1
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 September 30, 2002
[ ] 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: 757,914
Transitional Small Business Disclosure Format (check one):
Yes _________ No ___X______
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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 12
Item 3: Controls and Procedures 20
Part II. Other Information
Item 1: Legal Proceedings 21
Item 2: Changes in Securities 23
Item 3: Default Upon Senior Securities 23
Item 4: Submission of Matters to a Vote of Security Holders 23
Item 5: Other Information 23
Item 6: Exhibits and Reports on Form 8-K 23
SIGNATURES 23
Certifications Under Section 302 of the Sarbanes-Oxley Act of 2002 24
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COLONIAL TRUST COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
(Unaudited)
ASSETS September 30, 2002 March 31, 2002
Cash and cash equivalents $193,800 $166,592
Receivables 1,019,478 853,256
Income tax receivable 87,229 111,819
Note receivable 229,469 324,156
Property, furniture and equipment, net 701,042 705,426
Excess of cost over fair value acquired, net 104,729 104,729
Restricted cash 509,655 522,414
Other assets 151,383 99,382
---------- ----------
$2,996,785 $2,887,774
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $218,703 $213,729
Total Liabilities 218,703 213,729
Stockholders' equity:
Common stock, no par value;
25,000,000 shares authorized,
757,914 issued and outstanding,
at September 30, 2002 and 729,727
issued and outstanding at
March 31, 2002 689,286 614,286
Additional paid-in capital 506,208 506,208
Retained earnings 1,582,588 1,553,551
--------- ---------
Total stockholders' equity 2,778,082 2,674,045
--------- ---------
$2,996,785 $2,887,774
========== ==========
See accompanying notes to condensed financial statements.
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COLONIAL TRUST COMPANY
Condensed Statements of Earnings (Loss) (Unaudited)
Three-month periods Six-month periods
Ended September 30, Ended September 30,
Revenues: 2002 2001 2002 2001
Bond servicing income $453,172 $513,456 $855,988 $1,096,944
IRA servicing fees-corporate 154,466 130,484 331,337 310,766
IRA servicing fees-personal trust 71,786 64,932 146,632 131,287
Trust fee income 350,119 232,151 648,807 470,803
Interest income 9,796 17,786 20,056 36,200
--------- ------- --------- ---------
Total revenue 1,039,339 958,809 2,002,820 2,046,000
General and administrative
expenses 932,721 1,097,256 1,942,845 2,028,578
------- --------- --------- ---------
Earnings (loss) before
income taxes 106,618 (138,447) 59,975 17,422
Income taxes (benefit) 43,666 (56,648) 24,589 7,143
------ ------- ------ -----
Net earnings (loss) $62,952 ($81,799) $35,386 $10,279
======= ======== ======= =======
Basic net earnings (loss)
per common share $.09 ($.11) $.05 $.01
==== ===== ==== ====
Diluted net earnings (loss)
per common share (1) $.08 ($.11) $.05 $.01
==== ===== ==== ====
Weighted average shares
outstanding - basic 728,240 732,017 728,578 731,095
======= ======= ======= =======
Weighted average shares
outstanding - diluted (1) 752,004 732,017 752,129 755,242
======= ======= ======= =======
(1) Stock options are not included in diluted EPS where there is a net loss
since they are anti-dilutive.
See accompanying notes to condensed financial statements.
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COLONIAL TRUST COMPANY
Condensed Statements of Cash Flows (Unaudited)
Six-month periods
Ended September 30,
-------------------
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $35,386 $10,279
Adjustments to reconcile net earnings to
net cash provided by (used in) Operating activities:
Depreciation and amortization 61,810 79,930
(Increase) decrease in receivables (166,222) 49,333
Increase in other assets (52,001) (59,862)
Decrease in income tax receivable 24,590 -
Increase (decrease) in accounts payable and
accrued liabilities 4,974 (118,664)
-------- ---------
Net cash used in operating activities (91,463) (38,984)
-------- ---------
Cash flows from investing activities:
Purchase of property, furniture and equipment (57,426) (9,107)
Additions to note receivable (5,313) (234,793)
Payments received on note receivable 100,000 100,000
Decrease in restricted cash 12,759 2,771
------ ---------
Net cash provided by (used in) investing activities 50,020 (141,129)
------ ---------
Cash flows from financing activities:
Purchase and retirement of common stock (6,349) (6,978)
Proceeds from issuance of common stock under
stock option plan 75,000 35,375
------ ------
Net cash provided by financing activities 68,651 28,397
------ ------
Increase (decrease) in cash and cash equivalents 27,208 (151,716)
Cash and cash equivalents at beginning of period 166,592 319,204
-------- --------
Cash and cash equivalents at end of period $193,800 $167,488
======== ========
See accompanying notes to condensed financial statements.
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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, the results
of operations and cash flows for the periods presented. The results for the
three and six months ended September 30, 2002 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 accounting principles
generally accepted in the United States of America. 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, 2002. The independent
auditors' report included in that 10-KSB report stated there was
substantial doubt about the Company's ability to continue as a going
concern.
(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 40 states and the District of Columbia. 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 custodian 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. The Company also acts as custodian for self-directed
individual retirement accounts through its Personal Trust segment.
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(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 Colonial
for set-up and printing costs during the first year. Additionally,
an annual maintenance fee is required each succeeding 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.
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 that Colonial holds as trustee or agent.
Fees are assessed on a monthly basis to individual accounts
according to the prior month end estimated fair market value of
each account. The second fee structure relates to an annual
minimum 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 (Loss) Per Common
Share
Basic earnings (loss) per share 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.
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 six-month periods ended September
30, 2002, and September 30, 2001 follows:
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Three-month periods Six-month periods
Ended September 30, Ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net earnings (loss) $62,952 ($81,799) $35,386 $10,279
------- -------- ------- -------
Basic EPS
-weighted average
shares outstanding 728,240 732,017 728,578 731,095
======= ======= ======= =======
Basic earnings (loss)
per share $.09 ($.11) $.05 $.01
==== ====== ==== ====
Basic EPS
-weighted average
shares outstanding 728,240 732,017 728,578 731,095
Effect of dilutive securities:
Stock options (1) 23,764 - 23,551 24,146
------ - ------ ------
Diluted EPS
-weighted average
shares outstanding 752,004 732,017 752,129 755,242
======= ======= ======= =======
Diluted earnings (loss)
per share $.08 ($.11) $.05 $.01
==== ====== ==== ====
Stock options not included
in Diluted EPS since
anti-dilutive - 144,722 - -
= ======= = =
(1) Stock options are not included in diluted EPS where there is a net
loss since they are anti-dilutive.
4. Business Segments
Operating results and other financial data are presented for the principal
business segments of the Company for the three-month and six-month periods
ended September 30, 2002 and September 30, 2001. The Company has two
distinct business segments consisting of Corporate Trust services and
Personal Trust services.
In computing operating profit by business segment, interest income,
portions of administrative expenses and other items not considered direct
operating expenses were considered to be in the Other category.
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Corporate Personal
Trust Trust Other Total
Three-month periods:
September 30, 2002
Bond Servicing Income $453,172 - - $453,172
IRA Servicing Fees 154,466 $71,786 - 226,252
Trust Fee Income - 350,119 - 350,119
Interest Income - - $9,796 9,796
-------- -------- ------ ----------
$607,638 $421,905 $9,796 $1,039,339
======== ======== ====== ==========
General & Administrative
Expenses $328,592 $303,944 $300,185 $932,721
September 30, 2001
Bond Servicing Income $513,456 - - $513,456
IRA Servicing Fees 130,484 $64,932 - 195,416
Trust Fee Income - 232,151 - 232,151
Interest Income - - $17,786 17,786
-------- -------- ------- --------
$643,940 $297,083 $17,786 $958,809
-------- -------- ------- --------
General & Administrative
Expenses $573,244 $257,339 $266,673 $1,097,256
-------- -------- -------- ----------
Six-month periods:
September 30, 2002
Bond Servicing Income $855,988 - - $855,988
IRA Servicing Fees 331,337 $146,632 - 477,969
Trust Fee Income - 648,807 - 648,807
Interest Income - - $20,056 20,056
---------- -------- ------- ----------
$1,187,325 $795,439 $20,056 $2,002,820
---------- -------- ------- ----------
General & Administrative
Expenses $758,731 $619,417 $564,697 $1,942,845
September 30, 2001
Bond Servicing Income $1,096,944 - - $1,096,944
IRA Servicing Fees 310,766 $131,287 - 442,053
Trust Fee Income - 470,803 - 470,803
Interest Income - - $36,200 36,200
---------- -------- ------- ----------
$1,407,710 $602,090 $36,200 $2,046,000
---------- -------- ------- ----------
General & Administrative
Expenses $931,077 $509,313 $588,188 $2,028,578
-------- -------- -------- ----------
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5. Commitments and Contingencies
Colonial is subject to the maintenance of a minimum capital requirement of
$500,000 pursuant to State of Arizona (the State) banking regulations all
of which must be "liquid" (as defined by the State) as of September 30,
2002. To satisfy this requirement, Colonial owns certificates of deposit
held with banks totaling $509,655 at September 30, 2002. These assets are
classified as restricted cash in the accompanying balance sheets as of
September 30, 2002.
Colonial is involved in lawsuits and claims incidental to the ordinary
course of its operations. In the opinion of management, based on
consultation with legal counsel, with the possible exception of the events
mentioned below, the effect of such matters will not have a material
adverse effect on the Company.
A. 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.
01-03105-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 Time
Certificates and Fixed Rate Investments.
On February 1, 2002, a Complaint (Adv. No. 01-1319) was filed against the
Company and other 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 by, among other things, 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 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. The Company has filed an Answer denying
all material allegations.
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Colonial has submitted a claim to its E&O insurance carrier based on the
above litigation. The Company's E&O carrier has reserved its rights with
regard to insurance coverage, but is participating in defending the
litigation. As a result of the foregoing, 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 litigation. Additionally, the Company has
incurred costs of approximately $362,000 through September 30, 2002, net of
approximately $72,000 in defense cost reimbursements from its E&O carrier,
in connection with the Stevens Bankruptcy Proceeding and the above
litigation, 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 litigation. The Company is
submitting its defense costs incurred in connection with the above
litigation to its E&O carrier for reimbursement (and will submit future
defense costs to its E&O carrier for payment or reimbursement), and the
Company's E&O carrier is reimbursing the Company for a portion of such
costs; however, there may be no assurance as to the amount of expenses
incurred by the Company for which the Company will receive reimbursement
from its E&O carrier. 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.
Given the preliminary stage of the above litigation, it is not presently
possible to estimate the probability or range of potential loss to the
Company. However, the Company's E&O carrier could successfully deny
coverage for the claims asserted in the above Complaint, or the plaintiffs
in such litigation could recover amounts in excess of the policy limits of
the Company's E&O Policy. Additionally, the Company may not recover all, or
a material portion of, the costs it incurs in the Stevens Bankruptcy
Proceeding and the above litigation, and the Company's E&O carrier may not
reimburse the Company for such costs. Any of the above 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
operating certificate or the imposition of sanctions or operating
constraints (including without limitation requiring the Company to raise
additional capital) 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 or materially curtail its business operations. The financial
statements do not include any adjustments that might result from the
outcome of these uncertainties. The significance and uncertainty related to
these issues resulted in a modification of the independent auditors' report
included with the March 31, 2002 financial statements to include a
paragraph about the uncertainty of the Company's ability to continue as a
going concern resulting from the uncertain outcome of this matter.
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B. On September 18, 2002, the Personal Representative of the Estate of
Dorothy C. Long and certain other parties filed a Petition for Surcharge
and a Petition for Removal of Trustee and Appointment of Successor Trustee
against the Company (the "Petition"). In the Petition, Plaintiffs alleged
that the Company breached certain duties in connection with a loan procured
to pay certain federal estate taxes. The Plaintiffs have alleged that the
Company is liable for $210,929, as well as certain expenses, accounting
fees, attorneys' fees and costs as a result of its alleged breaches. The
Company has filed an Objection to the Petition denying all material
allegations of the Petition, a Counter-Petition (against the Personal
Representative of the Estate) and a Third-Party Complaint (against counsel
for the Personal Representative of the Estate) in the above matter. Given
the preliminary stage of the above litigation, it is not presently possible
to estimate the probability or range of potential loss to the Company. The
financial statements do not include any adjustments that might result from
the ultimate outcome of the above litigation.
Item 2. Management's Discussion and Analysis or Plan of Operation
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make a number of estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements. Such
estimates and assumptions affect the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, management of
the Company evaluates estimates and assumptions based upon historical
experience and various other factors and circumstances. The Company
believes its estimates and assumptions are reasonable in the circumstances;
however, actual results may differ from these estimates under different
future conditions.
Management believes that the estimates and assumptions that are most
important to the portrayal of the Company's financial condition and results
of operations, in that they require management's most difficult, subjective
or complex judgments, form the basis for the accounting policies deemed to
be most critical to the Company. These critical accounting policies relate
to revenue recognition and contingencies related to litigation. The Company
recognizes revenue when earned based on three fee structures which are
discussed in note 1 of the Company's financial statements included in this
Form 10-QSB. Liability estimates for contingencies related to litigation
are determined based on the probability of loss using the best information
available at each reporting date. Developments related to changes in
material contingencies are reviewed on an on-going basis, and serve as the
basis for changes in recorded liabilities, if any.
Management believes estimates and assumptions related to these critical
accounting policies are appropriate under the circumstances and there have
been no changes since the fiscal year end of March 31, 2002. However,
should future events or occurrences result in unanticipated consequences,
there could be a material impact on our future financial condition or
results of operations.
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Results of Operations - Three-Month Periods Ended September 30, 2002 and
September 30, 2001
------------------
The Company had net earnings of $62,952, or $.08 diluted earnings per
share, for the period ended September 30, 2002, compared to a net loss of
$81,799, or $.11 per diluted share, for the period ended September 30,
2001, an increase in net earnings of 177%. The Company had total revenue of
$1,039,339 for the period ended September 30, 2002, compared to total
revenue of $958,809 for the prior year, an increase of 8%.
The Corporate Trust segment's income decreased $36,302 to $607,638 for the
period ended September 30, 2002, compared to $643,940 for the period ended
September 30, 2001, a decrease of 6%. The Personal Trust segment's income
increased $124,822 to $421,905 for the period ended September 30, 2002,
compared to $297,083 for the period ended September 30, 2001, an increase
of 42%.
The Corporate Trust segment's bond servicing income decreased $60,284 to
$453,172 for the period ended September 30, 2002, compared to $513,456 for
the period ended September 30, 2001, a decrease of 12%. The decrease in
bond servicing income was primarily attributable to the following factors.
First, interest earnings on non fee-based trust investment balances
decreased to approximately $24,000 for the three months ended September 30,
2002, compared to approximately $46,000 in the comparable prior period,
reflecting the reduction in interest rates. Second, interest earnings on
fee-based investment balances decreased to approximately $77,000 for the
three months ended September 30, 2002, compared to approximately $144,000
in the comparable prior period, reflecting a reduction in interest rates
and the funds available for investment. These were partially offset by an
increase in bond printing fees to approximately $22,000 for the three
months ended September 30, 2002, compared to approximately $14,000 in the
comparable prior period. This resulted from approximately $7 million more
in new bond issues in the current quarter over the comparable prior period.
Additionally, municipal maintenance fees increased to approximately $33,000
for the three months ended September 30, 2002, compared to approximately
$13,000 in the comparable prior quarter. This was primarily due to the
collection of annual fees on a defaulted issue. At September 30, 2002, the
Company was serving as trustee and paying agent on 504 non-profit bond
offerings totaling approximately $466,300,000 in original principal amount;
at September 30, 2001, the Company was serving as trustee and paying agent
on 461 non-profit bond offerings totaling approximately $461,700,000 in
original principal amount.
Revenue from the Corporate Trust segment's IRA servicing activities
increased $23,982 to $154,466 for the period ended September 30, 2002,
compared to $130,484 for the period ended September 30, 2001, an increase
of 18%. This increase was primarily due to collection of approximately
$11,000 past-due institutional maintenance fees and higher fees due to the
increase in the number of IRA accounts serviced by the Company in the
three-month period ended September 30, 2002, as compared to the comparable
quarter in the prior year, partially offset by reduced monthly management
fees attributable to lower interest rates on un-invested IRA customer cash
balances compared with the comparable prior quarter. Revenue from the
Personal Trust segment's IRA servicing activities increased $6,854 to
$71,786 for the period ended September 30, 2002, compared to $64,932 for
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14
the period ended September 30, 2001, an increase of 11%. The increase in
Personal Trust IRA revenue was primarily due to the increase in the number
of new IRA's serviced by the Company, partially offset by a decrease in
fees based on declined market values attributed to underlying securities.
At September 30, 2002, the Corporate Trust segment was servicing 9,973
IRA's with an aggregate value of approximately $136,100,000 and the
Personal Trust segment was servicing 270 IRA Accounts with an aggregate
value of approximately $50,500,000. At September 30, 2001, the Corporate
Trust segment was servicing 9,687 IRA Accounts with an aggregate value of
approximately $180,400,000, and the Personal Trust segment was servicing
229 Accounts with an aggregate value of approximately $47,200,000. At
September 30, 2002, approximately $19 million loss in value of IRA
investment assets administered by the Corporate Trust segment has been
written off due to the Stevens Bankruptcy Proceeding, which is included in
the September 30, 2001 aggregate value.
The Personal Trust segment's trust revenue increased $117,968 to $350,119
for the period ended September 30, 2002, compared to $232,151 for the
period ended September 30, 2001, an increase of 51%. The increase in trust
revenue was primarily due to an increase in the number of trust, investment
or other accounts serviced by the Company, with approximately $39,000 of
that increase attributable to a single relationship which commenced January
2002, the recognition of approximately $8,000 of past-due prior fiscal year
employee benefit trust fees collected this fiscal quarter, and
approximately $22,000 higher fees related to real estate sales and other
irregularly occurring service fees in the three months ended September 30,
2002 as compared to the comparable prior year's quarter. At September 30,
2002, the Personal Trust segment was serving as trustee or agent for 639
trust, investment accounts, or other accounts with a fair market value of
approximately $118,000,000. At September 30, 2001, the Personal Trust
segment was serving as Trustee or agent for 601 trust, investment accounts,
or other accounts with a fair market value of approximately $125,000,000.
Interest income decreased $7,990 to $9,796 for the period ended September
30, 2002, compared to $17,786 for the period ended September 30, 2001 a
decrease of 45%. This decrease was primarily attributable to reduced
earnings on monies advanced under the master trust note, resulting from
lower interest rates, and investment balances in the current quarter
compared to the prior period.
The Corporate Trust segment's general and administrative expenses decreased
in the aggregate $244,652 to $328,592 for the period ended September 30,
2002, compared to $573,244 for the period ended September 30, 2001, and
decreased to 54% of segment revenues for the period ended September 30,
2002, from 89% of segment revenues for the period ended September 30, 2001.
The Personal Trust segment's general and administrative expenses increased
in the aggregate $46,605 to $303,944 for the period ending September 30,
2002, compared to $257,339 for the period ended September 30, 2001, but
decreased to 71% of segment revenues for the period ended September 30,
2002 from 87% of segment revenues for the period ended September 30, 2001.
The decrease in the Corporate Trust segment's general and administrative
expenses as a percentage of segment revenues was due primarily to the
expensing of approximately $247,000 of costs incurred through September 30,
2001 associated with the Stevens Bankruptcy Proceeding (see Item 1: Legal
Proceedings), in the three month period ended September 30, 2001, as
<page>
15
compared with a net refund of approximately $7,000 from our E & O insurance
carrier, in connection with the Stevens Bankruptcy Proceeding, in the three
months ended September 30, 2002. Although the Company intends to vigorously
attempt to recover the costs it has incurred to date and that it incurs in
the future in the Stevens Bankruptcy Proceeding, there may be no assurance
that any portion of such costs will be recovered. The decrease in the
Personal Trust segment's general and administrative expenses as a
percentage of segment revenues was due primarily to the increase in trust
revenues, explained above, more than offsetting the increase in staff
personnel costs, which includes a new business development officer, in the
three month period ended September 30, 2002 as compared to the comparable
prior period.
The Company's effective income tax rate remained constant at 41.0% for the
three-month periods ended September 30, 2002 and September 30, 2001.
Results of Operations - Six-Month Periods Ended September 30, 2002 and
September 30, 2001
------------------
The Company had net earnings of $35,386, or $.05 diluted earnings per
share, for the period ended September 30, 2002, compared to net earnings of
$10,279, or $.01 diluted earnings per share, for the period ended September
30, 2001, an increase in net earnings of 244%. The Company had total
revenue of $2,002,820 for the period ended September 30, 2002, compared to
total revenue of $2,046,000 for the prior period, a decrease of 2%.
The Corporate Trust segment's income decreased $220,385 to $1,187,325 for
the period ended September 30, 2002, compared to $1,407,710 for the period
ended September 30, 2001, a decrease of 16%. The Personal Trust segment's
income increased $196,775 to $798,865 in the period ended September 30,
2002, compared to $602,090 for the period ended September 30, 2001, an
increase of 33 %.
The Corporate Trust segment's bond servicing revenue decreased $240,956 to
$855,988 for the period ended September 30, 2002, compared to $1,096,944
for the period ended September 30, 2001, a decrease of 22%. The decrease in
bond servicing revenue was primarily attributable to a decrease in interest
related earnings brought about by lower interest rates and trust investment
account balances in the six months ended September 30, 2002, as compared to
the six months ended September 30, 2001. Additionally, bond issuer
refinancings through loans or other products which do not result in fees to
the company continued to negatively impact bond servicing revenues and are
expected to continue to negatively impact such revenues in the foreseeable
future.
Revenue from the Corporate Trust segment's IRA Account servicing activities
increased $20,571 to $331,337 for the period ended September 30, 2002,
compared to $310,766 for the period ended September 30, 2001, an increase
of 7%. This increase was primarily due to collection of past due
institutional maintenance fees as well as higher fees due to the increase
in the number of IRA's serviced by the Company in the six months ended
September 30, 2002 as compared with the six months ended September 30,
2001. These increases were partially offset by decreased monthly management
<page>
16
fees attributable to lower interest rates on un-invested IRA customer cash
balances as compared to the prior six month period. Revenue from the
Personal Trust segment's IRA servicing activities increased $15,345 to
$146,632 for the period ended September 30, 2002, compared to $131,287 for
the period ended September 30, 2001, an increase of 12%. The increase was
primarily due to the increase in the number of IRA Accounts serviced by the
Company.
The Personal Trust segment's trust revenue increased $178,004 to $648,807
for the period ended September 30, 2002, compared to $470,803 for the
period ended September 30, 2001, an increase of 38%. The increase in trust
revenue was primarily due to the increase in the number of trust,
investment, or other accounts serviced by the Company with approximately
$68,000 attributable to a single relationship that commenced January 2002,
and approximately $24,000 of the revenue increase coming from collection of
past-due prior fiscal year employee benefit trust fees, offset in part by
the general decline in the market values of the individual portfolios.
Interest income decreased $16,144 to $20,056 for the period ended September
30, 2002, compared to $36,200 for the period ended September 30, 2001, a
decrease of 45%. The decrease was primarily attributable to reduced
earnings caused by lower interest rates and investment balances in the six
months ended September 30, 2002 compared to the six months ended September
30, 2001.
The Corporate Trust segment's general and administrative expenses decreased
in the aggregate $172,346 to $758,731 for the period ended September 30,
2002, compared to $931,077 for the prior period, and decreased to 64% of
segment revenues for the period ended September 30, 2002, from 66% of
segment revenues for the prior period. The decrease in Corporate Trust
Segment's general and administrative expenses as a percentage of segment
revenues was due primarily to a reduction in expenses associated with the
Stevens Bankruptcy Proceeding (see Item 1: Legal Proceedings).
Approximately $32,000 was expensed in the six months ended September 30,
2002, net of approximately $72,000 in reimbursements by the Company's E & O
insurance carrier as compared to the expensing of approximately $247,000 of
costs in the six months ended September 30, 2001. This more than offset the
proportionate reduction in Corporate Trust revenues caused by lower
interest rates and investment account balances in the six months ended
September 30, 2002, as compared to the comparable prior period. Although
the Company intends to vigorously attempt to recover the costs it has
incurred to date and that it incurs in the future in the Stevens Bankruptcy
Proceeding, there may be no assurance that any portion of such costs will
be recovered. Additionally, the Company anticipates that additional
write-offs of previously unidentified trust account reconciling items may
occur but presently is unable to quantify the potential amount or range of
such write-offs. The Personal Trust segment's general and administrative
expenses increased in the aggregate $110,104 to $619,417 for the period
ended September 30, 2002, compared to $509,313 for the period ended
September 30, 2001, but decreased to 78% of segment revenues for the period
ended September 30, 2002 from 85% for the period ended September 30, 2001.
The decrease in the Personal Trust segment's general and administrative
expenses as a percentage of segment revenues was due primarily to a greater
proportionate increase in revenues resulting from an increase in the number
of accounts serviced by the Company, as compared to the net increase in
expenses for the six months ended September 30, 2002. The increased
expenses included staff personnel cost, including the addition of a new
business development officer, which were partially offset by reduced sales
consulting services/commissions in the six months ended September 30, 2002,
as compared to the comparable prior period.
<page>
17
The Company's effective income tax rate remained constant at 41% for the
six-month periods ended September 30, 2002, and September 30, 2001.
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
$2,778,082 on September 30, 2002. 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, 2002. At September
30, 2002, $509,655 of the Company's net capital met the Department's
liquidity requirements. The Company believes that it will be able to
satisfy its regulatory capital, working capital and capital expenditure
requirements for the foreseeable future from existing cash balances, from
anticipated cash flow from operating activities, from funds available under
the Company's Master Note with its former parent, Church Loans and
Investments Trust, and from borrowings secured by the Company's
headquarters building. However, the outcome of, or unreimbursed expenses
incurred in connection with, the Stevens Bankruptcy Proceeding or
litigation asserted against the Company arising out of the Stevens
Bankruptcy Proceeding, could result in the Company violating some or all of
these regulatory capital requirements and could impair the Company's
ability to satisfy its working capital and capital expenditure requirements
from the above or other sources.
The Company's cash and cash equivalents increased from $166,592 on March
31, 2002, to $193,800 on September 30, 2002, while the note receivable
decreased from $324,156 on March 31, 2002, to $229,469 on September 30,
2002. The increase in the cash and cash equivalents was primarily due to
cash flow from operations, proceeds from issuance of common stock under the
Company's stock options plan and payments received on the note receivable,
partially offset by the increase in receivables. The decrease in the note
receivable was primarily due to payments received of $100,000. The
Company's net property and equipment decreased from $705,426 on March 31,
2002, to $701,042 on September 30, 2002. The decrease was primarily due to
depreciation of existing property and equipment exceeding the purchase of
additional furniture, equipment and computer hardware and software for
employees.
New Accounting Pronouncements
-----------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, "Business Combinations," and Statement No 142, "Goodwill
and Other Intangible Assets." Statement No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after
June 30, 2001. Statement No.141 also specifies criteria that intangible
assets acquired in a purchase method business combination must meet to be
<page>
18
recognized and reported apart from goodwill. Effective April 1, 2002, the
Company complied with the provisions of Statement No. 142 which required
that goodwill and intangible assets with indefinite useful lives no longer
be amortized, but instead be tested for impairment at least annually in
accordance with the provisions of the statement. During the second quarter
ended September 30, 2002, management finalized the first of the required
impairment tests of goodwill and is of the opinion that there has been no
impairment.
The following table sets forth reported net earnings (loss) and earnings
(loss) per share, as adjusted to exclude goodwill amortization expense:
Three Months Six Months
Years Ended Ended Ended
March 31 September September
30, 30,
2002 2001 2000 2001 2001
---- ---- ---- ---- ----
Net earnings (loss),
as reported $(82,760) $341,048 $431,923 ($81,799) $10,279
Net earnings (loss),
as adjusted $(70,578) $353,218 $444,093 ($78,753) $16,367
Basic earnings (loss)
per share as
reported $ (0.11) $ 0.47 $ 0.57 ($ 0.11) $ 0.01
Basic earnings (loss)
per share as
adjusted $ (0.10) $ 0.49 $ 0.59 ($ 0.11) $ 0.02
Diluted earnings
(loss) per share
as reported $ (0.11) $ 0.44 $ 0.55 ($ 0.11) $ 0.01
Diluted earnings
(loss) per share
as adjusted $ (0.10) $ 0.47 $ 0.57 ($ 0.11) $ 0.02
Statement No. 142 will also require that identifiable intangible assets
with estimable useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for
impairment in accordance with Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Since the Company's only
intangible is Goodwill, the adoption of this standard will not have a
material impact on the operations or financial position of the Company.
Statement No. 144 supersedes 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, for the disposal of a
segment of a business. However, it retains the requirement in Opinion No.
30 to report separately discounted operations and extends that reporting to
<page>
19
a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for
sale. By broadening the presentation of discontinued operations to include
more disposal transactions, the FASB has enhanced management's ability to
provide information that helps financial statement users to assess the
effects of a disposal transaction on the ongoing operations of an entity.
Statement No. 144 is effective for fiscal years beginning after December
15, 2001. The adoption of this statement on April 1, 2002 did not have a
material impact on the Company's financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 amends existing
guidance on asset impairment and provides a single accounting model for
long-lived assets to be disposed of. SFAS No. 144 also changes the criteria
for classifying an asset as held-for-sale; and broadens the scope of
businesses to be disposed of that qualify for reporting as discontinued
operations and changes the timing of recognizing losses on such operations.
The Statement is effective for fiscal years beginning after December 15,
2001. The adoption of SFAS No. 144 did not have a material effect on the
Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This statement rescinds the requirement to report gains and
losses from extinguishment of debt as an extraordinary item. Additionally,
this statement amends Statement 13 to require sale-leaseback accounting for
certain lease modifications that have economic effects similar to
sale-leaseback transactions. The provisions of this statement relating to
Statement 4 are applicable in fiscal years beginning after May 15, 2002.
The provisions of this statement related to Statement 13 are effective for
transactions occurring after May 15, 2002. All other provisions of this
statement are effective for financial statements issued on or after May 15,
2002. The adoption of SFAS No. 145 is not expected to have an effect on the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. The
Statement is effective for exit or disposal activities initiated after
December 31, 2002. The adoption of SFAS No. 146 is not expected to have an
effect on the Company's financial statements.
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, 2002.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995.
<page>
20
Our quarterly report on Form 10-QSB contains various forward-looking
statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act, and is subject to the safe
harbors created thereby. Forward-looking statements are often characterized
by the words "believes," "estimates," "anticipates," "projects" or
"expects," or similar expressions. Forward-looking statements are
inherently subject to risks and uncertainties, some of which cannot be
predicted or quantified. Actual results could differ materially because of
the following factors, among others: the Company's continued involvement in
each of its current business segments; the Company's success in maintaining
relationships with the broker/dealers with whom it currently does business;
the success of the Company's efforts to develop relationships with other
broker/dealers who can serve as a source of referrals for the Company; the
continued employment of key management; the success of the Company in its
business development efforts; the continuation of the Company's investment
advisory agreements with Hackett Investment Advisors, Inc. and Feldman
Securities Group, L.L.C. and their success in managing the trust and
investment agency accounts for which they provide services; finding a
suitable replacement investment advisor for WIS; the Company's ability to
recover the costs it has incurred and will incur in the future in
connection with the bankruptcy proceeding of Stevens Financial Group, Inc.
("Stevens"), which costs totaled approximately $362,000 through September
30, 2002, net of approximately $72,000 in defense cost reimbursements from
the Company's E & O insurance carrier; the outcome of litigation filed (or
commenced in the future) against the Company related to the Company's
services as indenture trustee on the Stevens bond offerings; increased
staffing or office needs not currently anticipated; competitive factors,
such as increased competition for the services provided by the Company in
one or more of its business segments; the Company's successful performance
of its duties as trustee and/or paying agent on bond offerings, as
custodian for IRA's, as manager, administrator and custodian for trust and
investment agency accounts; and changes in rules and regulations adversely
impacting the Company's business segments. Other factors are detailed in
the sections entitled "Management's Discussion and Analysis or Plan of
Operation - Risk Factors" in our most recent Annual Report on Form 10-KSB
for the year ended March 31, 2002, and elsewhere in our Securities and
Exchange Commission filings. By making these forward-looking statements, we
undertake no obligation to update these statements for revisions or changes
after the date of this report.
Item 3. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior
to the filing date of this report, the Company carried out an evaluation of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures. This evaluation was carried out under the
supervision and with the participation of the Company's management,
including our Chief Executive Officer and our Controller/Treasurer. Based
upon that evaluation, our Chief Executive Officer and our
Controller/Treasurer concluded that the Company's disclosure controls and
procedures are effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
<page>
21
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that
information required to be disclosed in Company reports filed under the
Exchange Act is accumulated and communicated to management, including the
Company's Chief Executive Officer and Controller/Treasurer as appropriate,
to allow timely decisions regarding required disclosure.
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 mentioned below, will not have a
material adverse effect on the financial condition or results of operations
of the Company.
A. 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.
01-03105-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 Time
Certificates and Fixed Rate Investments.
On February 1, 2002, a Complaint (Adv. No. 01-1319) was filed against the
Company and other 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 by, among other things, 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 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
<page>
22
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. The Company has filed an Answer denying
all material allegations.
Colonial has submitted a claim to its E&O insurance carrier based on the
above litigation. The Company's E&O carrier has reserved its rights with
regard to insurance coverage, but is participating in defending the
litigation. As a result of the foregoing, 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 litigation. Additionally, the Company has
incurred costs of approximately $362,000 through September 30, 2002, net of
approximately $72,000 in defense cost reimbursements from its E& O carrier,
in connection with the Stevens Bankruptcy Proceeding, and the above
litigation, 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 litigation. The Company is
submitting its defense costs incurred in connection with the above
litigation to its E&O carrier for reimbursement (and will submit future
defense costs to its E&O carrier for payment or reimbursement), and the
Company's E&O carrier is reimbursing the Company for a portion of such
costs; however, there may be no assurance as to the amount of expenses
incurred by the Company for which the Company will receive reimbursement
from its E&O carrier. 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.
Given the preliminary stage of the above litigation, it is not presently
possible to estimate the probability or range of potential loss to the
Company. However, the Company's E&O carrier could successfully deny
coverage for the claims asserted in the above Complaint, or the plaintiffs
in such litigation could recover amounts in excess of the policy limits of
the Company's E&O Policy. Additionally, the Company may not recover all, or
a material portion of, the costs it incurs in the Stevens Bankruptcy
Proceeding and the above litigation, and the Company's E&O carrier may not
reimburse the Company for such costs. Any of the above 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
operating certificate or the imposition of sanctions or operating
constraints (including without limitation requiring the Company to raise
additional capital) 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 or materially curtail its business operations. The financial
statements do not include any adjustments that might result from the
outcome of these uncertainties. The significance and uncertainty related to
these issues resulted in a modification of the independent auditors' report
included with the March 31, 2002 financial statements to include a
paragraph about the uncertainty of the Company's ability to continue as a
going concern resulting from the uncertain outcome of this matter.
<page>
23
B. On September 18, 2002, the Personal Representative of the Estate of
Dorothy C. Long and certain other parties filed a Petition for Surcharge
and a Petition for Removal of Trustee and Appointment of Successor Trustee
against the Company (the "Petition"). In the Petition, Plaintiffs alleged
that the Company breached certain duties in connection with a loan procured
to pay certain federal estate taxes. The Plaintiffs have alleged that the
Company is liable for $210,929, as well as certain expenses, accounting
fees, attorneys' fees and costs as a result of its alleged breaches. The
Company has filed an Objection to the Petition denying all material
allegations of the Petition, a Counter-Petition (against the Personal
Representative of the Estate) and a Third-Party Complaint (against counsel
for the Personal Representative of the Estate) in the above matter. Given
the preliminary stage of the above litigation, it is not presently possible
to estimate the probability or range of potential loss to the Company. The
financial statements do not include any adjustments that might result from
the ultimate outcome of the above litigation.
Item 2: Changes in Securities
None.
Item 3: Default 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) Exhibit No. Description
99. 1 Certification pursuant to 18 U. S. C. Section 1350.
99. 2 Certification pursuant to 18 U. S. C. Section 1350.
(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: November 19, 2002 BY: /s/ John K. Johnson
John K. Johnson
Its: President
DATE: November 19, 2002 BY: /s/ Ian B. Currie
Ian B Currie
Its: Controller & Treasurer
<page>
24
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John K. Johnson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Colonial Trust
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 19, 2002
/s/ John K. Johnson
John K. Johnson
President and Chief Executive Officer
<page>
25
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ian B. Currie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Colonial Trust
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 19, 2002
/s/ Ian B. Currie
Ian B. Currie
Controller and Treasurer