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EXHIBIT 99(a)
There are various risks in purchasing our securities and investing in our
business, including those described below. You should carefully consider these
factors together with all other information included in this Form 10-QSB.
Lack of Liquidity of the Company's Common Stock
The Company's Common Stock is not listed on the Nasdaq Stock Market ("Nasdaq")
or on any national or regional securities exchange, and there is no established
trading market for the Company's Common Stock. The Company will continue to
attempt to match stockholders who wish to sell Company Common Stock with persons
who wish to buy such Common Stock. However, annual trading volume in the
Company's Common Stock has averaged only approximately 24,000 shares in the last
two most recently completed fiscal years. Therefore, a stockholder who owns a
substantial number of shares of Company Common Stock will likely be unable to
sell his shares in a short period of time should he or she need or wish to do
so.
Dependence on Key Personnel and Management of Growth
The Company's future success will depend upon the continued services of the
Company's senior management. The unexpected loss of the services of any of the
Company's senior management personnel could have a material adverse effect upon
the Company. The Company has entered into employment agreements with certain of
its senior management. The Company's future success will depend in part upon its
continuing ability to attract and retain highly qualified personnel to manage
the future growth of the Company. There may be no assurance that the Company
will be successful in attracting and retaining such personnel. Further, the
Company's ability to manage growth successfully will require the Company to
continue to improve its management, financial and operational controls. Failure
to do so could have a material adverse effect upon the Company's operating
results and financial condition.
Non-Profit Bond Servicing Market; Ability to Increase Bond Servicing Revenues
The Company's future financial performance will depend in significant part upon
the size of the non-profit bond market. The market for bonds issued by
non-profit organizations is subject to fluctuation due to a number of factors
beyond the control of the Company. The Company's revenues from bond servicing
activities during the nine-month period ending December 31, 2003 were slightly
higher than the comparable prior period, however the Company believes that
revenues from bond servicing activities could decline in the future as (i)
traditional lenders increase the availability of traditional loan financings at
attractive interest rates and other terms to non-profit borrowers, which may
decrease the demand for bond financings by non-profit issuers, along with
re-financings of existing outstanding bond issues (which terminate the Company's
duties as trustee and / or paying agent) and (ii) fewer broker/dealers, some of
whom refer bond servicing business to the Company, sell bonds to non-profit
issuers. The Company would also suffer a decrease in bond servicing revenues if
the Company loses market share with respect to those broker/dealers who do sell
bonds to non-profit issuers. The Company's ability to continue to maintain or
increase its market share will be dependent upon a number of factors, including
the Company's ability to develop and maintain relationships with the
broker/dealers who are primarily responsible for the sale of such non-profit
bonds. See "-Dependence Upon Certain Business Relationships" below. Revenues
from the Company's bond servicing activities accounted for approximately 39% of
the Company's total revenues in the nine months ended December 31, 2003. While
the level of new bonds issued during the current nine month period was 6% higher
than those issued during the comparable prior nine month period, the number of
bonds called due to re-financings of existing outstanding bond issues (which
terminate the Company's duties as trustee and / or paying agent) for the nine
months ended December 31, 2003 were approximately $115 million in original issue
amounts, more than double the approximately $55 million in original issue
amounts in bond calls for the comparable prior nine month period.
Market for Wealth Management Group Services; Ability to Increase Wealth
Management Group Service Revenues
The Company intends for the foreseeable future to limit the activities of its
Wealth Management Group segment to the metropolitan Phoenix area. Therefore, the
Company's future financial performance will depend in part upon the size of the
market for Wealth Management Group services in the metropolitan Phoenix area.
Revenues from such activities accounted for approximately 48% of the Company's
total revenues in the nine months ended December 31, 2003. The Company's ability
to continue to increase its revenues from Wealth Management Group services will
be dependent upon a number of factors, including the Company's ability to
develop and maintain relationships with professionals (such as attorneys and
accountants) who serve as a referral source for these services and the Company's
continuing ability to service Wealth Management Group accounts. Additionally, at
March 31, 2003, 47% of the Company's Wealth Management Group account assets were
held in trust for members of two families, and such accounts accounted for 12%
of the Company's Wealth Management Group revenues in the fiscal year ended March
31, 2003. Loss of such revenues could have a material adverse effect on the
Wealth Management Group segment and/or the Company's results of operations.
Dependence Upon Certain Business Relationships
The Company depends to a significant extent on its relationships with
broker/dealers who are involved in the sale of bonds for non-profit
organizations to refer business to the Company for bond servicing duties
associated with such offerings. As of March 31, 2003, all bond programs for
which the Company had served as trustee and paying agent had been originated by
twenty broker/dealers, and four of those broker/dealers had originated bonds
representing approximately 80% of the aggregate principal amount of all bonds
issued for which the Company served as trustee and paying agent. The loss of or
damage to any one of these relationships, or the failure or inability of any one
of these broker/dealers to initiate a similar number of non-profit bond
offerings in the future, could have a material adverse impact on the Company and
its operations. The Company also depends, to a great extent, upon its
relationships with trust professionals (such as attorneys and accountants) in
the metropolitan Phoenix area to refer opportunities to the Company to provide
Wealth Management Group services. The loss of or damage to existing
relationships, or the Company's inability to continue to develop additional
relationships with trust professionals, could have a material adverse impact on
the Company and its operations.
Competition
The principal business segments in which the Company is involved are highly
competitive. The Company currently competes with a number of other trust
companies to serve as trustee and paying agent for non-profit bond financings,
including Reliance Trust Company, Herring National Bank, American Church Trust
Company, and Trust Management, Inc. The Company also competes with large banks
and other financial institutions for these services. Other companies that do not
currently provide these services may enter this business. Additionally, bond
issuers compete with traditional lenders and other financing sources for
financings to non-profit entities. Continued increases in market share by
traditional or other lenders, and decreases in market share by bond issuers,
would have a material adverse impact on the Company. The Company also competes
with large banks and other financial institutions, including other trust
companies, located in the metropolitan Phoenix area for the business of
providing wealth management services. Other companies that do not currently
provide these services may enter this business.
Regulation, Licensing and Supervision - Net Capital Requirements
The Company's operations are subject to ongoing regulation, supervision and
licensing under various federal, state and local statutes, ordinances and
regulations, including but not limited to regulation by the Arizona Banking
Department.
Under applicable rules and regulations of the Arizona Banking Department, the
Company files periodic reports with the Department and is subject to periodic
examinations by the Department. Additionally, under Arizona law, the Company is
required to maintain net capital of at least $500,000; the Company's net capital
was approximately $2.94 million at December 31, 2003. Arizona law also requires
that $500,000 of the Company's net capital must meet the Department's liquidity
requirements. At December 31, 2003, $506,429 of the Company's net capital met
the Department's liquidity requirements.
Under legislation which became effective on August 9, 2001 and to which the
Company became subject on December 31, 2002, the Company may in certain
circumstances be required to maintain additional capital in excess of the
capital requirements described immediately above. Specifically, the Company will
be required to have additional capital of $250,000 for every $750 million of
"non-discretionary assets" and additional capital of $250,000 for every $250
million of "discretionary assets." The term "non-discretionary assets" is
defined as"...those assets in which the trust company must obtain from the
customer, broker or investment advisor specific direction and instructions
regarding both investment strategies and investment executions." The term
"discretionary assets" is defined as "...those assets in which the trust company
has the unilateral authority to determine investment strategies and execute
investment transactions without seeking the concurrence, approval or authority
from the customer or any other external party." Additionally, this legislation
requires that any trust company whose most recent composite rating from the
Arizona Banking Superintendent was "four" as defined in the revised uniform
interagency trust rating system must maintain an additional $250,000 in capital,
and that any trust company whose most recent composite rating from the Arizona
Banking Superintendent was "five" as defined in the above rating system must
maintain an additional $500,000 in capital. One-half of any additional capital
required by such legislation must be "liquid capital."
The Company believes that approximately $327 million of the funds which it held
in the ordinary course of business at December 31, 2003 would be classified as
"non-discretionary" assets and approximately $221 million of the funds which it
held in the ordinary course of business at December 31, 2003 would be described
as "discretionary" assets. The Company also does not believe that its
discretionary or its non-discretionary assets will grow in the foreseeable
future to the levels which will require additional capital. However, there may
be no assurance that the Arizona Banking Department will agree with the
Company's classification of its assets as non-discretionary or discretionary,
and to date no regulations or interpretations concerning these provisions have
been issued by the Arizona Banking Department. Additionally, although the
Company does not believe that it is likely to receive a "four" or "five"
composite rating from the Arizona Banking Superintendent in the foreseeable
future, there may be no assurance in this regard.
In the event the Company is required to have additional capital, including
additional liquid capital, the Company believes that this requirement can be
satisfied from cash flow from operations, and from funds available under its
master note with Church Loans and Investments Trust. The Company terminated its
$200,000 working capital line of credit with Bank One on September 29, 2003
because management believed it was no longer needed. There was no use of the
facility during the approximately nine months of its availability. Arizona law
also requires the Company to maintain a fidelity bond against dishonesty, fraud,
theft, embezzlement and other similar insurable losses. Under legislation which
became effective on August 9, 2001, this fidelity bond must be in the minimum
amount of $2.4 million. Arizona law also requires the Company to maintain errors
and omissions insurance of at least $500,000. The fidelity bond and the errors
and omissions insurance must also be adequate in relation to the Company's
potential exposure. The Company believes that it is in compliance with these
requirements and that it will continue to be in compliance with these
requirements in the future, including the fidelity bond requirements imposed by
the new legislation.
The Arizona Banking Department retains broad discretion to suspend or revoke the
certificate of any trust company subject to its jurisdiction (including the
Company) upon the occurrence of certain events, including (i) the trust
company's violation of any applicable law, rule or order, (ii) the trust
company's failure to conduct business in a safe, sound and lawful manner, or
(iii) upon the occurrence of any other event set forth in Arizona Revised
Statutes Section 6-864. The Company is also required to comply with federal
rules and regulations in connection with the Company's service as trustee for
IRA Accounts.
Failure to comply with applicable law could have a material adverse effect on
the Company's results of operations and financial condition and could, in
certain instances, affect the Company's certificate issued by the Arizona
Banking Department. Failure to maintain such a certificate would require the
Company to attempt to move its operations to another state, to discontinue its
operations, or to attempt to merge or effect another business combination.
Performance of Contractual Duties
In the performance of its duties as trustee and paying agent on bond offerings
of non-profit and other organizations, the Company is required to perform
certain duties under the trust indenture for such offering and/or the federal
Trust Indenture Act (15 U.S.C. ss. 77aaa et seq.) or the applicable state
version of such Act (if any). In the Company's capacity as trustee, such duties
include: receiving proceeds from the sale of the bonds; distributing such
proceeds according to the purposes of the bond offering; investing such proceeds
pending distribution; receiving periodic sinking fund payments by the bond
issuer; procuring a security interest in collateral from the bond issuer to
secure the issuer's bonds; perfecting such security interest; and, in the event
of default by a bond issuer, taking possession of and/or selling the collateral.
In the Company's capacity as paying agent, such duties include distributing
sinking fund payments to bondholders. Failure to perform such duties in the
manner required by the trust indenture or applicable law could cause the Company
to incur material liabilities, which in turn could have a material adverse
effect on the Company's results of operations and financial condition.
Risks Related to Potential Sale of Corporate Trust Division
The Company has entered into a Purchase and Assumption Agreement (the
"Agreement") dated December 30, 2003 with Happy Bancshares, Inc. and its
subsidiary, First State Bank, pursuant to which the Company agreed, subject to
the satisfaction of certain conditions described in the Agreement, to sell to
First State Bank substantially all of the assets of the Company's Corporate
Trust Division. See Part 1: Item 2 - Management's Discussion and Analysis or
Plan of Operation - Agreement to Sell Corporate Trust. The closing of the above
sale is subject to the satisfaction of certain conditions, including without
limitation approval by the Company's shareholders, and there may be no assurance
that the Company will be successful in completing the above sale. Additionally,
in the event the above sale is completed, the Company will be required to bear
the costs of operating a company which files periodic reports with the
Securities and Exchange Commission ("SEC"), and is subject to SEC rules and
regulations applicable to public reporting companies, unless the Company
subsequently sells its Personal Trust Division and terminates its obligation to
file periodic reports with the SEC, of which there may be no assurance.
Costs of Compliance with Sarbanes-Oxley Act of 2002
Congress recently enacted the Sarbanes-Oxley Act of 2002, which imposes a number
of additional significant and costly obligations on companies that file periodic
reports with the Securities and Exchange Commission. Compliance with the
Sarbanes-Oxley Act will result in significant additional costs to the Company
and will distract the Company's management from its day-to-day activities.
Partially as a result of the foregoing, the Company has entered into a Purchase
and Assumption Agreement with Happy Bancshares and its subsidiary, First State
Bank, for the sale of the Company's Corporate Trust Division. See "Part I: Item
2-Management's Discussion and Analysis or Plan of Operation-Agreement to Sell
Corporate Trust Division" and "Risks Related to Potential Sale of Corporate
Trust Division" immediately above. The Company is also continuing to actively
consider and analyze potential merger, going private and other strategic
opportunities with respect to its Wealth Management Group that may benefit the
Company and its stockholders.
Change in Securities Laws Affecting Non-Profit Bond Finance Market
Most bond offerings for which the Company serves as trustee and/or paying agent
are made in reliance upon an exemption from registration provided by Section
3(a)(4) of the Securities Act of 1933, as amended, and similar exemptions from
registration provided for under applicable state securities laws. In the event
such federal and/or state exemptions become unavailable for any reason, the
Company believes that the market for non-profit bond financings would be
materially and adversely affected due primarily to the increased costs
associated with registration of such bonds under federal and/or state laws. The
foregoing would have a material adverse impact on the Company's fees generated
from bond servicing activities and, thus, the Company's results of operations.
Common Stock Dividends
The Company has never paid dividends on its Common Stock. The Company intends
for the foreseeable future to retain any earnings to support the growth of the
Company's business. The Company therefore does not contemplate paying cash
dividends on its Common Stock in the foreseeable future.
Risks Related to Legal Proceeding
The Company has accrued a liability on its December 31, 2003 balance sheet of
$47,750 as a result of the litigation described in "Part II-Item 1: Legal
Proceedings" of this Form 10-QSB. Approximately $38,000 has also been included
in general and administrative expenses in the quarter ended December 31, 2003
for legal fees relating to this litigation. It is also possible that the Company
will incur additional liability as a result of the above litigation, including
without limitation an obligation to repay to the Trust certain of the trustee's
fees, attorneys' fees and costs previously paid to the Company from Trust
Assets. 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. See
"Part II-Item 1: Legal Proceedings" of this Form 10-QSB.