net Capital Requirements
The Company's operations are subject to ongoing regulation, supervision and
licensing under various federal, state and local statutes, ordinances and
regulations, including but not limited to regulation by the Arizona Banking
Department.
Under applicable rules and regulations of the Arizona Banking Department,
the Company files periodic reports with the Department and is subject to
periodic examinations by the Department. Additionally, under Arizona law,
the Company is required to maintain net capital of at least $500,000; the
Company's net capital was approximately $2.7 million at December 31, 2001.
Arizona law also requires that $500,000 of the Company's net capital must
meet the Department's liquidity requirements. At December 31, 2001,
$517,776 of the Company's net capital met the Department's liquidity
requirements.
Under legislation which became effective on August 9, 2001 and to which the
Company will become subject on December 31, 2002, the Company may in
certain circumstances be required to maintain additional capital in excess
of the capital requirements described immediately above. Specifically, the
Company will be required to have additional capital of $250,000 for every
$750 million of "non-discretionary assets" and additional capital of
$250,000 for every $250 million of "discretionary assets." The term
"non-discretionary assets" is defined as "..those assets in which the trust
company must obtain from the customer, broker or investment advisor
specific direction and instructions regarding both investment strategies
and investment executions." The term "discretionary assets" is defined as
"..those assets in which the trust company has the unilateral authority to
determine investment strategies and execute investment transactions without
seeking the concurrence, approval or authority from the customer or any
other external party." Additionally, this legislation requires that any
trust company whose most recent composite rating from the Arizona Banking
Superintendent was "four" as defined in the revised uniform interagency
trust rating system must maintain an additional $250,000 in capital, and
that any trust company whose most recent composite rating from the Arizona
Banking Superintendent was "five" as defined in the above rating system
must maintain an additional $500,000 in capital. One-half of any additional
capital required by such legislation must be "liquid capital."
The Company believes that approximately $310 million of the funds which it
held in the ordinary course of business at March 31, 2001 would be
classified as "non-discretionary" assets and approximately $102 million of
the funds which it held in the ordinary course of business at March 31,
2001 would be described as "discretionary" assets. The Company also does
not believe that its discretionary or its non-discretionary assets will
grow in the foreseeable future to the levels which will require additional
capital. However, there may be no assurance that the Arizona Banking
Department will agree with the Company's classification of its assets as
non-discretionary or discretionary, and to date no regulations or
interpretations concerning these provisions have been issued by the Arizona
Banking Department. Additionally, although the Company does not believe
that it is likely to receive a "four" or "five" composite rating from the
Arizona Banking Superintendent in the foreseeable future, there may be no
assurance in this regard.
In the event the Company is required to have additional capital, including
additional liquid capital, the Company believes that this requirement can
be satisfied from funds available under its master note with Church Loans
and Investments Trust, and/or borrowings from other financial institutions,
secured by the Company's real estate property.
Arizona law also requires the Company to maintain a fidelity bond against
dishonesty, fraud, theft, embezzlement and other similar insurable losses.
Under legislation which became effective on August 9, 2001, this fidelity
bond must be in the minimum amount of $2.1 million. Arizona law also
requires the Company to maintain errors and omissions insurance of at least
$500,000. The fidelity bond and the errors and omissions insurance must
also be adequate in relation to the Company's potential exposure. The
Company believes that it has been in compliance with these requirements to
date and will continue to be in compliance with these requirements in the
future, including the fidelity bond requirements imposed by the new
legislation.
The Arizona Banking Department retains broad discretion to suspend or
revoke the certificate of any trust company subject to its jurisdiction
(including the Company) upon the occurrence of certain events, including
(i) the trust company's violation of any applicable law, rule or order,
(ii) the trust company's failure to conduct business in a safe, sound and
lawful manner, or (iii) upon the occurrence of any other event set forth in
Arizona Revised Statutes Section 6-864. The Company is also required to
comply with federal rules and regulations in connection with the Company's
service as trustee for IRA Accounts.
Failure to comply with applicable law could have a material adverse effect
on the Company's results of operations and financial condition and could,
in certain instances, affect the Company's certificate issued by the
Arizona Banking Department. Failure to maintain such a certificate would
require the Company to attempt to move its operations to another state, to
discontinue its operations, or to attempt to merge or effect another
business combination.
Performance of Contractual Duties
In the performance of its duties as trustee and paying agent on bond
offerings of non-profit and other organizations, the Company is required to
perform certain duties under the trust indenture for such offering and/or
the federal Trust Indenture Act (15 U.S.C. ss. 77aaa et seq.) or the
applicable state version of such Act (if any). In the Company's capacity as
trustee, such duties include: receiving proceeds from the sale of the
bonds; distributing such proceeds according to the purposes of the bond
offering; investing such proceeds pending distribution; receiving periodic
sinking fund payments by the bond issuer; procuring a security interest in
collateral from the bond issuer to secure the issuer's bonds; perfecting
such security interest; and, in the event of default by a bond issuer,
taking possession of and/or selling the collateral. In the Company's
capacity as paying agent, such duties include distributing sinking fund
payments to bondholders. Failure to perform such duties in the manner
required by the trust indenture or applicable law could cause the Company
to incur material liabilities, which in turn could have a material adverse
effect on the Company's results of operations and financial condition.
Bankruptcy of Stevens Financial Group
The Company is serving as indenture trustee under seven Trust Indentures
issued by Stevens Financial Group, a financial services firm headquartered
in Springfield, Missouri ("Stevens"). The Trust Indentures secure
obligations of Stevens under certain debt instruments designated as Time
Certificates and Fixed Rate Investments.
Stevens has defaulted on all of its outstanding Time Certificates and Fixed
Rate Investments, and on March 19, 2001 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. 01-03105-ECF-RTB)
(the "Stevens Bankruptcy Proceeding"). 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 the above Complaint to its E&O carrier. 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.
Change in Securities Laws Affecting Non-Profit Bond Finance Market
Most bond offerings for which the Company serves as trustee and/or paying
agent are made in reliance upon an exemption from registration provided by
Section 3(a)(4) of the Securities Act of 1933, as amended, and similar
exemptions from registration provided for under applicable state securities
laws. In the event such federal and/or state exemptions become unavailable
for any reason, the Company believes that the market for non-profit bond
financings would be materially and adversely affected due primarily to the
increased costs associated with registration of such bonds under federal
and/or state laws. The foregoing would have a material adverse impact on
the Company's fees generated from bond servicing activities and, thus, the
Company's results of operations.
Common Stock Dividends
The Company has never paid dividends on its Common Stock. The Company
intends for the foreseeable future to retain any earnings to support the
growth of the Company's business. The Company therefore does not
contemplate paying cash dividends on its Common Stock in the foreseeable
future.