<page>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, 2003
[ ] 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: 757,864
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 Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis or
Plan of Operation 11
Item 3: Controls and Procedures 17
Part II. Other Information
Item 1: Legal Proceedings 19
Item 2: Changes in Securities 20
Item 3: Default Upon Senior Securities 20
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 5: Other Information 20
Item 6a: Exhibits 20
Item 6b: Reports on Form 8 - k 20
SIGNATURES 20
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COLONIAL TRUST COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
(Unaudited)
ASSETS September 30, 2003 March 31, 2003
Cash and cash equivalents $121,329 $243,048
Receivables 1,237,724 1,145,631
Income tax receivable - 5,864
Note receivable 560,628 353,635
Property, furniture and equipment, net 643,340 665,503
Excess of cost over fair value acquired, net 104,729 104,729
Restricted cash 506,391 506,377
Other assets 167,317 99,436
---------- ----------
$3,341,458 $3,124,223
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $421,352 $305,990
Total Liabilities 421,352 305,990
Stockholders' equity:
Common stock, no par value;
25,000,000 shares authorized,
757,864 issued and outstanding,
at September 30, 2003 and 757,884
issued and outstanding at
March 31, 2003 689,286 689,286
Additional paid-in capital 506,208 506,208
Retained earnings 1,724,612 1,622,739
--------- ---------
Total stockholders' equity 2,920,106 2,818,233
--------- ---------
$3,341,458 $3,124,223
========== ==========
See accompanying notes to condensed financial statements.
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COLONIAL TRUST COMPANY
Condensed Statements of Operations (Unaudited)
Three-month periods Six-month periods
Ended September 30, Ended September 30,
Revenues: 2003 2002 2003 2002
Bond servicing revenue $498,650 $453,172 $874,044 $855,988
IRA servicing fees-corporate 128,397 154,466 298,129 331,337
IRA servicing fees-personal trust 78,573 71,786 155,696 146,632
Trust fee income 478,015 350,119 953,283 648,807
Interest income 15,364 9,796 60,856 20,056
--------- --------- --------- ---------
Total revenue 1,198,999 1,039,339 2,342,008 2,002,820
General and administrative
expenses 1,105,328 932,721 2,169,290 1,942,845
--------- --------- --------- ---------
Earnings before
income taxes 93,671 106,618 172,718 59,975
Income taxes 38,405 43,666 70,773 24,589
------- ------- ------- -------
Net earnings $55,266 $62,952 $101,945 $35,386
======= ======= ======== =======
Basic net earnings
per common share $.07 $.09 $.13 $.05
==== ==== ==== ====
Diluted net earnings
per common share $.07 $.08 $.13 $.05
==== ==== ==== ====
Weighted average shares
outstanding - basic 757,864 728,240 757,874 728,578
======= ======= ======= =======
Weighted average shares
outstanding - diluted 760,757 752,004 760,767 752,129
======= ======= ======= =======
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,
-------------------
2003 2002
---- ----
Cash flows from operating activities:
Net earnings $101,945 $35,386
Adjustments to reconcile net earnings to
net cash provided by (used in) Operating activities:
Depreciation and amortization 48,300 61,810
Loss on disposal of assets 1,090 -
Increase in receivables (92,093) (166,222)
Increase in other assets (67,881) (52,001)
Decrease in income tax receivable 5,864 24,590
Increase in accounts payable and
accrued liabilities 115,362 4,974
------- ---------
Net cash provided (used in) operating activities 112,587 (91,463)
------- ---------
Cash flows from investing activities:
Purchase of property, furniture and equipment (27,227) (57,426)
Additions to note receivable (206,993) (5,313)
Payments received on note receivable - 100,000
Decrease (increase) in restricted cash (14) 12,759
------- ---------
Net cash provided by(used in)investing activities (234,234) 50,020
------- ---------
Cash flows from financing activities:
Purchase and retirement of common stock (72) (6,349)
Proceeds from issuance of common stock under
stock option plan - 75,000
------ -------
Net cash provided by (used in) financing activities (72) 68,651
------ -------
Increase (decrease) in cash and cash equivalents (121,719) 27,208
Cash and cash equivalents at beginning of period 243,048 166,592
-------- --------
Cash and cash equivalents at end of period $121,329 $193,800
======== =========
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, 2003 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, 2003.
(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 is domiciled in the State of Arizona and is
regulated by the Arizona Banking Department. 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
bondholders.
The Company also serves as trustee of self-directed individual
retirement accounts for certain bondholders or employees of
religious organizations.
The Company's Wealth Management Group 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 Wealth Management Group
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 trustee 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 Per Common Share
Basic earnings 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.
(d) Stock Based Compensation
We apply the intrinsic value-based method of accounting prescribed
by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations
including FASB Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25" to account for our fixed plan stock options. Under
this method, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeded
the exercise price. SFAS No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, we have
elected to continue to apply the intrinsic value-based method of
accounting described above and have adopted the disclosure
requirements of SFAS No. 123. Accordingly, we do not recognize
compensation expense for any of our stock-based plans because we
do not issue options at exercise prices below the market value at
date of grant. Had compensation cost for our stock-based plans
been determined consistent with SFAS No. 123, our net earnings and
earnings per share would have been adjusted to the pro forma
amounts indicated below (in thousands, except per share data):
<page>8
Three months ended Six months ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net earnings as reported $55,266 $62,952 $101,945 $35,386
Total stock-based employee
compensation expense/
Income determined under
fair value based method
for all awards, net of
related tax effects (886) (996) (1,773) (1,992)
------- ------- -------- -------
Pro forma net earnings 54,380 61,956 100,172 33,394
------- ------- -------- -------
Basic earnings per share:
As reported $.07 $.09 $.13 $.05
Pro forma $.07 $.08 $.13 $.05
Diluted earnings per share:
As reported $.07 $.08 $.13 $.05
Pro forma $.07 $.08 $.13 $.04
2. Note receivable
On December 1, 1990, the Company entered into a Master Note and Letter
Agreement with Church Loans and Investment Trust, 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 Per Share
A reconciliation from basic earnings per share to diluted earnings per
share for the three-month and six-month periods ended September 30, 2003,
and September 30, 2002 follows:
Three-months Six-months
ended September 30, ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net earnings $55,266 $62,952 $101,945 $35,386
------- ------- -------- -------
Basic EPS
-weighted average
shares outstanding 757,864 728,240 757,874 728,578
======= ======= ======= =======
Basic earnings
per share $.07 $.09 $.13 $.05
==== ====== ==== ====
Basic EPS
-weighted average
shares outstanding 757,864 728,240 757,874 728,578
Effect of dilutive
securities:
Stock options 2,893 23,764 2,893 23,551
----- ------ ----- ------
Diluted EPS
-weighted average
shares outstanding 760,757 752,004 760,767 752,129
======= ======= ======= =======
Diluted earnings
per share $.07 $.08 $.13 $.05
==== ==== ==== ====
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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, 2003 and September 30, 2002. The Company has two
distinct business segments consisting of Corporate Trust services and
Wealth Management Group 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.
Wealth
Corporate Management
Trust Group Other Total
Three-month periods:
September 30, 2003
Revenues:
Bond Servicing Income $498,650 - - $498,650
IRA Servicing Fees 128,397 $78,573 - 206,970
Trust Fee Income - 478,015 - 478,015
Interest Income - - $15,364 15,364
-------- -------- ------ ----------
$627,047 $556,588 $15,364 $1,198,999
======== ======== ====== ==========
General & Administrative
Expenses $339,140 $448,716 $317,472 $1,105,328
--------- -------- -------- ----------
September 30, 2002
Revenues:
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
-------- -------- -------- --------
Six-month periods:
September 30, 2003
Revenues:
Bond Servicing Income $874,044 - - $874,044
IRA Servicing Fees 298,129 $155,696 - 453,825
Trust Fee Income - 953,283 - 953,283
Interest Income - - $60,856 60,856
---------- ---------- ------- ----------
$1,172,173 $1,108,979 $60,856 $2,342,008
========== ========== ======= ==========
General & Administrative
Expenses $706,898 $821,421 $640,971 $2,169,290
-------- -------- ------- ----------
September 30, 2002
Revenues:
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
-------- -------- -------- ----------
Total Assets by
Segment $1,016,297 $376,402 $1,948,759 $3,341,458
---------- -------- ---------- ----------
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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,
2003. To satisfy this requirement, Colonial owns certificates of deposit
held with banks totaling $506,391 at September 30, 2003. These assets are
classified as restricted cash in the accompanying balance sheets
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 event
mentioned below, the effect of such matters will not have a material
adverse effect on the Company.
Dorothy Castenada, as Personal Representative of the Estate of Dorothy
Long, vs. Colonial Trust Company (PB 2002-000207).
The Company is a defendant in a lawsuit filed in the (Arizona) Maricopa
County Superior Court, Probate Division, by the personal representative of
the Dorothy Long Trust (the "Trust"), a trust for which the Company served
as trustee. The personal representative has alleged that the Company
breached its duties as trustee in connection with the Trust.
The Company filed a counter-petition against the personal representative of
the Trust and also filed a third-party complaint against counsel for the
personal representative. In its Complaint, the personal representative
sought damages of approximately $200,000 against the Company, representing
the amount of loan fees incurred by the Trust as a result of the
allegedly-wrongful acts of the Company, plus (i) the return by the Company
of certain trustee's fees, attorneys' fees and costs which the Company
previously received from the Trust, (ii) the payment by the Company of
costs and attorneys' fees incurred by the personal representative, and
(iii) pre-judgment interest on the above loan fees.
A trial in the above matter took place on November 3-5, 2003. At the
conclusion of the trial, the Court issued a bench ruling: (a) that the
Company and counsel for the personal representative had breached their
respective fiduciary duties to the Trust, (b) that the Company and counsel
for the personal representative were each liable for fifty percent (50%) of
the after-tax damage suffered by the Trust as a result of its payment of
the above loan fees, and (c) ordering that Colonial be removed as Trustee
for the Trust and replaced by a new trustee identified by the Court. The
Court ordered counsel for the personal representative to submit a form of
Order within 30 days for review by the Court and all other parties. Certain
parties in the litigation, including the Company, will have the right to
appeal all or portions of the Court's Order when issued.
The Company has accrued a liability on its September 30, 2003 balance sheet
of $47,750 as a result of the foregoing. This accrued liability represents
the Company's current best estimate of the Company's liability for the
after-tax damages suffered as a result of the Trust's payment of the loan
fees described above. It is also possible that the Company will incur
additional liability as a result of the above litigation, including without
limitation liability for certain of its trustee's fees, attorneys' fees and
costs related to the above trust and litigation. However, the Company is
presently unable to determine whether it will incur any such additional
liability, the amount, if any, of such potential liability, or the period
in which such potential liability may be capable of calculation.
<page>11
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 in these policies since the fiscal year end of March 31,
2003. 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.
Results of Operations - Three-Month Periods Ended September 30, 2003 and
September 30, 2002
------------------
The Company had net earnings of $55,266, or $.07 diluted earnings per
share, for the three-month period ended September 30, 2003, compared to an
earnings of $62,952, or $.08 per diluted share, for the three-month period
ended September 30, 2002, a decrease in net earnings of 12%. The Company
had total revenue of $1,198,999 for the three-month period ended September
30, 2003, compared to total revenue of $1,039,339 for the same three-month
period in the prior year, an increase of 15%.
The Corporate Trust segment's revenue increased to $627,047 for the period
ended September 30, 2003, compared to $607,638 for the period ended
September 30, 2002, an increase of 3%. The Wealth Management Group
segment's revenue increased to $556,588 for the period ended September 30,
2003, compared to $421,905 for the period ended September 30, 2002, an
increase of 32%.
<page>12
The Corporate Trust segment's bond servicing revenue increased to $498,650
for the period ended September 30, 2003, compared to $453,172 for the
period ended September 30, 2002, an increase of 10%. The increase in bond
servicing revenue was primarily attributable to the following factors.
First, sinking fund late fee income increased approximately $26,000 in the
current quarter compared to the three months ended September 30, 2002 as a
result of a large payoff on one delinquent bond issue. Second, bond call
fees in the current quarter exceeded these fees in the prior comparable
quarter by approximately $22,000 due to a more than doubling of bond calls,
measured in original issue amounts, between these two quarters. Third,
schedule B interest (defined below) of approximately $13,000 was earned in
the three months ended September 30, 2003; none was recorded in the
comparable prior quarter. Schedule B interest is additional interest from
bond issuers due to interest rates being below 4%. These factors were
partially offset by a reduction of approximately $15,000 in interest
received on investment balances due to lower rates in the current quarter.
At September 30, 2003, the Company was serving as trustee and paying agent
on 439 non-profit bond offerings totaling approximately $382,000,000 in
original principal amount; 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.
Revenue from the Corporate Trust segment's IRA servicing activities
decreased to $128,397 for the period ended September 30, 2003, compared to
$154,466 for the period ended September 30, 2002, a decrease of 17%. This
decrease was primarily due to a reduction of approximately $31,000 in
interest on investment balances due to lower rates in the current three
months ended September 30, 2003 compared to the three months ended
September 20, 2002. Revenue from the Wealth Management Group segment's IRA
servicing activities increased to $78,573 for the period ended September
30, 2003, compared to $71,786 for the period ended September 30, 2002, an
increase of 9%. The increase in the Wealth Management Group segment's IRA
revenue was primarily due to an increase in the number of IRA's serviced by
the Company. At September 30, 2003, the Corporate Trust segment was
servicing 9,736 IRA's with an aggregate value of approximately
$191,638,000, and the Wealth Management Group segment was servicing 301 IRA
Accounts with an aggregate value of approximately $66,900,000. At September
30, 2002, the Corporate Trust segment was servicing 9,973 IRA Accounts with
an aggregate value of approximately $136,100,000, and the Wealth Management
Group segment was servicing 270 Accounts with an aggregate value of
approximately $50,500,000.
The Wealth Management Group segment's trust revenue increased to $478,015
for the period ended September 30, 2003, compared to $350,119 for the
period ended September 30, 2002, an increase of 37%. The increase in trust
revenue was primarily due to the following factors. First, a single trust
relationship was added in January 2003 that generated fees of approximately
$137,000 in the quarter ended September 30, 2003. Second, a trust
relationship was terminated in the current quarter which resulted in
termination fees of approximately $34,000. These factors were partially
offset by the following factors. First, approximately $29,000 in real
estate fees and other irregularly occurring service fees were collected in
the quarter ended September 30, 20002. Second, approximately $8,000 in
past-due prior fiscal year employee benefit trust fees were collected in
the comparable prior quarter. At September 30, 2003, the Wealth Management
Group segment was serving as trustee or agent for 620 trust, investment
accounts, or other accounts with a fair market value of approximately
$235,000,000. At September 30, 2002, the Wealth Management Group 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.
Interest and other income increased to $15,364 for the period ended
September 30, 2003, compared to $9,796 for the period ended September 30,
2002 an increase of 57%. This increase was primarily due to the following
items: First, the Company had higher collections of interest on sinking
fund accounts receivable due to payoffs in the current quarter. Second, the
Company recognized compound interest on a bond investment called during the
current quarter; Third, the Company had a larger master note receivable
balance with Church Loans & Investment Trust in the current quarter,
partially offset by lower interest rates.
<page>13
The Corporate Trust segment's general and administrative expenses increased
to $339,140 for the period ended September 30, 2003, compared to $328,592
for the period ended September 30, 2002, an increase of 3%, but remained at
54% of segment revenues for the period ended September 30, 2003 as compared
to the period ended September 30, 2002. The Wealth Management Group
Segment's general and administrative expenses increased in the aggregate to
$448,716 for the period ended September 30, 2003, compared to $303,944 for
the period ended September 30, 2002, an increase of 48%, and increased to
81% of segment revenues. The Corporate Trust segment's general and
administrative expense as a percentage of segment revenues remained
constant with the comparable prior year's quarter because expenses grew
proportionately to the increase in revenues in both segments.
The increase in the Wealth Management segment's general and administrative
expenses as a percentage of segment revenues was primarily due to first, an
accrual of $47,750 for a loss contingency in the Estate of Dorothy Long
litigation (see Notes to Condensed Financial Statements 5. Commitments and
Contingencies), and second, higher personnel costs related to new sales and
support staff to further stimulate business development.
The Company's effective income tax rate remained constant at 41.0% for the
three-month periods ended September 30, 2003 and September 30, 2002.
Results of Operations - Six-Month Periods Ended September 30, 2003 and
September 30, 2002
------------------
The Company had net earnings of $101,945, or $.13 diluted earnings per
share, for the period ended September 30, 2003, compared to net earnings of
$35,386, or $.05 diluted earnings per share, for the period ended September
30, 2002, an increase in net earnings of 188%. The Company had total
revenue of $2,342,008 for the period ended September 30, 2003, compared to
total revenue of $2,002,820 for the prior comparable year.
The Corporate Trust segment's revenue decreased to $1,172,173 for the
period ended September 30, 2003, compared to $1,187,325 for the period
ended September 30, 2002, a decrease of 1%. The Wealth Management Group
segment's revenue increased to $1,108,979 in the period ended September 30,
2003, compared to $795,439 for the period ended September 30, 2002, an
increase of 39 %.
The Corporate Trust segment's bond servicing revenue increased to $874,044
for the period ended September 30, 2003, compared to $855,988 for the
period ended September 30, 2002, an increase of 2%. The increase in bond
servicing revenue was primarily attributable to the following factors.
First, revenues associated with bond calls (due to bond issuer refinancings
through loans or other products) in the six months ended September 30, 2003
exceeded these fees in the comparable prior period by approximately $32,000
due to a more than doubling of the level of bond calls, measured in
original issue amounts. Management believes these refinancings, which do
not result in on-going fees to the Company and which negatively impact bond
servicing revenues, will continue to negatively impact such revenues in the
foreseeable future. Second, Schedule B interest of approximately $18,000
was earned in the six months ended September 30, 2003; none of this type of
revenue was recorded in the comparable prior period. Schedule B interest is
additional interest from bond issuers due to interest rates being below 4%.
Third, the Company received other miscellaneous, irregularly- occurring
trust charges of approximately $24,000 in the current period in excess of
similar fees in the prior period. These items were partially offset by the
following factors. First, the Company experienced a reduction of
approximately $33,000 in interest-related earnings on investment balances
due to lower interest rates in the current six months ended September 30,
2003 compared to the comparable prior six-month period. Second, the
Company's annual maintenance fees pertaining to bond issue servicing were
approximately $22,000 less than the comparable prior period due to the
reduction of outstanding bond issues caused by bond calls, as described
above.
Revenue from the Corporate Trust segment's IRA servicing activities
decreased to $298,129 for the period ended September 30, 2003, compared to
$331,337 for the period ended September 30, 2002, a decrease of 10%. This
decrease was primarily due to a reduction of approximately $55,000 in
interest received on investment balances due to lower interest rates
partially offset by approximately $17,000 in IRA account transfer,
termination and conversion fees in the current period ended September 30,
2003 compared to the comparable prior period.
<page>14
Revenue from the Wealth Management Group segment's IRA servicing activities
increased to $155,696 for the period ended September 30, 2003, compared to
$146,632 for the period ended September 30, 2002, an increase of 6%. The
increase was primarily due to the increase in the number of IRA Accounts
serviced by the Company.
The Wealth Management Group segment's trust fee income increased to
$953,283 for the period ended September 30, 2003, compared to $648,807 for
the period ended September 30, 2002, an increase of 47%. The foregoing
increase was primarily due to the following factors. First, the Company
experienced an increase in the value of trust, investment or other accounts
serviced by it, due largely to the addition of a single relationship that
commenced in January 2003; approximately $273,000 of the Company's
increased fees in such period were attributable to the addition of this
single relationship. Second, one of the Company's trust relationships
terminated in the current period which resulted in termination fees of
approximately $34,000. Third, the Company generated approximately $18,000
in real estate fees and other irregularly occurring service fees in excess
of those fees earned in the comparable prior six month period. These
factors were partially offset by the Company's recovery in the six month
period ended September 30, 2002, of approximately $24,000 in past-due prior
fiscal year employee benefit trust fees.
Interest income increased to $60,856 for the period ended September 30,
2003, compared to $20,056 for the period ended September 30,2002, an
increase of 203%. This increase was primarily attributable to interest
income recognized on the payoff of a large sinking fund accounts receivable
in the current six month period.
The Corporate Trust segment's general and administrative expenses decreased
in the aggregate to $706,898 for the period ended September 30, 2003,
compared to $758,731 for the prior period, and decreased to 60% of segment
revenues for the period ended September 30, 2003, from 64% of segment
revenues for the prior period. The decrease in the Corporate Trust
segment's general and administrative expenses as a percentage of segment
revenues was due primarily to the following factors. First, the Company had
significantly less expenses associated with the Stevens Bankruptcy
Proceeding in the current period compared to the comparable prior period
(see Part I, Item 4: Legal Proceedings of the Company's Form 10-KSB for the
fiscal year ended March,31 2003). Specifically, approximately $32,000 was
expensed in the six months end 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 $600 of costs in the six months
ended September 30, 2003. Second, write-offs of approximately $52,000 of
previously unidentified trust account reconciling items occurred in the six
months ended September 30, 2002. That process was completed as of March 31
2003; therefore, there were no expenses incurred in the current six month
period. These cost savings in the current period were partially offset by
higher bank fees (approximately $14,000) and personnel costs (approximately
$39,000) reflecting inflationary increases of payroll and benefits. The
Wealth Management Group segment's general and administrative expenses
increased in the aggregate to $821,421 for the period ended September 30,
2003, compared to $619,417 for the period ended September 30, 2002, but
decreased to 74% of segment revenues for the period ended September 30,
2003 from 78% for the period ended September 30, 2002. The decrease in the
Wealth Management Group segment's general and administrative expenses as a
percentage of segment revenues was due primarily to a greater proportionate
increase in revenues resulting mostly from an increase in the value of
accounts serviced by the Company, as compared to the net increase in
expenses for the six months ended September 30, 2003. The increase in
revenues primarily resulted from: first, the addition of a single trust
relationship in January 2003 which generated fees of approximately $273,000
in the six months ended September 30, 2003 and none in the prior comparable
six month period; second, higher Agency fees of approximately $60,000 in
the six months ended September 30, 2003, including the termination of a
trust relationship which resulted in termination fees of approximately
$34,000; and third, approximately $18,000 more in irregularly occurring
estate fees in the current period. These factors were partially offset by
higher fees in the following categories occurring in the previous
comparable six month period; first, approximately $29,000 in real estate
fees and other irregularly occurring service fees; second, the recovery of
approximately $24,000 in past-due prior fiscal year employee benefit trust
<page>15
fees in the comparable prior period. The current period's expense increase
included an accrual of $47,750 for a loss contingency in the Estate of
Dorothy Long litigation (see Notes to Condensed Financial Statements 5.
Commitments and Contingencies), and additional personnel costs including
the addition of a new business development officer, and higher investment
advisory service fees associated with the new single trust relationship
mentioned above, in the six months ended September 30, 2003, as compared to
the comparable prior period.
The Company's effective income tax rate remained constant at 41% for the
six-month periods ended September 30, 2003, and September 30, 2002.
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
$2,920,106 on September 30, 2003. 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 became subject on
December 31, 2002. For further discussion of possible future additional
capital requirements, see "Part I, Item 1: Regulation, Licensing and
Supervision" of the Company's 10-KSB for fiscal year ended March 31, 2003.
At September 30, 2003, $506,391 of the Company's net capital met the
Department's liquidity requirements.
The Company's cash and cash equivalents decreased from $243,048 on March
31, 2003, to $121,329 on September 30, 2003, while the note receivable
increased from $353,635 on March 31, 2003, to $560,628 on September 30,
2003. The decrease in the cash and cash equivalents was primarily due to
payments of approximately $207,000 advanced under the note receivable and
approximately $27,000 in purchases of property, furniture and equipment,
partially offset by approximately $113,000 in cash flow provided by
operations. The increase in the note receivable was due to advances made of
approximately $206,000 mentioned above. The Company's net property and
equipment decreased from $665,503 on March 31, 2003, to $643,340 on
September 30, 2003. 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.
The Company believes that it will be able to satisfy its regulatory
capital, working capital and capital expenditure requirements (including
amounts required to be paid as a result of the litigation discussed in
"Part II: Item 1- Legal Proceedings") for the foreseeable future from
existing cash balances, from anticipated cash flow from operating
activities, and from funds available under the Company's Master Note with
its former parent, Church Loans and Investments Trust. The Company is
continuing to actively consider and analyze potential merger, going private
and other strategic opportunities that may benefit the Company and its
stockholders.
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
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. The goodwill impairment
test is a two-step process, and under the first step, the fair value of the
reporting unit is compared with its carrying value. If the fair value of
the reporting unit exceeds its carrying value (including goodwill), step
two does not need to be performed. At September 30, 2003, management
assessed the fair value of its Wealth Management Group reporting unit and
found that it exceeded the unit's carrying value and consequently is of the
opinion that there has been no impairment of goodwill.
<page>16
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 did not have an effect on
the Company's financial statements.
In November 2002, the EITF reached a consensus on Issue 00- 21,
Multiple-Deliverable Revenue Arrangements ("EITF 00-21")EITF 00-21
Addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services, and/or rights to use assets.
The consensus mandates how to identify whether goods or services or both
which are to be delivered separately in a bundled sales arrangement should
be accounted for separately because they are "separate units of
accounting." The guidance can affect the timing of revenue recognition for
such arrangements, even though it does not change rules governing the
timing or pattern of revenue recognition of individual items accounted for
separately. The final consensus will be applicable to agreements entered
into in fiscal periods beginning after June 15, 2003 with early adoption
permitted. Additionally, companies will be permitted to apply the consensus
guidance to all existing arrangements as the cumulative effect of change in
accounting principle in accordance with APB Opinion No. 20, Accounting
Changes. The adoption of EITF 00-21 did not have a material impact on its
financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure ("SFAS 148"). SFAS 148 amends Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"),
and provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. SFAS 148 also amends the disclosure requirements of SFAS 123
to require more prominent and frequent disclosures in financial statements
about the effects of stock-based compensation. The transition guidance and
annual disclosure provisions of SFAS 148 are effective for financial
statements issued for fiscal years ending after December 15, 2002. The
interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after
December 15, 2002. The adoption of SFAS 148 did not have a material impact
on the Company's financial position or results of operations.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends SFAS 133 for
certain decisions made by the FASB Derivatives Implementation Group. In
particular, SFAS 149 (1) clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a derivative, (2)
clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying to conform it to language used in FIN 45, and
(4) amends certain other existing pronouncements. This Statement is
effective for contracts entered into or modified after June 30, 2003, and
for hedging relationships designated after June 30, 2003. In addition, most
provisions of SFAS 149 are to be applied prospectively. The adoption of
SFAS 149 did not have a material impact upon the Company's financial
position, cash flows or results of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). SFAS 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. It is to be implemented by reporting
the cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. Restatement is
not permitted. The adoption of SFAS 150 did not have a material impact upon
the Company's financial position, cash flows or results of operations.
<page>17
In January 2003, the EITF reached a consensus on Issue No. 02-16,
"Accounting by a Reseller for Cash Consideration Received From a Vendor."
EITF Issue No. 02-16 provides guidance on how resellers of vendors'
products should account for cash consideration received from their vendors.
The provisions of EITF Issue No. 02-16 applies to arrangements, including
modifications of existing arrangements, entered into after December 31,
2002 and are implemented in this document. The adoption of EITF Issue No.
12-16 did not have a material impact on the Company's financial position or
results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51." FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. However, in October 2003, the FASB deferred the effective date for
implementation of FIN 46 until December 31, 2003. FIN 46 was originally
effective for the quarter ended September 30, 2003 for variable interest
entities in which the Company held a variable interest that it acquired
before February 1, 2003. Currently the Company believes that the provisions
of FIN 46 will not have a material effect on its financial condition or
results of operations. Management will continue to evaluate the provisions
of FIN 46, including any modifications that may result from the FASB's
deferral of the effective date, to determine its impact, if any, on the
financial condition and results of operations of the Company.
Item 3. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, the Company carried out
an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of September 30, 2003. 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.
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, 2003.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995.
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; a
continuation of low interest rates which (i)may make traditional loans more
attractive and result in the refinancing of bond financings (for which the
Company earns fees as trustee and / or paying agent) into traditional loans
(for which the Company does not earn fees), and (ii) will continue to
negatively impact segments of the Company's revenues (such as revenues from
the Corporate Trust segment's bond servicing activities, which are impacted
to a significant extent by interest rates); the continued employment of key
management; the success of the Company in its business development efforts;
<page>18
the continuation of the Company's investment advisory agreements with
Hackett Investment Advisors, Inc., Meridian Investment Management,
PlanMember Advisory Corp., and Stellar Capital Management and their success
in managing the trust and investment agency accounts for which they provide
services; 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 trustee for IRA's, and as manager,
administrator, trustee and custodian for trust and investment agency
accounts; the Company's potential additional liability as a result of the
litigation discussed in "Part II: Item 1: Legal Proceedings"; 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, 2003, 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.
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.
<page>19
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.
Dorothy Castenada, as Personal Representative of the Estate of Dorothy
Long, vs. Colonial Trust Company (PB 2002-000207).
The Company is a defendant in a lawsuit filed in the (Arizona) Maricopa
County Superior Court, Probate Division, by the personal representative of
the Dorothy Long Trust (the "Trust"), a trust for which the Company served
as trustee. The personal representative has alleged that the Company
breached its duties as trustee in connection with the Trust.
The Company filed a counter-petition against the personal representative of
the Trust and also filed a third-party complaint against counsel for the
personal representative. In its Complaint, the personal representative
sought damages of approximately $200,000 against the Company, representing
the amount of loan fees incurred by the Trust as a result of the
allegedly-wrongful acts of the Company, plus (i) the return by the Company
of certain trustee's fees, attorneys' fees and costs which the Company
previously received from the Trust, (ii) the payment by the Company of
costs and attorneys' fees incurred by the personal representative, and
(iii) pre-judgment interest on the above loan fees.
A trial in the above matter took place on November 3-5, 2003. At the
conclusion of the trial, the Court issued a bench ruling: (a) that the
Company and counsel for the personal representative had breached their
respective fiduciary duties to the Trust, (b) that the Company and counsel
for the personal representative were each liable for fifty percent (50%) of
the after-tax damage suffered by the Trust as a result of its payment of
the above loan fees, and (c) ordering that Colonial be removed as Trustee
for the Trust and replaced by a new trustee identified by the Court. The
Court ordered counsel for the personal representative to submit a form of
Order within 30 days for review by the Court and all other parties. Certain
parties in the litigation, including the Company, will have the right to
appeal all or portions of the Court's Order when issued.
The Company has accrued a liability on its September 30, 2003 balance sheet
of $47,750 as a result of the foregoing. This accrued liability represents
the Company's current best estimate of the Company's liability for the
after-tax damages suffered as a result of the Trust's payment of the loan
fees described above. It is also possible that the Company will incur
additional liability as a result of the above litigation, including without
limitation liability for certain of its trustee's fees, attorneys' fees and
costs related to the above trust and litigation. However, the Company is
presently unable to determine whether it will incur any such additional
liability, the amount, if any, of such potential liability, or the period
in which such potential liability may be capable of calculation.
<page>20
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(a) Risk Factors
31.1 Certification of John K. Johnson pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Ian B. Currie pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of John K. Johnson pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Ian B. Currie pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(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 14, 2003 BY: /s/ John K. Johnson
John K. Johnson
Its: President
DATE: November 14, 2003 BY: /s/ Ian B. Currie
Ian B Currie
Its: Controller & Treasurer