SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to__________.
Commission File Number 000-18887
COLONIAL TRUST COMPANY
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(Exact name of registrant as specified in its charter)
Arizona 75-2294862
- ------------------------ ------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
5336 N. 19th Avenue, Phoenix, Arizona 85015
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(Address of principal executive offices)
602-242-5507
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(Registrant's telephone number)
NONE
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(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the last practicable date: 7,740,401
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
COLONIAL TRUST COMPANY
INDEX
Page
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Part I. Financial Information:
Item 1: Financial Statements 3
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 10
Part II. Other Information
Item 1: Legal Proceedings 13
Item 2: Changes in Securities 13
Item 3: Default Upon Senior Securities 13
Item 4: Submission of Matters to a Vote of
Security Holders 13
Item 5: Other Information 13
Item 6: Exhibits and Reports on Form 8-K 13
SIGNATURES 13
Item 7: Exhibit 11 - Schedule of Computation
Of Earnings Per Share
2
COLONIAL TRUST COMPANY
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31, 1997 and March 31, 1997
December 31, 1997 March 31, 1997
----------------- --------------
ASSETS (Unaudited)
Cash and cash equivalents $ 166,872 132,426
Receivables 317,640 150,228
Note receivable 382,277 361,057
Property, furniture and equipment, net 719,934 739,456
Goodwill, net 156,462 165,590
Other assets 128,559 166,443
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$1,871,744 1,715,200
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 123,147 113,610
Income tax payable 26,598 25,617
Deferred income taxes 21,322 19,429
---------- ---------
Total liabilities 171,067 158,656
Stockholders' equity:
Common stock, no par value;
25,000,000 shares authorized,
7,740,401 and 7,777,401
issued and outstanding 554,942 554,942
Additional paid-in capital 505,347 505,347
Retained earnings 640,388 496,255
---------- ---------
Total stockholders' equity 1,700,677 1,556,544
---------- ---------
$1,871,744 1,715,200
========== =========
See accompanying notes to condensed financial statements.
3
COLONIAL TRUST COMPANY
Condensed Statements of Operations (Unaudited)
Three-month periods Nine-month periods
ended December 31, ended December 31,
1997 1996 1997 1996
---- ---- ---- ----
Revenues from trust services:
Bond servicing income $394,331 314,460 1,178,853 905,937
IRA servicing fees 88,617 69,565 317,209 230,750
Trust fee income 73,427 53,353 206,670 125,431
Interest income 10,402 8,907 29,475 25,479
-------- ------- --------- ---------
Total revenue 566,777 446,285 1,732,207 1,287,597
======== ======= ========= =========
General and administrative
expenses 477,580 390,085 1,470,005 1,114,519
-------- ------- --------- ---------
Income before income taxes 89,197 56,200 262,202 173,078
Income taxes 36,892 22,715 106,969 70,051
-------- ------- --------- ---------
Net income $ 52,305 33,485 155,233 103,027
======== ======= ========= =========
Basic Net income per
common share $ .007 .004 .020 .013
======== ======= ========= =========
Diluted Net income per
common share $ .007 N/A .020 N/A
======== ======= ========= =========
See accompanying notes to condensed financial statements and Exhibit 11.
4
COLONIAL TRUST COMPANY
Condensed Statements of Cash Flows (Unaudited)
Nine-month periods
ended December 31,
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 155,233 103,027
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization 9,128 9,127
Depreciation 52,852 41,403
Increase in receivables (167,412) (35,576)
Decrease in other assets 37,884 9,861
Increase in accounts payable,
accrued liabilities and income taxes 12,411 27,328
--------- --------
Net cash provided by operating activities 100,096 155,170
--------- --------
Cash flows from investing activities:
Purchase of property, furniture and equipment (33,330) (87,936)
Purchase of note receivable (21,220) (19,047)
Payment of Note Payable 0 (540,000)
Decrease in investment securities 0 464,883
--------- --------
Net cash used in investing activities (54,550) (182,100)
--------- --------
Cash flows from financing activities:
Purchase of common stock (11,100) 0
Net cash used in financing activities (11,100) 0
--------- --------
Increase (Decrease) in cash and
cash equivalents 34,446 (26,390)
Cash and cash equivalents at beginning of period 132,426 217,638
--------- --------
Cash and cash equivalents at end of period $ 166,872 190,708
========= ========
See accompanying notes to condensed financial statements.
5
COLONIAL TRUST COMPANY
Notes to Condensed Financial Statements
1. Significant Accounting Policies
In the opinion of Colonial Trust Company (the "Company"), the accompanying
unaudited condensed financial statements contain all adjustments necessary
to present fairly the financial position, the results of operations and
cash flows for the periods presented. The accompanying statements do not
include all disclosures considered necessary for a fair presentation in
conformity with generally accepted accounting principles. Therefore, it is
recommended that these accompanying statements be read in conjunction with
the financial statements appearing in the Company's 1997 Annual Report on
Form 10-KSB.
(a) Nature of Business
The Company was incorporated on August 15, 1989 in the State of
Arizona for the purpose of engaging in the business of acting as a
fiduciary. The Company is domiciled in the State of Arizona and is
regulated by the Arizona State Banking Department. Its Common Stock is
registered under the Securities Exchange Act of 1934.
The Company serves as trustee under various bond indentures for
issuers of bonds in 39 states. The issuers are primarily churches and
other non-profit organizations. As trustee, the Company receives,
holds, invests and disburses the bond proceeds as directed by the
applicable trust indenture and receives weekly or monthly sinking fund
payments from the issuer of the bonds, and, as paying agent, pays the
semi-annual principal and interest payments to the bondholders.
The Company also serves as trustee of self-directed individual
retirement accounts for certain bondholders or employees of religious
organizations.
On November 1, 1995, the Company purchased all of the issued and
outstanding capital stock of Camelback Trust Company ("Camelback").
Camelback serves as trustee or agent, providing investment management,
administration, and custodial services for customers with various
securities held in trust or for investment agency accounts.
6
COLONIAL TRUST COMPANY
Notes to Condensed Financial Statements
Effective on August 1, 1996, Camelback was merged with and into the
Company, the Company continued as the surviving corporation, and the
separate existence of Camelback terminated effective as of such date.
Camelback now operates as the Company's "Personal Trust Division".
(b) Revenue Recognition
The Company is compensated for its services as trustee and paying
agent in one of three ways. The first fee structure allows the Company
to invest trust funds held for disbursement and retain the gains and
earnings therefrom. The second fee structure requires the issuing
institution to pay a percentage of the bond proceeds to the Company
for set-up and bond printing costs during the first year.
Additionally, an annual maintenance fee is required each year. The
third fee structure entitles the Company to interest earnings up to
2.5% of daily trust funds held in bond proceeds accounts in lieu of a
set-up fee. Annual maintenance fees and bond printing costs are
charged as a percentage of the related bond issue. The Company's
policy is to allow the non-profit issuer to choose between the three
fee structures. The Company believes that the third fee structure is
currently utilized by a majority of the Company's competitors.
The Company also receives fees for services provided as custodian for
self-directed individual retirement accounts. For its services as
trustee, the Company receives an annual base fee of $40 and a
transaction fee of $5 per transaction for each transaction in excess
of 12 per year. The Company also retains, as a portion of its fee,
earnings up to 2% of the daily uninvested balance in each IRA account.
The Company's Personal Trust Division generates revenues based on two
fee structures. The first structure represents a percentage of the
fiduciary assets which are held as trustee or agent. Fees are assessed
on a quarterly basis to individual accounts according to the fair
market value of the supporting fiduciary assets in such account at the
end of each quarter.
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COLONIAL TRUST COMPANY
Notes to Condensed Financial Statements
Under the second fee structure, the Company charges a flat annual fee
based on the type of assets and services rendered. This fee varies
depending on the level of investment manage- ment the customer
desires. The Company charges a flat annual fee of $500 plus a per
asset fee for special assets held in the account for IRA accounts for
which it serves as custodian.
(c) Computation of Basic and Diluted Net Income Per Common Share
Income per share included in the financial statements is based on a
weighted average of 7,773,857 shares of Common Stock outstanding as of
December 31, 1997 and 7,777,401 shares of Common Stock outstanding as
of December 31, 1996. The Company repurchased and retired 37,000
shares of Common Stock, at $.30 per share, during the three-month
period ended December 31, 1997.
2. Note Receivable
On December 1, 1990, the Company entered into a Master Note and Letter
Agreement with Church Loans and Investment Trust, Inc., its former parent
corporation. The Master Note, in the maximum amount of $1,000,000, is due
on demand, bears interest payable monthly at 1% less than the prime rate
and is unsecured. Amounts advanced from time to time may be prepaid and
reborrowed.
3. Lease Commitments
The Company leases certain office equipment under various nonterminable
lease arrangements. The Company is also party to an office lease for
commercial office space formerly occupied by the Company. On March 15,
1995, the Company assigned its rights and obligations under the office
lease to an unrelated third party. The Company is liable for rent and other
obligations under the lease in the event the assignee defaults under the
office lease. The office lease terminated on September 30, 1996.
The Company is party to an office lease for commercial office space
formerly occupied by Camelback as its executive office. This space
currently is utilized by the Personal Trust Division. This office lease
terminates on February 14, 1998. The Company does not intend to renew this
lease.
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COLONIAL TRUST COMPANY
Notes to Condensed Financial Statements
4. Promissory Note
In connection with the acquisition of Camelback, the Company issued a
Promissory Note to the shareholders of Camelback in the amount of $540,000.
The Company held investments available for sale of approximately $540,000
as security for the Promissory Note. The Promissory Note was due on August
1, 1996, including all interest from November 1, 1995 through maturity. On
July 31, 1996, this Promissory Note was paid in full by transferring the
investment securities held as collateral to the holder of the Promissory
Note, including all interest earned from November 1, 1995 through July 31,
1996.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995:
This Form 10-QSB may contain one or more forward-looking statements within
the meaning of Section 21 E of the Securities Exchange Act of 1934, as
amended, and is subject to the safe harbors created thereby. These
forward-looking statements involve risks and uncertainties, including, but
not limited to: the Company's continued involvement in each of its current
businesses; the continued employment of key management, including John
Johnson, the Company's Chief Executive Officer, Marv Hoeflinger, the
Company's Vice President of Business Development, Bud Olson, the Company's
Vice President of Business Development - Personal Trust business, and
Christopher J. Olson, the Company's Vice President and senior officer
responsible for the Company's Personal Trust Business; the success of
Messrs. Johnson, Hoeflinger and Bud Olson in their business development
efforts on behalf of the Company; the Company's success in being repaid on
the bonds it purchases or the loans it makes under the Bond Repurchase
Program; the continuation of the Company's investment advisory agreement
with Hackett Investment Advisors ("HIA"), pursuant to which HIA provides
investment advisory services for the majority of the trust and investment
agency accounts of the Company, and the success of HIA in managing such
accounts; increased competition for the Company's services; competitive
pressures on prices for the Company's services; increased staffing or
office needs not currently anticipated; new rules or regulations not
currently anticipated which adversely affect the Company; and an increase
in interest rates or other economic factors having an adverse impact on the
Company.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
Under legislation passed by the State of Arizona effective on July 20,
1996, the Company is required to maintain net capital of at least $500,000, of
which $166,666 must be "liquid" (as defined in the legislation) by December 31,
1997. At December 31, 1997, the Company's total net capital was approximately
$1,711,777, of which $166,666 was considered liquid (as the Company interprets
the State Banking Department's definition of liquid capital), compared to net
capital of $1,556,000 at March 31, 1997, of which none was considered liquid.
The Company received clarification from the State Banking Department in early
January 1998 and was notified that its interpretation of "liquid" did not meet
the requirement. The Company immediately purchased a certificate of deposit in
the amount $166,666, which does meet the State Banking Department's definition
of "liquid" capital. As of the date hereof, the Company is in compliance with
the net capital requirements of the State Banking Department. Additionally, the
legislation requires the Company to have liquid net capital of $333,332 by
December 31, 1998 and liquid net capital of $500,000 by December 31, 1999. At
this time, the Company has no other sources of capital or liquidity available to
the Company, other than income earned and fees received by the Company.
Management believes that net income from future operations, together with
existing capital resources of the Company, will be sufficient to meet the
capital needs of the Company and the liquidity requirements imposed by the
recently-passed legislation for the foreseeable future, although there may be no
assurance in this regard.
On November 1, 1995, the Company purchased all the issued and
outstanding capital stock of Camelback Trust Company ("Camelback"). The total
consideration paid by Colonial for the net assets of Camelback was $197,046.
This amount included $27,646 cash (including $12,046 for Camelback's furniture
and equipment) and 769,999 shares of unregistered common stock of Colonial
valued at $169,400 ($.22 per share). The carrying value of Camelback's net
assets approximated their fair market value at the date of acquisition,
resulting in goodwill of $190,118. During fiscal 1997, the excess of cost over
fair value (goodwill) of $190,118 was reduced by $7,288 to reflect the fair
market value of assets and liabilities. In connection with the Company's
issuance of a $540,000 Promissory Note payable to the former shareholders of
Camelback, approximately $540,000 of the Company's investments available for
sale were held as security for certain Secured Debentures payable by Camelback's
previous shareholder, Bootstrap Capital Corporation, Inc., to its shareholders.
On July 31, 1996, this Promissory Note was paid in full by transferring the
investment securities held as collateral to the holder of the Promissory Note,
including all interest earned from November 1, 1995 through July 31, 1996.
Effective, August 1, 1996, Camelback was merged with and into the Company, the
Company continued as the surviving corporation, and Camelback's separate
existence terminated effective as of such date.
10
The Company's cash and cash equivalents increased from $132,426 on
March 31, 1997 to $166,872 on December 31, 1997, while the note receivable
increased from $361,057 on March 31, 1997 to $382,277 on December 31, 1997. The
increase in cash and cash equivalents was due to the results of operations, and
the increase in the note receivable was primarily due to the reinvestment of
interest earned on the note receivable. The Company's property and equipment
increased from $965,576 on March 31, 1997 to $998,906 on December 31, 1997. The
increase was primarily due to the purchase of additional furniture, equipment
and computer software for new employees.
RESULTS OF OPERATIONS - THREE-MONTH AND NINE-MONTH PERIODS ENDED DECEMBER 31,
1997
The Company reported increases in net income for both the three-month
and nine-month periods ended December 31, 1997 compared to comparable prior
periods. The Company had net income of $52,305, or $.007 per share, for the
three-month period ended December 31, 1997, compared to net income of $33,485,
or $.004 per share, for the three-month period ended December 31, 1996; a 56.2%
increase. The Company had net income of $155,233 or $.020 per share, for the
nine-month period ended December 31, 1997, compared to net income of $103,027,
or $.013 per share, for the nine-month period ended December 31, 1996; a 50.7%
increase. The Company had total revenue of $566,777 for the three-month period
ended December 31, 1997, compared to total revenue of $446,285 for the
three-month period ended December 31, 1996; a 27.0% increase. The Company had
total revenue of $1,732,207 for the nine-month period ended December 31, 1997,
compared to total revenue of $1,287,597 for the nine-month period ended December
31, 1996; a 34.5% increase.
The Company's bond servicing income increased to $394,331 for the
three-month period ended December 31, 1997, compared to $314,460 for the
three-month period ended December 31, 1996; a 25.4% increase. The Company's bond
servicing income increased to $1,178,853 for the nine-month period ended
December 31, 1997, compared to $905,937 for the nine-month period ended December
31, 1996; a 30.1% increase. The increase was primarily attributable to the
increase in the number of bond issues for which the Company serves as Trustee
and Paying Agent. As of December 31, 1997, the Company served as trustee for the
benefit of bondholders on 400 bond offerings totaling approximately $313,200,000
in original principal amount; as of December 31, 1996, the Company was serving
as trustee for the benefit of bondholders on 337 bond offerings totaling
approximately $265,900,000 in original principal amount. The increase in the
number of bond offerings for which the Company serves as Trustee and Paying
Agent reflects increased marketing and business development efforts of the
Company, including, but not limited to, the efforts of Marv Hoeflinger, the
Company's Vice President of Business Development, who joined the Company in
February 1996.
Income from IRA Accounts increased to $88,617 for the three-month
period ended December 31, 1997, compared to $69,565 for the three-month period
ended December 31, 1996; a 27.4% increase. Income from IRA Accounts increased to
11
$317,209 for the nine-month period ended December 31, 1997, compared to $230,750
for the nine-month period ended December 31, 1996; a 37.5% increase. These
increases were due primarily to an increase in the number of IRA accounts
serviced by the Company. IRA accounts are serviced by both the Corporate Trust
Division and the Personal Trust Division of the Company. As of December 31,
1997, the Company served as trustee for approximately 6,322 self-directed
Individual Retirement Accounts with total assets of approximately $138,000,000;
as of December 31, 1996, the Company served as trustee for 5,668 self-directed
Individual Retirement Accounts with total assets of approximately $113,500,000.
Trust fee income for the Personal Trust Division totaled $73,427 for
the three-month period ended December 31, 1997, compared to $53,353 for the
three-month period ended December 31, 1996; a 37.6% increase. Trust fee income
for the Personal Trust Division totaled $206,670 for the nine-month period ended
December 31, 1997, compared to $125,431 for the nine-month period ended December
31, 1996; a 64.8% increase. These increases were due to an increase in the
number of accounts for which the Company serves as trustee or agent.
Interest income increased to $10,402 for the three-month period ended
December 31, 1997, compared to $8,907 for the three-month period ended December
31, 1996; a 16.8% increase. Interest income increased to $29,475 for the
nine-month period ended December 31, 1997 compared to $25,479 for the nine-month
period ended December 30, 1996; a 15.7% increase. The increases were primarily
attributable to changes in interest rates.
The Company's general and administrative expenses increased to
$477,580 for the three-month period ended December 31, 1997, compared to
$390,085 for the three-month period ended December 31, 1996; a 22.4% increase.
The Company's general and administrative expenses increased to $1,470,005 for
the nine-month period ended December 31, 1997, compared to $1,114,519 for the
nine-month period ended December 31, 1996; a 31.9% increase. The increases were
due primarily to the addition of several staff members, as well as additional
expenses involved in administering the Company's expanding bond servicing
business and an increase in depreciation expense related to the recent
remodeling of the Company's corporate office. The Company also incurred an
expense of approximately $54,500.00 in connection with the termination in June
1997 of its proposed private placement of Common Stock. Such expenses were for
legal, accounting, and investment banking fees incurred (and previously accrued
by the Company) in connection with such private placement. The Company sold no
securities in the private placement. However, the Company's general and
administrative expenses decreased as a percentage of the Company's total
revenues to 84.3% for the three-month period ended December 31, 1997 compared to
87.4% for the comparable prior period, and decreased to 84.9% for the nine-month
period ended December 31, 1997 compared to 86.6% for the comparable prior
period. The foregoing decreases reflect the Company's ability to spread its
general ad administrative expenses over an expanding revenue base.
12
The Company's effective income tax rate was 41.4% and 40.4%,
respectively, for the three-month periods ended December 31, 1997 and December
31, 1996. The Company's effective income tax rate was 40.8% and 40.5%,
respectively, for the nine-month periods ended December 31, 1997 and December
31, 1996.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
ITEM 2: CHANGES IN SECURITIES
None.
ITEM 3: DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
Exhibit 11 - Schedule of Computation of Earnings per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K: None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
COLONIAL TRUST COMPANY
DATE: February 13, 1998 BY: /s/ John K. Johnson
--------------------------------
John K. Johnson
Its: President
DATE: February 13, 1998 BY: /s/ Cecil E. Glovier
--------------------------------
Cecil E. Glovier
Its: Chief Financial Officer
13