A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
AMENDMENT NO. 1
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, For Use of the
[ ] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Section 240.14a-12
Colonial Trust Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
___________________________________________________
(2) Aggregate number of securities to which transaction applies:
___________________________________________________
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
___________________________________________________
(4) Proposed maximum aggregate value of transaction:
___________________________________________________
(5) Total fee paid:
___________________________________________________
/ / Fee paid previously with preliminary materials.
___________________________________________________
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
___________________________________________________
(2) Form, Schedule or Registration Statement No.:
___________________________________________________
(3) Filing Party:
___________________________________________________
(4) Date Filed:
B
Colonial Trust Company
5336 N. 19th Avenue
Phoenix, AZ 85015
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________, 2004
To Our Stockholders:
A Special Meeting of the Stockholders of Colonial Trust Company, an Arizona
corporation ("Colonial" or the "Company"), will be held at the _________________
Phoenix, Arizona, on _________, 2004, at 10:00 a.m., Mountain Standard Time (the
"Special Meeting"), for the following purposes:
1. To approve the sale of the Company's Corporate Trust business, pursuant to
a Purchase and Assumption Agreement with Happy State Bank and its parent,
Happy Bancshares, Inc. of Happy, Texas;
2. To approve the sale of the Company's Wealth Management Group business to
Dubuque Bank and Trust Company, Arizona Bank & Trust and their parent
corporation, Heartland Financial USA, Inc. of Dubuque, Iowa, pursuant to a
Purchase and Assumption Agreement dated as of March 26, 2004 and an
Addendum to Purchase and Assumption Agreement dated as of April 26, 2004;
3. To approve the liquidation and dissolution of the Company pursuant to the
Plan of Liquidation and Dissolution, in the form of Appendix A attached to
the accompanying proxy statement, including the amendment of the Company's
Articles of Incorporation to effect a reverse stock split of one share of
Common Stock of the Company for every 35,032 shares of Common Stock that
are issued and outstanding, for purposes of making liquidating
distributions;
4. To consider and vote upon the adjournment of the Special Meeting to a later
date, if necessary, to solicit additional proxies in the event that there
are insufficient shares present in person or by proxy voting in favor of
any or all of the above matters presented at the Special Meeting to approve
those matters; and
5. To transact such other business as may properly come before the Special
Meeting or any adjournment(s) or postponement(s) thereof.
The Board of Directors has fixed the close of business on ________, 2004,
as the record date (the "Record Date") for the determination of stockholders
entitled to notice of and to vote at the Special Meeting or any postponement or
adjournment thereof. Shares of Common Stock may be voted at the Special Meeting
only if the holder is present at the Special Meeting in person or by valid
proxy.
Management of the Company cordially invites you to attend the Special
Meeting. Your attention is directed to the attached proxy statement for a
discussion of the foregoing proposals and the reasons the Board of Directors
encourages you to vote for approval of such proposals.
By Order of the Board of Directors
/s/ John K. Johnson
President, CEO and Director
Phoenix, Arizona
________ __, 2004
IMPORTANT: IT IS IMPORTANT THAT YOUR STOCK BE REPRESENTED AT THIS MEETING.
PLEASE COMPLETE, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY CARD IN THE
ACCOMPANYING ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
C
Colonial Trust Company
5336 N. 19th Avenue
Phoenix, AZ 85015
PROXY STATEMENT
This proxy statement is being furnished to stockholders of Colonial Trust
Company, an Arizona corporation ("Colonial" or the "Company"), in connection
with the solicitation of proxies by the Board of Directors for use at a special
meeting of stockholders of the Company to be held on __________, 2004, at 10:00
a.m., Mountain Standard Time, at the ___________________ Phoenix, Arizona, and
any adjournment or postponement thereof (the "Special Meeting"). A copy of the
Notice of the Special Meeting accompanies this proxy statement. This proxy
statement and the accompanying form of proxy card are being mailed on or about
________, 2004.
This proxy statement summarizes information about the proposals that our
stockholders will consider at the Special Meeting and other information you may
find useful in determining how to vote. By submitting the proxy card, you
authorize another person to vote your shares in accordance with your
instructions.
At the Special Meeting, stockholders will consider and act upon the
following matters:
1. To authorize and approve the sale of the Company's Corporate Trust business
to Happy State Bank, and its parent, Happy Bancshares, Inc. of Happy,
Texas, pursuant to a Purchase and Assumption Agreement dated as of December
30, 2003.
2. To authorize and approve the sale of the Company's Wealth Management
business to Dubuque Bank and Trust Company, Arizona Bank & Trust, and their
parent corporation, Heartland Financial USA, Inc., pursuant to a Purchase
and Assumption Agreement dated as of March 26, 2004 and an Addendum to
Purchase and Assumption Agreement dated as of April 26, 2004.
3. To approve and adopt the Plan of Liquidation and Dissolution of the Company
in the form attached to this proxy statement as Appendix A, including
amendment of the Company's Articles of Incorporation to effect a reverse
stock split of one share of Common Stock of the Company for every 35,032
shares of Common Stock that are issued and outstanding, for purposes of
making liquidating distributions to our stockholders.
4. To consider and vote upon the adjournment of the Special Meeting to a later
date, if necessary, to solicit additional proxies in the event that there
are insufficient shares present in person or by proxy voting in favor of
any or all of the above matters presented at the Special Meeting to approve
those matters.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE PROPOSED TRANSACTIONS, PASSED UPON
THE MERITS OR FAIRNESS OF THE PROPOSED TRANSACTIONS, OR PASSED UPON THE ADEQUACY
OR ACCURACY OF THE DISCLOSURES IN THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
AS USED IN THIS PROXY STATEMENT, "COLONIAL," THE "COMPANY," "WE," "OUR," "OURS"
AND "US" REFER TO COLONIAL TRUST COMPANY, AN ARIZONA CORPORATION, THE "CORPORATE
TRUST SALE" AND THE "WEALTH MANAGEMENT SALE" REFER TO THE SALE OF OUR CORPORATE
TRUST AND WEALTH MANAGEMENT BUSINESSES, RESPECTIVELY, AND THE "TRANSACTIONS"
REFER, COLLECTIVELY, TO THE CORPORATE TRUST SALE, THE WEALTH MANAGEMENT SALE AND
OUR PLAN OF LIQUIDATION AND DISSOLUTION, WHICH CONTEMPLATES A REVERSE STOCK
SPLIT, TOGETHER WITH LIQUIDATING DISTRIBUTIONS TO STOCKHOLDERS HOLDING FEWER
THAN 35,032 SHARES PRIOR TO THE REVERSE STOCK SPLIT.
D
REFERENCE TO ADDITIONAL INFORMATION
This proxy statement refers to important business and financial information
about Colonial Trust Company from documents that are not included in or
delivered with this proxy statement. These documents include, without
limitation: (i) our Purchase and Assumption Agreement with Happy State Bank
dated December 30, 2003, which is attached as an exhibit to our Form 8-K filed
on January 28, 2004 with the SEC; (ii) our Purchase and Assumption Agreement
with Dubuque Bank and Trust Company dated March 26, 2004 and our Addendum to
that Purchase and Assumption Agreement dated as of April 26, 2004, which are
attached as Exhibits to our Form 8-K filed on April 28, 2004; and (iii) our
First Amendment to Purchase and Assumption Agreement with Happy State Bank dated
June __, 2004, which is attached as an exhibit to our Form 8-K filed on June __,
2004.
You may obtain any documents referred to in this proxy statement without
charge by requesting them in writing at the following address:
Colonial Trust Company
5336 N. 19th Avenue
Phoenix, AZ 85015
Attention: Secretary
In order to obtain the documents in time for the Special Meeting, you must
request the documents from us by _______________, 2004, which is five business
days prior to the date of the Special Meeting.
For a more detailed description of the documents referred to in this proxy
statement and how you may obtain it, see "Information About the Special Meeting
- - Where to Find Additional Information".
E
Table of Contents
Page
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS..............................1
SUMMARY OF THE TRANSACTIONS...................................................1
Purpose of Special Meeting...........................................1
Sale of the Corporate Trust business (See Proposal No. 1)............2
Sale of the Wealth Management business (See Proposal No. 2)..........3
Plan of Liquidation and Dissolution (See Proposal No. 3).............4
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS.....................................6
Corporate Trust Sale.................................................7
Wealth Management Sale...............................................9
Liquidation and Dissolution..........................................11
Other Information....................................................13
RISK FACTORS..................................................................15
Risks Related to the Corporate Trust Sale and the Wealth
Management Sale.................................................15
Risks Related to the Plan of Liquidation and Dissolution.............16
INFORMATION ABOUT THE SPECIAL MEETING.........................................18
Where to Find Additional Information.................................18
Matters to be Considered at the Special Meeting......................19
Record Date and Outstanding Shares of Common Stock...................19
Voting and Votes Required; Adjournment...............................19
Quorum ............................................................20
Abstentions and Broker Non-Votes.....................................20
Shares Owned and Voted by our Directors and Executive Officers.......20
Recommendation of the Board of Directors.............................20
Revocability of Proxies..............................................21
Solicitation.........................................................21
Other Matters........................................................21
SELECTED FINANCIAL DATA.......................................................21
BACKGROUND OF THE TRANSACTIONS................................................22
Background...........................................................22
Purposes of and Reasons for the Transactions.........................23
Past Contacts and Negotiations.......................................24
SALE OF THE ASSETS OF THE CORPORATE TRUST BUSINESS (Proposal No. 1)...........28
Background of the Corporate Trust Sale...............................28
Happy State Bank and Happy Bancshares, Inc...........................28
Description of the Corporate Trust Sale..............................28
F
Use of Proceeds from the Corporate Trust Sale........................29
Other Material Terms of the Corporate Trust Sale Agreement...........30
Regulatory Approvals.................................................33
Interests of Our Directors and Officers in the Corporate
Trust Sale......................................................33
Federal Income Tax Consequences of the Corporate Trust Sale..........33
Opinion of Bank Advisory Group.......................................33
Factors That Our Stockholders Should Consider........................34
Reasons for the Board's Recommendations..............................34
Vote Required and Board Recommendation...............................34
SALE OF THE WEALTH MANAGEMENT GROUP BUSINESS (Proposal No. 2).................34
Background of the Wealth Management Group Sale.......................34
Dubuque Bank and Trust Company, Arizona Bank & Trust, and
Heartland Financial USA, Inc....................................34
Description of the Wealth Management Sale............................35
Use of Proceeds from the Wealth Management Sale......................36
Other Material Terms of the Wealth Management Sale Agreement.........36
Interests of Our Directors and Officers in the Wealth
Management Sale.................................................40
Federal Income Tax Consequences of the Wealth Management Sale........40
Opinion of Bank Advisory Group.......................................41
Factors That Our Stockholders Should Consider........................41
Reasons for the Board's Recommendation...............................41
Vote Required and Board Recommendation...............................41
ADOPTION OF PLAN OF LIQUIDATION AND DISSOLUTION AND AMENDMENT TO THE
COMPANY'S ARTICLES OF INCORPORATION TO EFFECT REVERSE STOCK SPLIT FOR
PURPOSES OF MAKING LIQUIDATING DISTRIBUTIONS (Proposal No. 3).................41
Background of the Plan of Liquidation and Dissolution................42
Principal Provisions of the Plan of Liquidation and Dissolution......42
Funds Anticipated to be Available for Distribution to Stockholders...46
Effects Of Failure To Obtain Stockholders Approval Of Proposal
No. 3, including the Reverse Split..............................47
Regulatory Approvals.................................................47
Interests of Our Directors and Officers in the Plan of
Liquidation and Dissolution.....................................47
Material Federal Income Tax Consequences of the Plan of
Liquidation.....................................................47
Opinion of Bank Advisory Group.......................................50
Factors That Our Stockholders Should Consider........................50
Reasons for the Board's Recommendation...............................50
Vote Required and Board Recommendation...............................50
G
ADJOURNMENT OF THE SPECIAL MEETING, IF NECESSARY, TO SOLICIT ADDITIONAL
PROXIES (Proposal No. 4)......................................................50
Description of Proposal to Adjourn Special Meeting, if Necessary.....50
Vote Required and Board Recommendation...............................51
ADDITIONAL INFORMATION ABOUT THE PROPOSALS....................................52
Reasons for the Board's Recommendations..............................52
Effect of Stockholders' Votes on the Proposals.......................54
Opinion of Bank Advisory Group.......................................55
Interests of Our Directors and Officers in the Transactions..........62
Rights of Appraisal..................................................64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................66
Compliance With Section 16(a) of the Securities Exchange Act
of 1934.........................................................68
OTHER MATTERS.................................................................68
Voting By Proxy......................................................68
Householding of Proxy Materials......................................69
Appendix A....................................................................1
Appendix B....................................................................1
Appendix C....................................................................1
1
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This proxy statement contains certain "forward-looking statements,"
including, among others, the statements regarding the proposed consummation of
the Corporate Trust Sale, the Wealth Management Sale and the Plan of Liquidation
and Dissolution, the potential value of our assets, and the timing and amount of
any distributions to stockholders under the Plan of Liquidation. Words such as
"anticipates," "believes," "expects," "intends," "plans," "may," "will,"
"estimates" or any negative variations or comparable terminology and similar
expressions are intended to identify "forward-looking statements." All of these
"forward-looking statements" are inherently uncertain, and stockholders must
recognize that actual events could cause actual results to differ materially
from management's expectations. Key risk factors that could, in particular, have
an adverse impact on our ability to consummate the Corporate Trust Sale and the
Wealth Management Sale, to effect the Plan of Liquidation and Dissolution, and
on the amount of distributions that may be made to stockholders pursuant to the
dissolution are set forth in this proxy statement under "Risk Factors," as well
as in reports we have previously filed with the Securities and Exchange
Commission ("SEC").
SUMMARY OF THE TRANSACTIONS
The following summaries highlight the material terms of the proposed
transactions, including the sale of our Corporate Trust business to Happy State
Bank, the sale of our Wealth Management business to Dubuque Bank and Trust
Company and Arizona Bank & Trust, and our Plan of Liquidation and Dissolution,
which contemplates an amendment to our articles of incorporation to effect a 1
for 35,032 reverse stock split for the purpose of making liquidating
distributions to our stockholders. This summary does not contain all of the
information that may be important for you to consider in evaluating the proposed
transactions. We have included references to direct you to more complete
information that appears elsewhere in this proxy statement. You should read this
entire proxy statement, the purchase and assumption agreements, the Plan of
Liquidation and the other documents attached to or referred to in this proxy
statement in their entirety to fully understand the consequences of the proposed
transaction to you before voting.
Purpose of Special Meeting
At the Special Meeting, stockholders will consider and act upon the
following matters:
1. Approve the sale of our Corporate Trust business to Happy State Bank;
2. Approve the sale of our Wealth Management business to Dubuque Bank and
Trust Company and Arizona Bank & Trust;
3. Approve the liquidation and dissolution of the Company pursuant to the Plan
of Liquidation and Dissolution of the Company, including the amendment of
the Company's Articles of Incorporation to effect a reverse stock split of
one share of Common Stock of the Company for every 35,032 shares of Common
Stock that are issued and outstanding, for purposes of making liquidating
distributions to our stockholders; and
4. Consider and vote upon the adjournment of the Special Meeting to a later
date, if necessary, to solicit additional proxies in the event that there
are insufficient shares present in person or by proxy voting in favor of
any or all of the above matters presented at the Special Meeting to approve
those matters.
2
Sale of the Corporate Trust business (See Proposal No. 1)
The Purchaser.
Happy State Bank is a banking association with trust powers organized under
the laws of the State of Texas with its principal offices in Happy, Texas. Happy
State Bank is the wholly-owned subsidiary of Happy Bancshares, Inc., a
registered bank holding company incorporated in Texas.
Assets Transferred and Liabilities Assumed.
We are selling substantially all of the assets of our Corporate Trust
business, including certain accrued fees and receivables, rights under various
contracts, the real property and facilities located at 5336 N. 19th Avenue in
Phoenix, Arizona, including all furniture and fixtures located on the property,
and all equipment and personal property used in the conduct of the Corporate
Trust business. Happy State Bank will assume the liabilities associated with the
Corporate Trust business, including the accrued expenses, obligations under
various contracts, including equipment leases and hardware maintenance
agreements, and a pro-rata portion of the real estate taxes associated with the
real property to be purchased. Happy State Bank has also agreed, subject to
certain conditions, to offer employment to all of our employees currently
employed in the Corporate Trust business, including John K. Johnson, Cecil
Glovier and Ian Currie, our President, Chief Operating Officer and
Controller/Treasurer, respectively.
Purchase Price.
If the Corporate Trust Sale is approved, Happy State Bank will pay us the
book value of the net assets of the Corporate Trust business, $819,000 for our
real property and improvements, and $550,000 as a goodwill premium. Although the
purchase price cannot be calculated with precision until the closing and is also
subject to post-closing adjustments related to the book value of the net assets
being purchased, proceeds from the Corporate Trust Sale are currently estimated
to be between $1.7 million and $2.0 million. Happy State Bank will pay the
purchase price in cash at the closing.
Conditions to the Transaction.
Happy State Bank has the right to terminate the sale if certain pre-closing
conditions are not met, including, but not limited to, conditions relating to a
minimum book value of the net assets of the Corporate Trust business, consents
of third parties, the absence of material litigation, the receipt of regulatory
approvals, and the accuracy of our representations and warranties. See "Other
Material Terms of the Corporate Trust Sale Agreement." We may terminate the sale
if certain pre-closing conditions are not met, including, without limitation,
our receipt of stockholder approval of the sale, the receipt of regulatory
approvals, and our receipt of a fairness opinion from our financial advisor, The
Bank Advisory Group ("Bank Advisory Group"), which we have received.
Representations, Warranties and Covenants.
The Corporate Trust Sale Agreement contains representations, warranties and
covenants typical of such asset sales, including, without limitation, those
related to proper administration of our fiduciary accounts, absence of
litigation, receipt of third-party consents and regulatory approvals, and
compliance with laws, including environmental laws. See "Other Material Terms of
the Corporate Trust Sale Agreement."
Indemnification.
We have agreed to indemnify Happy State Bank for losses and claims against
it arising out of the breach of any of our representations, warranties or
covenants and certain legal liabilities, and Happy State Bank has agreed to
3
similar indemnification provisions. We have also agreed to indemnify Happy State
Bank for losses and claims against it arising out of any pre-closing
environmental liability associated with the real property to be purchased. See
"Other Material Terms of the Corporate Trust Sale Agreement."
Termination Fee.
We must pay a termination fee to Happy State Bank in the amount of $250,000
if our board of directors determines that its fiduciary obligations to our
stockholders require acceptance of an alternative proposal. See "Other Material
Terms of the Corporate Trust Sale Agreement."
Sale of the Wealth Management business (See Proposal No. 2)
The Purchaser.
Dubuque Bank and Trust Company is an Iowa banking association with trust
powers with principal offices in Dubuque, Iowa. Arizona Bank & Trust is an
Arizona banking association with trust powers with principal offices in Mesa,
Arizona. Dubuque Bank and Trust and Arizona Bank & Trust are each wholly-owned
subsidiaries of Heartland Financial USA, Inc., a registered bank holding company
incorporated in Delaware with principal offices in Dubuque, Iowa.
Assets Transferred and Liabilities Assumed.
We are selling substantially all of the assets associated with the Wealth
Management business, including accrued fees and receivables, numerous prepaid
expenses, rights under various contracts, and equipment and personal property
used in the conduct of the Wealth Management business. Dubuque Bank and Trust
Company and Arizona Bank & Trust will assume the liabilities associated with the
Wealth Management business, including accrued expenses, obligations under
various contracts, including equipment lease agreements, software agreements and
hardware maintenance agreements, and a prorated portion of taxes attributable to
the Wealth Management business.
Purchase Price.
If the Wealth Management Sale is approved, Dubuque Bank and Trust will pay
us (i) the aggregate book value of the net assets of the Wealth Management
business, (ii) 1.88 times the annual recurring fees attributable to the
fiduciary trust accounts as of January 20, 2004 that are assumed by Arizona Bank
& Trust, and (iii) 1.0 times the estimated annual recurring fees attributable to
those fiduciary trust accounts created after January 20, 2004 that are assumed
by Arizona Bank & Trust; provided, however, that the estimated annual recurring
fees referenced in "ii" and "iii" immediately above will be prorated for
accounts that have been in existence for less than 12 months as of the closing
of the sale. Although the purchase price cannot be calculated with precision
until the closing and is also subject to post-closing adjustments related to the
book value of the net assets being purchased, proceeds from the Wealth
Management Sale are currently estimated to be between $2.1 million and $2.5
million. Dubuque Bank and Trust will pay the purchase price in cash at the
closing.
Conditions to the Transaction.
Dubuque Bank and Trust has the right to terminate the sale if certain
pre-closing conditions are not met, including, without limitation, those
relating to obtaining consents of third parties, the absence of material
litigation, the receipt of regulatory approvals, and the accuracy of our
representations and warranties (including without limitation our representation
and warranty that at the closing Arizona Bank & Trust will immediately succeed
4
Colonial as fiduciary on fiduciary or agency accounts where the fees resulting
therefrom represent not less than 67% of all the recurring fees received by
Colonial for such services). See "Other Material Terms of the Wealth Management
Sale Agreement." We have the right to terminate the sale if certain pre-closing
conditions are not met, including, without limitation, our receipt of
stockholder approval of the sale and the receipt of regulatory approvals.
Representations and Warranties.
The Wealth Management Sale Agreement contains representations, warranties
and covenants typical of such asset sales, including, without limitation, those
related to proper administration of our fiduciary accounts, absence of
litigation, receipt of third-party consents and regulatory approvals, compliance
with laws, and Arizona Bank & Trust's ability to occupy the portion of the real
property to be sold to Happy State Bank currently used in the operation of the
Wealth Management business for a period of no more than one year following the
closing. See "Other Material Terms of the Wealth Management Sale Agreement."
Indemnification.
We have agreed to indemnify Dubuque Bank and Trust and Arizona Bank & Trust
for losses and claims against it arising out of the breach of any of our
representations, warranties or covenants and certain legal liabilities, and
Dubuque Bank and Trust and Arizona Bank & Trust have agreed to similar
indemnification provisions. We have also agreed to indemnify Dubuque Bank and
Trust and Arizona Bank & Trust for losses and claims against it arising out of
any pre-closing breach of a fiduciary account by us. See "Other Material Terms
of the Wealth Management Sale Agreement."
Termination Fee.
In the event that the Wealth Management Sale Agreement is terminated by
Dubuque Bank and Trust because (i) Colonial breached its covenants or agreements
under such Agreement, or (ii) Colonial's representations or warranties were
incorrect as of the date of such Agreement, then Colonial must pay to Dubuque an
amount equal to Dubuque's expenses in connection with the Wealth Management Sale
(not to exceed $100,000), plus $200,000. In the event that the Wealth Management
Sale Agreement is terminated by Dubuque Bank and Trust or Colonial because (i)
Colonial did not receive the required fairness opinion from Bank Advisory Group
by June 30, 2004, or (ii) Colonial's stockholders failed to approve the Wealth
Management Sale Agreement by September 30, 2004, then Colonial must pay to
Dubuque an amount equal to Dubuque's expenses in connection with the Wealth
Management Sale (not to exceed $100,000). Additionally, if Colonial's
stockholders fail to approve the Wealth Management Sale Agreement by September
30, 2004, and within eighteen months Colonial sells Colonial or the Wealth
Management Group business, then Colonial must pay to Dubuque an additional
$200,000.
Plan of Liquidation and Dissolution (See Proposal No. 3)
Under the Plan of Liquidation and Dissolution, we will distribute to our
stockholders, in cash and an interest in a promissory note, all of our property
and assets. The board of directors of the Company has determined that, for the
reasons discussed in detail in this proxy statement, the liquidation is in the
best interests of the Company and its stockholders. The liquidation would
include an amendment to our articles of incorporation to effect a reverse stock
split for purposes of making liquidating distributions to our stockholders. The
Company believes the liquidation would:
o relieve the Company of the administrative burden and cost associated with
filing reports and otherwise complying with the requirements of
registration under the Securities Exchange Act of 1934 (the "Exchange
Act"), and complying with the Sarbanes-Oxley Act of 2002, by allowing the
Company to deregister as a reporting company under the Exchange Act;
o eliminate the expense and burden of dealing with a number of stockholders
holding small positions in the Company's stock; and
o afford our stockholders the opportunity to receive cash for their shares.
5
For more information, see "Background of the Transactions - Purposes of and
Reasons for the Liquidation."
Estimated Distribution Amounts
We cannot predict with certainty the amount or timing of any liquidating
distributions to our stockholders. The actual amount of cash received from the
sale of assets of the Corporate Trust and Wealth Management businesses that we
distribute to our stockholders will be subject to taxes payable by the Company
as a result of such sales and to reserves for contingent or other claims against
the Company. We estimate that stockholders will receive cash distributions
ranging from $4.37 to $5.16 per share. Factors that could result in material
fluctuations around this estimate include, without limitation:
o variations in the proceeds received by us under the Corporate Trust Sale
Agreement;
o variations in the proceeds received by us under the Wealth Management Sale
Agreement;
o variations in the taxes payable by us as a result of the Corporate Trust
and Wealth Management Sales;
o variations in the expenses we incur in connection with such Sales and in
connection with the Plan of Liquidation and Dissolution; and
o unexpected claims made against us or unexpected liquidation expenses.
Transaction Costs
If the Corporate Trust Sale, the Wealth Management Sale and the Liquidation
are approved, based on our current estimates, in addition to settling current
liabilities, we expect to incur the following costs associated with the
transactions:
o Taxes payable as a result of the transactions of at least $677,000;
o Transaction fees of at least $140,000 after March 1, 2004;
o Employee severance, bonuses, other payments and related costs of at least
$380,000 on or before September 30, 2004; and
o Insurance costs and costs to terminate benefit plans of at least $170,000
after March 1, 2004.
In addition, we may incur additional liabilities arising out of contingent
claims, such as liabilities relating to lawsuits that could be brought against
us in the future, that are not yet reflected as liabilities on our balance
sheet.
Votes Required
The first three proposals to be voted on at the Special Meeting (the sale
of the Corporate Trust business, the sale of the Wealth Management business, and
the Plan of Liquidation and Dissolution of the Company, including the amendment
to the Company's Articles of Incorporation to effect a reverse stock split of
one share of common stock for every 35,032 shares of common stock that are
issued and outstanding, require the affirmative approval from holders of a
majority of the shares of the Company's common stock that are issued and
outstanding. The fourth proposal to be voted on at the Special Meeting (to allow
the Company to adjourn the Special Meeting to a later date to solicit additional
proxies in the event there are insufficient shares present in favor of any or
all of the above matters to approve those matters), requires the affirmative
approval from holders of a majority of the shares of common stock present or
represented by proxy at the Special Meeting.
The Plan of Liquidation and Dissolution will be voted upon only if
stockholders approve the Corporate Trust Sale and the Wealth Management Sale.
The proposal to sell the assets of the Corporate Trust business is independent
of the other proposals, and its approval is not conditioned upon the approval of
6
any other proposal. The proposal to sell the assets of the Wealth Management
business is independent of the other proposals, and its approval is not
conditioned upon the approval of any other proposal. The proposal to allow the
Company to solicit additional proxies is independent of the other proposals, and
its approval is not conditioned upon the approval of the other proposals.
Change in Control Payments
Pursuant to agreements reached with certain of its senior management, upon
consummation of the Corporate Trust Sale and the Wealth Management Sale, we
would be obligated to pay Messrs. John Johnson and Cecil Glovier, our Chief
Executive Officer and Chief Operating Officer, lump sum cash payments of
$142,850 and $107,150, respectively. Moreover, based on current estimates, upon
consummation of the Wealth Management Sale, we would be obligated to pay Bruce
Mitchell, our Vice President and Manager - Wealth Management Group, a lump sum
cash payment of $30,000. Additionally, in the event that Mr. Glovier has his
employment terminated by Happy State Bank in the first year of Mr. Glovier's
employment by Happy State Bank (other than termination by Happy State Bank for
cause, as defined by the parties), we will be obligated to pay Mr. Glovier an
amount equal to the difference between $92,882 (Mr. Glovier's current annual
base salary) and any salary paid by Happy State Bank to Mr. Glovier during his
employment by Happy State Bank.
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Who is entitled to vote at the Special Meeting?
The record date for the Special Meeting is __________, 2004. Only
stockholders of record at the close of business on that date are entitled to
notice of and to vote at the Special Meeting. At the close of business on the
record date there were 760,843 shares of our common stock issued and
outstanding.
Will any other business be conducted at the Special Meeting?
Our board of directors knows of no business, other than as set forth in the
attached Notice of Special Meeting of Stockholders, that will be presented at
the Special Meeting. If any other proposal properly comes before the
stockholders for a vote at the Special Meeting, the persons named in the proxy
card that accompanies this proxy statement will, to the extent permitted by law
and to the extent we were not notified of the proposal a reasonable time before
our solicitation, vote your shares in accordance with their judgment on such
matter.
Why has the board of directors decided to terminate our operations and return
the value of our assets to our stockholders?
Our board of directors determined that it is in the best interests of our
stockholders to sell our Corporate Trust business to Happy State Bank and to
sell our Wealth Management business to Dubuque Bank and Trust Company and
Arizona Bank & Trust, pursuant to the purchase and assumption agreements that
are referred to in this proxy statement. Our board also determined that, rather
than using available cash to pursue an acquisition strategy, which would be
highly speculative and may not result in investment returns for a considerable
period of time, if at all, it is in our stockholders' best interest to return
available cash and assets to stockholders and allow each stockholder to
determine individually how to invest available amounts.
How does our board of directors recommend I vote on the proposal to approve the
sale of the assets of the Corporate Trust business, the proposal to approve
the sale of the assets of the Wealth Management business, the proposal to
approve the Plan of Liquidation, and the proposal to allow the Company to
solicit additional proxies?
7
Our board of directors recommends that you vote FOR the approval of the
Corporate Trust Sale. (See Proposal No. 1). Our board of directors recommends
that you vote FOR the approval of the Wealth Management Sale. (See Proposal No.
2). Our board of directors recommends that you vote FOR the approval and
adoption of the Plan of Liquidation and Dissolution, including the amendment of
our Articles of Incorporation to effect a reverse stock split of one share of
Common Stock of the Company for every 35,032 shares of Common Stock that are
issued and outstanding, for purposes of making liquidating distributions. (See
Proposal No. 3). Our board of directors recommends that you vote FOR the
proposal to allow the Company to adjourn the Special Meeting, if necessary, to
solicit additional proxies if there are not sufficient votes at the time of the
Special Meeting to approve Proposal Nos. 1, 2 or 3 (See Proposal No. 4).
Corporate Trust Sale
What assets are proposed to be sold to Happy State Bank in the Corporate Trust
Sale?
Our business consists of two separate businesses: our Corporate Trust
business and our Wealth Management Group business. If the Corporate Trust Sale
is approved at the Special Meeting, we will sell substantially all of the assets
of our Corporate Trust business, including associated customer contracts, the
real estate and improvements comprising our corporate headquarters, equipment
and other assets, to Happy State Bank. Upon the consummation of the Corporate
Trust Sale, our business would only consist of our Wealth Management business,
which we are also proposing to sell.
Why has the board of directors approved the Corporate Trust Sale?
Our board of directors decided to sell our Corporate Trust business based
on many factors, including economic and industry downturns and long-term
industry trends. The board of directors also considered the possibility of
increased competition in our industry from companies with greater resources, as
well as the significant and increasing costs associated with running the
Corporate Trust business as part of a public company that files periodic reports
with the SEC and is subject to SEC rules and regulations applicable to SEC
reporting companies. After considering these factors, along with many others,
our board of directors decided to look at strategic alternatives, including,
among others, a sale of the Corporate Trust business to AMG Guaranty Trust, the
sale of the entire Company to a single purchaser, or a going private transaction
effectuated by the Company without the sale of any of its businesses. (See
"Background of the Transactions - Past Contacts and Negotiations" and
"Additional Information About the Proposals - Reasons for the Board's
Recommendations"). After careful consideration and discussions with our
management and legal and financial advisors, our board of directors has
determined that the Corporate Trust Sale to Happy State Bank is advisable and in
the best interests of the Company and its stockholders (See "Proposal No. 1").
What was the opinion of Colonial's financial advisor?
Our board of directors received an opinion from our financial advisor, Bank
Advisory Group, that the per share consideration to be paid to our stockholders
under the Plan of Liquidation (which will include the net proceeds from the
Corporate Trust Sale) is financially fair and equitable to our unaffiliated
stockholders. (See "Additional Information About the Proposals - Opinion of Bank
Advisory Group").
What will happen if the Corporate Trust Sale is approved?
If the Corporate Trust Sale is approved at the Special Meeting, we plan to
consummate the transactions contemplated by the purchase and assumption
agreement, and related amendment, between Colonial and Happy State Bank,
referred to as the Corporate Trust Sale Agreement, as soon as practicable
following the Special Meeting, assuming all required regulatory approvals are
received.
8
What will happen if the Corporate Trust Sale is not approved?
If the Corporate Trust Sale is not approved at the Special Meeting, the
Corporate Trust Sale Agreement may be terminated and we will likely not proceed
with the Plan of Liquidation. If we do not proceed with the Corporate Trust Sale
and the Plan of Liquidation, we may attempt to sell the Corporate Trust business
to other buyers. The Corporate Trust Sale Agreement obligates us to pay Happy
State Bank a termination fee of $250,000 in the event our board of directors
withdraws its recommendation in favor of the Corporate Trust Sale or if we
terminate the Purchase Agreement to pursue a superior offer. (See "Additional
Information about the Proposals - Effect of Stockholders' Votes on the
Proposals").
Do directors and officers have interests in the Corporate Trust Sale that differ
from mine?
In considering the recommendation of our board of directors to approve the
Corporate Trust Sale, you should be aware that some of our directors and
officers might have interests that are different from or in addition to your
interests as a stockholder. These interests include:
o two of our directors hold vested options to purchase an aggregate of 15,000
shares of common stock at a weighted average exercise price of $3.35 per
share which they intend to exercise prior to consummation of the Corporate
Trust Sale and the Wealth Management Sale, which will give the
optionholders a right to receive a pro rata portion of distributions to
stockholders to the extent the distributions exceed the option exercise
price;
o certain of our executive officers will receive bonus payments and other
benefits as described more fully under "Additional Information About the
Proposals - Interests of our Directors and Officers in the Transactions";
o certain officers of Colonial will become employees of Happy State Bank,
including Messrs. Johnson, Glovier and Currie, the President, Chief
Operating Officer and Controller/Treasurer, respectively, of Colonial. Mr.
Johnson and Mr. Glovier have also executed employment and non-competition
agreements that will be effective at the closing; and
o Gerald G. Morgan, a member of our board of directors, is a member of the
law firm of Burdett, Morgan, Williamson & Boykin LLP of Amarillo, Texas.
Mr. Tom Burdett, also a member of Burdett, Morgan, Williamson & Boykin, is
a member of the board of directors of Happy Bancshares, Inc., the parent of
Happy State Bank, and Burdett, Morgan, Williamson & Boykin provides legal
services to Happy Bancshares, Inc. and Happy State Bank. Burdett, Morgan,
Williamson & Boykin has served as Colonial's legal counsel in connection
with the Corporate Trust Sale. Burdett, Morgan, Williamson & Boykin has not
provided any legal services to Happy Bancshares, Inc. or Happy State Bank
in connection with the Corporate Trust Sale. Additionally, prior to
commencing its representation of Colonial in the Corporate Trust Sale,
Burdett, Morgan, Williamson & Boykin also agreed not to disclose any
information of or relating to Colonial to Happy State Bank.
For information as to the number of shares of our common stock held by our
directors and officers, see "Securities Ownership of Certain Beneficial Owners
and Management." For a description of the interests our officers and certain of
our directors have in the Corporate Trust Sale, please see "Additional
Information About the Proposals - Interests of our Directors and Officers in the
Transactions."
What are the risks of the Corporate Trust Sale?
We have set forth certain risks to Colonial of the Corporate Trust Sale
proposed in this proxy statement. See "Risk Factors - Risks Related to the
Corporate Trust Sale and the Wealth Management Sale."
9
What are the tax consequences to Colonial of the Corporate Trust Sale?
We will recognize gain or loss with respect to the sale of our Corporate
Trust assets in an amount equal to the difference between the fair market value
of the consideration received for each asset and our adjusted tax basis in the
asset sold. Consummation of the Corporate Trust Sale itself will not result in
any United States federal income tax consequences to our stockholders; however,
amounts received by our stockholders pursuant to the Liquidation or,
alternatively, as a dividend, will cause stockholders to recognize taxable gain
or loss. See "Proposal No. 1 - Federal Income Tax Consequences of the Corporate
Trust Sale" and "Proposal No. 3 - Federal Income Tax Consequences of the Plan of
Liquidation."
Wealth Management Sale
What assets are proposed to be sold in the Wealth Management Sale?
If the Wealth Management Sale is approved at the Special Meeting, we will
sell substantially all of the assets of our Wealth Management business,
including associated customer contracts, equipment and other assets, to Dubuque
Bank and Trust Company and Arizona Bank & Trust, both of whom are subsidiaries
of Heartland Financial USA, Inc. Upon the consummation of the Wealth Management
Sale, our business would only consist of our Corporate Trust business, which we
are also proposing to sell.
Why has the board of directors approved the Wealth Management Sale?
Our board of directors decided to sell our Wealth Management business based
on many factors. Specifically, without limitation, the board of directors
considered the increased competition in our industry from companies with greater
resources, as well as the significant and increasing costs associated with
running the Wealth Management Group business as part of a public company that
files periodic reports with the SEC and is subject to SEC rules and regulations
applicable to SEC reporting companies. After considering these factors, along
with many others, our board of directors decided to look at strategic
alternatives, including, among others, a sale of the Wealth Management business
to First National Bank of Arizona, Midwest Trust Company, Heartland Financial
USA, Inc./Dubuque Bank and Trust Company, or AMG Guaranty Trust, the sale of the
entire Company to a single purchaser, or a going private transaction effectuated
by the Company without the sale of any of its businesses. (See "Background of
the Transactions - Past Contacts and Negotiations" and "Additional Information
About the Proposals - Reasons for the Board's Recommendation"). After careful
consideration and discussions with our management and legal and financial
advisors, our board of directors has determined that the Wealth Management Sale
is advisable and in the best interests of the Company and its stockholders. (See
"Proposal No. 2").
What was the opinion of Colonial's financial advisor?
Our board of directors received an opinion from our financial advisor, Bank
Advisory Group, that the per share consideration to be paid to our stockholders
under the Plan of Liquidation (which would include the net proceeds from the
Wealth Management Sale) is financially fair and equitable to our unaffiliated
stockholders. (See "Additional Information About the Proposals - Opinion of Bank
Advisory Group").
What will happen if the Wealth Management Sale is approved?
If the Wealth Management Sale is approved at the Special Meeting, we plan
to consummate the transactions contemplated by the purchase and assumption
agreement, and related addendum, between Colonial, Dubuque Bank and Trust and
Arizona Bank & Trust, referred to as the Wealth Management Sale Agreement, as
soon as practicable following the Special Meeting, assuming all required
regulatory approvals are received.
10
What will happen if the Wealth Management Sale is not approved?
If the Wealth Management Sale is not approved at the Special Meeting, the
Wealth Management Sale Agreement may be terminated by any party to the Wealth
Management Sale Agreement, and we will likely not proceed with the Plan of
Liquidation. If we do not proceed with the Wealth Management Sale and the Plan
of Liquidation, we may attempt to sell the assets covered by the Wealth
Management Sale Agreement to other buyers. The Wealth Management Sale Agreement
obligates us to pay Dubuque Bank and Trust an amount equal to Dubuque's costs
and expenses in the transaction (not to exceed $100,000) in the event we or
Dubuque terminate the Agreement because our stockholders have failed to approve
the Wealth Management Sale by September 30, 2004. Additionally, if Colonial's
stockholders fail to approve the Wealth Management Sale Agreement by September
30, 2004, and within eighteen months Colonial enters into certain specified
transactions for the acquisition of Colonial or the Wealth Management Group
business, then Colonial must pay to Dubuque an additional $200,000. See
"Additional Information about the Proposals - Effect of Stockholders' Votes on
the Proposals".
Do directors and officers have interests in the Wealth Management Sale that
differ from mine?
In considering the recommendation of our board of directors to approve the
Wealth Management Sale, you should be aware that some of our directors and
officers might have interests that are different from or in addition to your
interests as a stockholder. These interests include:
o two of our directors hold options to purchase an aggregate of 15,000 shares
of common stock at a weighted average exercise price of $3.35 per share
which they intend to exercise prior to consummation of the Corporate Trust
Sale and the Wealth Management Sale, which will give the optionholders a
right to receive a pro rata portion of distributions to stockholders to the
extent the distributions exceed the option exercise price;
o certain of our current executive officers will receive bonus payments, and
other benefits as described more fully under "Additional Information About
the Proposals - Interests of our Directors and Officers in the
Transactions."
o certain officers of Colonial will become employees of Arizona Bank & Trust,
including Bruce L. Mitchell, Vice-President and Manager of the Wealth
Management division, and Patricia L. Heitter, Vice-President of Colonial.
Mr. Mitchell and Ms. Heitter have also executed employment and
non-competition agreements that will be effective at the closing.
For information as to the number of shares of our common stock held by our
directors and officers, see "Securities Ownership of Certain Beneficial Owners
and Management". For a description of the interests our directors and officers
have in the Wealth Management Sale, please see "Additional Information About the
Proposals - Interests of our Directors and Officers in the Transactions."
What are the risks of the Wealth Management Sale?
We have set forth certain risks to Colonial of the Wealth Management Sale
proposed in this proxy statement. See "Risk Factors - Risks Related to the
Corporate Trust Sale and the Wealth Management Sale".
What are the tax consequences of the Wealth Management Sale?
We will recognize gain or loss with respect to the sale of our Wealth
Management assets in an amount equal to the difference between the fair market
value of the consideration received for each asset and our adjusted tax basis in
the asset sold. Consummation of the Wealth Management Sale itself will not
result in any United States federal income tax consequences to our stockholders;
however, amounts received by our stockholders pursuant to the Liquidation or,
11
alternatively, as a dividend, will cause stockholders to recognize taxable gain
or loss. See "Proposal No. 2 - Federal Income Tax Consequences of the Wealth
Management Sale" and "Proposal No. 3 - Federal Income Tax Consequences of the
Plan of Liquidation."
Liquidation and Dissolution
Why has the board of directors adopted the Plan of Liquidation and Dissolution?
Our board of directors has determined that it is not advisable to continue
to operate our businesses on an independent basis. This determination was made
based on the economic and/or industry downturns in recent years, long-term
trends in these businesses, increasing competition and costs of regulatory
compliance, market uncertainty, and the other factors listed below under
"Additional Information About the Proposals - Reasons for the Board's
Recommendation." As a result of the process undertaken by us to solicit
purchasers for our businesses and the results of this process, as well as the
other factors listed under "Additional Information About the Proposals - Reasons
for the Board's Recommendation", our board of directors has also determined that
the distribution of our assets in a liquidation has a greater probability of
producing more value to our stockholders than other alternatives. See Proposal
No. 3.
What will happen if the Plan of Liquidation and Dissolution are approved?
If the Corporate Trust Sale, the Wealth Management Sale, and the Plan of
Liquidation and Dissolution are approved by stockholders and the Corporate Trust
Sale and the Wealth Management Sale are subsequently consummated, we will,
except as otherwise determined by our board of directors:
o dissolve as a corporation;
o wind up our business affairs;
o liquidate our remaining assets;
o pay or attempt to adequately provide for the payment of all of our known
obligations and liabilities;
o establish a contingency reserve designed to satisfy any additional
liabilities; and
o make distributions to our stockholders of available liquidation proceeds.
See "Proposal No. 3 - Principal Provisions of the Plan of Liquidation and
Dissolution".
What will happen if the Plan of Liquidation and Dissolution are not approved?
If our stockholders do not approve the Plan of Liquidation and Dissolution,
our board of directors will continue to manage Colonial as a publicly owned
corporation and will explore what, if any, alternatives are then available for
the future of our business, taking into account, among other factors, whether
our stockholders approve the Corporate Trust Sale and the Wealth Management
Sale. If our stockholders do not approve the proposed Plan of Liquidation and
Dissolution, we may nonetheless pay all or a portion of the proceeds from any
asset sales that are approved by stockholders and consummated to our
stockholders as a special cash dividend. See "Additional Information About the
Proposals - Effect of Stockholders' Votes on the Proposals".
When will stockholders receive payment of any available liquidation proceeds?
If our stockholders approve the Plan of Liquidation and Dissolution, we
currently anticipate making an initial distribution to our stockholders within
approximately 60 days following stockholder approval. Thereafter, we will
distribute available liquidation proceeds to our stockholders as our board of
directors deems appropriate. We are currently unable to predict the precise
timing of any distributions pursuant to the Plan of Liquidation, although we
anticipate that a substantial majority of the liquidation proceeds will be
12
distributed in the initial liquidating distribution. We anticipate that further
distributions will be made over a period of five years, although distributions
could be made over a longer period of time if unanticipated claims are made
against us. The timing of any distributions will be determined by our board of
directors and will depend upon a number of factors, including our ability to pay
and settle our remaining liabilities and obligations, including contingent
claims. See "Proposal No. 3 - Principal Provisions of the Plan of Liquidation
and Dissolution".
How much will stockholders receive in the liquidation?
At this time, we cannot predict with certainty the amount or timing of any
liquidating distributions to our stockholders. However, based on information
currently available to us, assuming, among other things, no unanticipated actual
or contingent liabilities, we estimate that over a period of up to five years,
stockholders will receive cash distributions that in the aggregate range from
$4.37 to $5.16 per share. Actual distributions could be higher or lower. The
amount that we will be able to distribute to our stockholders will depend on the
net proceeds after taxes and expenses that we realize from the asset sales. See
"Proposal No. 3 - Principal Provisions of the Plan of Liquidation and
Dissolution."
Do directors and officers have interests in the Plan of Liquidation and
Dissolution that differ from mine?
In considering the recommendation of our board of directors to approve the
Plan of Liquidation and Dissolution, you should be aware that some of our
directors and officers might have interests that are different from or in
addition to your interests as a stockholder, as summarized above in this General
Information section and under "Additional Information About the Proposals -
Interests of our Directors and Officers in the Transactions." In addition, we
will prepay for up to three years of coverage under our errors and omissions
insurance policy, and for up to six years of coverage under our director and
officer liability insurance policy for the benefit of our current and former
directors and officers, and we will continue to indemnify our directors and
officers following our dissolution. See "Additional Information About the
Proposals - Interests of our Directors and Officers in the Transactions".
What are the risks of the Plan of Liquidation and Dissolution
We have set forth certain risks to Colonial of the proposed Plan of
Liquidation in this proxy statement. See "Risk Factors - Risks Associated with
the Plan of Liquidation and Dissolution".
What are the tax consequences of the liquidation?
We will recognize gain or loss with respect to the sale of our assets in an
amount equal to the difference between the fair market value of the
consideration received for each asset and our adjusted tax basis in the asset
sold. Upon the distribution of any non-cash assets to our stockholders pursuant
to the Plan of Liquidation, we will recognize gain or loss as if such asset were
sold to the stockholders at its fair market value.
As a result of our liquidation, for federal income tax purposes,
stockholders will recognize a gain or loss equal to the difference between (1)
the sum of the amount of cash distributed to them and the aggregate fair market
value of any property distributed to them (including each stockholder's Note
Interest), and (2) their tax basis for their shares of our stock. A
stockholder's tax basis in the stockholder's shares will depend upon various
factors, including the stockholder's cost and the amount and nature of any
distributions received with respect to the shares. Any loss generally will be
recognized when the initial distribution from us has been received (except as to
the single remaining stockholder after the reverse split to be undertaken in
connection with liquidation).
For a brief summary of the material federal income tax consequences of the
Plan of Liquidation, see "Proposal No. 3 - Material Federal Income Tax
Consequences of the Plan of Liquidation." Tax consequences to stockholders may
differ depending on their circumstances. You should consult your tax advisor as
to the tax effect of your particular circumstances.
13
Other Information
Do I have dissenters' appraisal rights?
Under Arizona law, stockholders have dissenters' appraisal rights in
connection with the reverse stock split contemplated under the Plan of
Liquidation. It is important to follow the procedures set forth in section
entitled "Other Information About the Proposals - Appraisal Rights" and as set
forth in Appendix B. Any stockholder who wishes to dissent from Proposal No. 3
and exercise appraisal rights, but who fails to follow the procedures outlined
in this proxy statement and in Appendix B, will not be entitled to payment for
his or her shares under Arizona's appraisal rights statutes. See "Additional
Information About the Proposals - Appraisal Rights".
How may I vote if my shares are registered in my name?
You may vote your shares at the Special Meeting by written proxy or in
person.
To vote by written proxy, you must mark, sign and date the enclosed proxy
card and then mail the proxy card in the enclosed postage-paid envelope. Your
proxy will be valid only if you complete and return the proxy card before the
Special Meeting. By completing and returning the proxy card, you will direct the
designated persons to vote your shares at the Special Meeting, including at any
adjournment of the Special Meeting, in the manner you specify in the proxy card.
If you complete the proxy card but do not provide voting instructions, then the
designated persons will vote your shares FOR the approval of the sale of our
Corporate Trust business, FOR the approval of the sale of our Wealth Management
business, and FOR the approval and adoption of the Plan of Liquidation,
including the amendment of our Articles of Incorporation to effect the 1 for
35,032 reverse stock split for purposes of making liquidating distributions, and
the approval of our dissolution. To vote in person, you must attend the Special
Meeting, and then complete and submit the ballot provided at the Special
Meeting.
How may I vote if my shares are held in "street name?"
If the shares you own are held in "street name" by a bank or brokerage
firm, the nominee of your bank or brokerage firm, as the record holder of your
shares, is required to vote your shares according to your instructions. In order
to vote your shares, you will need to follow the directions your bank or
brokerage firm provides you. Many banks and brokerage firms also offer the
option of voting over the Internet or by telephone, instructions for which would
be provided by your bank or brokerage firm.
If you do not give instructions to your bank or brokerage firm, it will
still be able to vote your shares with respect to certain "discretionary" items,
but will not be allowed to vote your shares with respect to certain
"non-discretionary" items. In the case of non-discretionary items, the shares
will be treated as "broker non-votes." "Broker non-votes" are shares that are
held in "street name" by a bank or brokerage firm that indicates on its proxy
that it does not have discretionary authority to vote on a particular matter. If
you do not give instructions to your bank or brokerage firm, your bank or
brokerage firm will not be permitted to vote your shares with respect to the
approval of the Corporate Trust Sale, the Wealth Management Sale, or the Plan of
Liquidation and Dissolution.
If you wish to attend the Special Meeting in person to vote your shares
held in street name, you will need to obtain a proxy card from the holder of
record (i.e., the nominee of your brokerage firm or bank).
14
Can I change my vote after I submit my proxy?
Yes, you may revoke your proxy and change your vote by:
o sending us another signed proxy with a later date;
o giving written notice of the revocation of your proxy to our Secretary
prior to the Special Meeting; or
o voting in person at the Special Meeting.
How many shares must be present to hold the Special Meeting?
A quorum must be present at the Special Meeting on a matter for a vote to
be taken on the matter. The presence at the Special Meeting, in person or by
proxy, of the holders of a majority of the shares of common stock issued,
outstanding and entitled to vote on a matter will constitute a quorum with
respect to that matter. Proxies received but marked as abstentions or broker
non-votes will be included in the calculation of the number of shares considered
to be present at the Special Meeting on all matters.
What if a quorum is not present at the Special Meeting, or we do not obtain the
required vote for approval of a proposal?
If a quorum is not present at the Special Meeting with respect to a matter
or we do not obtain the required vote for approval of a matter, we expect to
adjourn the Special Meeting in order to solicit additional proxies with respect
to that matter.
How will votes be counted?
Each share of common stock will be counted as one vote. Shares will not be
voted in favor of a matter, and will not be counted as voting on a matter, if
the holder of the shares abstains from voting on a particular matter or the
shares are broker non-votes. Accordingly, withheld shares, abstentions and
broker non-votes will have the effect of a vote against the proposal to approve
the Corporate Trust Sale, the proposal to approve the Wealth Management Sale and
the proposal to approve the Plan of Liquidation and Dissolution.
Can I still sell my shares?
Yes, you may sell your shares at this time, but it may be difficult or
impossible to sell your shares in the near future. If the Plan of Liquidation is
approved, we expect to close our stock transfer books and prohibit transfers of
record ownership of our common stock approximately 20 days following the
consummation of the Corporate Trust Sale and the Wealth Management Sale. In
addition, 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. Although we have
typically attempted to match stockholders who wish to sell their shares of
common stock with persons who wish to buy such shares, annual trading volume in
the Company's common stock has averaged only approximately 16,700 shares in the
last two years. Therefore, a stockholder who owns a substantial number of shares
of Company common stock will likely be unable to sell his shares in a short
period of time should he or she need or wish to do so. See "Information About
the Special Meeting - Where to Find Additional Information".
When and how will stockholders receive information about Colonial during the
liquidation period?
Following our dissolution, while we intend to cease filing reports such as
Forms 10-KSB and 10-QSB with the SEC, we may continue to file reports on Form
8-K to disclose material events relating to our liquidation. Stockholders will
be able to access these reports on the SEC's Web site. See "Information About
the Special Meeting - Where to Find Additional Information".
15
What do I need to do now?
After carefully reading and considering the information contained in this
proxy statement, you should complete and sign your proxy and return it in the
enclosed return envelope as soon as possible so that your shares are represented
at the Special Meeting. A majority of shares entitled to vote must be
represented at the Special Meeting to enable us to conduct business at the
Special Meeting.
RISK FACTORS
Risks Related to the Corporate Trust Sale and the Wealth Management Sale
There are many factors that stockholders should consider when deciding to
vote to approve the Corporate Trust Sale and the Wealth Management Sale,
including the following factors:
If the Asset Sales are not completed as expected, our business could be
materially disrupted.
If we are unable to close either of the Asset Sales, including as a result
of our failure to obtain the approval of our stockholders, our business could be
materially disrupted. This disruption could be caused by confusion among our
customers, industry partners and employees as to our future plans with respect
to our operating businesses. We have already announced both proposed Asset Sales
by, among other things, filing Form 8-K's with respect to both of the Asset
Sales with the SEC. Any failure to consummate either Asset Sale could have a
material adverse effect on our sales and operating results and our ability to
attract and retain customers, industry partners and key personnel. In addition,
we will have to pay for our costs related to each of the Asset Sales, such as
legal, accounting and financial advisory fees, even if they are not completed.
Management believes that our Corporate Trust business is subject to adverse
long-term trends, and that our Wealth Management business is facing and is
likely to continue to face increased competition in the future.
Our management believes that our Corporate Trust business is subject to
adverse long-term trends, including that we are facing increased competition
from traditional lenders and other financing sources that are offering
traditional loans to non-profit entities as an alternative to the bond
financings which generate the overwhelming majority of the income from our
Corporate Trust business. This has negatively impacted the results of operations
of our Corporate Trust business, and management believes our Corporate Trust
business will continue to be negatively impacted in the foreseeable future.
Additionally, our management believes that we are facing and are likely to
continue to face increased competition in our Wealth Management Group business
from competitors who have significantly greater financial and other resources
than we do.
Because our stockholders will not receive stock in either the Corporate Trust
Sale or the Wealth Management Sale, our stockholders will not participate in the
potential future growth of our Corporate Trust or Wealth Management businesses.
The purchase prices in the Corporate Trust Sale Agreement and the Wealth
Management Sale Agreement consist entirely of cash. As a result, our
stockholders will not participate in the expected synergies between our
Corporate Trust business and Happy State Bank or between our Wealth Management
business and Dubuque Bank and Trust Company/Arizona Bank & Trust. Our
stockholders will lose the opportunity to capitalize on the potential future
growth of our operating businesses and on their potential future success and
profits.
16
The termination fees and restrictions on solicitation contained in the Corporate
Trust Sale Agreement and the Wealth Management Sale Agreement may discourage
other potential purchasers from trying to acquire either of our operating
businesses.
The Corporate Trust Sale Agreement obligates us to pay Happy State Bank a
termination fee of $250,000 under certain circumstances, including where our
board of directors withdraws its recommendation in favor of the Corporate Trust
Sale or where we terminate the Corporate Trust Sale Agreement to pursue a
superior offer. The Wealth Management Sale Agreement obligates us to pay Dubuque
Bank and Trust an amount equal to Dubuque's costs and expenses in the
transaction (not to exceed $100,000) in the event we or Dubuque terminate the
Wealth Management Sale Agreement because our stockholders have failed to approve
the Wealth Management Sale by September 30, 2004. An additional fee of $200,000
would be required from us if our stockholders do not approve the Agreement and
within eighteen months thereafter we sell Colonial or the Wealth Management
business. These obligations would make it more costly for other potential
purchasers to acquire us or our operating businesses. The Corporate Trust Sale
Agreement also generally prohibits us from soliciting, initiating, encouraging
or facilitating any proposals that may lead to a proposal or offer for a merger
or other business combination with any person other than Happy State Bank.
Our directors and executive officers may have interests that are different from,
or in addition to, those of our stockholders generally.
You should be aware of interests of, and the benefits available to, our
directors and executive officers when considering the recommendation of our
board of directors of the Corporate Trust Sale and the Wealth Management Sale.
Our directors and executive officers have interests in the Asset Sales that are
in addition to, or different from, their interests as stockholders. In
connection with the Asset Sales, or upon termination of employment following the
Asset Sales, certain of our officers are entitled to receive bonus or other
payments. Moreover, certain of our management will become employees of Happy
State Bank or Arizona Bank & Trust following completion of the Asset Sales.
Additionally, Gerald G. Morgan, a member of our board of directors, is a member
of the law firm of Burdett, Morgan, Williamson & Boykin LLP of Amarillo, Texas;
Mr. Tom Burdett, also a member of Burdett, Morgan, Williamson & Boykin, is a
member of the board of directors of Happy Bancshares, Inc., the parent of Happy
State Bank, and Burdett, Morgan, Williamson & Boykin provides legal services
(unrelated to the Corporate Trust Sale) to Happy Bancshares, Inc. and Happy
State Bank. For a more detailed discussion of the interests of our directors and
management, see "Additional Information About the Transactions - Interests of
our Directors and Officers in the Transactions."
Risks Related to the Plan of Liquidation and Dissolution
There are many factors that stockholders should consider when deciding
whether to vote to approve the Plan of Liquidation and Dissolution, including
the following factors:
Our future plans would be uncertain if our stockholders failed to approve the
Plan of Liquidation and Dissolution.
The Plan of Liquidation and Dissolution is dependent upon approval by our
stockholders holding at least a majority of our outstanding shares. If our
stockholders approve the Corporate Trust Sale and the Wealth Management Sale but
not the Plan of Liquidation and Dissolution, we will not have any business and
will consider other alternatives, such as using our available cash to acquire
other companies or businesses.
Our anticipated timing of the liquidation and dissolution may not be achieved.
17
If our stockholders approve the Plan of Liquidation and Dissolution and the
Corporate Trust Sale and Wealth Management Sale are subsequently consummated, we
intend to file articles of dissolution with the Secretary of State of the State
of Arizona after the closing of such Sales. Although we anticipate that we will
make an initial distribution to stockholders within approximately 60 days
following the Special Meeting, there are a number of factors that could delay
our anticipated timetable, including the following:
o delays in consummating the Corporate Trust Sale or the Wealth Management
Sale;
o legal, regulatory or administrative delays;
o lawsuits or other claims asserted against us; and
o delays in settling our remaining obligations.
We cannot determine with certainty the amount of the distributions to
stockholders.
We cannot determine at this time the amount of distributions to our
stockholders pursuant to the Plan of Liquidation. This determination depends on
a variety of factors, including, but not limited to, the consummation of the
Corporate Trust Sale and the Wealth Management Sale, the actual proceeds
received from those asset sales, taxes we incur as a result of those asset
sales, expenses we incur in connection with those asset sales, the amount
required to settle known and unknown debts and liabilities and other contingent
liabilities, the net proceeds, if any, from the sale of our remaining assets,
and other factors. Examples of uncertainties that could reduce the value of or
eliminate distributions to our stockholders include unanticipated costs relating
to:
o the defense, satisfaction or settlement of lawsuits or other claims that
may be made or threatened against us in the future; and
o delays in our liquidation and dissolution, including due to our inability
to settle claims.
As a result, we cannot determine with certainty the amount of distributions to
our stockholders.
We may not be able to settle all of our obligations to creditors.
We have current and future obligations to creditors. Our estimated
distribution to stockholders takes into account all of our known obligations and
our best estimate of the amount reasonably required to satisfy such obligations.
As part of the wind-down process, we will attempt to settle those obligations
with our creditors. We cannot assure you that we will be able to settle all of
these obligations or that they can be settled for the amount we have estimated
for purposes of calculating the likely distribution to stockholders. If we are
unable to reach an agreement with a creditor relating to an obligation, that
creditor may bring a lawsuit against us. Amounts required to settle obligations
or defend lawsuits in excess of the amounts estimated by us will reduce the
amount of remaining capital available for distribution to stockholders.
Our stockholders may be liable to our creditors for an amount up to the amount
distributed by us if our reserves for payments to creditors are inadequate.
If our stockholders approve the Plan of Liquidation and Dissolution, the
Corporate Trust Sale and the Wealth Management Sale are consummated, and our
board of directors determines to proceed with our liquidation and dissolution,
articles of dissolution will be filed with the Arizona Corporation Commission
dissolving Colonial. After the dissolution becomes effective, we will continue
to exist only for the purpose of prosecuting and defending suits against us and
enabling us to close our business, to dispose of our property, to discharge our
liabilities and to distribute to our stockholders any remaining assets. Under
applicable Arizona law, stockholders could be held liable for payment to our
creditors up to the amount distributed to such stockholder in the liquidation.
18
Accordingly, in such event, a stockholder could be required to return all
distributions previously made to such stockholder pursuant to the Plan of
Liquidation and could receive nothing from us under the Plan of Liquidation.
Moreover, in the event a stockholder has paid taxes on amounts previously
received by the stockholder, a repayment of all or a portion of such amount
could result in a stockholder incurring a net tax cost if the stockholder's
repayment of an amount previously distributed does not cause a commensurate
reduction in taxes payable. We have not engaged an appraisal firm to render an
opinion to our board of directors as to whether we would be rendered insolvent
as a result of the initial liquidating distribution or subsequent liquidating
distributions. For these purposes, insolvency means that immediately prior to
making a distribution to our stockholders, as described herein, and after giving
effect to all such distributions (a) the fair saleable value of our assets is
less than our probable liabilities, including disputed, unliquidated and
contingent liabilities or (b) we are not able to pay or will not be able to pay
our liabilities, as they are projected to become due. Although we anticipate
that our board would not authorize a distribution in excess of an amount that
would result in our being insolvent as a result of our distributions, we cannot
assure you that the contingency reserve established by us will be adequate to
cover all expense and liabilities.
It may become difficult or impossible for stockholders to trade their shares.
If the Plan of Liquidation is approved, we expect to close our stock
transfer books and prohibit transfers of record ownership of our common stock
upon our dissolution, which would make it more difficult or impossible for a
stockholder to sell our shares and could result in a decrease in the value of
our stock.
INFORMATION ABOUT THE SPECIAL MEETING
Where to Find Additional Information
Colonial files annual, quarterly and special reports and other information
with the SEC. You may read and copy any reports, statements or other information
that Colonial files at the SEC's public reference room at the following
location:
Public Reference Room
450 Fifth Street, N.W., Room 1024
Washington, D.C. 20549
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Colonial's SEC filings are also available to the public from
commercial document retrieval services and at the Web site maintained by the SEC
at www.sec.gov.
Certain documents referred to in this proxy statement have been filed
separately with the SEC. Specifically, this proxy statement contains references
to the following documents, which we have previously filed with the SEC:
Form Title Date Filed
- ---------- -------------------------------------------------- -----------------
- ---------- -------------------------------------------------- -----------------
8-K Purchase and Assumption Agreement between Colonial
and Happy State Bank January 28, 2004
8-K Purchase and Assumption Agreement between Colonial,
Heartland Financial USA, Inc. and Dubuque
Bank and Trust Company April 28, 2004
8-K Addendum to Purchase and Assumption Agreement
between Colonial, Heartland Financial USA,
Inc., Dubuque Bank and Trust Company and
Arizona Bank & Trust April 28, 2004
8-K First Amendment to Purchase and Assumption
Agreement between Colonial and Happy State Bank June __, 2004
- ---------- -------------------------------------------------- -----------------
19
You may obtain any of the documents listed above through the SEC or the
SEC's website, provided above. You may also obtain the documents listed above
from us without charge by requesting them in writing at the following address:
Colonial Trust Company
5336 N. 19th Avenue
Phoenix, Arizona 85015
Attention: Secretary
If you would like to request documents from us, please do so by
___________, 2004, to receive them before the Special Meeting.
You should rely only on the information contained in this proxy statement
to vote on the proposals. We have not authorized anyone to provide you with
information that is different from what is contained in this proxy statement.
This proxy statement is dated ________ __, 2004. You should not assume that the
information contained in this proxy statement is accurate as of any date other
than that date.
Matters to be Considered at the Special Meeting
At the Special Meeting, stockholders will consider and vote on proposals
(1) to approve the sale of our Corporate Trust business to Happy State Bank
pursuant to the Corporate Trust Sale Agreement, (2) to approve the sale of our
Wealth Management business to Dubuque Bank and Trust/Arizona Bank & Trust
pursuant to the Wealth Management Sale Agreement, (3) to approve and adopt our
Plan of Liquidation and Dissolution, attached as Appendix A, which includes
amendment of our Articles of Incorporation to effect a 1 for 35,032 reverse
stock split for purposes of making liquidating distributions to our
stockholders, and our dissolution; and (4) to consider and vote upon the
adjournment of the Special Meeting to a later date, if necessary, to solicit
additional proxies in the event that there are insufficient shares present in
person or by proxy voting in favor of any or all of the above matters presented
at the Special Meeting to approve those matters.
Record Date and Outstanding Shares of Common Stock
The record date for the determination of stockholders entitled to notice of
and to vote at the special meeting is ________, 2004. At the close of business
on the record date there were issued, outstanding and entitled to vote an
aggregate of 760,843 shares of our no par value common stock.
Voting and Votes Required; Adjournment
Each share of our common stock is entitled to one vote. All proxies will be
voted in accordance with the stockholders' instructions contained therein, and
if no choice is specified, the proxies will be voted in favor of the Corporate
Trust Sale, the Wealth Management Sale, and the Plan of Liquidation and
Dissolution.
A stockholder may revoke any proxy at any time before it is exercised by
delivery of written revocation to the Secretary of Colonial or by voting in
person at the Special Meeting. A stockholder may also change a vote by signing
another proxy with a later date. Attendance at the Special Meeting will not
itself be deemed to revoke a proxy unless the stockholder gives affirmative
notice at the Special Meeting that the stockholder intends to revoke the proxy
and vote in person.
The affirmative vote of the holders of a majority of the shares of common
stock issued, outstanding and entitled to vote thereon is required to approve
Proposals Nos. 1, 2 and 3.
20
The affirmative vote of the holders of a majority of the shares of common
stock present in person or represented by proxy at the Special Meeting is
required to approve the adjournment of the Meeting to a later date, if
necessary, to solicit additional proxies (Proposal No. 4). The most likely
reason for adjournment would be to solicit additional proxies to approve any or
all of Proposal Nos. 1, 2 and 3 if fewer shares are voted in favor of the
proposal than are required to approve the proposal. At any subsequent
reconvening of the Special Meeting, all proxies will be voted in the same manner
as they would have been voted at the original convening of the Special Meeting
with respect to any matter being considered at the reconvened Meeting, except
for any proxies properly changed or revoked.
With respect to any other matter properly presented at the Special Meeting,
the persons named in the proxy will be authorized to vote, or otherwise act, in
accordance with their judgment on such matter. There are no voting agreements
with respect to any matter to be voted upon at the Special Meeting.
Quorum
Under our by-laws, the holders of a majority of the shares of common stock
issued, outstanding and entitled to vote at the Special Meeting will constitute
a quorum at the Special Meeting. Shares of common stock present in person or
represented by proxy, including shares that abstain, represent broker non-votes
or do not vote with respect to one or more of the matters presented for
stockholder approval, will be counted for purposes of determining whether a
quorum is present.
Abstentions and Broker Non-Votes
Shares that abstain from voting as to a particular matter, and shares held
in "street name" by brokers or nominees who indicate on their proxies that they
do not have discretionary authority to vote such shares as to a particular
matter, will not be counted as votes in favor of such matter and will also not
be counted as votes cast or shares voting on such matter. Accordingly,
abstentions and "broker non-votes" will have the effect of a vote against the
proposals. Abstentions and broker non-votes will have no effect on any vote to
adjourn the meeting to a later date, if necessary, to solicit additional
proxies.
Shares Owned and Voted by our Directors and Executive Officers
At the close of business on ________, 2004, the record date for the special
meeting, our directors and executive officers and certain of their affiliates
beneficially owned, in the aggregate, 126,290 shares (or 16.6%) of the shares of
our outstanding common stock. These shares do not include the 15,000 shares of
common stock issuable upon the exercise of outstanding stock options owned by
two of our directors, which such directors have informed us they intend to
exercise prior to consummation of the Corporate Trust Sale and the Wealth
Management Sale. See "Security Ownership of Certain Beneficial Owners and
Management". All of these parties have informed the Company that they intend to
vote in favor of Proposal Nos. 1, 2, 3 and 4 to be considered at the Special
Meeting. See "Security Ownership of Certain Beneficial Owners and Management."
Recommendation of the Board of Directors
After careful consideration, our board of directors has approved the
Corporate Trust Sale and recommends that you vote FOR the approval of the
Corporate Trust Sale. See "Proposal No. 1". After careful consideration, our
board of directors has approved the Wealth Management Sale and recommends that
you vote FOR the approval of the Wealth Management Sale. See "Proposal No. 2".
After careful consideration, our board of directors has approved the Plan of
Liquidation and Dissolution and recommends that you vote FOR the approval and
adoption of the Plan of Liquidation and Dissolution. See "Proposal No. 3". After
careful consideration, our board of directors recommends that you vote FOR
Proposal No. 4. See "Proposal No. 4".
21
In considering such recommendations, you should be aware that some of our
officers and directors have interests in the Corporate Trust Sale, the Wealth
Management Sale and the Plan of Liquidation that are different from, or in
addition to, those of our stockholders generally. See the discussion entitled
"Additional Information About the Proposals - Interests of Our Directors and
Officers in the Transactions."
Revocability of Proxies
Proxies may be revoked at any time prior to the time they are voted by: (a)
delivering to the Secretary of the Company a written instrument of revocation
bearing a date later than the date of the proxy; or (b) duly executing and
delivering to the Secretary a subsequent proxy relating to the same shares; or
(c) attending the Special Meeting and voting in person, provided that the
stockholder notifies the Secretary of the meeting of his or her intention to
vote in person at any time prior to the voting of the proxy. In order to vote
their shares in person at the Special Meeting, stockholders who own their shares
in "street name" must obtain a special proxy card from their broker.
Solicitation
The cost of soliciting proxies, including the cost of preparing and mailing
the Notice and Proxy Statement, will be paid by the Company. Solicitation will
be primarily by mailing this proxy statement to all stockholders entitled to
vote at the Special Meeting. Proxies may be solicited by officers and directors
of the Company personally or by telephone or facsimile, without additional
compensation. The Company may reimburse brokers, banks and others holding shares
in their names for others for the cost of forwarding proxy materials and
obtaining proxies from beneficial owners.
Other Matters
Our board of directors knows of no other business that will be presented at
the Special Meeting. If any other proposal properly comes before the
stockholders for a vote at the Special Meeting, the persons named in the proxy
card that accompanies this proxy statement will, to the extent permitted by law,
vote your shares in accordance with their judgment on such matter.
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read together
with our audited consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included in our Annual Report on Form 10-KSB filed on
June 30, 2003, and our unaudited consolidated financial statements and related
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are included in our Quarterly Report on Form
10-QSB filed on February 20, 2004. The foregoing Form 10-KSB and Form 10-QSB are
available through the SEC or the SEC's website at www.sec.gov or from us without
charge. See "Information About the Special Meeting - Where to Find Additional
Information." Our historical results are not necessarily indicative of our
results of operations to be expected in the future.
22
December 31 March 31 March 31
2003 2003 2002
----------- ----------- -----------
(unaudited) (audited) (audited)
Current assets:
Cash and cash equivalents ........... $ 314,581 $ 243,048 $ 166,592
Accounts, notes and other
receivables ...................... 1,652,942 1,505,130 1,289,231
Non-current assets: .................... 1,358,023 1,376,045 1,431,951
----------- ----------- -----------
----------- ----------- -----------
Total Assets: .......................... 3,325,546 3,124,223 2,887,774
Accounts payable and accrued
liabilities: ..........................$ 381,780 $ 305,990 $ 213,729
Nine months Fiscal Year Fiscal Year
ended ended ended
December 31 March 31 March 31
2003 2003 2002
(unaudited) (audited) (audited)
Gross revenues: ........................$ 3,451,845 $ 4,161,886 $ 3,865,501
General and administrative expenses: ... 3,254,279 4,041,145 3,989,466
----------- ----------- -----------
----------- ----------- -----------
Income (Loss) before income taxes
and extraordinary items: ............ 197,566 120,741 (123,965)
Income (Loss) per share (basic): ....... 0.26 $ 0.16 ($ 0.17)
Income (Loss) per share (diluted): ..... 0.26 $ 0.16 ($ 0.17)
Net Income (Loss): ...................... 116,605 75,644 (82,759)
Net Income (Loss) per share (basic): ... 0.15 $ 0.10 ($ 0.11)
Net Income (Loss) per share (diluted): .$ 0.15 $ 0.10 ($ 0.11)
Weighted average shares outstanding
(basic): ........................... 758,012 743,239 730,865
Weighted average shares outstanding
(diluted): ......................... 760,155 757,322 730,865
Book value per share ...................$ 3.87 n/a n/a
BACKGROUND OF THE TRANSACTIONS
Background
Colonial Trust Company was incorporated under the laws of the State of
Arizona on August 15, 1989, and commenced business operations on September 11,
1989. From the time of its organization through September 30, 1990, the Company
was a wholly-owned subsidiary of Church Loans and Investments Trust, a real
estate investment trust located in Amarillo, Texas. On October 1, 1990, all of
the capital stock of the Company was distributed to the stockholders of its
parent company on the basis of one share of common stock of the Company for each
share of our parent company's stock owned on that date.
The Company is a nondepository trust company that currently has two
businesses: Corporate Trust and Wealth Management Group (previously named the
Personal Trust division of the Company). The Corporate Trust business provides
services including serving as trustee for individual retirement accounts, or
IRA's, and trustee for bond offerings of churches and other non-profit
organizations. Presently, we are primarily engaged in serving as trustee and
paying agent on bond programs of churches and other non-profit organizations.
From time to time, we serve as trustee and/or paying agent on bond programs of
for-profit organizations. Through its Wealth Management Group business, the
Company provides traditional investment management, administration and custodial
services for customers with trust assets. This business also serves as trustee
or custodian for IRA Accounts ("IRA's").
23
Historically, the Company's primary business has been serving as trustee
and paying agent for bond offerings of churches and other non-profit
organizations. The majority of these bonds are sold by broker/dealers in
offerings that are exempt from registration under federal and state securities
laws. In its capacity as trustee for bond offerings of non-profit organizations,
the Company receives proceeds from the sale of the bonds and distributes those
proceeds according to the purposes of the bond offering. The Company invests
such proceeds in U.S. Treasury Obligation Money Market Mutual Funds according to
the terms of the Company's investment policy and the applicable trust indenture.
In its capacity as paying agent, the Company also receives periodic sinking fund
payments (payments of principal and interest on the bonds by the non-profit
organizations, typically made on a weekly basis) and distributes the sinking
fund payments to bondholders pursuant to a trust indenture between the Company
and the non-profit organization. In instances in which a bondholder has
transferred ownership of a bond for which the Company is serving as paying
agent, the Company serves as transfer agent and effects the transfer of such
bond between the former and current bondholder. If the non-profit organization
defaults under the terms of the trust indenture, the Company forecloses on the
property securing the payment of the bonds (typically real estate and related
improvements owned by the non-profit organization, such as a church), attempts
to sell the property, and thereafter distributes the proceeds (if any) received
from the foreclosure sale to bondholders.
The Company also serves as trustee for IRA's. As trustee, the Company
receives all contributions to these accounts, invests the contributions as
directed by the account participant and distributes the funds of the accounts
pursuant to the terms of each individual account. The majority of the IRA's
serviced by the Company have been originated by the broker/dealers who originate
the bond offerings for which the Company serves as trustee and paying agent.
Currently, there are a limited number of IRA trustees who allow church bonds as
an investment in their IRA's. The Company has been able to grow its IRA
servicing business primarily through marketing efforts directed at the
broker/dealers with whom the Company has a bond servicing relationship and to a
lesser extent through marketing efforts directed at non-profit organizations.
The Wealth Management Group business provides traditional investment
management, administration and custodial services for customers with assets
(cash, securities, real estate or other assets) held in trust or in an
investment agency account. It also serves as custodian for self-directed IRA's
and trustee for managed IRA's.
Purposes of and Reasons for the Transactions
Having assessed our ability to develop our two operating businesses, we
determined that it would be preferable not to continue operations based on a
number of factors, including the likelihood that we would continue to incur
significant regulatory expenditures as a result of our status as a
public-reporting company that files public reports with the SEC, the existence
of competitors in our industry with greater resources at their disposal, adverse
long-term trends in our businesses, and the fact that even if successful, the
realization of significant profits was uncertain and could take years. Having
determined that discontinuing our operations was in the best interests of our
stockholders, we further determined that the sale of our operating businesses as
independent going concerns was the alternative likely to yield the highest per
share value for our stockholders and began searching for potential buyers for
our operating businesses.
We have also determined that in recent years, the public marketplace has
had less interest in public companies with a small market capitalization and a
limited amount of securities available for trading in the public marketplace.
Our board of directors believes it is highly speculative whether our common
stock would ever achieve significant market value with an active and liquid
24
market. Thus, our board of directors concluded that, in the event the sales of
our Corporate Trust and Wealth Management Group businesses were approved by
stockholders and subsequently consummated, it would be in the best interest of
our stockholders to distribute the net proceeds from those transactions to our
stockholders and terminate our status as a public-reporting company, instead of
attempting to find other businesses to purchase and maintaining our status as a
public-reporting company.
The purpose of the proposed reverse stock split and liquidation is to cash
out the equity interests in the Company of the approximately 1,700 record
holders of our common stock at a price determined to be fair by the board of
directors. The transactions will allow the Company to reduce the number of
stockholders of record to fewer than 300 so as:
o to permit our stockholders to receive cash for their stock;
o to relieve the Company of the administrative burden and increasing costs
associated with filing reports and otherwise complying with the
requirements of registration under the Exchange Act by deregistering the
Company under the Exchange Act;
o to relieve the Company of the additional cost and investment of management
time associated with compliance with the Sarbanes-Oxley Act of 2002 and the
related regulations, many of which become effective over the following
12-24 months; and
o to decrease the expense and burden of communicating with the Company's high
number of stockholders holding small positions in the Company's stock.
The Company incurs direct and indirect costs associated with compliance
with the SEC's filing and reporting requirements imposed on public companies,
costs which we expect will only increase in the near future. The Company also
incurs substantial indirect costs as a result of, among other things, the
executive time spent to prepare and review such filings. Since the Company has
relatively few executive personnel, these indirect costs can be substantial. The
Company's annual direct and indirect costs related to being a public company are
estimated at $168,000, and include the following:
Public Company Expense Cost
--------------------------------------------------- -------------------
--------------------------------------------------- -------------------
Audit $ 56,000
Quarterly reviews by accountants 22,600
Legal SEC work 33,000
Director fees 20,400
Annual Report costs 16,000
Director and officer insurance 20,000
TOTAL: $ 168,000
--------------------------------------------------- -------------------
The principal advantages to the Company of remaining a public company
include the potential to raise capital through the sales of securities in a
public offering in the future or to acquire other business entities using stock
as the consideration for any such acquisition. As a practical matter, capital
from the public market has not been, and is not expected to be, available to the
Company. Furthermore, the Company has no plans to acquire other businesses, and
the Company believes that the illiquid nature of the Company's common stock
makes such common stock relatively unattractive as consideration to a potential
seller. Accordingly, the board believes that any advantages of remaining a
public company are outweighed by the disadvantages.
Past Contacts and Negotiations
In May 2002, we were contacted concerning the potential purchase or merger
of Colonial by Randall K. Barton of Foundation Capital. Mr. Barton was a former
Colonial Board member who resigned in December 2002. Although Foundation Capital
ultimately elected not to pursue a combination with Colonial, our board decided
to consider other potential combinations.
25
At a board meeting on February 5, 2003, it was suggested that one of our
directors make contact with Happy State Bank representatives. As a result of a
meeting on February 27, 2003, between Gerald G. Morgan of Colonial and certain
representatives of Happy State Bank, including Pat Hickman, Tom Burdett and
Kelly Forehand, Happy State Bank decided to pursue negotiations for the purchase
of Colonial. By March 15, 2003, a confidentiality agreement had been executed by
both parties and a due diligence trip had been planned for March 27 and March
28, 2003, at which Pat Hickman, David Norris and Kelly Forehand of Happy State
Bank met with John Johnson, Cecil Glovier and Bruce Mitchell of Colonial. Prior
to the due diligence trip, the parties exchanged certain financial information.
On April 3, 2003, a board meeting was held at which, following
consideration of Willamette & Associates, Bank Advisory Group and Peacock,
Hislop, Staley & Given as potential financial advisors, Bank Advisory Group was
chosen to prepare a valuation of Colonial for Colonial's board of directors.
Bank Advisory Group was subsequently engaged to provide such a valuation. See
also "Additional Information About the Proposals - Opinions of Bank Advisory
Group".
Throughout April and May 2003, we continued providing due diligence
information to Happy State Bank and Bank Advisory Group, and representatives
from Colonial and Bank Advisory Group participated in numerous telephonic
discussions relating to the valuation of Colonial.
In May 2003, AMG Guaranty Trust, through David Wright, its Vice President,
contacted John Johnson of Colonial by telephone concerning the potential
purchase of Colonial. By June 24, 2003, a confidentiality agreement had been
executed by both parties.
On June 10, 2003, Bank Advisory Group delivered its valuation to Colonial.
Colonial subsequently engaged in telephonic discussions and e-mail
correspondence with Happy State Bank concerning a potential purchase of all of
Colonial's businesses, including telephone conversations on June 12 and June 27,
2003, between John Johnson of Colonial and Pat Hickman of Happy State Bank.
Colonial also had a board meeting via telephone conference call on June 16, 2003
to discuss the status of discussions with Happy State Bank and AMG Guaranty
Trust. At a board meeting held on June 30, 2003, the board also engaged in
extensive discussions about the possibility of taking Colonial private, and the
means by which a going private transaction could potentially be effectuated.
Through the summer and fall of 2003, representatives of AMG traveled to
Phoenix to conduct due diligence. Specifically, on June 25, 2003, John Johnson
and Bruce Mitchell of Colonial met with Earl Wright, the President and Chief
Executive Officer of AMG, and David Wright of AMG, and on October 16, 2003, John
Johnson and Bruce Mitchell met with Earl Wright, David Wright, Sheryl Bollinger,
AMG's vice-president and General Counsel, and Michael Bergmann, AMG's Senior
Executive Vice President.
On July 28, 2003, Gerald G. Morgan of Colonial and Pat Hickman of Happy
State Bank met to discuss the divergence in Colonial's and Happy State Bank's
valuation analyses and the potential continuation of the negotiations between
Colonial and Happy State Bank. On August 12, 2003, Pat Hickman, Joe Horn, Erin
Viermann and Kelly Forehand of Happy State Bank participated in a Colonial board
meeting and indicated that Happy State Bank was still interested in an
acquisition of Colonial, but only in connection with Colonial's Corporate Trust
business, and only under certain conditions relating to relocation of Colonial's
operations and retention of certain key employees. The Colonial board invited
Happy State Bank to complete its due diligence and extend any offer Happy State
Bank was interested in making to Colonial. From September 2 - 4, 2003,
representatives of Happy State Bank, including Pat Hickman, Erin Viermann, Kathy
McKaskle, Jason James and Mozelle Hedrick, conducted due diligence in Phoenix.
26
At a board meeting on September 15, 2003, the board decided to pursue
negotiations with AMG Guaranty Trust for the sale of Colonial, or,
alternatively, for the sale of Colonial's Wealth Management business, and to
continue negotiations with Happy State Bank concerning the sale of the Corporate
Trust Business. Negotiations with both Happy State Bank and AMG Guaranty Trust
continued through the end of September 2003.
At a board meeting held on October 2, 2003, the board considered the
preliminary proposals received from AMG Guaranty Trust and Happy State Bank for
the purchase of the Wealth Management and Corporate Trust businesses,
respectively. The board subsequently determined to engage Bank Advisory Group to
advise it concerning these proposals and any other proposals received by the
Company and to provide a fairness opinion in the event the board determined to
proceed with transactions for the sale of the Corporate Trust and Wealth
Management Group businesses. On October 30, 2003, Bruce Mitchell and Patricia
Heitter of Colonial traveled to the AMG headquarters in Denver to meet with AMG
principals, including Earl Wright, David Wright, Sheryl Bollinger and Michael
Bergmann.
At a board meeting held on November 10, 2003, the board considered and
approved an engagement letter from Bank Advisory Group to provide advisory
services to the Company and to provide a fairness opinion concerning the
distributions Colonial's stockholders would receive in the event the Company
sold its Corporate Trust and Wealth Management Group businesses and distributed
its available cash to its stockholders in a liquidation.
Throughout the remainder of October 2003 and through and including the
signing of the definitive Corporate Trust Sale Agreement on December 30, 2003,
the board and Colonial's senior management held numerous conversations, received
and revised drafts of such Agreement and related agreements with Happy State
Bank, and negotiated various terms of the transaction and provisions of the
agreements with Happy State Bank. This process involved representatives of
Burdett, Morgan, Williamson & Boykin LLP and Squire, Sanders & Dempsey L.L.P.,
Colonial's legal counsel, Jenkins & Gilchrist, Happy State Bank's legal counsel,
and Bank Advisory Group, Colonial's financial advisor.
On December 5, 2003, John Johnson of Colonial and William F. Frank,
President of Arizona Bank and Trust met to discuss the potential interest of
Arizona Bank and Trust's parent company, Heartland Financial USA, in purchasing
Colonial's Wealth Management business.
On December 26, 2003, in a series of e-mail communications, the board
approved the Corporate Trust Sale Agreement with Happy State Bank and authorized
John Johnson to execute the agreement on behalf of Colonial. On December 30,
2003, the Corporate Trust Sale Agreement was executed. On February 3, 2004, the
board ratified its earlier approval of the Corporate Trust Sale Agreement with
Happy State Bank and John Johnson's execution of this Sale Agreement on behalf
of Colonial.
On Friday, January 2, 2004, John Johnson met with Gary Dorris, President of
First National Bank of Arizona, Kari Dorris, Executive Director of First
National Financial Advisors and Pat Lamb, First National Bank of Arizona General
Counsel. During this meeting, the First National Bank representatives expressed
their interest in purchasing the Wealth Management business.
On January 6-8, 2004, representatives of AMG Guaranty Trust, including
David Wright, Michael Bergmann and Greg Greene, Vice President and Chief
Financial Officer, arrived in Phoenix to conduct additional due diligence
concerning our Wealth Management business. At a board meeting on January 8,
2004, the board discussed the various parties who had expressed an interest in
purchasing the Wealth Management business and imposed on all prospective
purchasers a January 21, 2004 deadline to submit offers.
27
Throughout January 2004, various prospective purchasers, including
Heartland Financial USA, Inc. and First National Bank of Arizona, performed
on-site due diligence, as follows: (1) on January 8, 2004, Bruce Mitchell of
Colonial met with Kari Dorris, Steve Curley and Steve Austin with First National
Bank of Arizona, who reviewed financial reports and conducted initial due
diligence on Colonial's fiduciary accounts; (2) on January 9, 2004, Bruce
Mitchell participated in a conference call with Heartland Financial officials
including Paul Peckosh, Senior Vice President, Mel Miller, Senior Vice President
and Chief Investment Officer, and Bruce Rehmke, Vice President, to generally
discuss the Wealth Management business; (3) on January 12, 2004, Bruce Mitchell
again met with Gary Dorris, Kathryn Chryst, Vice President of Human Resources,
and Kari Dorris of First National Bank to discuss various operational issues;
and (4) on January 20, 2004, representatives of Heartland Financial, including
Paul Peckosh, Mel Miller, Bruce Rehmke, Janet Quick, Vice President of Finance,
and Polly Hauser, Trust Officer, traveled to Phoenix to conduct due diligence.
Prospective purchasers included:
o TCI Holdings (the parent company of Trust Company of Illinois);
o Wedbush Morgan Securities;
o Heartland Trust Company (Fargo, ND);
o First National Bank of Arizona;
o Midwest Trust Company;
o Heartland Financial USA, Inc. (Dubuque, Iowa);
o Administaff; and
o AMG Guaranty Trust.
On or prior to its board meeting on January 21, 2004, the board received
four offers for our Wealth Management business. These offers were from First
National Bank of Arizona, Midwest Trust Company, Heartland Financial USA,
Inc./Dubuque Bank and Trust Company, and AMG Guaranty Trust. At its January 21,
2004 board meeting, the board considered these four offers. The board voted to
tentatively accept the offer submitted by Heartland Financial USA/Dubuque Bank
and Trust Company, as it reflected a higher multiple of earnings than the other
bidders, and to attempt to negotiate a definitive purchase agreement with
Heartland Financial USA/Dubuque Bank and Trust Company containing terms
acceptable to Colonial's board.
Throughout the remainder of January 2004 and through and including the
signing of the definitive purchase agreement with Heartland Financial USA on
March 26, 2004, members of the management of Colonial held various meetings with
representatives of Arizona Bank & Trust in the furtherance of consummating the
Wealth Management Sale, as follows: (1) on January 28, 2004, Bruce Mitchell and
numerous staff members of Colonial met with various representatives of Arizona
Bank & Trust, including Paul Peckosh, Executive Vice President - Trusts, Bruce
Rehmke, Vice President, Time Britfelder, Vice President and Nancy Wilson, Vice
President - Human Resources, to perform due diligence; (2) on various dates
between February 10, 2004 and March 8, 2004, Bruce Mitchell of Colonial met with
Paul Peckosh of Heartland Financial USA and William Frank of Arizona Bank &
Trust to discuss possible sites for the relocation of the Wealth Management
business and progress on the Wealth Management Sale Agreement; and (3) the board
and senior management of Colonial held numerous conversations, reviewed and
revised drafts of the Wealth Management Sale Agreement and related agreements,
and negotiated various terms of the transaction and provisions of the agreements
with Heartland Financial USA/Dubuque Bank and Trust Company. This process
involved representatives of Burdett, Morgan, Williamson & Boykin LLP and Squire,
Sanders & Dempsey L.L.P., Colonial's legal counsel, Barack Ferrazzano Kirschbaum
Perlman & Nagelberg LLC, legal counsel for Heartland Financial USA/Dubuque Bank
and Trust Company, and Bank Advisory Group, Colonial's financial advisor.
At a board meeting on March 12, 2004, the board approved the sale of the
Wealth Management business pursuant to the terms of the Wealth Management Sale
Agreement between Colonial, Dubuque Bank and Trust Company and Heartland
Financial USA, and directed that John Johnson execute the Agreement on behalf of
Colonial.
28
On May 4, 2004, Bank Advisory Group presented its opinion, that, as of the
date of its opinion and based on the matters considered and subject to the
assumptions, conditions and qualifications set forth in the written opinion, the
consideration to be received by our stockholders under the Plan of Liquidation
and Dissolution was financially fair and equitable to our unaffiliated
stockholders. See "Additional Information About the Proposals - Opinion of Bank
Advisory Group".
On May 4, 2004, at a board meeting, our board of directors adopted a Plan
of Liquidation and Dissolution of Colonial. The Plan of Liquidation and
Dissolution is subject to stockholder approval of both the Corporate Trust Sale
and the Wealth Management Sale and the subsequent consummation both of such
Sales. See "Proposal No. 3 - Approval of Plan of Liquidation and Dissolution."
SALE OF THE ASSETS OF THE CORPORATE TRUST BUSINESS
(Proposal No. 1)
Our board of directors is proposing the Corporate Trust Sale pursuant to
the terms of the Corporate Trust Sale Agreement for approval by our stockholders
at the Special Meeting. The Corporate Trust Sale was approved by our board of
directors, subject to stockholder approval, on December 26, 2003, and ratified
on February 3, 2004. The Corporate Trust Sale Agreement is attached as an
exhibit to our Form 8-K filed on January 28, 2004, and the first amendment to
the Corporate Trust Sale Agreement is attached as an exhibit to our Form 8-K
filed on June __, 2004. See "Information About the Special Meeting - Where to
Find Additional Information." The material terms of the Corporate Trust Sale
Agreement are summarized below. This is not a complete summary of the Corporate
Trust Sale Agreement and is subject in all respects to the provisions of, and is
qualified by reference to, the Corporate Trust Sale Agreement. Stockholders are
urged to read the Corporate Trust Sale Agreement in its entirety. Our board of
directors recommends a vote FOR the sale of the Corporate Trust business
described below.
Background of the Corporate Trust Sale
For background information, please see "Background of and Reasons for the
Proposed Transactions."
Happy State Bank and Happy Bancshares, Inc.
Happy State Bank, a Texas banking association, is a wholly-owned subsidiary
of Happy Bancshares, Inc., a Texas corporation. Happy Bancshares is a registered
bank holding company that owns indirectly all the outstanding common stock of
Happy State Bank. Happy State Bank is a banking association with trust powers
with its principal offices in Happy, Texas.
Description of the Corporate Trust Sale
General. On December 30, 2003, we entered into a Purchase and Assumption
Agreement (the "Corporate Trust Sale Agreement") with Happy State Bank and its
parent, Happy Bancshares, Inc., to sell substantially all the assets of our
Corporate Trust business to Happy State Bank. Upon the closing of the Corporate
Trust Sale, we will assign and Happy State Bank will assume certain obligations
associated with the Corporate Trust business, Happy State Bank will be the
substitute fiduciary for Colonial on each of Colonial's Corporate Trust
accounts, and Colonial will be released from all fiduciary duties with respect
to the Corporate Trust business. The Corporate Trust Sale Agreement is
anticipated to close on or before September 30, 2004, unless closing is extended
by agreement of the parties.
29
Assets Transferred and Liabilities Assumed. We are selling and transferring
substantially all of the assets of our Corporate Trust business, including
without limitation (1) certain accrued fees, receivables, prepaid expenses and
rights under contracts of Corporate Trust, (2) all equipment and personal
property used in the conduct of the business of Corporate Trust, (3) the real
property and facilities located at 5336 N. 19th Avenue, Phoenix, Arizona which
comprise Colonial's corporate headquarters, and (4) all furniture and fixtures
located on the above-referenced real estate. Happy State Bank has also agreed to
assume certain liabilities associated with the Corporate Trust business,
including without limitation (1) Corporate Trust's accrued expenses, (2) certain
liabilities and obligations with respect to assumed contracts, (3) a prorated
portion of the real estate taxes attributable to the real estate being
purchased, and (4) liabilities under certain equipment lease agreements,
hardware maintenance agreements and other related agreements. Effective upon the
closing, and subject to credit checks, Happy State Bank has also agreed to offer
employment to all of the current employees of Corporate Trust. Additionally, Mr.
John K. Johnson and Cecil Glovier, our President and Chief Operating Officer,
respectively, executed employment and non-competition agreements that will be
effective at the closing of the Corporate Trust Sale Agreement. It is
anticipated that Happy State Bank will operate Corporate Trust from Colonial's
current headquarters in Phoenix following the closing.
Consideration to be received in the Corporate Trust Sale. The purchase
price for the Corporate Trust assets will be the sum of: (1) $819,000,
representing the agreed-upon value of the real property and improvements being
purchased, (2) the aggregate book value of the Corporate Trust assets being
purchased, less the book value of the Corporate Trust liabilities being assumed,
and (3) $550,000, representing a goodwill premium. The purchase price is subject
to adjustment within ten days following the closing date upon Colonial's and
Happy State Bank's agreement upon a final settlement statement indicating the
final calculation of the aggregate book value of the net assets being purchased
and net liabilities being assumed.
Deliveries at the Closing. Two business days prior to the closing, Colonial
will deliver to Happy State Bank a settlement statement and supporting exhibits,
indicating the computation of the purchase price. At the closing, Happy State
Bank will deliver to Colonial:
o A certificate of a Happy State Bank officer authorizing the transactions
contemplated by the Corporate Trust Sale Agreement;
o The purchase price by one or more checks or by one or more deposits into
Colonial's account;
o An assumption agreement setting forth the liabilities of the Corporate
Trust business to be assumed by Happy State Bank; and
o All other documentation necessary to transfer all of Colonial's interest in
the assets of the Corporate Trust business to Happy State Bank.
At the closing, Colonial will deliver to Happy State Bank:
o A certificate of a Colonial officer authorizing the transactions
contemplated by the Corporate Trust Sale Agreement;
o The settlement statement, bill of sale, general assignment and associated
exhibits and schedules;
o The warranty deed and a title policy covering any and all real estate to be
purchased by Happy State Bank;
o An executed power of attorney granting Happy State Bank the authority to
carry on the Corporate Trust business after the closing;
o Executed copies of the employment agreements and noncompetition agreements
for John K. Johnson and Cecil Glovier; and
o All other documentation necessary to transfer all of Colonial's interest in
the assets of the Corporate Trust business to Happy State Bank, including
the books and records of the Corporate Trust business.
30
Use of Proceeds from the Corporate Trust Sale
We intend to use the proceeds of the Corporate Trust Sale to pay our
existing liabilities and to distribute cash available for distribution to our
stockholders in connection with our Plan of Liquidation, if approved by our
stockholders. The liabilities that we intend to pay with the proceeds of the
Corporate Trust Sale include accounts payable, accrued expenses and lease
commitments, as well as transaction costs. The transaction costs include fees
payable to Bank Advisory Group of up to $24,000, plus approved expenses up to
$750. The aggregate benefits that Messrs. Johnson and Glovier will receive in
connection with the Corporate Trust Sale will be approximately $150,000, the
payment of which amount will be in lieu of bonuses to which Messrs. Johnson and
Glovier would otherwise have been entitled under their respective employment
contracts. Additionally, in the event that Mr. Glovier, our Chief Operating
Officer, has his employment terminated by Happy State Bank during the first year
of Mr. Glovier's employment by Happy State Bank (other than termination by Happy
State Bank for cause, as defined by the parties), we will be obligated to pay
Mr. Glovier an amount equal to the difference between $92,882 (Mr. Glovier's
current annual base salary) and salary paid by Happy State Bank during Mr.
Glovier's employment by Happy State Bank. See "Additional Information About the
Proposals - Interests of our Directors and Officers in the Transactions."
Other Material Terms of the Corporate Trust Sale Agreement
Representations and Warranties. The Corporate Trust Sale Agreement contains
customary representations and warranties from us to Happy State Bank relating
to, among other things:
o Due organization, good standing, and corporate authority to enter into the
Corporate Trust Sale Agreement;
o Impact of consummation of the Corporate Trust Sale on Colonial's charter
documents or applicable laws, orders, regulations, agreements or judicial
rulings;
o Compliance with laws and regulations;
o Proper administration of Colonial's fiduciary accounts;
o Absence of litigation;
o Matters relating to contracts, commitments, consents and regulatory
approvals;
o Accuracy of financial statements and books and records, and appropriateness
of internal accounting controls;
o Matters relating to the financial condition of the Corporate Trust
business; and
o Tax and insurance matters.
The Corporate Trust Sale Agreement contains customary representations and
warranties from Happy State Bank and, where applicable, from Happy State Bank
jointly and severally with Happy Bancshares, Inc. to us relating to, among other
things:
o Due organization, good standing, and corporate authority to enter into the
Corporate Trust Sale Agreement;
o Impact of consummation of the Corporate Trust Sale on either Happy State
Bank's or Happy Bancshares, Inc.'s charter documents or applicable laws,
orders, regulations, agreements or judicial rulings;
o Compliance with laws and regulations;
o Absence of litigation; and
o Matters relating to contracts, commitments and consents.
Conditions to the Closing. The closing is scheduled to occur within thirty
days after the date of receipt of all necessary regulatory approvals and
expiration of all mandatory waiting periods, but is anticipated to occur no
later than September 30, 2004 (unless extended by agreement of the parties). The
obligation of Happy State Bank to purchase the assets of the Corporate Trust
business is subject to the satisfaction prior to the closing of the following
conditions:
31
o We have taken all necessary corporate action to authorize execution,
delivery and performance under the Corporate Trust Sale Agreement, and our
stockholders have approved the Corporate Trust Sale Agreement;
o No material litigation pertaining to the Corporate Trust Sale has been
instituted or threatened;
o The book value of the assets of the Corporate Trust business, excluding the
real property assets, is no less than $400,000;
o We have permitted Happy State Bank reasonable access to our books and
records;
o We have obtained all necessary third party consents;
o We have complied with or performed all of our covenants and conditions, and
all of our representations and warranties remain true and correct in all
material respects;
o All documents to be delivered in connection with the Corporate Trust Sale
are satisfactory in all respects to Happy State Bank; and
o All necessary regulatory approvals have been obtained.
Our obligation to sell the assets of the Corporate Trust business to Happy
State Bank is subject to the satisfaction prior to the closing of the following
conditions:
o Happy State Bank has taken all necessary corporate action to authorize
execution, delivery and performance under the Corporate Trust Sale
Agreement;
o Our stockholders have approved the Corporate Trust Sale Agreement;
o No material litigation pertaining to the Corporate Trust Sale has been
instituted or threatened;
o Happy State Bank has complied with or performed all of its covenants and
conditions, and all of its representations and warranties remain true and
correct in all material respects;
o All documents to be delivered in connection with the Corporate Trust Sale
are satisfactory in all respects to us;
o All necessary regulatory approvals have been obtained; and
o We have received a fairness opinion from Bank Advisory Group that the terms
of the Corporate Trust Sale Agreement are fair, from a financial point of
view, to Colonial's stockholders.
Covenants. The Corporate Trust Sale Agreement contains covenants
customarily included in transactions of a similar nature. Between the date of
execution of the Corporate Trust Sale Agreement and the closing of the Corporate
Trust Sale, we are obligated, among other things, to:
o Conduct the Corporate Trust business in the ordinary course consistent with
our past practices;
o Use our best efforts to preserve the present relationships of Colonial with
its Corporate Trust customers, with all entities having business dealings
with Colonial's Corporate Trust business, and with its Corporate Trust
personnel;
o Not enter into any material contracts without Happy State Bank's prior
consent, except for contracts in the ordinary course of our Corporate Trust
business;
o Use our best efforts to solicit stockholder approval of the Corporate Trust
Sale, including calling a stockholder meeting to vote on the approval of
the Corporate Trust Sale Agreement, and submitting a proxy statement to
stockholders;
o Use our best efforts to satisfy all closing conditions under our control,
including filing all necessary applications to obtain regulatory approval
of the Corporate Trust Sale;
o Furnish all information to Happy State Bank to be included in any
application to be filed by Happy State Bank with any governmental or
regulatory body in connection with the Corporate Trust Sale;
o Deliver to Happy State Bank on the closing date after the close of business
all files and records relating to the Corporate Trust assets and
liabilities;
o Provide reasonable access to Happy State Bank to conduct an environmental
investigation of the real property to be transferred under the Corporate
Trust Sale Agreement, including making available all documents and other
material in our possession relating to prior environmental inspections and
surveys;
32
o Not lease, sublease or otherwise encumber any portion of the real estate
without Happy State Bank's prior written consent, and obtain necessary
third party consents in connection with the transfer of the real property;
and
o Not negotiate, solicit or otherwise facilitate an alternative proposal for
the sale of the assets associated with the Corporate Trust business.
Between the date of execution of the Corporate Trust Sale Agreement and the
closing of the Corporate Trust Sale, Happy State Bank is obligated, among other
things, to:
o Use its best efforts to satisfy all closing conditions under its control,
including obtaining all third party consents in connection with assigning
contracts to Happy State Bank;
o Promptly disclose to us any fact or condition that makes any of Happy State
Bank's representations or warranties untrue in any material respect, or
results in Happy State Bank's failure to comply with any condition or
covenant contained in the Corporate Trust Sale Agreement;
o Promptly disclose to us any pending or threatened litigation or other
proceeding against Happy State Bank that might invalidate the Corporate
Trust Sale Agreement; and
o Provide all information reasonably requested by us in order to consummate
the Corporate Trust Sale Agreement.
Between the date of execution of the Corporate Trust Sale Agreement and the
closing of the Corporate Trust Sale, Happy State Bank and Colonial are mutually
obligated, among other things, to:
o Cooperate in applying for all regulatory approvals;
o Execute and deliver all documents in connection with the Corporate Trust
Sale, and take all other reasonably necessary actions to effect the
consummation of the transactions contemplated by the Corporate Trust Sale
Agreement, including the transfer from us to Happy State Bank of the assets
and liabilities associated with the Corporate Trust business;
o Facilitate the offer of employment by Happy State Bank and the termination
of employment by Colonial of those Colonial employees associated with the
Corporate Trust business, and ensure the availability of John K. Johnson,
Cecil Glovier and such other current employees of Colonial as may be
necessary to assist in the winding up of Colonial's business affairs
pursuant to the Plan of Liquidation;
o Appropriately utilize and return all confidential information;
o Coordinate public communications to the mutual satisfaction of both
parties; and
o Reconcile the allocation of the purchase price in any tax disclosures
consistent with the settlement statement.
Colonial must also provide for the continued occupation by the purchaser of
Colonial's Wealth Management Group of the portion of the real property currently
used in the operation of the Wealth Management business for one year following
the closing of the Corporate Trust Sale.
Termination. The Corporate Trust Sale Agreement may be terminated as
follows:
o by mutual written consent of the parties;
o by either party if the conditions to their respective obligations have not
been satisfied by September 30, 2004, or if a material breach of a
representation or warranty by the other party remains uncured for thirty
days;
o by either party if a governmental body has issued a nonappealable final
order prohibiting the Corporate Trust Sale;
o by Happy State Bank on the basis of the findings of any environmental
investigation or other environmental survey in connection with the real
property to be purchased by Happy State Bank under the Corporate Trust Sale
Agreement; and
o by Colonial if our board of directors determines that failure to terminate
the Corporate Trust Sale Agreement would be inconsistent with its fiduciary
obligations by reason of an alternative proposal.
33
In the event we terminate the Corporate Trust Sale Agreement due to our
board of directors' determination that its fiduciary obligations to our
stockholders requires acceptance of an alternative proposal, we will be
obligated to pay Happy State Bank a $250,000 termination fee.
Indemnification. Under the Corporate Trust Sale Agreement, for two years
following the closing, Colonial and Happy State Bank have agreed to mutually
indemnify each other for any losses and claims suffered by the other party as a
result of any inaccuracy in the other party's representations or warranties or
any breach of any covenant by the other party. Happy State Bank and Happy
Bancshares, Inc. jointly and severally agree to indemnify Colonial and its
officers, directors, stockholders and representatives and their respective
heirs, successors and assigns for losses and claims arising out of:
o Material breach of the representations or warranties of Happy State Bank in
the Corporate Trust Sale Agreement or any related document which causes
Colonial damage in an amount equal to or in excess of $25,000, or a breach
of or failure to perform any obligation contained in the Corporate Trust
Sale Agreement or related documents; and
o Any legal proceedings, any liability arising out of the operation of the
Corporate Trust business, or any contract breach based on or as a result of
Happy State Bank's acts or omissions following the closing.
We have agreed to similar indemnification obligations, and further agree to
indemnify Happy State Bank and its officers, directors, stockholders and
representatives (including Happy Bancshares) and their respective heirs,
successors and assigns for losses and claims arising out of:
o Any pre-closing liability of the Corporate Trust business not assumed by
Happy State Bank; and
o Any pre-closing environmental liability associated with the real property
being purchased by Happy State Bank.
Voting Agreements. There are no voting agreements with respect to any
matter to be voted upon at the Special Meeting. However, our directors and
executive officers, who collectively own 126,290 shares of our common stock,
excluding shares issuable upon the exercise of outstanding stock options (or
approximately 16.6% of our common stock as of the record date for the Special
Meeting), have informed the Company that they intend to vote in favor of
Proposal Nos. 1, 2 and 3 at the Special Meeting, including the Corporate Trust
Sale. See "Information About the Special Meeting - Voting and Votes Required."
Regulatory Approvals
Other than applicable regulations of the Texas Department of Banking and
the Arizona State Banking Department, neither Colonial nor Happy State Bank is
required to comply with any federal or state regulatory requirements or obtain
approval from any federal or state agency in connection with the Corporate Trust
Sale.
Interests of Our Directors and Officers in the Corporate Trust Sale
For a description of the interests our directors and officers have in the
Corporate Trust Sale, the Wealth Management Sale and the Plan of Liquidation and
Dissolution, please see "Additional Information About the Proposals - Interests
of our Directors and Officers in the Transactions."
Federal Income Tax Consequences of the Corporate Trust Sale
34
We will recognize gain or loss with respect to the sale of our Corporate
Trust assets in an amount equal to the difference between the fair market value
of the consideration received for each asset and our adjusted tax basis in the
asset sold. Consummation of the Corporate Trust Sale itself will not result in
any United States federal income tax consequences to our stockholders; however,
amounts received by our stockholders pursuant to the Plan of Liquidation or,
alternatively, as a dividend, will cause stockholders to recognize taxable gain
or loss. See "Proposal No. 1 - Federal Income Tax Consequences of the Corporate
Trust Sale" and "Proposal No. 3 - Federal Income Tax Consequences of the Plan of
Liquidation".
Opinion of Bank Advisory Group
For a description of the opinion of Bank Advisory Group, please see
"Additional Information About the Proposals - Opinion of Bank Advisory Group".
Factors That Our Stockholders Should Consider
For a description of the factors that our stockholders should consider when
deciding whether to vote to approve the Corporate Trust Sale, please see "Risk
Factors - Risks Related to the Corporate Trust Sale and the Wealth Management
Sale."
Reasons for the Board's Recommendations
For a description of the factors that the board of directors considered in
its decision to approve and recommend the Corporate Trust Sale, please see
"Additional Information About the Proposals - Reasons for the Board's
Recommendations."
Vote Required and Board Recommendation
The approval of the Corporate Trust Sale requires the affirmative vote of
the holders of a majority of the shares of common stock issued and outstanding.
Our board of directors recommends a vote FOR this proposal. It is intended that
shares represented by the enclosed form of proxy will be voted in favor of this
proposal unless otherwise specified in such proxy.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL
TO SELL THE ASSETS OF THE COMPANY'S CORPORATE TRUST BUSINESS.
SALE OF THE WEALTH MANAGEMENT GROUP BUSINESS
(Proposal No. 2)
Our board of directors is proposing the Wealth Management Sale pursuant to
the terms of the Wealth Management Sale Agreement for approval by our
stockholders at the Special Meeting. The Wealth Management Sale was approved by
our board of directors, subject to stockholder approval, on March 12, 2004. The
Wealth Management Sale Agreement and related addendum are attached as exhibits
to our Form 8-K filed on April 28, 2004. See "Information About the Special
Meeting - Where to Find Additional Information." The material terms of the
Wealth Management Sale Agreement are summarized below. This is not a complete
summary of the Wealth Management Sale Agreement and is subject in all respects
to the provisions of, and is qualified by reference to, the Wealth Management
Sale Agreement. Stockholders are urged to read the Wealth Management Sale
Agreement in its entirety. Our board of directors recommends a vote FOR the sale
of the Wealth Management business described below.
35
Background of the Wealth Management Group Sale
For background information, please see "Background of and Reasons for the
Proposed Transactions."
Dubuque Bank and Trust Company, Arizona Bank & Trust, and Heartland Financial
USA, Inc.
Dubuque Bank and Trust Company is an Iowa banking association with trust
powers whose principal offices are located in Dubuque, Iowa. Arizona Bank &
Trust is an Arizona banking association with trust powers located in Mesa,
Arizona. Dubuque Bank and Trust Company and Arizona Bank & Trust are
wholly-owned subsidiaries of Heartland Financial USA, Inc. Heartland Financial
USA, Inc., a Delaware corporation whose principal offices are in Dubuque, Iowa,
is a registered bank holding company.
Description of the Wealth Management Sale
On March 26, 2004, we entered into a Purchase and Assumption Agreement with
Dubuque Bank and Trust and its parent, Heartland Financial USA, Inc., to sell
substantially all the assets of our Wealth Management business. On April 26,
2004, we entered into an Addendum to Purchase and Assumption Agreement with
Heartland Financial USA, Dubuque Bank and Trust Company, and Arizona Bank &
Trust. The foregoing Purchase and Assumption Agreement and Addendum are
collectively referred to as the "Wealth Management Sale Agreement" in this Proxy
Statement.
Upon the closing of the Wealth Management Sale, we will assign and Arizona
Bank & Trust and/or Dubuque Bank and Trust Company will assume certain
obligations associated with the Wealth Management business, Arizona Bank & Trust
will be the substitute fiduciary for Colonial on all of Colonial's personal
trust accounts that can be assigned to Arizona Bank & Trust at the closing, and
Colonial will be released from all fiduciary duties with respect to such
personal trust accounts. Additionally, the parties agreed that, as to fiduciary
or agency accounts that have not been transferred as of the closing date
("Incomplete Accounts"), (i) Arizona Bank & Trust will assume the administrative
functions as to all Incomplete Accounts as of the closing date; (ii) upon
receipt of all necessary approvals to the transfer of an Incomplete Account,
such Incomplete Account will be transferred to Arizona Bank & Trust; (iii) all
fees relating to Incomplete Accounts will be paid to Arizona Bank & Trust
beginning on the closing date; (iv) Dubuque Bank and Trust will pay to Colonial
on the last day of each month the purchase price applicable to all Incomplete
Accounts which are transferred to Arizona Bank & Trust during the previous
month; and (v) in the event that all Incomplete Accounts are not transferred to
Arizona Bank & Trust within 120 days of the closing date under the Agreement,
Colonial may, at any time thereafter, terminate the arrangement described above
as to Incomplete Accounts and transfer the applicable Incomplete Accounts to
another party. The Wealth Management Sale Agreement is anticipated to close in
the third quarter of 2004.
Assets Transferred and Liabilities Assumed. We are selling and transferring
substantially all of the assets of our Wealth Management business, including
without limitation (1) all or substantially all of our fiduciary and agency
agreements, including all rights under the fiduciary and agency accounts, (2)
certain accrued fees, receivables, prepaid expenses and all claims against
others related to the assets or liabilities of the Wealth Management business,
(3) all equipment and personal property used in the conduct of the Wealth
Management business, (4) all confidential and proprietary information relating
to the Wealth Management business, (5) all of Colonial's transferable rights to
the corporate name "Camelback Trust Company" and all of its variations, and (6)
all goodwill and going concern value attributable to the Wealth Management
business. Arizona Bank & Trust and/or Dubuque Bank and Trust has also agreed to
assume certain liabilities associated with the Wealth Management business,
including without limitation (1) Wealth Management's accrued expenses incurred
36
in the ordinary course of business during the calendar month in which the
closing occurs, (2) all liabilities and obligations with respect to maintenance
and servicing of the fiduciary and agency accounts after the closing, (3) a
prorated portion of the personal property and other taxes attributable to the
Wealth Management assets being purchased, and (4) liabilities under the Infovisa
software agreement, except for any liabilities caused by a breach by Colonial of
such agreement.
Consideration to be received in the Wealth Management Sale. The purchase
price for the Wealth Management assets will be the sum of: (1) 1.88 times the
annual recurring fees during the last twelve months ending on the last day of
the month immediately preceding the month in which the transfer occurs that are
attributable to the fiduciary trust accounts in existence on January 20, 2004
that are transferred to Arizona Bank & Trust; (2) 1.0 times the estimated annual
recurring fees attributable to the fiduciary trust accounts created after
January 20, 2004 that are transferred to Arizona Bank & Trust; and (3) the
aggregate book value of the Wealth Management assets being purchased; provided,
however, that the estimated annual recurring fees referenced in (1) and (2)
immediately above will be prorated for accounts that have been in existence for
less than twelve months as of the Closing under the Agreement. The purchase
price is subject to adjustment within thirty days following the closing date
upon our computation of a final settlement statement indicating the final
calculation of the aggregate book value of the net assets attributable to the
Wealth Management business.
Deliveries at the closing. Two business days prior to the closing, Colonial
will deliver to Dubuque Bank and Trust a proposed settlement statement and
supporting exhibits indicating Colonial's computation of the purchase price. At
the closing, Dubuque Bank and Trust will deliver to Colonial:
o A certificate of a Dubuque Bank and Trust officer authorizing the
transactions contemplated by the Wealth Management Sale Agreement;
o The purchase price by one or more checks or by one or more deposits into
our account;
o An executed assumption agreement setting forth the liabilities of the
Wealth Management business to be assumed by Dubuque Bank and Trust/Arizona
Bank & Trust; and
o All other documentation necessary to transfer all of our interest in the
assets of the Wealth Management business to Arizona Bank & Trust.
At the closing, we will deliver to Dubuque Bank and Trust/Arizona Bank &
Trust;
o A certificate of a Colonial officer authorizing the transactions
contemplated by the Wealth Management Sale Agreement;
o The settlement statement, bill of sale, general assignment and associated
exhibits and schedules;
o An executed power of attorney granting Arizona Bank & Trust the authority
to carry on the Wealth Management business after the closing; and
o Possession of the Wealth Management assets, as well as all documentation
necessary to transfer all of Colonial's interest in the assets of the
Wealth Management business to Arizona Bank & Trust, including the books and
records of the Wealth Management business.
Use of Proceeds from the Wealth Management Sale
We intend to use the proceeds of the Wealth Management Sale to pay our
existing liabilities and to distribute cash available for distribution to our
stockholders in connection with our Plan of Liquidation, if approved by our
stockholders. The liabilities that we intend to pay with the proceeds of the
Wealth Management Sale include accounts payable, accrued expenses and lease
commitments, as well as transaction costs. The transaction costs include fees
payable to Bank Advisory Group of up to $24,000, plus approved expenses up to
$750. Based on our current projections, the aggregate benefits that Messrs.
Johnson, Glovier and Mitchell will receive in connection with the Wealth
Management Sale will be approximately $130,000, the payment of which amount will
be in lieu of bonuses to which Messrs. Johnson, Glovier and Mitchell would
otherwise have been entitled under their respective employment contracts. See
"Additional Information About the Proposals - Interests of our Directors and
Officers in the Transactions."
37
Other Material Terms of the Wealth Management Sale Agreement
Representations and Warranties. The Wealth Management Sale Agreement
contains customary representations and warranties from us to Dubuque Bank and
Trust relating to, among other things:
o Due organization, good standing, and corporate authority to enter into the
Wealth Management Sale Agreement;
o Impact of consummation of the Wealth Management Sale on Colonial's charter
documents or applicable laws, orders, regulations, agreements or judicial
rulings;
o Compliance with laws and regulations;
o Proper administration of Colonial's fiduciary accounts;
o Absence of litigation;
o Absence of brokerage or finder's fees in connection with the Wealth
Management Sale;
o Matters relating to contracts, commitments, consents and regulatory
approvals;
o Accuracy of financial statements and books and records, and appropriateness
of internal accounting controls;
o That, as of the Closing Date, Dubuque Bank and Trust/Arizona Bank & Trust
will immediately succeed Colonial as fiduciary on fiduciary or agency
accounts where the fees resulting therefrom represent not less than
sixty-seven percent of all the recurring fees received by Colonial for such
services;
o Matters relating to the financial condition of the Wealth Management
business and title to the Wealth Management assets; and
o Tax matters.
The Wealth Management Sale Agreement contains customary representations and
warranties from Dubuque Bank and Trust and Arizona Bank & Trust and, where
applicable, from Dubuque Bank and Trust jointly and severally with Heartland
Financial USA, Inc. to us, relating to, among other things:
o Due organization, good standing, and corporate authority to enter into the
Wealth Management Sale Agreement;
o Impact of consummation of the Wealth Management Sale on Dubuque Bank and
Trust's, Arizona Bank & Trust's or Heartland Financial USA, Inc.'s charter
documents or applicable laws, orders, regulations, agreements or judicial
rulings;
o Compliance with laws and regulations;
o Absence of litigation;
o Absence of brokerage or finder's fees in connection with the Wealth
Management Sale;
o Accuracy of financial statements; and
o Matters relating to contracts, commitments and consents.
Conditions to the closing. The closing is scheduled to occur within thirty
days after the date of receipt of all necessary regulatory approvals and
expiration of all mandatory waiting periods, but is anticipated to occur in the
third quarter of 2004. The obligation of Dubuque Bank and Trust/Arizona Bank &
Trust to purchase the assets of the Wealth Management business is subject to the
satisfaction prior to the closing of the following conditions:
o We have taken all necessary corporate action to authorize execution,
delivery and performance under the Wealth Management Sale Agreement, and
our stockholders have approved the Wealth Management Sale Agreement;
o No material litigation pertaining to the Wealth Management Sale has been
instituted or threatened;
o We have obtained all necessary third party consents;
38
o We have complied with or performed all of our covenants and conditions, and
all of our representations and warranties remain true and correct in all
material respects;
o All documents to be delivered in connection with the Wealth Management Sale
are reasonably satisfactory in all respects to Dubuque Bank and Trust; and
o All necessary regulatory approvals have been obtained and no regulatory
body with authority over the parties shall have taken or threatened to take
any action that could have the effect of preventing the consummation of the
Wealth Management Sale or that could result in potential liability to
Dubuque.
Our obligation to sell the assets of the Wealth Management business to
Dubuque Bank and Trust/Arizona Bank & Trust is subject to the satisfaction prior
to the closing of the following conditions:
o Dubuque Bank and Trust and Arizona Bank & Trust have taken all necessary
corporate action to authorize execution, delivery and performance under the
Wealth Management Sale Agreement;
o Our stockholders have approved the Wealth Management Sale Agreement;
o No material litigation pertaining to the Wealth Management Sale has been
instituted or threatened;
o Dubuque Bank and Trust has complied with or performed all of its covenants
and conditions, and all of its representations and warranties remain true
and correct in all material respects;
o All documents to be delivered in connection with the Wealth Management Sale
are satisfactory in all respects to us; and
o All necessary regulatory approvals have been obtained, and no regulatory
body with authority over the parties shall have taken or threatened to take
any action that could have the effect of preventing the consummation of the
Wealth Management Sale or that could result in potential liability to
Colonial.
Covenants. The Wealth Management Sale Agreement contains covenants
customarily included in transactions of a similar nature. Between the date of
execution of the Wealth Management Sale Agreement and the closing of the Wealth
Management Sale, we are obligated, among other things, to:
o Conduct the Wealth Management business in the ordinary course consistent
with our past practices;
o Use our best efforts to preserve the present relationships of Colonial with
its Wealth Management customers, with all entities having business dealings
with Colonial's Wealth Management business, and with Wealth Management
personnel;
o Not enter into any material contracts without Dubuque Bank and Trust's
prior consent, except for contracts in the ordinary course of our Wealth
Management business;
o Use our best efforts to solicit stockholder approval of the Wealth
Management Sale, including calling a stockholders meeting to vote on the
approval of the Wealth Management Sale Agreement, submitting a proxy
statement to stockholders; and using its best efforts to obtain stockholder
approval of the Wealth Management Sale;
o Use our best efforts to satisfy all closing conditions under our control,
including filing all necessary applications to obtain regulatory approval
of the Wealth Management Sale;
o Furnish all information to Dubuque Bank and Trust to be included in any
application to be filed by Dubuque Bank and Trust with any governmental or
regulatory body in connection with the Wealth Management Sale;
o Deliver to Arizona Bank & Trust on the closing date after the close of
business all files and records relating to the Wealth Management assets and
liabilities;
o Deliver executed employment agreements in an agreed-upon form with Bruce
Mitchell and Patricia Heitter;
o Use its best efforts to transfer all of Colonial's rights to the name
"Colonial Trust Company";
o Use its best efforts to cause Arizona Bank & Trust to immediately succeed
Colonial as fiduciary on all of the fiduciary or agency accounts now in
existence or created prior to the closing relating to the Wealth Management
Group business; and
o Use its best efforts to obtain a fairness opinion from Bank Advisory Group
that the terms of the Wealth Management Sale agreement are fair, from a
financial point of view, to Colonial's Stockholders.
39
Between the date of execution of the Wealth Management Sale Agreement and
the closing of the Wealth Management Sale, Dubuque Bank and Trust is obligated,
among other things, to:
o Use its best efforts to satisfy all closing conditions under its control,
including obtaining all third party consents in connection with assigning
contracts to Arizona Bank & Trust;
o Promptly disclose to us any fact or condition that makes any of Dubuque
Bank and Trust's representations or warranties untrue in any material
respect, or results in Dubuque Bank and Trust's failure to comply with any
condition or covenant contained in the Wealth Management Sale Agreement;
o Promptly disclose to us any pending or threatened litigation or other
proceeding against Dubuque Bank and Trust Bank that might invalidate the
Wealth Management Sale Agreement; and
o Provide all information reasonably requested by us in order to consummate
the Wealth Management Sale Agreement.
Between the date of execution of the Wealth Management Sale Agreement and
the closing of the Wealth Management Sale, Dubuque Bank and Trust and Colonial
are mutually obligated, among other things, to:
o Cooperate in applying for all regulatory approvals;
o Execute and deliver all documents in connection with the Wealth Management
Sale, and take all other reasonably necessary actions to effect the
consummation of the transactions contemplated by the Wealth Management Sale
Agreement, including the transfer from us to Dubuque Bank and Trust/Arizona
Bank & Trust of the assets and liabilities associated with the Wealth
Management business;
o Take such action as may reasonably be necessary to facilitate the
consummation of the Wealth Management Sale;
o Facilitate the termination of all Wealth Management employees and the offer
of employment by Arizona Bank & Trust of those Wealth Management employees
designated by Arizona Bank & Trust;
o Appropriately utilize and return all confidential information;
o Coordinate public communications to the mutual satisfaction of both
parties; and
o Reconcile the allocation of the purchase price in any tax disclosures
consistent with the settlement statement.
Regulatory Approvals. Other than the regulations of the Iowa State Banking
Department and the Arizona State Banking Department, the parties are not
required to comply with any federal or state regulatory requirements or obtain
approval from any federal or state agency in connection with the Wealth
Management Sale.
Termination. The Wealth Management Sale Agreement may be terminated as
follows:
o by mutual written consent of the parties;
o by either party if the conditions to their respective obligations have not
been satisfied by September 30, 2004, or if a material breach of a
representation or warranty by the other party remains uncured for thirty
days;
o by either party if a governmental body has issued a nonappealable final
order prohibiting the Wealth Management Sale; or
o by any party if Colonial has not received the required fairness opinion
from Bank Advisory Group by June 30, 2004.
40
In the event that the Wealth Management Sale Agreement is terminated by
Dubuque Bank and Trust because (i) Colonial breached its covenants or agreements
under such Agreement, or (ii) Colonial's representations or warranties were
incorrect as of the date of such Agreement, then Colonial must pay to Dubuque an
amount equal to Dubuque's expenses in connection with the Wealth Management Sale
(not to exceed $100,000), plus $200,000. In the event that the Wealth Management
Sale Agreement is terminated by Dubuque Bank and Trust or Colonial because (i)
Colonial did not receive the required fairness opinion from Bank Advisory Group
by June 30, 2004, or (ii) Colonial's stockholders failed to approve the Wealth
Management Sale Agreement by September 30, 2004, then Colonial must pay to
Dubuque an amount equal to Dubuque's expenses in connection with the Wealth
Management Sale (not to exceed $100,000). Additionally, if Colonial's
stockholders fail to approve the Wealth Management Sale Agreement by September
30, 2004, and within eighteen months Colonial enters into certain specified
transactions for the acquisition of Colonial or the Wealth Management Group
business, then Colonial must pay to Dubuque an additional $200,000.
In the event the Wealth Management Sale Agreement is terminated by Colonial
because (i)-Dubuque or Heartland breached their covenants or agreements under
such Agreement, or (ii) Dubuque or Heartland's representations or warranties
were incorrect as of the date of such Agreement, then Dubuque Bank and Trust
must pay to Colonial an amount equal to Colonial's expenses in connection with
the Wealth Management Sale (not to exceed $100,000), plus $200,000.
Indemnification. Under the Wealth Management Sale Agreement, Dubuque Bank
and Trust and Heartland Financial USA, Inc., jointly and severally, have agreed
to indemnify Colonial and its officers, directors, stockholders and
representatives and their respective heirs, successors and assigns for losses
and claims arising out of:
o Material breach of the representations or warranties of Dubuque Bank and
Trust in the Wealth Management Sale Agreement or any related document,
which causes Colonial damage in an amount equal to or in excess of $25,000,
or a breach of or failure to perform any obligation contained in the Wealth
Management Sale Agreement or related documents; and
o Any legal proceedings, any liability arising out of the operation of the
Wealth Management business, the breach of any of its covenants under the
Wealth Management Sale Agreement, or breach of a fiduciary account, based
on or as a result of Dubuque Bank and Trust's acts or omissions following
the closing, other than breaches by Colonial of its fiduciary duties as to
an Incomplete Account prior to the transfer of such Account post-closing to
Arizona Bank & Trust or another third party.
We have agreed to similar indemnification obligations, and further have
agreed to indemnify Dubuque Bank and Trust and its officers, directors,
stockholders and representatives and their respective heirs, successors and
assigns for losses and claims arising out of any pre-closing liability of the
Wealth Management business not assumed by Dubuque Bank and Trust/Arizona Bank &
Trust and any pre-closing breach of a fiduciary account.
Voting Agreements. There are no voting agreements with respect to any
matter to be voted upon at the special meeting. However, our directors and
executive officers, who collectively own 126,290 shares of our common stock,
excluding shares issuable upon the exercise of outstanding stock options (or
approximately 16.6% of our common stock as of the record date for the Special
Meeting), have informed the Company that they intend to vote in favor of
Proposal Nos. 1, 2, 3 and 4 at the Special Meeting, including the Wealth
Management Sale. See "Information About the Special Meeting - Voting and Votes
Required."
Interests of Our Directors and Officers in the Wealth Management Sale
For a description of the interests our directors and officers have in the
Wealth Management Sale, please see "Additional Information About the Proposals -
Interests of our Directors and Officers in the Transactions."
41
Federal Income Tax Consequences of the Wealth Management Sale
We will recognize gain or loss with respect to the sale of our Wealth
Management assets in an amount equal to the difference between the fair market
value of the consideration received for each asset and our adjusted tax basis in
the asset sold. Consummation of the Wealth Management Sale itself will not
result in any United States federal income tax consequences to our stockholders;
however, amounts received by our stockholders pursuant to the Plan of
Liquidation or, alternatively, as a dividend, will cause stockholders to
recognize taxable gain or loss. See "Proposal No. 2 - Federal Income Tax
Consequences of the Wealth Management Sale" and "Proposal No. 3 - Federal Income
Tax Consequences of the Plan of Liquidation".
Opinion of Bank Advisory Group
For a description of the opinion of Bank Advisory Group, please see
"Additional Information About the Proposals - Opinion of Bank Advisory Group".
Factors That Our Stockholders Should Consider
For a description of the factors that our stockholders should consider when
deciding whether to vote to approve the Wealth Management Sale, please see "Risk
Factors - Risks Related to the Corporate Trust Sale and the Wealth Management
Sale."
Reasons for the Board's Recommendation
For a description of the factors that the board of directors considered in
its decision to approve and recommend the Wealth Management Sale, please see
"Additional Information About the Proposals - Reasons for the Board's
Recommendations."
Vote Required and Board Recommendation
The approval of the Wealth Management Sale requires the affirmative
approval from the holders of a majority of the shares of common stock issued and
outstanding. Our board of directors recommends a vote FOR this proposal. It is
intended that shares represented by the enclosed form of proxy will be voted in
favor of this proposal unless otherwise specified in such proxy.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL
TO SELL THE ASSETS OF THE COMPANY'S WEALTH MANAGEMENT GROUP BUSINESS.
ADOPTION OF PLAN OF LIQUIDATION AND DISSOLUTION AND AMENDMENT TO THE COMPANY'S
ARTICLES OF INCORPORATION TO EFFECT REVERSE STOCK
SPLIT FOR PURPOSES OF MAKING LIQUIDATING DISTRIBUTIONS
(Proposal No. 3)
Our board of directors has approved a Plan of Liquidation and Dissolution,
which would include a reverse stock split for purposes of making liquidating
distributions to our stockholders. The Plan of Liquidation is subject to the
prior satisfaction of certain conditions, including approval of both the
Corporate Trust Sale (Proposal No. 1) and Wealth Management Sale (Proposal No.
2) by our stockholders and the subsequent consummation of both such Sales. A
copy of the Plan of Liquidation is attached as Appendix A to this proxy
statement. The material features of the Plan of Liquidation are summarized
below. This summary is not a complete summary of the Plan of Liquidation and is
subject in all respects to the provisions of, and is qualified by reference to,
the Plan of Liquidation. Stockholders are urged to read the Plan of Liquidation
in its entirety.
42
Proposal No. 3 is conditioned upon the approval of Proposal No. 1 and
Proposal No. 2 (and the subsequent consummation of the Corporate Trust Sale and
Wealth Management Sale described in Proposal Nos 1 and 2). In the event Proposal
Nos. 1 and 2 are not approved by stockholders at the Special Meeting, Proposal
No. 3 will not be presented to stockholders for their consideration at the
Special Meeting. Our board of directors recommends a vote FOR the approval of
Proposal No. 3.
Background of the Plan of Liquidation and Dissolution
For background information, please see "Background of and Reasons for the
Proposed Transactions."
Principal Provisions of the Plan of Liquidation and Dissolution
We will distribute pro rata to our stockholders, in cash and an interest in
a note as described below, the net proceeds from the sale of all our property
and assets that can be sold or otherwise disposed of. Any sales of our assets
following the consummation of the Corporate Trust Sale and Wealth Management
Sale described in both Proposal No. 1 and Proposal No. 2 will be made in private
or public transactions and on such terms as are approved by our board of
directors. We will have minimal assets if the Corporate Trust Sale and the
Wealth Management Sale are consummated, and we do not anticipate that we will
solicit any further votes of our stockholders with respect to the approval of
the specific terms of any particular sale of assets approved by our board of
directors. While the Plan of Liquidation permits us to distribute non-cash
assets to our stockholders, we do not anticipate making any non-cash
distributions other than granting each stockholder (as described below) a pro
rata interest in a note instrument, which gives such stockholder a pro rata
interest in any unused cash (or, in the discretion of the board of directors,
other property) in the Contingency Reserve, as described in the paragraph
following the next paragraph (the "Note Interest"). Each stockholder's Note
Interest will be received with such stockholder's pro rata portion of our
initial liquidating distribution and will be non-transferable upon receipt by a
stockholder (except for transfers upon death of a stockholder or by operation of
law).
This liquidation is expected to commence as soon as practicable after
consummation of both the Corporate Trust Sale and the Wealth Management Sale and
to be concluded as soon as possible by an initial liquidating distribution
directly to the stockholders.
We intend to establish a reserve, referred to as the Contingency Reserve,
in an amount determined by our board of directors to be sufficient to satisfy
actual and potential liabilities, expenses and obligations. We intend to
distribute to our stockholders pro rata pursuant to the Note the net balance of
unused cash, if any, in the Contingency Reserve remaining after payment,
provision or discharge of all such liabilities, expenses and obligations.
Upon receipt of their respective Note Interests, we anticipate that the
recipients of the Note Interest will be treated for tax purposes as having
received their pro rata share of the net value of the Contingency Reserve (i.e.,
the estimated excess of the cash, assets, and property in the reserve, over the
estimated amount of actual and potential liabilities, expenses and obligations)
and will take into account for tax purposes their allocable portion of such
value.
We expect to close our stock transfer books and discontinue recording
transfers of shares of common stock on the date of our dissolution, sometimes
referred to as the Final Record Date. Thereafter, certificates representing
shares of common stock will not be assignable or transferable on our books,
except by will, intestate succession or operation of law. After the Final Record
Date, we will not issue any new stock certificates, other than replacement
certificates.
Within approximately 10 days following consummation of both the Corporate
Trust Sale and the Wealth Management Sale, we expect to file a notice that the
43
dissolution has been authorized with the Arizona State Banking Department and
the Arizona Department of Revenue. Articles of dissolution will then be filed
with the State of Arizona. In accordance with Arizona law, once the articles of
dissolution have been properly filed with the Arizona Corporation Commission,
the dissolution will become effective when the Commission has received an
affidavit evidencing that a copy of the articles of dissolution have been
published in a newspaper of general circulation in the county of our place of
business for three consecutive publications, and a notice from the Arizona
Department of Revenue to the effect that we have paid all, or are not subject
to, Arizona sales and excise taxes. Once the dissolution is effective, we will
continue to exist for the purpose of prosecuting and defending suits, whether
civil, criminal or administrative, by or against our company, and enabling us to
gradually settle and close our business, to dispose of and convey our property,
to discharge our liabilities and to distribute to our stockholders any remaining
assets, but not for the purpose of continuing the business for which we were
organized. However, any action commenced by or against us during the one year
dissolution period will not terminate by reason of the expiration of the period.
Abandonment or Amendment. Under the Plan of Liquidation, our board of
directors may modify, amend or abandon the Plan of Liquidation, notwithstanding
stockholder approval, to the extent permitted by Arizona law. We may not amend
or modify the Plan of Liquidation under circumstances that would require
additional stockholder solicitations under Arizona law or the federal securities
laws without complying with Arizona law and the federal securities laws.
Liquidating Distributions. Our board of directors intends to authorize
liquidating distributions as promptly as reasonably practicable. We currently
anticipate that we will make an initial liquidating distribution to stockholders
within approximately 60 days following the Special Meeting. At this time, we
cannot predict with certainty the amount of any liquidating distributions to our
stockholders.
The Plan of Liquidation contemplates effecting a reverse stock split for
the purpose of making the pro-rata liquidating distributions to our
stockholders. Accordingly, the Plan of Liquidation includes an amendment to our
Articles of Incorporation to effect a reverse stock split of one share of our
common stock for every 35,032 shares of common stock that are currently issued
and outstanding, as follows:
The authorized capital stock of the Corporation is 25,000,000 shares
of common stock, no par value per share (the "Common Stock"). Each
thirty-five thousand and thirty-two (35,032) shares of the
Corporation's Common Stock issued as of [Date on which Articles of
Amendment are filed] (the "Split Effective Date"), shall be
automatically changed and reclassified, as of the Split Effective Date
and without further action, into one (1) fully paid and nonassessable
share of the Corporation's Common Stock, with no fractional shares
being issued as a result of the foregoing (the "Reverse Stock Split").
The above is hereinafter referred to as the "Reverse Stock Split Amendment".
The Reverse Stock Split Amendment will become effective upon the filing of
an amendment to our Articles of Incorporation with the Arizona Corporation
Commission. If Proposal No. 3 is not approved by our stockholders and the
conditions to the Plan of Liquidation described herein are not satisfied, the
Articles of Incorporation will not be amended.
The following table illustrates the principal effects on the Company's
capital stock of the Reverse Split, assuming a 1-for-35,032 reverse split:
Number Of Shares Of Capital Stock Prior To Reverse After Reverse
Stock Split Stock Split
- --------------------------------- -------------------- ---------------
Authorized 25,000,000 25,000,000
Issued and outstanding (1) 760,843 1
Available for future issuance 24,239,157 24,999,999
- --------------------------------- -------------------- ---------------
(1) Excludes 15,000 shares issuable upon exercise of outstanding options as of
April 1, 2004.
44
Upon the Reverse Stock Split, the Company will distribute to each record
holder an initial cash payment and the Note Interest representing such record
holder's pro rata interest. If effected, the Reverse Stock Split will enable us
to terminate our public company status. As a private company, we will not be
subject to the reporting requirements of the Exchange Act, and there will be no
public trading market in our shares.
Our Board has determined that the adoption of the Reverse Stock Split is
fair to and in the best interests of the Company's unaffiliated stockholders,
including those being redeemed pursuant to the Reverse Stock Split and the
single stockholder who will retain an equity interest in the Company subsequent
to the consummation of the Reverse Stock Split. The Board recommends that you
approve the Reverse Stock Split. In arriving at its recommendation with respect
to the Reverse Stock Split, the Board considered a number of factors, including,
among other things, the fairness opinion of Bank Advisory Group that was
rendered to the Board on May 4, 2004, to the effect that, as of the date of its
opinion, the consideration to be received by the holders of our common stock is
fair, from a financial point of view, to our unaffiliated stockholders. The full
text of Bank Advisory Group's opinion, which describes, among other things, the
opinion expressed, procedures followed, matters considered, and qualifications
and limitations on the scope of the review undertaken in connection with the
opinion, is attached as Appendix C to this proxy statement. Any description of
the Bank Advisory Group's opinion in this proxy statement is qualified in its
entirety by reference to the full text of the opinion. Stockholders are urged
to, and should, read Bank Advisory Group's opinion in its entirety.
Stockholders have the right under Arizona law to dissent from the Reverse
Stock Split. See "Additional Information About the Proposals - Appraisal
Rights."
The amount that we will be able to distribute as described herein to our
stockholders with respect to the proceeds from the Corporate Trust Sale and the
Wealth Management Sale will depend on the net proceeds after taxes and expenses
that we realize from those asset sales and any cash or other property needed for
the Contingency Reserve. Our board of directors is currently unable to predict
the precise amount or timing of any other distributions pursuant to the Plan of
Liquidation. Our board of directors, in its sole discretion, will determine the
actual amount and timing of all distributions. We expect to conclude the
liquidation on or about the fifth anniversary of the filing of the articles of
dissolution in Arizona by a final liquidating distribution to our sole remaining
stockholder, and a distribution with respect to the Note Interest to our former
stockholders.
We do not plan to satisfy all of our liabilities and obligations prior to
making distributions to our stockholders, but instead we plan to establish a
Contingency Reserve and reserve assets deemed by our board of directors to be
adequate to provide for such liabilities and obligations.
45
Sales of Our Assets. The Plan of Liquidation gives our board of directors
the authority to sell all of our remaining assets. If the Corporate Trust Sale
and the Wealth Management Sale are approved by stockholders and subsequently
consummated, we will have minimal remaining assets. Agreements for the sale of
any remaining assets may be entered into before or after the Special Meeting
and, to the extent required by law, may be contingent upon the approval of the
Plan of Liquidation and Dissolution at the Special Meeting. Approval of the Plan
of Liquidation and Dissolution will constitute approval of any such agreements
and sales. We will sell our remaining assets on such terms as are approved by
our board of directors. We may conduct sales by any means, including by
competitive bidding or privately negotiated sales. We do not anticipate that we
will solicit any further stockholder votes with respect to the approval of the
specific terms of any particular sale of assets approved by our board of
directors. We do not anticipate amending or supplementing this proxy statement
to reflect any such agreement or sale. Our sale of an appreciated asset will
result in the recognition of taxable gain to the extent the fair market value of
such asset exceeds our tax basis in such asset.
Our Conduct Following Approval of the Plan of Liquidation. Following
approval of the Plan of Liquidation and Dissolution by our stockholders, our
activities will be limited to consummating the Corporate Trust Sale and the
Wealth Management Sale, winding up our affairs, taking such action as we believe
may be necessary to preserve the value of our assets and distributing our assets
in accordance with the Plan of Liquidation. We will seek to distribute or
liquidate all of our assets in such manner and upon such terms as our board of
directors determines to be in the best interests of our stockholders.
Contingency Reserve. Following consummation of the Corporate Trust Sale and
the Wealth Management Sale, we will pay all expenses and fixed and other known
liabilities, or set aside a Contingency Reserve consisting of cash or other
assets that we believe to be adequate for payment of those known liabilities, as
well as claims that are unknown or have not yet arisen but that, based on facts
known to us, are likely to arise or become known to us within five years after
the date of our dissolution. We currently anticipate establishing a Contingency
Reserve of approximately $1.6 million to $1.9 million, and the amount of this
Contingency Reserve will be deducted from the amount initially available for
distribution to stockholders.
The actual amount of the Contingency Reserve will be based upon estimates
and opinions of our board of directors, derived from consultations with
management and outside experts and a review of, among other things, our
estimated contingent liabilities and our estimated operating expenses,
including, without limitation, anticipated compensation payments for services
related to the liquidation, estimated fees to Bank Advisory Group and our
lawyers, accountants and tax professionals, taxes payable by us (including taxes
payable as a result of the Corporate Trust Sale and the Wealth Management Sale),
miscellaneous office expenses and expenses accrued in our financial statements.
The Contingency Reserve may not be sufficient to satisfy all obligations,
expenses and liabilities, in which case a creditor could bring a claim against
one or more of our stockholders for each stockholder's pro rata portion of the
claim, up to the total amount distributed by us to the stockholder pursuant to
the Plan of Liquidation. Subsequent to the establishment of the Contingency
Reserve, we will distribute to our stockholders any portions of the Contingency
Reserve that our board deems no longer to be required.
Potential Liability of Stockholders. Under Arizona law, in the event we are
insolvent at the time of, or rendered insolvent by the making of, any
distribution to stockholders, each stockholder could be held liable for up to
the amounts received by such stockholder from us under the Plan of Liquidation.
A stockholder would have a claim against other stockholders if such stockholder
is required to pay more than such stockholder's pro rata share of the claim.
If we were held by a court to have failed to make adequate provision for
our expenses and liabilities or if the amount ultimately required to be paid in
respect of such liabilities exceeded the amount available from the Contingency
Reserve, a creditor could seek an injunction prohibiting us from making
46
distributions under the Plan of Liquidation. Any such action could delay or
substantially diminish the cash distributions to stockholders. Also,
stockholders will be deemed to have received a net value of the Contingency
Reserve equal to their pro rata share of the net Note Interest. See "Federal
Income Tax Consequences of the Plan of Liquidation."
Final Record Date. We will close our stock transfer books and discontinue
recording transfers of shares of common stock on the Final Record Date.
Accordingly, after the Final Record Date, certificates representing shares of
common stock will not be assignable or transferable on our books except by will,
intestate succession or operation of law. After the Final Record Date, we will
not issue any new stock certificates, other than replacement certificates. It is
anticipated that no further trading of our shares will occur after the Final
Record Date. All liquidating distributions made by us on or after the Final
Record Date will be made to stockholders according to their holdings of common
stock as of the Final Record Date. Stockholders should not forward their stock
certificates before receiving instructions to do so. If surrender of stock
certificates should be required, all distributions otherwise payable by Colonial
to stockholders who have not surrendered their stock certificates may be held in
trust for such stockholders, without interest, until the surrender of their
certificates (subject to escheat pursuant to the laws relating to unclaimed
property). If a stockholder's certificate evidencing the common stock has been
lost, stolen or destroyed, the stockholder may be required to furnish us with
satisfactory evidence of the loss, theft or destruction, together with a surety
bond or other indemnity, as a condition to the receipt of any distribution.
Regulatory Approvals. We do not believe that any material United States
federal or state regulatory requirements must be complied with or approvals
obtained in connection with the liquidation.
Reporting Requirements. If the Plan of Liquidation and Dissolution is
authorized and approved, the Reverse Stock Split is effected and we commence
dissolution, we intend to file a Form 15 with the SEC to terminate our
obligation to file periodic reports (such as Form 10-KSB's and Form 10-QSB's)
under the Exchange Act. If we cease reporting, we may, however, in our
discretion continue to file current reports on Form 8-K to disclose material
events relating to our liquidation.
Continuing Indemnification and Insurance. Following stockholder approval of
the Plan of Liquidation and Dissolution, we will continue to indemnify our
officers, directors, employees and agents for their actions in accordance with
the terms of our articles of organization, including for actions taken in
connection with the Plan of Liquidation and the wind-down of our business and
affairs. We may enter into indemnification agreements to provide this
indemnification. We have maintained, and intend to continue to maintain,
director and officer liability insurance for the benefit of such persons. As
part of our wind-down, we will purchase a "tail" policy, meaning we will prepay
the premium to continue to maintain such insurance for up to six years for
claims made following the filing of our articles of dissolution. We will also
pre-pay the premium necessary to continue to maintain our errors and omissions
insurance for up to three years for claims made following the filing of our
articles of dissolution. We will also include the deductibles that we would be
required to pay for a single claim under our directors and officers insurance
and for a single claim under our errors and omissions insurance within the
Contingency Reserve.
Payment of Expenses. We may, in the discretion of our board of directors,
pay any fees and expenses we incur in connection with the sale or other
disposition of our assets and the implementation of the Plan of Liquidation.
Funds Anticipated to be Available for Distribution to Stockholders
We are currently unable to estimate with precision the amount of proceeds
we would receive from the Corporate Trust Sale or the Wealth Management Sale or
the amount of our Contingency Reserve. Our Contingency Reserve will include
amounts estimated to be adequate to pay all known and unknown claims and
47
liabilities, including, without limitation, our anticipated compensation
payments for services related to the liquidation, estimated fees to Bank
Advisory Group and our lawyers, accountants and tax professionals, taxes payable
by us (including taxes resulting from the Corporate Trust Sale and the Wealth
Management Sale), miscellaneous office expenses and expenses accrued in our
financial statements. However, based on information currently available to our
board of directors and management, we estimate that the funds available for
distribution to our stockholders would be within the following range:
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Estimated amounts
----------------------------
High Low
Estimated proceeds from the Corporate
Trust Sale and the Wealth Management Sale......... $4,500,000 $3,800,000
Estimated proceeds from distribution of cash
and other assets.................................. $1,400,000 $1,190,000
Total estimated proceeds................................$5,900,000 $4,990,000
Estimated taxes, net operating costs and other
expenses during liquidation
(including the Contingency Reserve) .............. $1,900,000 $1,600,000
Total estimated net cash proceeds available for
distribution to stockholders...................... $4,000,000 $3,390,000
Per share amount1....................................... $5.16 $4.37
(1) Based on 775,843 shares outstanding, after giving effect to the anticipated
exercise of options to purchase 15,000 shares of Common Stock by two of our
directors. See "Security Ownership of Certain Beneficial Owners and Management."
Effects Of Failure To Obtain Stockholders Approval Of Proposal No. 3, including
the Reverse Split
In the event stockholder approval is not obtained for the Plan of
Liquidation, the Company will not be able to amend its Articles of Incorporation
to effect the Reverse Split and will not be able to implement the Plan of
Liquidation.
Regulatory Approvals
Other than approval of the Plan of Liquidation and Dissolution by our
stockholders, there are no state or federal regulatory approvals that are
required to consummate our liquidation and dissolution.
Interests of Our Directors and Officers in the Plan of Liquidation and
Dissolution
For a description of the interests our directors and officers have in the
Corporate Trust Sale, the Wealth Management Sale and the Plan of Liquidation and
Dissolution, please see "Additional Information About the Proposals - Interests
of our Directors and Officers in the Transactions."
Material Federal Income Tax Consequences of the Plan of Liquidation
The following discussion is a general summary of the material federal
income tax consequences of the Plan of Liquidation but does not purport to be a
complete analysis of all potential tax effects. The discussion addresses neither
the tax consequences that may be relevant to particular categories of
stockholders subject to special treatment under certain federal income tax laws
(such as accrual method taxpayers, dealers in securities, banks, insurance
companies, tax-exempt organizations, mutual funds, and foreign individuals and
entities) nor any tax consequences arising under the laws of any state, local or
foreign jurisdiction. The discussion is based upon the Internal Revenue Code of
1986, as amended, which we refer to in this proxy statement as the Code, U.S.
Department of the Treasury regulations, Internal Revenue Service, or the IRS,
rulings, and judicial decisions now in effect, all of which are subject to
change or to varying interpretation at any time. Any such changes or varying
interpretations may also be applied retroactively. The following discussion has
no binding effect on the IRS or the courts and assumes that we will liquidate in
accordance with the Plan of Liquidation.
49
Distributions pursuant to the Plan of Liquidation may occur at various
times and in more than one tax year. We can give no assurance that the tax
treatment described herein will remain unchanged at the time of such
distributions. No ruling has been requested from the IRS with respect to the
anticipated tax treatment of the Plan of Liquidation, and we will not seek an
opinion of counsel with respect to the anticipated tax treatment. If any of the
anticipated tax consequences stated herein proves to be incorrect, the result
could be increased taxation at the corporate or stockholder level, thus reducing
the benefit to us and our stockholders of the liquidation. Tax considerations
applicable to particular stockholders may vary with and be contingent on the
stockholder's individual circumstances.
Consequences to Colonial. After the approval of the Plan of Liquidation and
Dissolution and until the liquidation is completed, we will continue to be
subject to income tax on our taxable income such as interest income, gain from
the sale of our assets or income from operations. We will recognize gain or loss
with respect to the sale of our assets in an amount equal to the difference
between the fair market value of the consideration received for each asset and
our adjusted tax basis in the asset sold. Upon the distribution of any non-cash
asset to our stockholders pursuant to the Plan of Liquidation, we will recognize
gain or loss as if such asset were sold to the stockholders at its fair market
value, unless certain exceptions to the recognition of loss apply.
Consequences to Stockholders. Amounts received by stockholders pursuant to
the liquidation will be treated as full payment in exchange for their shares of
our common stock. As a result of our liquidation, stockholders will recognize
gain or loss equal to the difference between (1) the sum of the amount of cash
distributed to them and the fair market value, at the time of distribution, of
any property distributed to them (including each stockholder's Note Interest),
and (2) their tax basis for their shares of common stock. A stockholder's tax
basis in such stockholder's shares will depend upon various factors, including
the stockholder's cost and the amount and nature of any distributions received
with respect thereto. On October 1, 1990, all of our capital stock was
distributed to the then stockholders of our then parent company on the basis of
one share of our common stock for each share of our parent company's stock owned
on that date. At that time, the then-parent informed you that your basis was
$1.20 per share (adjusted to reflect the 1-for-10 reverse stock split effected
by us in 1999).
A stockholder's gain or loss will be computed on a "per share" basis.
Except with respect to the remaining single shareholder after the Reverse Stock
Split, we expect to make only one liquidating distribution, which will be
allocated proportionately to each share of stock owned by a stockholder as of
the effective date of the reverse stock split. The value of such liquidating
distribution will be applied against and reduce a stockholder's tax basis in
such stockholder's shares of stock. Gain will be recognized by reason of a
liquidating distribution only to the extent that the aggregate value of such
distribution received by a stockholder with respect to a share exceeds such
stockholder's tax basis for that share. Except with respect to the remaining
single shareholder after the Reverse Stock Split, any loss generally will be
recognized when our initial distribution to stockholders has been received, but
only if the aggregate value of the liquidating distribution with respect to a
share (including the stockholder's Note Interest) is less than the stockholder's
tax basis for that share. With respect to the remaining single shareholder after
the Reverse Stock Split, any loss generally will be recognized only when our
final distribution to it has been received and then only if the aggregate value
of the liquidating distributions with respect to a share is less than the
stockholder's tax basis for that share. Gain or loss recognized by a stockholder
will be capital gain or loss provided the shares are held as capital assets and
will be long-term capital gain or loss if the stock has been held for more than
one year. Gain resulting from distributions of cash or assets from a corporation
pursuant to a plan of liquidation is, therefore, generally capital gain rather
than ordinary income.
Upon any distribution of property (including the Note Interest), the
stockholder's tax basis in such property immediately after the distribution will
be the fair market value of such property at the time of distribution. The gain
or loss realized upon the stockholder's future sale of that property will be
measured by the difference between the stockholder's tax basis in the property
at the time of such sale and the proceeds of such sale.
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After the close of our taxable year, we will provide our stockholders and
the IRS with a statement of the amount of cash distributed to stockholders and
our best estimate as to the value of any property, including the Note Interest,
distributed to them during that year. The IRS could challenge such valuation. As
a result of such a challenge, the amount of gain or loss recognized by
stockholders might be changed. Distributions to our stockholders could result in
tax liability to any given stockholder exceeding the amount of cash received,
requiring that stockholder to meet the tax obligations from other sources or by
selling all or a portion of the assets received.
If a stockholder is required to satisfy any liability of ours not fully
covered by our Contingency Reserve, payments by a stockholder in satisfaction of
such liabilities would generally produce a capital loss, which, in the hands of
an individual stockholder, could not be carried back to prior years to offset
capital gains realized from liquidating distributions in those years.
The Note Interest. Stockholders will be treated for tax purposes as having
received their pro rata share of the net value of the Contingency Reserve (i.e.,
the estimated excess of the cash, assets, and property in the reserve, over the
estimated amount of actual and potential liabilities, expenses and obligations)
when we distribute the Note Interest. Stockholders should be aware that they may
be subject to tax with respect to their receipt of the Note Interest, whether or
not they have received any cash with respect to the Note Interest with which to
pay such tax.
Taxation of Non-United States Stockholders. Foreign corporations or persons
who are not citizens or residents of the United States should consult their tax
advisors with respect to the U.S. and non-U.S. tax consequences of the Plan of
Liquidation.
State and Local Tax. Stockholders may also be subject to state or local
taxes and should consult their tax advisors with respect to the state and local
tax consequences of the Plan of Liquidation.
Information Reporting. We are required to report to the Internal Revenue
Service and to each stockholder that is a U.S. person the amount of any payment
received by such stockholder upon our dissolution. In order for us to comply
with this information reporting requirement and for backup withholding not to
apply, stockholders must (1) furnish us with a correct taxpayer identification
number on a properly completed Internal Revenue Service Form W-9 or successor
form or (2) provide us with a certification of foreign status on an appropriate
Form W-8 or successor form. The current backup withholding rate is 28%. Prior to
any distribution, we intend to forward to all stockholders a Form W-9 or W-8, as
appropriate, to be completed and returned to us. We reserve the right to require
you to send to us any and all necessary forms required by any taxing authority
(including without limitation a Form W-9 or W-8) before we release your pro rata
cash or the Note Interest to you. If we do exercise this right, we will hold
such cash or Note Interest, without interest, for you as your agent.
The foregoing summary OF MATERIAL FEDERAL income tax consequences is
included for general information only and does not constitute legal advice to
any stockholder. The tax consequences of the Plan of Liquidation may vary
depending upon the particular circumstances of the stockholder. We recommend
that each stockholder consult his, her or its own tax advisor regarding the tax
consequences of the plan of liquidation.
51
Opinion of Bank Advisory Group
For a description of the opinion of Bank Advisory Group in connection with
the Plan of Liquidation, please see "Additional Information About the Proposals
- - Opinion of Bank Advisory Group".
Factors That Our Stockholders Should Consider
For a description of the factors that our stockholders should consider when
deciding whether to vote to approve the Plan of Liquidation and Dissolution,
please see "Risk Factors - Risks Related to the Plan of Liquidation and
Dissolution."
Reasons for the Board's Recommendation
For a description of the factors that the board of directors considered in
its decision to approve and recommend the Plan of Liquidation and Dissolution,
please see "Additional Information About the Proposals - Reasons for the Board's
Recommendations."
Vote Required and Board Recommendation
The approval of the Plan of Liquidation and Dissolution requires the
affirmative vote of the holders of at least a majority of the common stock
issued and outstanding and entitled to vote thereon. Our board of directors
recommends a vote FOR this proposal. It is intended that shares represented by
the enclosed form of proxy will be voted in favor of this proposal unless
otherwise specified in such proxy.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO ADOPT THE PLAN OF
LIQUIDATION, INCLUDING AMENDING THE COMPANY'S ARTICLES OF INCORPORATION TO
EFFECT A REVERSE STOCK SPLIT FOR PURPOSES OF MAKING LIQUIDATING DISTRIBUTIONS TO
OUR STOCKHOLDERS, AND OUR DISSOLUTION.
ADJOURNMENT OF THE SPECIAL MEETING, IF NECESSARY,
TO SOLICIT ADDITIONAL PROXIES
(Proposal No. 4)
Description of Proposal to Adjourn Special Meeting, if Necessary
The board of directors is soliciting proxies to authorize Colonial to
adjourn the Special Meeting on one or more occasions, if necessary, to solicit
additional proxies if there are not sufficient votes at the time of the Special
Meeting to approve the Corporate Trust Sale (Proposal 1), the Wealth Management
Sale (Proposal 2) or the Plan of Liquidation and Dissolution (Proposal 3). A
vote for this proposal is a vote to grant Colonial the authority to adjourn the
Special Meeting, if necessary, under the circumstances described above. An
adjournment of the Special Meeting may allow the Corporate Trust Sale, the
Wealth Management Sale or the Plan of Liquidation and Dissolution to be approved
when they otherwise would have been defeated. In light of this significant
effect, our board of directors has concluded that stockholders should vote on
granting us the authority to adjourn the Special Meeting. During any such
adjournment, stockholders who have not yet voted will be apprised of the
adjournment and will be solicited in connection with proposals presented at the
Special Meeting.
52
Vote Required and Board Recommendation
The approval of the proposal to adjourn the Special Meeting on one or more
occasions, if necessary, to a later date to solicit additional proxies if there
are not sufficient votes at the time of the Special Meeting to approve Proposals
1, 2 and 3, requires the affirmative vote of the holders of a majority of the
shares of common stock present or represented by proxy at the Special Meeting.
Approval of the adjournment proposal is not a condition to the approval of the
Corporate Trust Sale, the Wealth Management Sale or the Plan of Liquidation and
Dissolution. Our board of directors recommends a vote FOR this proposal. It is
intended that shares represented by the enclosed form of proxy will be voted in
favor of this proposal unless otherwise specified in such proxy.
53
ADDITIONAL INFORMATION ABOUT THE PROPOSALS
Reasons for the Board's Recommendations
In reaching its decision to approve and recommend the Corporate Trust Sale
and the Wealth Management Sale, our board of directors considered the factors
listed under "Risk Factors," as well as the following:
o Increasing competition in our businesses, particularly from companies with
greater financial resources, broader service portfolios, deeper client
relationships and superior market recognition;
o An unfavorable long-term trend in our Corporate Trust Business toward banks
and other traditional lenders providing financing for non-profit borrowers,
which has decreased the number of bond financings for which we are able to
serve as trustee and/or paying agent;
o The process undertaken by us and our financial advisors to solicit third
party indications of interest in the acquisitions;
o The fact that we have not received any firm offers for our Corporate Trust
or Wealth Management businesses involving cash consideration exceeding
those offered by Happy State Bank and Dubuque Bank and Trust, respectively;
o That the structure of the proposals by Happy State Bank and Dubuque Bank
and Trust as cash transactions were deemed favorable by our board of
directors;
o The fact that the terms of the Corporate Trust Sale Agreement and the
Wealth Management Sale Agreement were the result of substantial arm's
length negotiations;
o Presentations by, and discussions with, our senior management and
representatives of our financial and legal advisors regarding the proposed
transactions;
o Factors that increase the likelihood of the consummation of the
transactions contemplated by the Corporate Trust Sale Agreement and the
Wealth Management Sale Agreement, including (1) the fact that the Asset
Sales are not subject to any material regulatory consents and approvals
that are not likely to be timely received, nor a filing under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (2) the
fact that Happy State Bank's obligations under the Corporate Trust Sale
Agreement and Dubuque Bank and Trust's obligations under the Wealth
Management Sale Agreement are not subject to any financing condition, and
(3) the amount of cash and cash equivalents of Happy State Bank and Dubuque
Bank and Trust as reported in their respective financial statements
provided to us during negotiations;
o Bank Advisory Group's valuation analysis dated June 10, 2003;
o Bank Advisory Group's opinion dated May 4, 2004, that, as of the date of
its opinion and based on the matters considered and subject to the
assumptions, conditions and qualifications set forth in the written
opinion, the consideration to be paid to our stockholders, arising, in
part, from the proceeds we receive under the Corporate Trust Sale Agreement
and the Wealth Management Sale Agreement, is financially fair and equitable
to our unaffiliated stockholders; and
o The ability, due to the "fiduciary out" provisions of the Corporate Trust
Sale Agreement, for another qualified person to make a superior offer and
the ability of our board, in certain circumstances, to respond to such an
offer and, in certain circumstances, to terminate the Corporate Trust Sale
Agreement.
Our board of directors also identified and considered potentially negative
factors involved in the Asset Sales, including the following:
o The possibility that the Asset Sales may not be completed and the effect of
public announcement of the Asset Sales on our sales and operating results
and our ability to attract and retain customers, industry partners and key
personnel;
o The fact that the termination fees of $250,000 to be paid to Happy State
Bank and in varying amounts to Dubuque Bank and Trust in certain
circumstances by the terms of the Corporate Trust Sale Agreement and the
Wealth Management Sale Agreement, respectively, would make it more costly
for another potential purchaser to acquire us or either of our businesses;
54
o The fact that neither of the proposed Asset Sales provides for a cash
payment directly to our stockholders enabling our stockholders, at the
earliest possible time, to obtain the benefits of the transactions, but the
benefits of which would be obtained over time through a series of
distributions under the Plan of Liquidation; and
o That our stockholders will lose the opportunity to capitalize on the
potential future growth of our businesses and on our potential future
success and profits had we elected to continue as a going concern.
Our board also considered the impact of the Asset Sales on our liquidation
analysis, including the proceeds of the Asset Sales as well as the related
transaction costs, including the payments and benefits to our executive officers
that will result from the Asset Sales and any distributions to our stockholders
of the proceeds of the Asset Sales.
Our board of directors believes that the distribution of our remaining
assets in a liquidation has a greater probability of producing more value to our
stockholders than other alternatives. In evaluating the fairness of the Plan of
Liquidation and Dissolution to our unaffiliated stockholders, and in reaching
its conclusion that the Plan of Liquidation and Dissolution is fair to our
unaffiliated stockholders and its decision to approve and recommend the Plan of
Liquidation and Dissolution, our board of directors considered the factors
listed above, as well as the following:
o our inability to execute a definitive agreement to acquire our entire
company with a buyer or strategic partner on terms acceptable to us;
o the low probability that we would obtain, within a reasonable period of
time under the circumstances, any viable offer to engage in a more
attractive alternative transaction or transactions;
o the valuation analysis of Bank Advisory Group, which incorporates analysis
of the net asset value, market value and investment value of our common
stock and which concludes that the cash fair market value of Colonial was
$2.84 - $3.08 per share as of the date of such analysis (assuming that
Colonial was sold in more than one transaction and engaged in a subsequent
liquidation and dissolution);
o the fact that the Plan of Liquidation and Dissolution contemplates per
share distributions to our shareholders in excess of the $3.50 per share
price at which we repurchased shares of our common stock in transactions in
the two most recent fiscal years;
o the Fairness Opinion of Bank Advisory Group;
o our board of directors' belief that it would be in the best interests of
our stockholders to allow our stockholders to determine how to invest
available cash rather than us pursuing an acquisition strategy involving
the investment of our cash in businesses outside of our traditional
business model; and
o prevailing economic conditions both generally and specifically relating to
our industry.
Our board of directors also identified and considered potentially negative
factors involved in the Plan of Liquidation, including the following:
o that all distributions will likely be complete over a period of several
years;
o that the liquidation will likely require the majority of our stockholders
to pay taxes on the liquidating distributions they receive;
o that the aggregate amount of the distributions to be made to our
stockholders is uncertain, due to our inability to predict with certainty,
the existence or amount of claims or liabilities that we may face in the
five-year period following our dissolution;
o that under applicable law, our stockholders could be required to return to
creditors some or all of the distributions made to stockholders in the
liquidation; and
o that stockholders will lose the opportunity to capitalize on the potential
future growth of our Corporate Trust and Wealth Management businesses and
on our potential future success had we elected to pursue an acquisition
strategy or otherwise use our available cash to continue as a going
concern.
55
In light of factors including the significant regulatory expenditures as a
result of our status as a public-reporting company that files public reports
with the SEC, the existence of competitors in our industry with greater
resources at their disposal, adverse long-term trends in our businesses, and the
fact that even if our future operations were successful, the realization of
significant profits was uncertain and could take years, our board of directors
determined that the most viable course of action was to sell the Corporate Trust
and Wealth Management businesses and distribute the proceeds to our
stockholders. Our board rejected alternative offers for the sale of our
Corporate Trust and Wealth Management businesses because such alternative
transactions would have yielded less cash consideration than that offered by
Happy State Bank and Dubuque Bank and Trust, respectively. Our board also
rejected pursuing a going private transaction to be effected and financed by the
Company without the sale of its businesses. In addition to certain of the
reasons described above which would apply to such a transaction, the reasons the
board rejected such a potential going private transaction included, without
limitation, the Company's limited cash resources in the absence of a sale of one
or more of its operating divisions with which to complete such a transaction,
the uncertainty whether the Company could complete one or more financings
necessary to complete such a transaction on terms acceptable to it, and the
possibility that sale transactions on terms at least as favorable as those
contained in the Corporate Trust Sale to Happy State Bank and the Wealth
Management Sale to Dubuque Bank and Trust Company/Arizona Bank & Trust might not
be available in the foreseeable future.
The foregoing discussion of the information and positive and negative
factors considered and given weight by our board of directors is not intended to
be exhaustive. The members of the board considered their knowledge of our
business, financial condition and prospects, and the views of management and our
financial and legal advisors. In view of the variety of factors considered, the
board did not find it practicable to, and did not, quantify or otherwise assign
relative weights to the specific factors considered in reaching its
determinations and recommendations. In addition, individual members of the board
may have given different weights to different factors. The Plan of Liquidation
and Dissolution was unanimously approved by our non-employee directors. Because
the Plan of Liquidation and Dissolution contemplates identical per-share
distributions to affiliated and unaffiliated shareholders, the Plan of
Liquidation and Dissolution has not been structured to independently require the
approval of the majority of unaffiliated security holders, and we have not
retained an unaffiliated representative to act solely on behalf of unaffiliated
security holders for purposes of either negotiating the terms of the Plan of
Liquidation and Dissolution or preparing a fairness opinion that relates solely
to the terms of the Plan of Liquidation and Dissolution.
Effect of Stockholders' Votes on the Proposals
If our stockholders approve the Corporate Trust Sale, the Wealth Management
Sale, and the Plan of Liquidation and Dissolution, we will attempt to consummate
the Asset Sales and proceed with our liquidation and dissolution as contemplated
in this proxy statement and the attached documents.
If our stockholders approve the Corporate Trust Sale and the Wealth
Management Sale, but do not approve the Plan of Liquidation and Dissolution, we
will attempt to consummate the Corporate Trust Sale and the Wealth Management
Sale and will explore the alternatives then available for the future of
Colonial, including using available cash to acquire other businesses or
companies.
If our stockholders approve the Corporate Trust Sale, but do not approve
the Wealth Management Sale, we will attempt to consummate the Corporate Trust
Sale and will explore the alternatives then available, including searching for
alternative purchasers for our Wealth Management business. We may also choose to
distribute all or part of any net cash that we receive from this Sale in the
form of a dividend to our stockholders. See "Additional Information About the
Proposals - Income Tax Effects of a Distribution following the Approval of
Either, but not both of, Proposal No. 1 and Proposal No. 2" immediately below.
If our stockholders approve the Wealth Management Sale, but do not approve the
Corporate Trust Sale, we will attempt to consummate the Wealth Management Sale
and will explore the alternatives then available, including searching for
alternative purchasers for our Corporate Trust business. We may also choose to
distribute all or part of any net cash that we receive from this Sale in the
form of a dividend to our stockholders. See "Additional Information About the
Proposals - Income Tax Effects of a Distribution following the Approval of
Either, but not both of, Proposal No. 1 and Proposal No. 2" immediately below.
Approval of both the Corporate Trust Sale and the Wealth Management Sale are
conditions to the Plan of Liquidation.
56
If our stockholders do not approve the Wealth Management Sale, the
Corporate Trust Sale, or the Plan of Liquidation and Dissolution, we will
continue to operate our Corporate Trust and Wealth Management businesses and
explore the alternatives then available for the future of Colonial, including
searching for alternative purchasers for those businesses.
Income Tax Effects of a Distribution Following the Approval of Either, but not
both of, Proposal No. 1 and Proposal No. 2, or either the Corporate Trust Sale
or the Wealth Management Sale are consummated, but not both.
The following discussion is a general summary of the material federal
income tax consequences of a distribution but does not purport to be a complete
analysis of all potential tax effects. The discussion addresses neither the tax
consequences that may be relevant to particular categories of stockholders
subject to special treatment under certain federal income tax laws (such as
dealers in securities, banks, insurance companies, tax-exempt organizations,
mutual funds, and foreign individuals and entities) nor any tax consequences
arising under the laws of any state, local or foreign jurisdiction. The
discussion is based upon the Code, U.S. Department of the Treasury regulations,
IRS rulings, and judicial decisions now in effect, all of which are subject to
change or to varying interpretation at any time. Any such changes or varying
interpretations may also be applied retroactively. The following discussion has
no binding effect on the IRS or the courts.
If we make a distribution of cash or other property (other than certain pro
rata distributions of our common stock) in respect of our stock, the
distribution will be treated as a dividend, taxable to an individual at a
maximum rate of 15% (if paid prior to December 31, 2008 and if "qualified"), to
the extent it is paid from our current or accumulated earnings and profits. If
the distribution exceeds our current or accumulated earnings and profits, the
excess will be treated first as a tax-free return of your investment, up to your
basis in such common stock. Any remaining excess will be treated as capital
gain. If you are a corporation, the distribution will be taxable at ordinary
rates and you may be able to claim a deduction for a portion of any distribution
received that is considered a dividend.
In general, information reporting requirements will apply to dividends paid
on the common stock unless you are an exempt recipient. Backup withholding will
apply to such payments if you fail to provide your taxpayer identification
number and/or the proper and properly executed Forms W-9 and W-8 or
certification of foreign or other exempt status, or if you fail to report in
full dividend income. The backup withholding rate for 2004 is 28%.
The foregoing summary OF MATERIAL FEDERAL income tax consequences is
included for general information only and does not constitute legal advice to
any stockholder. The tax consequences of the ABOVE may vary depending upon the
particular circumstances of the stockholder. We recommend that each stockholder
consult his, her or its own tax advisor regarding the tax consequences of the
distribution described above.
57
Opinion of Bank Advisory Group
Pursuant to an engagement letter dated October 30, 2003, we retained Bank
Advisory Group to render an opinion to our board of directors as to, among other
things, the fairness, from a financial point of view, to our unaffiliated
stockholders of the consideration to be paid to our stockholders pursuant to the
Plan of Liquidation and Dissolution, based, in part, on the proceeds to be
received by us upon consummation of the Corporate Trust Sale and the Wealth
Management Sale (the "Fairness Opinion").
Prior to engaging Bank Advisory Group for the Fairness Opinion and pursuant
to an engagement letter dated April 1, 2003, we retained Bank Advisory Group to
provide a valuation of 100% of our outstanding common stock, assuming the sale
of Colonial for cash consideration (the "Valuation Opinion").
Valuation Opinion
In a letter dated June 10, 2003, Bank Advisory Group delivered its
Valuation Opinion and supporting analysis to our board of directors to the
effect that and subject to the various assumptions set forth therein, as of
March 31, 2003, the cash fair market value range of 100% of the outstanding
common stock of Colonial was $3,500,000 - $3,800,000 in aggregate, or $4.62 -
$5.01 per share (based on 757,884 shares that were issued and outstanding as of
such date). However, the Valuation Opinion assumed the sale of the Company as a
"whole" rather than in parts through a liquidation and dissolution. Were the
Valuation Opinion adjusted to reflect a liquidation and distribution, the
Valuation Opinion would have been $2,152,500 - $2,337,000 in aggregate, or
approximately $2.84 - $3.08 per share (based on 757,884 shares that were issued
and outstanding as of such date).
In arriving at its conclusion for the Valuation Opinion, Bank Advisory
Group employed the net asset, market value and investment value methodologies.
The Net Asset Value approach, when valuing a financial organization, is
frequently defined as the value of the net worth of the company, including every
kind of property and value. This approach normally assumes liquidation or sale
on the date of appraisal with the recognition of securities gains or losses,
real estate appreciation or depreciation, or changes in the net value of its
assets. As such, it is not the best approach to use when valuing a going
concern. However, it would be applicable when valuing any nonoperating or "held"
assets at a "shell" holding company (such as excess real estate, or low- or
non-dividend paying equity securities held for long-term investment purposes).
Accordingly, in determining the Valuation Opinion, Bank Advisory Group
considered the $2,814,000 equity capital position of Colonial at March 31, 2003,
but placed the least emphasis on the Net Asset Value appraisal methodology.
The Market Value approach is generally defined as the price at which
knowledgeable buyers and sellers would agree, and is frequently used to
determine the price of the appraised stock when both the quantity and the
quality of the trade data are deemed sufficient. However, the lack of
availability of trade data that is comparable to the stock being appraised may
result in the need to employ other valuation approaches.
When valuing a "control" position in a financial organization, a comparison
is typically made to the prices paid in recent acquisitions of similar financial
organizations. Accordingly, Bank Advisory Group reviewed the prices paid for
"control" of selected U.S. asset management companies acquired during January
2001 - March 2003 and with assets under management below $1 billion at
announcement date. These organizations possessed the following financial traits
and related price levels, on average:
58
Trust Company Deals With
Stated Values
---------------------------------------------------------------------
Average Administered Assets (000s) $175,000
Total Price (000s) $900
Price/Assets 0.51%
# of Transactions 2
When sufficient, comparable trade data is available, the market value
deserves equal or possibly greater consideration than the investment value.
However, as illustrated in the table above, the number of transactions and the
related financial and pricing information are considerably limited, thereby
severely restricting Bank Advisory Group's reliance on the Market Value approach
for determining a cash fair market value range for Colonial. Nevertheless, the
data resulted in the market value conclusion of $2,425,600, summarized as
follows:
Colonial
3/31/2003
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Average Administered Assets for Colonial (000s) $475,600
Price/Assets Comparable 0.51%
Market Value Approach (Aggregate in 000s) $2,425.6
The Investment Value approach is sometimes referred to as the income value
or earnings value. The investment or earnings value of any financial
organization's stock is, simply stated, an estimate of the present value of the
future benefits, usually earnings, cash flow, or dividends, that will accrue to
the stock. An earnings value is comprised of two major components: annual future
earnings and an appropriate capitalization rate (the present value discount
rate), and is defined by the following formula:
Net Present Value = ? [valuesi/(1 + rate)i]
Bank Advisory Group believes the utilization of net earnings, rather than
cash flows, for this investment value methodology is appropriate given the
minimal level of long-term, non-earning investments typically held by a trust
company. Thus, for most asset management organizations, the absence of
significant non-cash depreciation and/or amortization expense produces little
variance between the net earnings and cash flow streams. Additionally, the
utilization of net earnings in calculating the present value of benefits is a
widely understood and accepted practice in the valuation of financial
institutions.
Bank Advisory Group's twelve-year financial projections of the future
performance of Colonial were based on Bank Advisory Group's analysis of the
financial service industry, market area, and current financial condition of and
historical levels of growth and earnings for Colonial, as well as information
provided to Bank Advisory Group by the management of Colonial. In summary, Bank
Advisory Group forecast earnings of $224 thousand in the first projection year,
rising gradually over the 12-year projection period until equaling $731 thousand
by 2015, equating to a compound annual earnings growth rate of 11.35%. The
growth in net earnings reflects total revenues which rise from $4.7 million
during 2004 until equaling $8.3 million by 2015, and general & administrative
expenses which rise from $4.4 million to $7.0 million during the same time
period. The forecast growth in revenues is centered primarily in trust income,
bond servicing income, and corporate servicing fees for individual retirement
accounts. Finally, a combined federal and state corporate tax rate of 41% was
employed.
59
Thereafter, in order to create a ninety-year earnings stream for Colonial,
Bank Advisory applied the following growth rates to Colonial's net earnings:
4.00% for projection years 13 through 20, and 3.00% for the remaining seventy
years. On this basis - using a present value discount rate of 12.00% applied to
the first ten years of the projection period, a 13.00% discount rate applied to
the following ten years, and a 14.00% discount rate applied to the last seventy
years of the ninety-year projection period - the present value of the projected
90-year net earnings stream equaled $5,322,000. Bank Advisory Group believes
that the discount rate should incorporate both (a) a "risk-free rate," or the
amount that an investor believes will be definitely realized over the set
holding period; and, (b) a premium for risk, which includes a systematic risk
for movements in returns on the investment market and general and an
unsystematic risk that is specific to the investment. Moreover, Bank Advisory
Group believes that the "risk-free rate" includes the "rental rate" for
foregoing the use of funds of the set holding period and the expected rate of
inflation over the set holding period. Accordingly, given Colonial's current
financial condition and recent financial performance, the existing interest rate
environment, potential alternative investment opportunities, and the anticipated
rates of inflation, Bank Advisory Group believes the discount rates employed in
its analysis to be appropriate.
When the net asset value, market value, and investment value approaches
were appropriately considered and all other relevant valuation variables and
factors analyzed, giving consideration to the Market Value conclusion of
$2,425,600 and the Investment Value conclusion of $5,322,000, and after Bank
Advisory Group employed its substantial experience and judgment derived from
having completed well over 1,000 appraisals for community financial institutions
during the past twenty years, and as a result of performing these appraisals,
becoming specifically aware of the trading activity and price levels and trends
that currently exist for stocks of community financial institutions, the cash
fair market value range of 100% of the outstanding common stock of Colonial, as
of March 31, 2003, was determined to be $3,500,000 - $3,800,000 in aggregate,
assuming Colonial operated as a private company.
It should be noted, however, that the Valuation Opinion assumed the sale of
the Company as a "whole" rather than in parts through a liquidation and
dissolution. Were the Valuation Opinion adjusted to reflect a liquidation and
distribution and, accordingly, adjusted for a blended effective tax rate assumed
at 38.5%, the adjusted Valuation Opinion would have been $2,152,500 - $2,337,000
in the aggregate, or approximately $2.84 - $3.08 per share, as of March 31,
2003. Since that date, Bank Advisory Group believes that there has been little
change in the fundamental financial position of Colonial to significantly alter
the Valuation Opinion, other than to account for the retention of earnings since
March 31, 2003.
We have paid Bank Advisory Group a professional fee of $6,000 for rendering
the Valuation Opinion, and reimbursed Bank Advisory Group for out-of-pocket
expenses totaling $172. The terms of the fee arrangement with Bank Advisory
Group were negotiated at arm's length between our management and Bank Advisory
Group, and our board was aware of the arrangement.
Fairness Opinion
On May 4, 2004, Bank Advisory Group delivered certain of its written
analyses and its written opinion to our board of directors to the effect that
and subject to the various assumptions set forth therein, as of May 4, 2004, the
consideration to be paid under the Plan of Liquidation is financially fair and
equitable to Colonial's unaffiliated stockholders. The full text of the written
Fairness Opinion of Bank Advisory Group, dated May 4, 2004, is attached as
Appendix C. Our stockholders are urged to read the opinion in its entirety for
the assumptions made, procedures followed, other matters considered and limits
of the review by Bank Advisory Group. The summary of the written opinion of Bank
Advisory Group set forth herein is qualified in its entirety by reference to the
full text of such opinion. Bank Advisory Group's analyses and opinion were
prepared for and addressed to our board of directors and are directed only to
the fairness, from a financial point of view, to our unaffiliated stockholders
of the consideration to be received by our stockholders under the Plan of
Liquidation, and do not constitute an opinion as to the merits of either of the
asset sales or the Plan of Liquidation itself, or a recommendation to any
stockholder as to how to vote on any of the proposals. The distributions to be
made to our stockholders pursuant to the Plan of Liquidation were determined by
Colonial and not pursuant to recommendations of Bank Advisory Group.
60
In arriving at its Fairness Opinion, Bank Advisory Group reviewed and
considered such financial and other matters as it deemed relevant, including,
among other things:
o The Corporate Trust Sale Agreement;
o The Wealth Management Sale Agreement;
o The Plan of Liquidation and Dissolution;
o Certain publicly available financial and other information for us, and
certain other relevant financial and operating data furnished to Bank
Advisory Group by our management;
o Certain internal financial analyses, financial forecasts, reports and other
information concerning Colonial prepared by our management, collectively
referred to as the Colonial Forecasts;
o Discussions Bank Advisory Group had with certain members of our management
concerning the historical and current business operations, financial
conditions and prospects of Colonial and such other matters Bank Advisory
Group deemed relevant;
o Certain operating results of Colonial as compared to the operating results
of certain other financial institutions and/or trust companies Bank
Advisory Group deemed relevant; and
o Such other information, financial studies, analyses and investigations and
such other factors that Bank Advisory Group deemed relevant for the
purposes of its opinion.
In conducting its review and arriving at its Fairness Opinion, Bank
Advisory Group, with management's consent, assumed and relied, without
independent investigation, upon the accuracy and completeness of all financial
and other information provided to it by us or which was publicly available. Bank
Advisory Group did not undertake any responsibility for the accuracy,
completeness or reasonableness of, or independently to verify, this information.
In addition, Bank Advisory Group did not conduct any physical inspection of the
properties or facilities of Colonial. Bank Advisory Group further relied upon
the assurance of our management that we were unaware of any facts that would
make the information provided to Bank Advisory Group incomplete or misleading in
any respect. Bank Advisory Group, with management's consent, assumed that any
projections provided to Bank Advisory Group were reasonably prepared by our
management, and reflected the best available estimates and good faith judgments
of our management as to our future performance and the values to be received
upon sale of our operating assets net of any potential contingent liabilities
remaining upon the consummation of such sales, and that such projections and
analysis provide a reasonable basis for this opinion.
Bank Advisory Group did not make or obtain any independent evaluations,
valuations or appraisals of our assets or liabilities. Bank Advisory Group's
services to us in connection with the transaction have included serving as
exclusive financial advisor to our board of directors and rendering an opinion,
from a financial point of view, of the fairness to our unaffiliated stockholders
of the distributions to be made to our stockholders in connection with our Plan
of Liquidation and Dissolution. Bank Advisory Group's opinion was necessarily
based upon economic and market conditions and other circumstances as they
existed and could be evaluated by Bank Advisory Group on the date of its
opinion. It should be understood that although subsequent developments may
affect its opinion, Bank Advisory Group does not have any obligation to update,
revise or reaffirm its opinion and Bank Advisory Group expressly disclaims any
responsibility to do so.
In rendering its Fairness Opinion, Bank Advisory Group assumed, in all
respects material to its analysis, that the representations and warranties of
each party contained in the Corporate Trust Sale Agreement and the Wealth
Management Sale Agreement, respectively, are true and correct, that each party
61
will perform all of the covenants and agreements required to be performed by it
under the Corporate Trust Sale Agreement and the Wealth Management Sale
Agreement, and that all conditions to the consummation of the Corporate Trust
Sale Agreement and the Wealth Management Sale Agreement will be satisfied
without waiver thereof. Bank Advisory Group also assumed that all governmental,
regulatory and other consents and approvals contemplated by the Corporate Trust
Sale Agreement and the Wealth Management Sale Agreement would be obtained and
that, in the course of obtaining any of those consents, no restrictions will be
imposed or waivers made that would have an adverse effect on the contemplated
benefits of either the Corporate Trust Sale or the Wealth Management Sale.
Bank Advisory Group's opinion does not constitute a recommendation to any
stockholder as to how the stockholder should vote on any of the proposals. Bank
Advisory Group's opinion is limited to the fairness, from a financial point of
view, to our unaffiliated stockholders of the consideration to be received by
our stockholders in connection with the Plan of Liquidation and Dissolution,
based, in part, on the proceeds received by us upon consummation of the
Corporate Trust Sale and the Wealth Management Sale. Bank Advisory Group
expresses no opinion as to the underlying business reasons that may support the
decision of our board of directors to approve, or our decision to consummate,
the Corporate Trust Sale or the Wealth Management Sale.
The following is a summary of the principal financial analyses performed by
Bank Advisory Group to arrive at its opinion. This summary alone does not
constitute a complete description of the financial analyses. Also, considering
the following summary without considering the full narrative description of the
financial analyses, including the methodologies and assumptions underlying the
analyses, could create a misleading or incomplete view of the financial
analyses. Bank Advisory Group performed certain procedures, including each of
the financial analyses described below, and reviewed with our management the
assumptions on which such analyses were based and other factors, including our
historical and projected financial results. No limitations were imposed by our
board with respect to the investigations made or procedures followed by Bank
Advisory Group in rendering its opinion.
The Net Asset Value approach, as previously discussed in connection with
the Valuation Opinion, normally assumes liquidation or sale on the date of
appraisal with the recognition of securities gains or losses, real estate
appreciation or depreciation, or changes in the net value of its assets.
Accordingly, in issuing the Fairness Opinion, Bank Advisory Group considered the
$2,943,766 equity capital position of Colonial at December 31, 2003. However,
assuming distribution of Colonial's net assets and therefore adjusting for a
blended effective tax rate of 38.5% and assuming the exercise of all Colonial
stock options outstanding, the after-tax value of Colonial's net assets is
$1,841,320, or $2.37 per share (based on 775,843 shares outstanding). As with
the Valuation Opinion, Bank Advisory Group placed the least emphasis on the Net
Asset Value for supporting the Fairness Opinion.
The Market Value approach, as previously discussed in connection with the
Valuation Opinion, is generally defined as the price at which knowledgeable
buyers and sellers would agree, and is frequently used to determine the price of
the appraised stock when both the quantity and the quality of the trade data are
deemed sufficient. Bank Advisory Group reviewed the prices paid for "control" of
selected U.S. asset management companies acquired during January 2001 - March
2004 and with assets under management below $1 billion at announcement date.
These organizations possessed the following financial traits and related price
levels, on average:
62
Trust
All Deals Company
With Stated Deals With
Values Stated Values
- -------------------------------------------------------------------------------
Average Administered Assets (000s) $381,000 $175,000
Total Price (000s) $6,760 $900
Price/Assets 1.77 % 0.51 %
# of Transactions 4 2
When sufficient, comparable trade data is available, the market value
deserves equal or possibly greater consideration than the investment value.
However, as illustrated in the table above, the number of transactions and the
related financial and pricing information are considerably limited, thereby
severely restricting Bank Advisory Group's reliance on the Market Value approach
for determining a market value range for Colonial. Nevertheless, the data
reveals the following:
Colonial Colonial
Wealth Management Corporate Trust
Assets Assets
12/31/2003 12/31/2003
- --------------------------------------------------------------------------------
Average Administered Assets for Colonial (000s) $260,570 $238,789
Price/Assets Comparable 1.77 % 0.51 %
Market Value Approach (Aggregate in 000s) $4,612 $1,218
Combining the market value approaches calculated above for Colonial's
Wealth Management assets and Corporate Trust assets, results in a combined
market value of $5,829,915 in aggregate. Assuming a blended effective tax rate
of 38.5% to account for the liquidation and dissolution of Colonial, the market
value of Colonial on an after-tax basis equaled $3,616,301, or $4.66 per share
(based on 775,843 shares outstanding).
The Investment Value approach, as previously discussed in connection with
the Valuation Opinion, is sometimes referred to as the income value or earnings
value. Bank Advisory Group, after analyzing the financial performance of
Colonial since the Valuation Opinion date of March 31, 2003, concluded that no
basis exists for materially revising or modifying the financial projections for
Colonial used in connection with the Valuation Opinion. Likewise, Bank Advisory
concluded that no basis exists for altering the present value discount rate of
12.00% applied to the first ten years of the projection period, 13.00% applied
to the following ten years, and 14.00% applied to the last seventy years of the
ninety-year projection period. Therefore, the present value of Colonial's
projected 90-year net earnings stream, on a pre-tax basis, remained unchanged at
$5,322,000. Assuming a blended effective tax rate of 38.5% to account for the
liquidation and dissolution of Colonial and assuming the exercise of all
Colonial stock options outstanding, the present value of Colonial's projected
90-year net earnings stream on an after-tax basis equaled $3,273,030, or $4.22
per share (based on 775,843 shares outstanding).
When the net asset value, market value, and investment value approaches
were appropriately considered, together with Bank Advisory's Group's experience
in valuing the stocks of community financial institutions, Bank Advisory Group
believes it has sufficient justification for its assertion that the estimated
liquidating distributions - expected to range between $4.37 and $5.16 per share
- - to be paid to the holders of Colonial Stock based, in part, on the proceeds to
be received by Colonial upon consummation of the Corporate Trust Sale and the
Wealth Management Sale, are financially fair and equitable to the unaffiliated
stockholders of Colonial.
63
The summary set forth above does not purport to be a complete description
of all the analyses performed by Bank Advisory Group. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analyses and the application of these methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. Bank Advisory Group did
not attribute any particular weight to any analysis or factor considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. Accordingly, notwithstanding the separate factors
summarized above, Bank Advisory Group believes, and has advised our board, that
its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered by it, without considering all analyses and
factors, could create an incomplete view of the process underlying its opinion.
In performing its analyses, Bank Advisory Group made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond our control. These analyses performed by Bank
Advisory Group are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. In addition, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which businesses or
securities may actually be sold. Accordingly, such analyses and estimates are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of the parties or their respective advisors. None of
Colonial, Colonial's management, Bank Advisory Group or any other person assumes
responsibility if future results are materially different from those projected.
The analyses supplied by Bank Advisory Group and its opinion were among several
factors taken into consideration by our board in making its decision to enter
into the Corporate Trust Sale Agreement and the Wealth Management Sale Agreement
and should not be considered as determinative of such decision.
Bank Advisory Group was selected by our board to render an opinion to our
board because Bank Advisory Group is a nationally recognized financial
institution valuation firm that is routinely engaged in the valuation of
financial institutions in connection with mergers and acquisitions, as well as
valuations for corporate and other purposes. Bank Advisory Group is providing
financial services for us for which it will receive customary fees.
Pursuant to the Bank Advisory Group engagement letter, we will pay a fee
not to exceed $24,000 to Bank Advisory Group for rendering its opinion, as well
as reimbursement of reasonable out-of-pocket expenses not to exceed $750. In
addition to this fee, we will reimburse Bank Advisory Group for any legal
support services and time spent providing testimony. The terms of the fee
arrangement with Bank Advisory Group, which management believes are customary in
transactions of this nature, were negotiated at arm's length between our
management and Bank Advisory Group, and our board was aware of the arrangement.
No portion of the fee payable to Bank Advisory Group is contingent on
consummation of either the Corporate Trust Sale or the Wealth Management Sale.
Interests of Our Directors and Officers in the Transactions
The approval of the Corporate Trust Sale, the Wealth Management Sale and
our Plan of Liquidation and Dissolution by our stockholders may have certain
effects upon our officers and directors, including those set forth below, which
interests may be different than those of our stockholders.
As of _______________, 2004, (i) our current executive officers and
directors held, directly or indirectly, an aggregate of 126,290 shares of common
stock, and (ii) two of our directors held vested options to purchase a total of
15,000 shares of common stock, which these directors have informed us that they
intend to exercise prior to consummation of the Corporation Trust Sale and the
Wealth Management Sale. All of these parties have informed the Company that they
intend to vote in favor of Proposal Nos. 1, 2, 3 and 4 to be considered at the
Special Meeting.
64
Our current executive officers are parties to agreements with us providing
for certain benefits upon consummation of the transactions contemplated by the
proposals. The tables below summarize these benefits as applicable to the
matters being considered at the Special Meeting.
Name and principal position Transaction
Payments Certain other benefits
- --------------------------- ----------------- ------------------------------
- --------------------------- ----------------- ------------------------------
John K. Johnson, President $142,850(1) Employment with Happy State
Bank upon the close of the
Corporate Trust Sale Agreement
Cecil Glovier, Chief $107,150(1) Employment with Happy State
Bank upon the close of the
Corporate Trust Sale Agreement
Additionally, in the event
that Mr.Glovier, our Chief
Operating Officer, has his
employment terminated by Happy
State Bank during the first
year of Mr.Glovier's
employment by Happy State Bank
(other than termination by
Happy State Bank for cause, as
defined by the parties), we
will be obligated to pay Mr.
Glovier an amount equal to the
difference between $92,882
(Mr. Glovier's current annual
base salary) and salary paid
by Happy State Bank during Mr.
Glovier's first year of
employment by Happy State
Bank.
Bruce Mitchell $30,000(2) Employment with Dubuque Bank
and Trust upon the close of
the Wealth Management Sale
Agreement.
(1) Based upon consummation of the asset sales, payable at 60% upon the close
of the Corporate Trust Sale and 40% upon the close of the Wealth Management
Sale. These transaction bonus payments are in lieu of bonuses due to Mr.
Johnson and Mr. Glovier under their respective employment agreements.
(2) Based upon consummation of the Wealth Management Sale. Represents the
amount estimated to be paid upon consummation of the Wealth Management Sale
pursuant to the terms of an agreement dated January 30, 2004 with Mr.
Mitchell. Pursuant to this agreement, upon the closing of the Wealth
Management Sale, Mr. Mitchell will receive a bonus equal to the sum of (i)
1% of the sales price attributed to fiduciary accounts in existence on
January 20, 2004 for which Dubuque Bank and Trust succeeds Colonial at the
closing, (ii) 5% of the first $250,000 in sales price attributable to
fiduciary accounts that come in to existence after January 20, 2004 for
which Dubuque Bank and Trust succeeds Colonial at the closing, and (iii)
10% of any amounts in excess of $250,000 of the sales price attributable to
fiduciary accounts that come into existence after January 20, 2004 for
which Dubuque Bank and Trust succeeds Colonial at the closing. This bonus
arrangement is in lieu of any other bonuses to which Mr. Mitchell would
have otherwise been entitled under his employment agreement.
The following table sets forth information concerning the aggregate number
of Colonial stock options held by each of our executive officers and directors
as of April 1, 2004:
65
Total Shares of Common Stock Issuable Upon
Exercise of Outstanding Options, Expiration
Date and Exercise Price
Optionholder
- --------------------------------- --------------------------------------------
Shares Expiration Date Exercise Price
- --------------------------------- ------- --------------- --------------
Lynn Camp - Director 1,500 12/31/04 $3.00
1,500 12/31/05 $3.25
1,500 12/31/06 $3.50
1,500 12/31/07 $3.50
1,500 12/31/08 $3.50
Gerald G. Morgan - Director 1,500 12/31/04 $3.00
1,500 12/31/05 $3.25
1,500 12/31/06 $3.50
1,500 12/31/07 $3.50
1,500 12/31/08 $3.50
For information as to the number of shares of our common stock beneficially
owned by our directors and officers, see "Security Ownership Of Certain
Beneficial Owners And Management."
Gerald G. Morgan, a member of our board of directors, is a member of the
law firm of Burdett, Morgan, Williamson & Boykin LLP of Amarillo, Texas. Mr. Tom
Burdett, also a member of Burdett, Morgan, Williamson & Boykin, is a member of
the board of directors of Happy Bancshares, Inc., the parent of Happy State
Bank, and Burdett, Morgan, Williamson & Boykin provides legal services to Happy
Bancshares, Inc. and Happy State Bank. Burdett, Morgan, Williamson & Boykin
represented Colonial in connection with the Corporate Trust Sale. Burdett,
Morgan, Williamson & Boykin has not provided any legal services to Happy
Bancshares, Inc. or Happy State Bank in connection with the Corporate Trust
Sale. Additionally, prior to commencing it representation of Colonial in the
Corporate Trust Sale, Burdett, Morgan, Williamson & Boykin also agreed not to
disclose any information of or relating to Colonial to Happy State Bank.
In connection with the Plan of Liquidation, we intend to continue to
indemnify our directors and officers and to purchase a director and officer
liability "tail" insurance policy for up to six years of coverage for the
benefit of our current and former directors and officers, as described below
under "Proposal No. 3 - Principal Provisions of the Plan of
Liquidation-Dissolution - Continuing Indemnification and Insurance."
Rights of Appraisal
In connection with the Plan of Liquidation, our stockholders are entitled
to exercise dissenters' rights pursuant to the provisions of Chapter 13 of Title
10 of the Arizona Revised Statutes, or the Arizona Appraisal Statutes, copies of
which sections are included with this proxy statement as Appendix B. In
accordance with these sections, our stockholders have the right to dissent from
the Plan of Liquidation and Dissolution and to be paid the "fair value" of their
common stock. In this context, the term "fair value" means the value of a
stockholder's common stock as of the day preceding the date of the vote
approving the Plan of Liquidation. The following discussion is a summary of the
material terms of the appraisal rights and is not a complete statement of the
law pertaining to a dissenting stockholder's rights under the Arizona Appraisal
Statutes and is qualified by the full text of Chapter 13 of Title 10 of the
Arizona Appraisal Statutes, inclusive, and attached as Appendix B. Any
stockholder who wishes to exercise the right to dissent and demand the fair
value of such stockholder's shares, or who wishes to preserve the right to do
so, should review the following discussion and Appendix B carefully because
failure to timely and properly comply with the procedures will result in the
loss of a stockholder's right to dissent under the Arizona Appraisal Statutes.
66
With respect to any amendment to the articles of incorporation to effect a
reverse stock split that will reduce the number of shares held by any
stockholder to a fraction of a share, which is to be acquired for cash, under
Section 10-1320(A) of the Arizona Appraisal Statutes, we must notify each of our
stockholders of the right to dissent. This proxy statement constitutes notice to
our stockholders under Section 10-1320(A).
A stockholder wishing to exercise the right to demand the fair value of
such stockholder's common stock must first file, before the vote of stockholders
is taken at the special meeting, a written objection to the proposed action and
state such stockholder's intent to demand the fair value of such stockholder's
common stock if the action is taken. In addition, the dissenting stockholder
must not vote in favor of the Plan of Liquidation, in the event the dissenting
stockholder wishes to exercise appraisal rights with respect to the reverse
stock split amendment. Because a proxy that does not contain voting instructions
will, unless revoked, be voted FOR the Plan of Liquidation, a stockholder who
votes by proxy and who wishes to exercise dissenter's rights must vote AGAINST
the applicable resolution or ABSTAIN from voting on the applicable resolution. A
vote against the applicable resolution, in person or by proxy, will not in and
of itself constitute a written notice of intent to demand the fair value of a
stockholder's common stock satisfying the requirements of Section 10-1320(A) of
the Arizona Appraisal Statutes. A stockholder will not have appraisal rights
with respect to the reverse stock split amendment if our stockholders do not
approve or we do not consummate the Plan of Liquidation. A demand for appraisal
must be properly executed by or for the stockholder of record. A record owner
who holds shares as a nominee for others, such as a broker, may demand an
appraisal of the shares held for all, or fewer than all, of the beneficial
owners of such shares, but only if the record stockholder dissents with respect
to all shares beneficially owned by any one person and notifies the corporation
in writing of the name and address of each person on whose behalf the record
stockholder asserts dissenters' rights. Beneficial owners of common stock who
are not record owners and who intend to exercise appraisal rights must do so
with respect to all shares of which the beneficial stockholder is the beneficial
stockholder or over which the beneficial stockholder has power to direct the
vote. To assert dissenters' rights, a beneficial stockholder must submit to the
corporation the record stockholder's written consent to the dissent not later
than the time the beneficial stockholder asserts dissenters' rights.
Stockholders who elect to exercise appraisal rights should mail or deliver
their written demand to Colonial Trust Company, 5336 N. 19th Avenue, Phoenix, AZ
85015, Attention: Secretary. The written demand for appraisal should specify the
stockholder's name and mailing address, the number of shares of stock owned and
that the stockholder is thereby demanding appraisal of such stockholder's
shares. Within 10 days after the approval of the Plan of Liquidation, we will
cause to be mailed to each stockholder who has properly asserted appraisal
rights with respect to the reverse stock split amendment, a notice that the Plan
of Liquidation, including the reverse stock split amendment, has been
authorized. This notice will include where the payment demand must be sent,
where and when certificates for certificated shares must be deposited, transfer
restrictions relating to uncertificated shares, and supply a form for making a
demand for payment. To receive the fair value of the common stock, a stockholder
exercising appraisal rights must send to us a written demand for payment within
30 to 60 days after this notice from us is given.
Within 60 days after we receive a valid demand for payment, we will pay to
such stockholder the amount we estimate to be the fair value of such
stockholder's shares of common stock. However, if we and such stockholder cannot
reach agreement within the 60 days following the filing of the dissenting
stockholder's demand with us as to the value of the stock, we will petition the
court in the county in which our principal office is located for a determination
of the value of the stock of all such objecting stockholders. A stockholder who
has demanded payment will be entitled to judgment either for the amount, if any,
by which the court finds the fair value of his shares plus interest exceeds the
amount we paid, or for the fair value plus accrued interest of the dissenter's
after-acquired shares for which we elected to withhold payment.
67
Generally the costs and expenses associated with a court proceeding to
determine the fair value of the common stock will be determined by the court,
and will include the costs of the reasonable compensation and expenses of any
master appointed by the court to assist in the valuation process. The court will
generally assess these costs against us, except that the costs will be assessed
against some or all of the dissenters to the extent the court finds that the
fair value does not materially exceed the amount we offered, or that the
dissenters acted arbitrarily, vexatiously or not in good faith in demanding
payment. The court may assess the fees and expenses of the parties' attorneys
and experts: (1) against us and in favor of any or all dissenters if the court
finds that we did not substantially comply with the procedures relating to
dissenters' rights; (2) against the dissenter and in favor of us if the court
finds that the fair value does not materially exceed the amount we offered; or
(3) against either party if the court finds that the party acted arbitrarily,
vexatiously or not in good faith with respect to the procedures relating to
dissenters' rights. Additionally, if the court finds that the services of an
attorney for any dissenter were of substantial benefit to other dissenters and
that the fees for those services should not be assessed against us, the court
may award to these attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
Failure to follow the steps required by Chapter 13 of Title 10 of the
Arizona Appraisal Statutes for asserting dissenters' rights may result in the
loss of a stockholder's rights, if applicable, to demand the fair value of
shares of common stock owned by such stockholder. Stockholders considering
seeking appraisal with respect to the reverse stock split amendment should
realize that the fair value of their shares, as determined under the Arizona
Appraisal Statutes in the manner outlined above, could be more than, the same as
or less than the value of the cash they would be entitled to as a result of the
Plan of Liquidation if they did not seek appraisal of their shares.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock as of June 1, 2004 by each
director of the Company, the other executive officers of the Company, all
persons known by the Company to be the beneficial owner of more than five
percent (5%) of the outstanding Common Stock, and all executive officers and
directors as a group.
In certain instances, the number of shares listed includes, in addition to
shares owned directly, shares held by the spouse or children of the person, or
by a trust or estate of which the person is a trustee or an executor or in which
the person may have a beneficial interest. The table that follows is based upon
information supplied by executive officers, directors and principal stockholders
and Schedules 13D and 13G filed with the Commission. The holdings reflected in
the following table are calculated pursuant to Rule 13d-3(d) under the Exchange
Act.
68
Name And Address Of Amount And Nature Of Percent
Beneficial Owner Beneficial Ownership(1) Of Class(%)
- ---------------------------------- ----------------------- -----------
Lynn R. Camp 22,467 shares (2) 2.9%
3517 Tripp
Amarillo, TX 79121
Gerald G. Morgan 24,024 shares (2) 3.1%
4705 Olsen
Amarillo, TX 79106
Mike Borger 24,697 shares 3.2%
P.O. Box 51200
Amarillo, TX 79159
Bill McMorries 30,931 shares 4.0%
1601 Jordan
Amarillo, TX 79106
John K. Johnson 41,491 shares 5.4%
3414 E. Clark Road
Phoenix, AZ 85024
William and Sue Johnson 45,586 shares (3) 5.9%
14001 Interstate 27
Amarillo, TX 79119
Cecil E. Glovier 3,140 shares (4)
16925 Roadrunner Road
Mayer, AZ 86333
Bruce L. Mitchell 1,000 shares (4)
1974 E. McNair Drive
Tempe, AZ 85283-4922
Susan D. Carlisle 1,401 shares (4)
8026 E. Redwing Road
Scottsdale, AZ 85250-5649
Kurt J. Kiesling 401 shares (4)
13514 W. Post Drive
Surprise, AZ 85374
All directors and officers as a group
(9 persons) 141,290 shares 18.2%
__________________
(1) The number of shares beneficially owned by each director or executive
officer is determined under rules of the SEC, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under
such rules, beneficial ownership includes any shares as to which the
individual has the sole or shared voting power or investment power and also
any shares which the individual has the right to acquire within 60 days of
June 1, 2004, through the exercise of any stock option or other right. Such
shares of Common Stock subject to options or rights that are currently
exercisable or exercisable within 60 days of June 1, 2004, are deemed
outstanding for purposes of computing the percentage of the person holding
such options or rights, but are not deemed outstanding for computing the
percentage of any other person. The amount and percentages in the table are
based upon 775,843 shares outstanding as of June 1, 2004.
69
(2) The totals for Mr. Camp and Mr. Morgan each include 7,500 shares of Common
Stock subject to immediately exercisable options held by them, with the
following exercise prices: 3,000 shares at $3.00, 3,000 shares at $3.25,
and 9,000 shares at $3.50. Mr. Camp and Mr. Morgan have informed the
Company that they intend to exercise such options prior to consummation of
the Corporate Trust Sale and the Wealth Management Sale.
(3) Includes 35,032 shares owned by Amberwood Management Company. Mr. and Mrs.
Johnson, through trusts of which they are the sole trustees, own all of the
issued and outstanding shares of capital stock of Amberwood. Mr. and Mrs.
Johnson therefore control the disposition of the shares owned by Amberwood
and may be deemed the beneficial owners of such shares. Mr. and Mrs.
Johnson are the parents of Mr. John K. Johnson.
(4) Represents less than one percent of the issued and outstanding Common
Stock.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, as well as persons beneficially
owning more than 10% of the Company's outstanding Common Stock, to file reports
of ownership and changes in ownership with the SEC within specified time
periods. Such officers, directors and stockholders are also required to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on its review of such forms received by it, or written
representations from certain reporting persons, the Company believes that all
Section 16(a) filing requirements applicable to its officers, directors and 10%
stockholders were complied with during the fiscal year ended March 31, 2004.
OTHER MATTERS
Voting By Proxy
In order to ensure that your shares will be represented at the Special
Meeting, please sign and return the enclosed Proxy in the envelope provided for
that purpose, whether or not you expect to attend. Any stockholder may, without
affecting any vote previously taken, revoke a written proxy by giving notice of
revocation to the Company in writing or by executing and delivering to the
Company a later dated proxy.
70
Householding of Proxy Materials
To reduce the expenses of printing and delivering duplicate copies of proxy
statements, some banks, brokers, and other nominee record holders may be taking
advantage of the SEC "householding" rules that permit the delivery of only one
copy of these materials to stockholders who share an address unless otherwise
requested. If you share an address with another stockholder and have received
only one copy of this proxy statement, you may request a separate copy of these
materials at no cost to you by writing to Colonial Trust Company, 5336 N. 19th
Avenue, Phoenix, Arizona 85015, Attention: Secretary. For future stockholder
meetings, you may request separate copies of these materials, or request that we
send only one set of these materials to you if you are receiving multiple copies
by writing to us at the address given above.
BY ORDER OF THE BOARD OF DIRECTORS
John K. Johnson, President & CEO
Phoenix, AZ
June ___, 2004
P1
Colonial Trust Company
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF COLONIAL TRUST
COMPANY FOR THE SPECIAL MEETING OF STOCKHOLDERS
The undersigned stockholder of Colonial Trust Company, an Arizona
corporation (the "Company"), hereby acknowledges receipt of the Notice of
Special Meeting of Stockholders and Proxy Statement, dated ______, 2004, and
hereby appoints John K. Johnson and Sue Carlisle, or either of them, proxy and
attorney-in-fact, with full power of substitution, on behalf and in the name of
the undersigned, to represent the undersigned at the Special Meeting of
Stockholders of Colonial Trust Company to be held at the ________________,
Phoenix, Arizona on ________, 2004 at 10:00 a.m., Mountain Standard Time, and at
any adjournment(s) or postponement(s) thereof, and to vote all shares of Common
Stock that the undersigned would be entitled to vote if then and there
personally present, on the matters set forth below.
1. Sale of assets of the Corporate Trust Business.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Sale of assets of the Wealth Management Group Business.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Liquidation and dissolution of the company pursuant to the Plan of
Liquidation and Dissolution, including amendment of the Company's Articles
of Incorporation to effect a reverse stock split of one share of common
stock for every 35,032 shares of common stock that are issued and
outstanding for purposes of making liquidating distributions to
stockholders.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Adjournment of the Special Meeting to a later date, if necessary, to
solicit additional proxies in the event that there are insufficient shares
present in person or by proxy voting in favor of any or all of the above
matters presented at the Special Meeting to approve those matters.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
IN FAVOR OF THE PROPOSALS LISTED ABOVE AND AS SAID PROXIES DEEM ADVISABLE ON
SUCH MATTERS AS MAY COME BEFORE THE MEETING.
Dated: , 2004
Please sign exactly as your name appears on this proxy card. When shares are
held in common or in joint tenancy, both should sign. When signing as attorney,
as executor, administrator, trustee or guardian, please give full title as such.
If a corporation, sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by an authorized
person.
SIGNATURE(S):
I Will ________ Will not ______ attend the Special Meeting.
Please return in the enclosed, postage-paid envelope.
A1
Appendix A
PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION
OF
COLONIAL TRUST COMPANY
This Plan of Complete Liquidation and Dissolution (the "Plan") is intended to
accomplish the dissolution and complete liquidation of Colonial Trust Company,
an Arizona corporation (the "Company"), in accordance with the Arizona Revised
Statutes (the "ARS") and Section 331 of the Internal Revenue Code of 1986, as
amended (the "Code"), as follows:
1. The Board of Directors of the Company (the "Board of Directors") has adopted
this Plan and called a special meeting (including any adjournment thereof, the
"Meeting") of the Company's stockholders (the "Stockholders") to take action on
the Plan. If Stockholders holding a majority of the Company's issued and
outstanding no par value common stock (the "Common Stock") vote at the Meeting
for the authorization and approval of this Plan and the dissolution of the
Corporation, the Plan shall constitute the adopted Plan of the Company as of the
date of the Meeting or such later date on which the Stockholders may approve the
Plan if the Meeting is adjourned to a later date (the "Adoption Date").
2. The Plan shall become effective and may be implemented only upon the later of
the dates on which the following transactions are consummated: (i) the sale of
our Corporate Trust business to First State Bank pursuant to that Purchase and
Assumption Agreement dated as of December 30, 2003, and (ii) the sale our Wealth
Management business to Dubuque Bank and Trust Company and Arizona Bank and Trust
Company pursuant to that Purchase and Assumption Agreement dated as of March 26,
2004, and that Addendum to Purchase and Assumption Agreement dated as of April
26, 2004, (the "Effective Date").
3. After the Effective Date, the Company shall not engage in any business
activities except to the extent necessary to preserve the value of its assets,
wind up its business and affairs, and distribute its assets in accordance with
this Plan. No later than thirty (30) days following the Adoption Date, the
Company shall file a Form 966 with the Internal Revenue Service.
4. From and after the Effective Date, the Company shall complete the following
corporate actions:
(a) The Company shall determine whether and when to collect, sell, exchange
or otherwise dispose of all of its remaining property and assets in one or more
transactions upon such terms and conditions as the Board of Directors, in its
absolute discretion, deems expedient and in the best interests of the Company
and the Stockholders. In connection with such collection, sale, exchange and
other disposition, the Company shall collect or make provision for the
collection of all accounts receivable, debts and claims owing to the Company.
All of the remaining Company property and assets, and any proceeds from the
sales, exchanges, dispositions and collections from such property and assets,
shall be included in the Contingency Reserve (as described in Paragraph 4(b)).
A2
(b) The Company, as determined by the Board of Directors, shall establish a
reserve to: (i) pay or make reasonable provision to pay all claims and
obligations of the Company, including all contingent, conditional or unmatured
contractual claims known to the Company, (ii) make such provision as will be
reasonably likely to be sufficient to provide compensation for any claim against
the Company that is the subject of a pending action, suit or proceeding to which
the Company is a party, and (iii) make such provision as will be reasonably
likely to be sufficient to provide compensation for claims that have not been
made known to the Company or that have not arisen but that, based on facts known
to the Company, are likely to arise or to become known to the Company within
five years after the date of dissolution (the "Contingency Reserve").
(c) The Board of Directors will authorize liquidating distributions as
promptly as reasonably practicable. The Company intends to effect a reverse
stock split for the purpose of making the pro-rata liquidating distributions to
Stockholders. Accordingly, on or after the Effective Date, the Company will
amend its Articles of Incorporation to effect a reverse stock split of one share
of our common stock for every 35,032 shares of common stock that are currently
issued and outstanding, as follows:
The authorized capital stock of the Corporation is 25,000,000 shares
of common stock, no par value per share (the "Common Stock"). Each
thirty-five thousand and thirty-two (35,032) shares of the
Corporation's Common Stock issued as of [Date which Articles of
Amendment are filed] (the "Split Effective Date"), shall be
automatically changed and reclassified, as of the Split Effective Date
and without further action, into one (1) fully paid and nonassessable
share of the Corporation's Common Stock, with no fractional shares
being issued as a result of the foregoing (the "Reverse Stock Split").
The above is hereinafter referred to as the "Reverse Stock Split Amendment".
Upon the Reverse Stock Split, the Company will distribute to each record
holder a pro rata portion of all available cash, including the cash proceeds of
any sale, exchange or disposition, except such property or assets not yet
reduced to cash and cash in the Contingency Reserve, and a pro rata interest in
a note instrument, which gives such stockholder a pro rata interest (based on
the number of shares of Common Stock owned immediately prior to the Reverse
Stock Split) in any unused cash, property or assets that will ultimately remain
in the Contingency Reserve after all property and assets, that can in the
judgment of the Board of Directors, be disposed of for cash and all liabilities
as described above are satisfied (the "Note Interest"). As a result of the
Reverse Stock Split, there will remain one Stockholder (the "Remaining
Stockholder") holding one share of Common Stock.
(d) Upon the Board of Directors determining that the amount of the
Contingency Reserve can be reduced, an amount of cash (or other property if the
Board should so decide) shall be distributed pro rata to each holder of a Note
Interest. Such distributions may occur all at once or in a series of
distributions and shall be in cash, in such amounts, and at such time or times,
as the Board of Directors in its absolute discretion, may determine.
(e) The Company will make a final distribution to the Remaining Stockholder
after all distributions to the holders of the Note Interest are completed.
(f) The distributions to the Stockholders pursuant to Paragraphs 4(c) - (e)
hereof shall be in complete cancellation of all of the outstanding Common Stock.
As a condition to making any distribution to the Stockholders, the Board of
Directors, in its absolute discretion, may require the Stockholders to (i)
surrender their certificates evidencing the Common Stock to the Company or its
agent for recording of such distributions thereon, or (ii) furnish the Company
with evidence satisfactory to the Board of Directors of the loss, theft or
destruction of their certificates evidencing the Common Stock, together with
such surety bond or other security or indemnity as may be required by and
satisfactory to the Board of Directors ("Satisfactory Evidence and Indemnity").
The Company will finally close its stock transfer books and discontinue
recording transfers of Common Stock on the date of dissolution of the Company,
and thereafter certificates representing Common Stock will not be assignable or
transferable on the books of the Company except by will, intestate succession,
or operation of law.
A3
5. If any distribution to a Stockholder or a holder of a Note Interest cannot be
made, whether because the Stockholder or holder cannot be located, has not
surrendered its certificates evidencing the Common Stock as required hereunder
or for any other reason, the distribution to which such person is entitled shall
be transferred, at such time as the liquidating distribution occurs in
Paragraphs 4(c) - (e) (or in the case of a Note Interest, when a final payment
to the holders of a Note Interest is made by the Company), to an official of
such state or other jurisdiction authorized by applicable law to receive the
proceeds of such distribution. The proceeds of such distribution shall
thereafter be held solely for the benefit of and for ultimate distribution to
such Stockholder or holder of the Note Interest as the sole equitable owner
thereof and shall be treated as abandoned property and escheat to the applicable
state or other jurisdiction in accordance with applicable law. In no event shall
the proceeds of any such distribution revert to or become the property of the
Company.
6. If the Board of Directors determines to follow the procedures described in
Sections 10-1406 and 10-1407 of Chapter 14 of the ARS, then the additional steps
set forth below, to the extent necessary or appropriate, and any other steps
determined by the Board of Directors in its absolute discretion to be necessary
or appropriate, shall be taken:
(a) The giving of notice of the dissolution to the Secretary of State, the
Corporation Commission and the Department of Revenue of the State of Arizona,
and to all known creditors and by publication one time in a newspaper of general
circulation in the county in which the principal office of the Company is
located; and
(b) The taking of such action as may be determined by the Board of
Directors in its absolute discretion to be necessary or appropriate, including
without limitation the satisfaction of known, matured, uncontested claims, the
posting of security and the payment or making of adequate provision for payment
of any other claims.
Notwithstanding the foregoing, the Company shall not be required to follow the
procedures described in Chapter 14 of the ARS, and the adoption of the Plan by
the Company's Stockholders shall constitute full and complete authority for the
Board of Directors and the officers of the Company, without further stockholder
action, to proceed with the dissolution and liquidation of the Company in
accordance with any applicable provision of the ARS, including, without
limitation, Sections 10-1406 and 10-1407 thereof.
7. After the Effective Date, the officers of the Company shall, at such time as
the Board of Directors, in its absolute discretion, deems necessary, appropriate
or desirable, obtain any certificates required from and make any required
filings with the Arizona corporation, banking and tax authorities and, upon
obtaining such certificates and making such filings, the Company shall file with
the Secretary of State of the State of Arizona articles of dissolution (the
"Articles of Dissolution") in accordance with the ARS.
8. Adoption of this Plan by holders of at least a majority of the outstanding
Common Stock shall constitute the authorization and approval of the Stockholders
of this Plan, the dissolution of the Company and the sale, exchange or other
disposition in liquidation of all of the property and assets of the Company,
whether such sale, exchange or other disposition occurs in one transaction or a
series of transactions, and shall constitute ratification of any contracts for
sale, exchange or other disposition which are conditioned on adoption of this
Plan.
9. In connection with and for the purpose of implementing and assuring
completion of this Plan, the Company may, in the absolute discretion of the
Board of Directors, pay any brokerage, agency, professional and other fees and
expenses of persons rendering services to the Company in connection with the
collection, sale, exchange or other disposition of the Company's property and
assets and the implementation of this Plan.
A4
10. In connection with and for the purpose of implementing and assuring
completion of this Plan, the Company may, in the absolute discretion of the
Board of Directors, pay to the Company's officers, directors, employees, agents
and representatives, or any of them, compensation or additional compensation
above their regular compensation, in money or other property, in recognition of
the extraordinary efforts they, or any of them, will be required to undertake,
or actually undertake, in connection with the implementation of this Plan.
Authorization and approval of this Plan by the Stockholders shall constitute the
approval of the Stockholders of the payment of any such compensation.
11. The Company shall continue to indemnify its officers, directors, employees,
agents and representatives in accordance with its articles of organization and
by-laws, the ARS and any contractual arrangements, including without limitation
for actions taken in connection with this Plan and the winding up of the affairs
of the Company. The Company's obligation to indemnify such persons may also be
satisfied out of the assets of the Contingency Reserve. The Board of Directors,
in its absolute discretion, is authorized to obtain and maintain insurance as
may be necessary or appropriate to cover the Company's obligations hereunder.
12. Notwithstanding authorization and approval of this Plan by the Stockholders,
the Board of Directors may modify, amend or abandon this Plan and the
transactions contemplated hereby without further action by the Stockholders to
the extent permitted by the ARS.
13. The Board of Directors of the Company is hereby authorized, without further
action by the Stockholders, to do and perform or cause the officers of the
Company, subject to approval of the Board of Directors, to do and perform, any
and all acts, and to make, execute, deliver or adopt any and all agreements,
resolutions, conveyances, certificates and other documents of every kind that
are deemed necessary, appropriate or desirable, in the absolute discretion of
the Board of Directors, to implement this Plan and the transactions contemplated
hereby, including, without limiting the foregoing, all filings or acts required
by any state or federal law or regulation to wind up its affairs.
B1
Appendix B
ARIZONA REVISED STATUTES
Title 10 - Corporations and Associations
CHAPTER 13 - DISSENTERS' RIGHTS
Article 1 - Dissent and Payment for Shares
10-1301 Dissent and Payment for Shares
In this article, unless the context otherwise requires:
1. "Beneficial shareholder" means the person who is a beneficial owner of shares
held in a voting trust or by a nominee as the record shareholder.
2. "Corporation" means the issuer of the shares held by a dissenter before the
corporate action or the surviving or acquiring corporation by merger or share
exchange of that issuer.
3. "Dissenter" means a shareholder who is entitled to dissent from corporate
action under section 10-1302 and who exercises that right when and in the manner
required by article 2 of this chapter.
4. "Fair value" with respect to a dissenter's shares means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion is inequitable.
5. "Interest" means interest from the effective date of the corporate action
until the date of payment at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair and equitable
under the circumstances.
6. "Record shareholder" means the person in whose name shares are registered in
the records of a corporation or the beneficial owner of shares to the extent of
the rights granted by a nominee certificate on file with a corporation.
7. "Shareholder" means the record shareholder or the beneficial shareholder.
10-1302 Right to Dissent
A. A shareholder is entitled to dissent from and obtain payment of the fair
value of the shareholder's shares in the event of any of the following corporate
actions:
1. Consummation of a plan of merger to which the corporation is a
party if either:
(a) Shareholder approval is required for the merger by section
10-1103 or the articles of incorporation and if the shareholder
is entitled to vote on the merger.
(b) The corporation is a subsidiary that is merged with its
parent under section 10-1104.
2. Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan.
3. Consummation of a sale or exchange of all or substantially all of
the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale
or exchange, including a sale in dissolution, but not including a sale
pursuant to a court order or a sale for cash pursuant to a plan by
which all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within one year after the date of
sale.
4. An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it
either:
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(a) Alters or abolishes a preferential right of the shares.
(b) Creates, alters or abolishes a right in respect of
redemption, including a provision respecting a sinking fund for
the redemption or repurchase, of the shares.
(c) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities.
(d) Excludes or limits the right of the shares to vote on any
matter or to cumulate votes other than a limitation by dilution
through issuance of shares or other securities with similar
voting rights.
(e) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be
acquired for cash under section 10-604.
5. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, the bylaws or a resolution of
the board of directors provides that voting or nonvoting shareholders
are entitled to dissent and obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares under
this chapter may not challenge the corporate action creating the shareholder's
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. This section does not apply to the holders of shares of any class or series
if the shares of the class or series are redeemable securities issued by a
registered investment company as defined pursuant to the investment company act
of 1940 (15 United States Code section 80a-1 through 80a-64).
D. Unless the articles of incorporation of the corporation provide otherwise,
this section does not apply to the holders of shares of a class or series if the
shares of the class or series were registered on a national securities exchange,
were listed on the national market systems of the national association of
securities dealers automated quotation system or were held of record by at least
two thousand shareholders on the date fixed to determine the shareholders
entitled to vote on the proposed corporate action.
10-1303. Dissent by nominees and beneficial owners
A. A record shareholder may assert dissenters' rights as to fewer than all of
the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
person and notifies the corporation in writing of the name and address of each
person on whose behalf the record shareholder asserts dissenters' rights. The
rights of a partial dissenter under this subsection are determined as if the
shares as to which the record shareholder dissents and the record shareholder's
other shares were registered in the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares held on
the beneficial shareholder's behalf only if both:
1. The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights.
2. The beneficial shareholder does so with respect to all shares of
which the beneficial shareholder is the beneficial shareholder or over
which the beneficial shareholder has power to direct the vote.
Article 2 - Procedure for Exercise of Dissenters' Rights
10-1320. Notice of dissenters' rights
A. If proposed corporate action creating dissenters' rights under section
10-1302 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under this article and shall be accompanied by a copy of this article.
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B. If corporate action creating dissenters' rights under section 10-1302 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and shall send them the dissenters' notice described in section 10-1322.
10-1321. Notice of intent to demand payment.
A. If proposed corporate action creating dissenters' rights under section
10-1302 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights shall both:
1. Deliver to the corporation before the vote is taken written notice
of the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effectuated.
2. Not vote the shares in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A of this
section is not entitled to payment for the shares under this article.
10-1322. Dissenters' notice.
A. If proposed corporate action creating dissenters' rights under section
10-1302 is authorized at a shareholders' meeting, the corporation shall deliver
a written dissenters' notice to all shareholders who satisfied the requirements
of section 10-1321.
B. The dissenters' notice shall be sent no later than ten days after the
corporate action is taken and shall:
1. State where the payment demand must be sent and where and when
certificates for certificated shares shall be deposited.
2. Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received.
3. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of
the proposed corporate action and that requires that the person
asserting dissenters' rights certify whether or not the person
acquired beneficial ownership of the shares before that date.
4. Set a date by which the corporation must receive the payment
demand, which date shall be at least thirty but not more than sixty
days after the date the notice provided by subsection A of this
section is delivered.
5. Be accompanied by a copy of this article.
10-1323. Duty to demand payment.
A. A shareholder sent a dissenters' notice described in section 10-1322 shall
demand payment, certify whether the shareholder acquired beneficial ownership of
the shares before the date required to be set forth in the dissenters' notice
pursuant to section 10-1322, subsection B, paragraph 3 and deposit the
shareholder's certificates in accordance with the terms of the notice.
B. A shareholder who demands payment and deposits the shareholder's certificates
under subsection A of this section retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
C. A shareholder who does not demand payment or does not deposit the
shareholder's certificates if required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
article.
10-1324. Share restrictions.
A. The corporation may restrict the transfer of uncertificated shares from the
date the demand for their payment is received until the proposed corporate
action is taken or the restrictions are released under section 10-1326.
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B. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.
10-1325. Payment.
A. Except as provided in section 10-1327, as soon as the proposed corporate
action is taken, or if such action is taken without a shareholder vote, on
receipt of a payment demand, the corporation shall pay each dissenter who
complied with section 10-1323 the amount the corporation estimates to be the
fair value of the dissenter's shares plus accrued interest.
B. The payment shall be accompanied by all of the following:
1. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an
income statement for that year, a statement of changes in
shareholders' equity for that year and the latest available interim
financial statements, if any.
2. A statement of the corporation's estimate of the fair value of the
shares.
3. An explanation of how the interest was calculated.
4. A statement of the dissenter's right to demand payment under
section 10-1328.
5. A copy of this article.
10-1326. Failure to take action.
A. If the corporation does not take the proposed action within sixty days after
the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
B. If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under section 10-1322 and shall repeat the payment demand
procedure.
10-1327. After-acquired shares.
A. A corporation may elect to withhold payment required by section 10-1325 from
a dissenter unless the dissenter was the beneficial owner of the shares before
the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
B. To the extent the corporation elects to withhold payment under subsection A
of this section, after taking the proposed corporate action, it shall estimate
the fair value of the shares plus accrued interest and shall pay this amount to
each dissenter who agrees to accept it in full satisfaction of his demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares, an explanation of how the interest was calculated and a
statement of the dissenters' right to demand payment under section 10-1328.
10-1328. Procedure if a shareholder dissatisfied with payment or offer.
A. A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest due
and either demand payment of the dissenter's estimate, less any payment under
section 10-1325, or reject the corporation's offer under section 10-1327 and
demand payment of the fair value of the dissenter's shares and interest due, if
either:
1. The dissenter believes that the amount paid under section 10-1325
or offered under section 10-1327 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated.
2. The corporation fails to make payment under section 10-1325 within
sixty days after the date set for demanding payment.
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3. The corporation, having failed to take the proposed action, does
not return the deposited certificates or does not release the transfer
restrictions imposed on uncertificated shares within sixty days after
the date set for demanding payment.
B. A dissenter waives the right to demand payment under this section unless the
dissenter notifies the corporation of the dissenter's demand in writing under
subsection A of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
Article 3 - Judicial Appraisal of Shares
10-1330. Court action.
A. If a demand for payment under section 10-1328 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and shall petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
B. The corporation shall commence the proceeding in the court in the county
where a corporation's principal office or, if none in this state, its known
place of business is located. If the corporation is a foreign corporation
without a known place of business in this state, it shall commence the
proceeding in the county in this state where the known place of business of the
domestic corporation was located.
C. The corporation shall make all dissenters, whether or not residents of this
state, whose demands remain unsettled parties to the proceeding as in an action
against their shares, and all parties shall be served with a copy of the
petition. Nonresidents may be served by certified mail or by publication as
provided by law or by the Arizona rules of civil procedure.
D. The jurisdiction of the court in which the proceeding is commenced under
subsection B of this section is plenary and exclusive. There is no right to
trial by jury in any proceeding brought under this section. The court may
appoint a master to have the powers and authorities as are conferred on masters
by law, by the Arizona rules of civil procedure or by the order of appointment.
The master's report is subject to exceptions to be heard before the court, both
on the law and the facts. The dissenters are entitled to the same discovery
rights as parties in other civil proceedings.
E. Each dissenter made a party to the proceeding is entitled to judgment either:
1. For the amount, if any, by which the court finds the fair value of
his shares plus interest exceeds the amount paid by the corporation.
2. For the fair value plus accrued interest of the dissenter's
after-acquired shares for which the corporation elected to withhold
payment under section 10-1327.
10-1331. Court costs and attorney fees.
A. The court in an appraisal proceeding commenced under section 10-1330 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of any master appointed by the court. The court shall assess the costs
against the corporation, except that the court shall assess costs against all or
some of the dissenters to the extent the court finds that the fair value does
not materially exceed the amount offered by the corporation pursuant to sections
10-1325 and 10-1327 or that the dissenters acted arbitrarily, vexatiously or not
in good faith in demanding payment under section 10-1328.
B. The court may also assess the fees and expenses of attorneys and experts for
the respective parties in amounts the court finds equitable either:
1. Against the corporation and in favor of any or all dissenters if
the court finds that the corporation did not substantially comply with
the requirements of article 2 of this chapter.
2. Against the dissenter and in favor of the corporation if the court
finds that the fair value does not materially exceed the amount
offered by the corporation pursuant to sections 10-1325 and 10-1327.
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3. Against either the corporation or a dissenter in favor of any other
party if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good
faith with respect to the rights provided by this chapter.
C. If the court finds that the services of an attorney for any dissenter were of
substantial benefit to other dissenters similarly situated and that the fees for
those services should not be assessed against the corporation, the court may
award to these attorneys reasonable fees to be paid out of the amounts awarded
the dissenters who were benefitted.
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Appendix C
May 4, 2004
Board of Directors
Colonial Trust Company
Phoenix, Arizona
Gentlemen:
You have requested that The Bank Advisory Group, L.L.C. serve as an
independent financial analyst and advisor on behalf of Colonial Trust Company,
Phoenix, Arizona ("Colonial" or the "Company"). Specifically, we have been asked
to render advice and analysis in connection with: (i)-the proposed sale of
Colonial's Corporate Trust business to First State Bank and its parent, Happy
Bancshares, Inc. of Happy, Texas; (ii)-the proposed sale of Colonial's Wealth
Management business to Dubuque Bank and Trust Company, Arizona Bank & Trust
Company and their parent Corporation, Heartland Financial, USA, Inc., of
Dubuque, Iowa; and, (iii)-the proposed Plan of Liquidation and Dissolution of
Colonial (collectively, the "Subject Proposals"). In our role as an independent
financial analyst, you have requested our opinion with regard to the financial
fairness - from the perspective of the unaffiliated holders of the common stock
of Colonial (the "Colonial Stock") - of the per share cash distribution,
estimated to approximate $4.67 per share, resulting from the liquidation and
dissolution of the Company. The specific details of the sale of Colonial's
Corporate Trust and Wealth Management businesses together with the proposed Plan
of Liquidation and Dissolution of the Company are described in the Notice of
Special Meeting of Shareholders and Proxy Statement (the "Proxy Statement") to
which this opinion is attached.
Our understanding is that Colonial proposes to affect the Subject Proposals
pursuant to the following financial terms:
o Colonial shall sell its Corporate Trust business to First State Bank and
its parent, Happy Bancshares, Inc. of Happy, Texas, for cash consideration
equaling the sum of: (i)-the book value of the net assets of the Corporate
Trust business; (ii)-$819,000 for the real property connected to the
Corporate Trust business; and, (iii)-$550,000 as a goodwill premium (the
"Corporate Trust Sale").
o Colonial shall sell its Wealth Management business to Dubuque Bank and
Trust Company, Arizona Bank & Trust Company and their parent Corporation,
Heartland Financial, USA, Inc., of Dubuque, Iowa, for cash consideration
equaling the sum of: (i) the book value of the net assets of the Wealth
Management business; and, (ii) 1.88 times the annual recurring fees
attributable to the fiduciary trust accounts as of January 20, 2004, and
1.0 times the estimated annual recurring fees attributable to those
accounts created after January 20, 2004. The purchase price is subject to
post-closing adjustments related to the book value of the net assets being
purchased (the "Wealth Management Sale").
o Subsequent to the Corporate Trust and Wealth Management Sales, Colonial
shall commence with its Plan of Liquidation and Dissolution, resulting in
the holders of Colonial Stock receiving liquidating distributions expected
to range between $4.37 and $5.16 per share.
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o The Bank Advisory Group, L.L.C. is a specialized consulting firm focusing
on providing stock valuations together with traditional merger &
acquisition advisory services exclusively to financial institutions located
throughout the United States, or to groups of individuals associated with
U.S.-based financial institutions. As part of its line of professional
services, The Bank Advisory Group,-L.L.C. specializes in rendering
valuation opinions of banks and bank holding companies in connection with
mergers and acquisitions nationwide. Prior to its retention for this
assignment:
o The Bank Advisory Group has previously provided stock appraisal services to
Colonial. However, the professional fee of $6,000 paid by Colonial was
insignificant relative to the total revenues of The Bank Advisory Group.
o The Bank Advisory Group has previously provided various financial advisory
and stock appraisal services to Happy Bancshares, Inc., the parent company
of First State Bank, between 1993 and 1997. However, the fees paid by Happy
Bancshares/First State Bank, totaling approximately $19,500, were
insignificant relative to the total revenues of The Bank Advisory Group
during that time period. No financial services have been delivered to, nor
have any revenues been derived from, Happy Bancshares or First State Bank
since 1997 by The Bank Advisory Group.
o The Bank Advisory Group has not provided any services to, nor has it
received any professional fees from, Dubuque Bank & Trust or its parent,
Heartland Financial USA, Inc.
For our services as an independent financial analyst and advisor to
Colonial in connection with the Subject Proposals, Colonial has agreed to pay
The Bank Advisory Group professional fees totaling between $21,000 and $24,000.
Colonial also has agreed to provide reimbursement for reasonable out-of-pocket
expenses. Colonial has agreed to indemnify The Bank Advisory Group, the
officers, directors, employees, and shareholders of The Bank Advisory Group and
assigns, heirs, beneficiaries and legal representatives of each indemnified
entity and person.
No portion of the professional fee is contingent upon the conclusion
reached herein. And, no limitations were imposed by the Colonial Board of
Directors with respect to the investigations made or procedures followed in
rendering this opinion.
In connection with this opinion and with respect to Colonial, we have
reviewed, among other things:
1. Quarterly financial statements, included in the Colonial quarterly report
on Form 10-QSB, as filed with the U.S. Securities and Exchange Commission,
for the nine-month periods ended December 31, 2003 and 2002;
2. Audited consolidated financial statements, included in the Colonial annual
reports on Form 10-KSB, as filed with the U.S. Securities and Exchange
Commission, for the fiscal years ended March 31, 2003 and 2002;
3. Audited financial statements for Colonial, at and for the fiscal years
ended March 31, 2000 - 2003;
4. Annual Reports of Trust Assets for Colonial as of December 31, 2002 and
2003, as filed with the Federal Deposit Insurance Corporation;
5. Internally-generated, unaudited financial statements for Colonial as of
February 29, 2004;
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6. Certain internal financial analyses and forecasts for Colonial prepared by
the management of Colonial, including projections of future performance;
7. Certain other summary materials and analyses with respect to Colonial's
respective receivables holdings, investments portfolio, deposit base, fixed
assets, and operations; and,
8. Such other information regarding Colonial that we deemed relevant to this
assignment.
In connection with this opinion and with respect to the Subject Proposals,
we further have reviewed, among other things:
1. The Proxy Statement, in draft form, dated April 28, 2004;
2. The Corporate Trust Sale Purchase & Assumption Agreement by and between
First State Bank and Colonial, dated December 30, 2003;
3. The Wealth Management Sale Purchase & Assumption Agreement by and between
Dubuque Bank & Trust and Colonial, dated March 26, 2004, and the Addendum
thereto dated as of April 26, 2004;
4. The Plan of Liquidation and Dissolution;
5. The prices paid for "control" of selected U.S. asset management companies
acquired during January 2001 - March 2004 and with assets under management
below $1 billion at announcement date; and,
6. Such other information - including financial studies, analyses,
investigations, and economic and market criteria - that we deem relevant to
this assignment.
Based on our experience, we believe our review of, among other things, the
aforementioned items provides a reasonable basis for our opinion, recognizing
that we are expressing an informed professional opinion - not a certification of
value.
We have relied upon the information provided by the management of Colonial,
or otherwise reviewed by us, as being complete and accurate in all material
respects. Furthermore, we have not verified through independent inspection or
examination the specific assets or liabilities of Colonial. We have also assumed
that there has been no material change in the assets, financial condition,
results of operations, or business prospects of Colonial since the date of the
last financial statements made available to us. We have met with the management
of Colonial for the purpose of discussing the relevant information that has been
provided to us.
We have analyzed all relevant valuation variables and employed all
applicable valuation techniques or methodologies to determine the financial
fairness of the estimated liquidating distributions - expected to range between
$4.37 and $5.16 per share - to be paid to the holders of Colonial Stock based,
in part, on the proceeds to be received by Colonial upon consummation of the
Corporate Trust Sale and the Wealth Management Sale. Accordingly, based on all
factors that we deem relevant and assuming the accuracy and completeness of the
information and data provided to us, we conclude that, pursuant to the Plan of
Liquidation and Dissolution, liquidating distributions ranging between $4.37 and
$5.16 per share, payable in cash or in-kind, would be financially fair and
equitable from the perspective of the unaffiliated shareholders of Colonial
Stock.
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This fairness opinion letter is available for disclosure to all
shareholders of Colonial. Accordingly, we hereby consent to the reference to
this opinion and to our Firm in any disclosure materials provided to the
shareholders of Colonial in conjunction with the Proxy Statement.
Respectfully submitted,
The Bank Advisory Group, l.l.c.
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By:
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J. Stephen Skaggs, President