<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
_______to_______.
Commission File No. 000-18887
COLONIAL TRUST COMPANY
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
Arizona 75-2294862
(State of Incorporation) (IRS Employer Identification
Number)
</TABLE>
5336 N. 19th Avenue
Phoenix, Arizona 85015
(Address of principal executive offices)
602-242-5507
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
1
<PAGE> 2
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
___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $3,909,053.
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant was $2,408,955 as of June 1, 2000.
As of June 1, 2000, 741,217 shares of the Registrant's Common Stock were
outstanding.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
Item 1: Description of Business ......................... 4
Item 2: Description of Properties ....................... 12
Item 3: Legal Proceedings ............................... 12
Item 4: Submission of Matters to a Vote of
Security Holders ................................ 12
PART II
Item 5: Market for Common Equity and Related
Stockholder Matters ......................... 12
Item 6: Management's Discussion and Analysis
or Plan of Operation ........................ 13
Item 7: Financial Statements ........................ 23
Item 7.a: Qualitative Risks ........................... 40
Item 8: Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure ........................ 40
PART III
Item 9: Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act ........... 41
Item 10: Executive Compensation ...................... 43
Item 11: Security Ownership of Certain Beneficial
Owners and Management ....................... 48
Item 12: Certain Relationships and Related
Transactions ................................ 49
Item 13: Exhibits and Reports on Form 8-K ............ 49
</TABLE>
3
<PAGE> 4
PART I
Item 1. Description of Business.
Forward Looking Statements
This report contains forward looking statements. Additional written or
oral forward looking statements may be made by the Company from time to time by
filings with the Securities and Exchange Commission or otherwise. Such forward
looking statements are within the meaning of that term in Section 27A of the
Securities Act of 1993, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
statements may include, but not be limited to, projection of revenues, income,
or loss, estimates of capital expenditures, plans for future operations,
products or services, and financing needs or plans, as well as assumptions
relating to the foregoing. The words "believe", "expect", "anticipate",
"estimate", "project" and similar expressions identify forward looking
statements, which speak only as of the date the statement was made. Forward
looking statements are inherently subject to risks and uncertainties, some of
which cannot be predicted or quantified. Future events and actual results could
differ materially from those set forth in, contemplated by, or underlying the
forward looking statements. The Company undertakes no obligation to publicly
update or revise any forward looking statements, whether as a result of new
information , future events, or otherwise. The following disclosures, as well as
other statements in this Report on Form 10-KSB, including but not limited to
those contained below in "Item 1: Description of Business-Growth Plans," and
"Item 6: Management's Discussion and Analysis or Plan of Operation," describe
factors, among others, that could contribute to or cause such differences, or
that could affect the Company's stock price.
General
Colonial Trust Company (the "Company") was incorporated under the laws
of the State of Arizona on August 15, 1989. The business operations of the
Company commenced 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 ("Church Loans"), 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 Church Loans on the basis of one
share of common stock of the Company for each share of Church Loans stock owned
on such date.
4
<PAGE> 5
Business Segments
The Company currently has two business segments: Corporate Trust and
Personal Trust. The Corporate Trust segment provides services including serving
as custodian for individual retirement accounts ("IRA Accounts"), and trustee
for bond offerings of churches and other non-profit organizations. The Company
is presently primarily engaged in serving as trustee and paying agent on bond
programs of churches and other non-profit organizations. Through its Personal
Trust segment, the Company provides traditional investment management,
administration and custodial services for customers with trust assets. This
segment also serves as trustee or custodian for IRA Accounts.
Corporate Trust Segment
Bond Offering Services
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. The Company also receives periodic sinking fund
payments (payments of interest on the bonds by the non-profit organizations,
typically made on a weekly basis) on their respective due dates. In its capacity
as paying agent, the Company 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 is compensated for its services as trustee and paying agent
in one of three ways. The first fee structure allows
5
<PAGE> 6
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 a $10 fee in instances in which
the Company serves as transfer agent.
As of March 31, 2000, the Company had served as trustee and paying
agent for 703 bond offerings totaling approximately $632 million in original
principal amount. The foregoing includes a total of 81 bond offerings in
original principal amount of approximately $103 million originated in the fiscal
year ended March 31, 2000. The Company's revenues from these activities
represented approximately 66% of the Company's aggregate revenues for the year
ended March 31, 2000. See "Item 6-Management's Discussion and Analysis or Plan
of Operation - Results of Operations-Results of Operations for the Years Ended
March 31, 2000 and 1999."
As of March 31, 2000, all bond programs for which the Company was
serving as trustee and paying agent had been originated by sixteen
broker/dealers, and four of those broker/dealers had originated bonds
representing approximately 79% of the aggregate principal amount of all bonds
for which the Company was serving as trustee and paying agent. For the year
ending March 31, 2000, 2 broker-dealers had originated 64% of the aggregate
principal amount of all new bond issues for the year. The Company's ability to
generate bond servicing fees is dependent upon the ability of broker/dealers to
originate bond offerings for non-profit organizations and the Company's ability
to maintain or develop a relationship with broker/dealers who are successful in
originating such bond offerings.
The Company is attempting to procure additional business from the
broker/dealers with whom the Company currently has a relationship, and is also
attempting to develop relationships with and procure business from
broker/dealers with whom the Company does not currently have a relationship.
IRA Account Services
The Company also serves as trustee for IRA Accounts. As trustee, the
Company receives all contributions to these accounts,
6
<PAGE> 7
invests the contributions as directed by the account participant and distributes
the funds of the accounts pursuant to the terms of each individual account. 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.
At March 31, 2000, the Company was serving as trustee for approximately
9,228 IRA Accounts with an aggregate value of approximately $151 million.
Revenue from the Company's activities in this area represented approximately 14%
of the Company's aggregate revenues for the year ended March 31, 2000. See "Item
6-Management's Discussion and Analysis or Plan of Operation - Results of
Operations for the Years Ended March 31, 2000 and 1999."
The majority of the IRA Accounts 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
Accounts. 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.
The Company intends to attempt to grow this business primarily through
marketing efforts directed at non-profit organizations. The Company promotes its
IRA services through investment seminars emphasizing the Company's ability and
willingness to allow church bonds as a self-directed IRA investment.
Personal Trust Segment
The Personal Trust segment 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 Accounts and
trustee for managed IRA Accounts. At March 31, 2000, the Personal Trust segment
served as trustee or agent for 338 trust, other accounts, or investment agency
accounts with a fair market value of approximately $87 million, and served as
custodian or trustee for approximately 205 IRA Accounts with a fair market value
of approximately $45 million.
The Personal Trust segment generates revenues based on two fee
structures. The first fee structure represents a percentage of the fiduciary
assets which the Company holds 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. Under
the second fee
7
<PAGE> 8
structure, the Personal Trust segment charges a flat annual fee based on the
type of asset and the services rendered for its services. The fee varies
depending on the level of investment management the customer desires. This
segment charges either a flat annual fee of $500 plus $25 per special asset, or
a percentage of total assets held in the account for IRA Accounts for which it
serves as custodian or trustee.
The Personal Trust segment is party to an investment advisory agreement
dated December 1998 with Hackett Investment Advisors, Inc. ("HIA"), an
investment advisor located in Scottsdale, Arizona. Pursuant to this agreement,
this business segment designates HIA, and HIA serves for the Company, as
investment advisor on a portion of the investment accounts of the Personal Trust
segment. HIA further refers to the Personal Trust segment all business
opportunities for which an independent corporate fiduciary is necessary or
appropriate. The Personal Trust segment pays HIA 30% of the gross fees collected
by the Company from the segment's investment management accounts receiving HIA
advisory services. The agreement with HIA is scheduled to terminate on December
31, 2000.
The Personal Trust segment is also party to an investment advisory
agreement dated January 2, 1997 with Wright Investors Services ("WIS"). WIS is
an investment advisor located in Bridgeport, Connecticut. Pursuant to this
agreement, this segment designates WIS, and WIS serves for the segment, as
investment advisor on a portion of the designated investment accounts of the
Personal Trust segment. The Company pays WIS 30% or 10%, depending upon the type
of account, of the gross fees collected by the segment from the segment's
investment management accounts for which WIS serves as investment advisor. The
agreement initially ran through January 31, 1998. The agreement automatically
renews for subsequent terms of one year each, unless either party notifies the
other in writing at least three months in advance of the anniversary date of its
intent to terminate the agreement. The agreement has been renewed and continues
in effect until January 31, 2001.
The Personal Trust segment is also party to an investment
advisory agreement dated August 16, 1999 with Feldman Securities Group, L.L.C.
("FSG"). FSG is an investment advisor located in Chicago, Illinois. Pursuant to
this agreement, this segment designates FSG, and FSG serves for the segment, as
investment advisor on a portion of the designated investment accounts of the
Personal Trust segment. The Company pays FSG 28 basis points for managed assets
up to $10 million in the aggregate. For every subsequent $10 million increment
in managed assets, the fee the Company pays drops by 2 basis points. Currently,
the Company is paying 28 basis points. The agreement runs continuously
8
<PAGE> 9
until either party gives the other in writing at least thirty days notice of its
intent to terminate the agreement.
The profitability of the Personal Trust segment is largely dependent on
the Company's ability to manage the trust accounts resulting from these efforts.
Revenues from the Personal Trust segment represented approximately 18% of the
Company's aggregate gross revenues for the year ended March 31, 2000. See
"-Growth Plans" and "Management's Discussion and Analysis or Plan of Operation -
Results of Operations for the Years Ended March 31, 2000 and 1999."
Growth Plans
The Company intends to attempt to expand its non-profit bond servicing
operations, its IRA Account servicing operations, and its traditional trust and
investment agency servicing operations. Although the Company may make additional
acquisitions in the event opportunities arise on favorable terms, the Company
anticipates that expansion will result primarily from internal development.
The Company intends to (i) attempt to expand its non-profit bond
servicing operations by attempting to increase the number of bond offerings it
services which are initiated by broker/dealers with whom the Company has an
existing relationship, and (ii) attempt to develop relationships with additional
broker/dealers from whom the Company will receive bond servicing referrals. The
Company also intends to attempt to develop additional sources of revenue by
serving as paying agent for non-profit loan funds established by denominations
of various religious organizations. The Company also intends to attempt to
continue to develop additional sources of revenue by serving as trustee for
certain municipal bond offerings established by municipalities throughout the
United States, but concentrated mainly in the western United States. There may
be no assurance that the Company will be successful in its efforts to increase
bond-servicing revenues or to develop additional sources of revenue. See
"Management's Discussion and Analysis or Plan of Operation - Results of
Operations for the Years Ended March 31, 2000 and 1999."
The Company intends to (i) attempt to expand its IRA Account servicing
business through attempting to develop relationships with new broker/dealers
with whom the Company has not previously had a relationship, and (ii) host
investment seminars emphasizing the Company's ability and willingness to allow
church bonds as a self-directed IRA investment. There may be no assurance that
the Company will be successful in its efforts to increase IRA Account servicing
revenues. See "Management's Discussion and Analysis or Plan of Operation Results
of Operations for the Years Ended March 31, 2000 and 1999."
9
<PAGE> 10
The Company also intends to attempt to expand its traditional trust
account and investment agency account business by (i) attempting to procure
additional business from lawyers, accountants and other trust professionals in
the Phoenix area with whom the Company has an existing relationship, and (ii)
attempting to develop relationships with additional trust professionals in the
Phoenix area who will serve as referral sources for the Company. The Company is
party to an agreement with the Baptist Foundation of Arizona to assume the
successor trusteeship for approximately 100 accounts during the summer of 2000.
The assumption of successor trusteeship must be approved by the Probate Court of
Maricopa County, Arizona. Court proceedings have been scheduled to begin in June
2000. The Company believes that they will be successful in their efforts to
become successor trustee. There may be no assurances that the Company will be
successful in its efforts to increase trust account and investment agency
account servicing revenues. See "Management's Discussion and Analysis or Plan of
Operation - Results of Operations for the Years Ended March 31, 2000 and 1999."
The foregoing discussion entitled "Growth Plans" contains
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934 and is subject to the
safe harbors created thereby. The Company's actual future operations could
differ materially because of the following factors, among others: the Company's
continued involvement in each of its current business segments; the continued
employment of key management; the Company's success in marketing its existing
relationships with broker/ dealers who can serve as referral sources for the
Company; the Company's success in developing additional relationships with
broker/dealers who can serve as new sources of referrals for the Company; the
continuation of the Company's investment advisory agreements with WIS, FSG, and
HIA and their success in managing the trust and IRA Accounts for which they
provide services; no material changes in existing laws, rules or regulations
affecting the Company's operations; competitive factors, such as increased
competition for the Company's services in one or more of the above business
segments; an increase in interest rates or other economic factors having an
adverse impact on the Company's non-profit bond servicing business and other
factors set forth in "Management's Discussion and Analysis or Plan of
Operation."
Competition
The Company's primary competitors in the non-profit bond servicing
business are Reliance Trust Company, Herring National Bank, American Church
Trust Company and Trust Management Inc. Some
10
<PAGE> 11
of these companies have significantly greater financial and other resources than
the Company. Increased success by these competitors or increased competition
from additional sources could have a material adverse effect on the Company's
financial condition and results of operations.
Competition in the IRA Account servicing business is intense. However,
to date the Company has focused its efforts on procuring IRA Account servicing
business from non-profit organizations and their members. Thus, the Company's
primary competition comes from the relatively small number of trustees who will
allow church bonds as a self-directed investment. The Company's primary
competitors in this business include Reliance Trust Company, American Church
Trust, Trust Management Inc. and, to a lesser extent, broker/dealers, banks and
other financial institutions, investment advisors, money management firms and
other trust companies, many of which have significantly greater financial and
other resources than the Company.
The Company competes with the trust departments of large banks (and
other financial institutions) and, to a lesser extent, with other independent
trust companies for trust account and investment agency account business.
Although the Company has focused its efforts on trust accounts which are smaller
than those typically serviced by large banks, increased competition by large
banks for these accounts and/or increased success by other independent trust
companies could have a material adverse impact on the Company's financial
condition and results of operations. The large banks, and some of the
independent trust companies located in the Phoenix area, have significantly
greater financial and other resources than the Company.
Regulation, Licensing and Supervision
The Company's operations are subject to ongoing regulation, licensing
and supervision under various federal, state and local statutes, ordinances and
regulations, including but not limited to regulation by the Arizona Department
of Banking. Under applicable rules and regulations of the Arizona Department of
Banking, the Company files periodic reports with the Department and is subject
to periodic examinations of that Department.
Under legislation effective on July 20, 1996, the Company is required
to maintain net capital of at least $500,000; the Company's net capital was
approximately $2,500,000 on March 31, 2000. The legislation also requires that
the Company's net capital meet certain liquidity requirements. Specifically,
$166,666, $333,332 and $500,000 of such net capital must meet the Department's
liquidity requirements by July 19, 1997, July 19, 1998 and July 19, 1999,
respectively. At March 31, 2000, $502,555 of
11
<PAGE> 12
the Company's net capital met the Department's liquidity requirements.
The Company believes that it is currently in substantial compliance
with all applicable federal, state and local laws and regulations.
Employees
At March 31, 2000, the Company employed 36 people. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
Item 2. Description of Properties.
On March 15, 1995, the Company purchased an office building located at
5336 N. 19th Avenue in Phoenix, Arizona. The building is approximately 10,000
square feet in size and serves as the Company's executive offices.
The Company was also a party to a lease for commercial office space
formerly occupied by the Personal Trust segment. The office lease terminated on
February 14, 1998.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
On June 1, 2000, the Company had approximately 2,200 stockholders of
record. There is no established public trading market for the Company's Common
Stock. The Company does not expect to pay dividends in the foreseeable future
but instead intends to retain future earnings, if any, to increase stockholders'
equity and to satisfy the capital and liquidity requirements of the Arizona
Banking Department. See "Business-Regulation, Licensing and Supervision".
On September 24, 1998, the Company's stockholders approved a
12
<PAGE> 13
one-for-ten reverse stock split of the Company's issued and outstanding common
stock. All share amounts, share prices and earnings per share have been
retroactively adjusted for all periods presented to reflect this reverse split.
Initial purchases and sales of the Company's Common Stock occurred in
January 1991. See Item 1 "Description of Business." The high and low sales
prices for the Company's Common Stock during the year ended March 31, 2000, were
$3.25 and $3.00 per share, respectively. Such prices represent negotiated sales
between buyers and sellers without mark-up, mark-down or retail commission. The
Company served as transfer agent in connection with all such transactions.
Item 6. Management's Discussion and Analysis or Plan of Operation
Results of Operations for the Years Ended March 31, 2000 and 1999
The Company had net earnings of $431,923, or $.55 diluted earnings per
share, for the fiscal year ended March 31, 2000, compared to net earnings of
$378,958, or $.49 diluted earnings per share, for the fiscal year ended March
31, 1999, an increase in net earnings of 14%. The Company had total revenue of
$3,909,053 for the fiscal year ended March 31, 2000, compared to total revenue
of $3,072,236 for the fiscal year ended March 31, 1999, an increase of 27%.
<TABLE>
<CAPTION>
Corporate Trust Personal Trust Other Total
----------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
2000
Bond Servicing Income $2,592,749 - - $2,592,749
IRA Servicing Fees 556,405 $172,799 - 729,204
Trust Income - 521,073 - 521,073
Interest Income - - $66,027 66,027
----------------- ---------------- -------------- ----------------
$3,149,154 $693,872 $66,027 $3,909,053
================= ================ ============== ================
General & Administrative Expenses $1,583,500 $629,285 $972,001 $3,184,786
================= ================ ============== ----------------
1999
Bond Servicing Income $2,006,221 - - $2,006,221
IRA Servicing Fees 448,328 $120,064 - 568,392
Trust Income - 445,569 - 445,569
Interest Income - - $52,054 52,054
----------------- ---------------- -------------- ----------------
$2,454,549 $565,633 $52,054 $3,072,236
================= ================ ============== ================
General & Administrative Expenses $1,257,385 $483,462 $692,137 $2,432,984
================= ================ ============== ================
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
1998
<S> <C> <C> <C> <C>
Bond Servicing Income $1,582,917 - - $1,582,917
IRA Servicing Fees 348,660 $95,331 - 443,991
Trust Income - 279,903 - 279,903
Interest Income - - $39,799 39,799
----------------- ---------------- -------------- ----------------
$1,931,577 $375,234 $39,799 $2,346,610
================= ================ ============== ================
General & Administrative Expenses $866,149 $327,116 $791,220 $1,984,485
================= ================ ============== ================
</TABLE>
The Corporate Trust segment's revenue increased to $3,149,154 for the
fiscal year ended March 31, 2000, compared to $2,454,549 for the fiscal year
ended March 31, 1999, an increase of 28%. The Personal Trust segment's revenue
increased to $693,872 for the fiscal year ended March 31, 2000, compared to
$565,633 for the fiscal year ended March 31, 1999, an increase of 23%.
The Corporate Trust segment's bond servicing revenue increased to
$2,592,749 for the fiscal year ended March 31, 2000, compared to $2,006,221 for
the year ended March 31, 1999, an increase of 29%. The increase in bond
servicing revenue was primarily attributable to the increase in the number of
bond accounts serviced by the Company. At March 31, 2000, the Company was
serving as trustee and paying agent on 448 bond offerings totaling approximately
$435,000,000 in original principal amount; at March 31, 1999, the Company was
serving as trustee and paying agent on 466 bond offerings totaling approximately
$409,000,000 in original principal amount. The Company anticipates that its bond
servicing revenue will increase in the fiscal year ending March 31, 2001, as a
result of an increase in the number and principal amount of bond offerings for
which the Company serves as trustee and paying agent.
Revenue from the Corporate Trust segment's IRA Account servicing
activities increased to $556,405 for the fiscal year ended March 31, 2000,
compared to $448,328 for the fiscal year ended March 31, 1999, an increase of
24%. Revenue from the Personal Trust segment's IRA Account servicing activities
increased to $172,799 for the fiscal year ended March 31, 2000, compared to
$120,064 for the fiscal year ended March 31, 1999, an increase of 44%.
At March 31, 2000, the Corporate Trust segment was servicing 9,228 IRA
Accounts with an aggregate value of approximately $151,000,000, and the Personal
Trust segment was servicing 205 IRA accounts with an aggregate value of
approximately $45,000,000. At March 31, 1999, the Corporate Trust segment was
servicing 8,143 IRA Accounts with an aggregate value of approximately
$136,000,000, and the Personal Trust segment was servicing 198 accounts with an
aggregate value of approximately $38,000,000. The Company anticipates that its
IRA Account servicing revenue will increase in
14
<PAGE> 15
the fiscal year ending March 31, 2000 as a result of an increase in the number
of IRA Accounts serviced by these segments.
The Personal Trust segment's trust revenue increased to $521,073 for
the fiscal year ended March 31, 2000, compared to $445,569 for the fiscal year
ended March 31, 1999, an increase of 17%. At March 31, 2000, the Personal Trust
segment was serving as trustee or agent for 338 trust, investment accounts, or
other accounts with a fair market value of approximately $87,000,000. At March
31, 1999, the Personal Trust segment was serving as trustee or agent for 304
trust, investment accounts, or other accounts with a fair market value of
approximately $61,000,000. The Company anticipates that trust revenue will
increase in the fiscal year ending March 31, 2001 as a result of an increase in
the number of accounts serviced by this segment.
Interest revenue increased to $66,027 for the fiscal year ended March
31, 2000, compared to $52,054 for the fiscal year ended March 31, 1999, an
increase of 27%. The increase was primarily attributable to a larger balance
held for investment and higher interest rates.
The Corporate Trust segment's general and administrative expenses
increased in the aggregate to $1,583,500 for the fiscal year ended March 31,
2000, compared to $1,257,385 for the fiscal year ended March 31, 1999, but
decreased to 50% of segment revenues for the fiscal year ended March 31, 2000,
compared to 51% of segment revenues in the fiscal year ended March 31, 1999. The
Personal Trust segment's general and administrative expenses increased in the
aggregate to $629,285 for the fiscal year ending March 31, 2000, compared to
$483,462 for the fiscal year ended March 31, 1999, and increased to 91% of
segment revenues for the fiscal year ended March 31, 2000, compared to 85% of
segment revenues for the fiscal year ended March 31, 1999. The Company
anticipates that general and administrative expenses will increase in the
aggregate for both segments in the fiscal year ending March 31, 2001, but will
remain relatively constant or decrease slightly as a percentage of revenues from
fiscal 2000 levels as a result of spreading these increased costs over a larger
revenue base.
The foregoing discussion contains various forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act, and is subject to the safe harbors created thereby.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Actual results could differ
materially because of the following factors, among others: the Company's
continued involvement in each of its current business segments; the Company's
success in maintaining relationships with the broker/dealers with whom it
currently does business; the success of the
15
<PAGE> 16
Company's efforts to develop relationships with other broker/dealers who can
serve as a source of referral for the Company; the continued employment of key
management; the success of the Company in its business development efforts; the
continuation of the Company's investment advisory agreements with HIA, WIS and
FSG and their success in managing the trust and investment agency accounts for
which they provide services; increased staffing or office needs not currently
anticipated; increased competition for the Company's services, competitive
pressures or prices for the Company's services; and changes in rules and
regulations adversely impacting the Company's business segments.
Results of Operations for the Years Ended March 31, 1999 and 1998
The Corporate Trust segment's revenue increased to $2,454,549 for the
fiscal year ended March 31, 1999, compared to $1,931,577 for the fiscal year
ended March 31, 1998, an increase of 27%. The Personal Trust segment's revenue
increased to $565,633 for the fiscal year ended March 31, 1999, compared to
$375,234 for the fiscal year ended March 31, 1998, an increase of 51%.
The Company had net earnings of $378,958, or $.49 diluted earnings per
share, for the fiscal year ended March 31, 1999, compared to net earnings of
$214,358, or $.27 diluted earnings per share, for the fiscal year ended March
31, 1998, an increase in net earnings of 77%. The Company had total revenue of
$3,072,236 for the fiscal year ended March 31, 1999, compared to total revenue
of $2,346,610 for the fiscal year ended March 31, 1998, an increase of 31%.
The Corporate Trust segment's bond servicing revenue increased to
$2,006,221 for the fiscal year ended March 31, 1999, compared to $1,582,917 for
the fiscal year ended March 31, 1998, an increase of 27%. The increase in bond
servicing revenue was primarily attributable to the increase in the number of
bond accounts serviced by the Company. At March 31, 1999, the Company was
serving as trustee and paying agent on 466 bond offerings totaling approximately
$409,000,000 in principal amount; at March 31, 1998, the Company was serving as
trustee and paying agent on 418 bond offerings totaling approximately
$315,000,000 in principal amount.
Revenue from the Corporate Trust segment's IRA Account servicing
activities increased to $448,328 for the fiscal year ended March 31, 1999,
compared to $348,660 for the fiscal year ended March 31, 1998, an increase of
29%. Revenue from the Personal Trust segment's IRA Account servicing activities
increased to $120,064 for the fiscal year ended March 31, 1999, compared to
$95,331 for the fiscal year ended March 31, 1998, an increase of 26%.
16
<PAGE> 17
At March 31, 1999, the Corporate Trust segment was servicing 8,143 IRA
Accounts with an aggregate value of approximately $136,000,000, and the Personal
Trust segment was servicing 198 accounts with an aggregate value of
approximately $38,000,000. At March 31, 1998, the Corporate Trust segment was
servicing 6,503 IRA Accounts with an aggregate value of approximately
$117,000,000, and the Personal Trust segment was servicing 141 IRA Accounts with
an aggregate value of approximately $26,000,000.
The Personal Trust segment's trust revenue increased to $445,569 for
the fiscal year ended March 31, 1999, compared to $279,903 for the fiscal year
ended March 31, 1998, an increase of 59%. This increase was primarily due to an
increase in the number of accounts being serviced by this segment.
Interest revenue increased to $52,054 for the fiscal year ended March
31, 1999, compared to $39,799 for the fiscal year ended March 31, 1998, an
increase of 31%. The increase was primarily attributable to a larger balance
held for investment.
The Corporate Trust segment's general and administrative expenses
increased in the aggregate to $1,257,385 for the fiscal year ended March 31,
1999, compared to $866,149 for the fiscal year ended March 31, 1998, and
increased to 51% of segment revenues for the fiscal year ended March 31, 1999,
compared to 45% for the fiscal year ended March 31, 1998. The Personal Trust
segment's general and administrative expenses increased in the aggregate to
$483,462 for the fiscal year ended March 31, 1999, compared to $327,116 for the
fiscal year ended March 31, 1998, but decreased to 85% of segment revenues for
the fiscal year ended March 31, 1999, compared to 87% of segment revenues for
the fiscal year ended March 31, 1998.
Liquidity and Capital Resources
Under legislation effective on July 20, 1996, the Company is required
to maintain net capital of at least $500,000; the Company's net capital was
$2,509,770 on March 31, 2000. The legislation also requires that the Company's
net capital meet certain liquidity requirements. Specifically, $166,666,
$333,332 and $500,000 of such net capital must meet the Department's liquidity
requirements as of July 19, 1997, July 19, 1998 and July 19, 1999, respectively.
At March 31, 2000, $502,556 of the Company's net capital met the Department's
liquidity requirements. Net cash provided by operating activities was $128,752
for the year ended March 31, 2000. Net cash used in investing activities was
$276,538 for the year ended March 31, 2000, resulting primarily from the
purchase of property and equipment and an increase in restricted cash.
17
<PAGE> 18
The Company believes that it will be able to satisfy its working
capital and capital expenditure requirements for the foreseeable future from
existing cash balances, anticipated cash flow from operating activities, and
from funds available under the Company's Master Note with its former parent,
Church Loans and Investments Trust.
Accounting Matters
In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131: "Disclosures about Segments
of an Enterprise and Related Information" (SFAS No. 131), which became effective
on April 1, 1998. SFAS No. 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim reports issued to stockholders. The adoption of
SFAS No. 131 did not have a material impact on the Company.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132: "Employer Disclosures about
Pensions and Other Postretirement Benefits" (SFAS No. 132), which became
effective on April 1, 1998. SFAS No. 132 establishes standards for the
information that public enterprises report in annual financial statements. The
adoption of SFAS No. 132 has not had a material impact on the Company.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133: "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), which established accounting
and reporting standards for all derivative instruments and hedging activities.
SFAS No. 133 requires the recognition of all derivatives as either assets or
liabilities in the balance sheet at fair value. In June 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" (SFAS No. 137), which
defers the effective date of SFAS No. 133 to be effective for all fiscal years
beginning after June 15, 2000. The Company will adopt SFAS No. 133 in Fiscal
2002. SFAS No. 133 is not expected to have a material impact on the Company's
result of operations or financial position.
18
<PAGE> 19
Risk Factors
Lack of Liquidity of the Company's Common Stock
The Company's Common Stock is not listed on the Nasdaq Stock Market
("Nasdaq") or on any national or regional securities exchange, and there is no
established trading market for the Common Stock. The Company will continue to
attempt to match stockholders who wish to sell Company Common Stock with persons
who wish to buy such Common Stock. However, based on historical trading volume
in the Company's Common Stock, a stockholder who owns a substantial number of
shares of Company Common Stock will likely be unable to sell his shares in a
short period of time should he or she need or wish to do so.
Dependence on Key Personnel and Management of Growth
The Company's future success will depend upon the continued services of
the Company's senior management. The unexpected loss of the services of any of
the Company's senior management personnel could have a material adverse effect
upon the Company. The Company has entered into employment agreements with
certain of its senior management. See "Item 10: Executive
Compensation-Employment Agreements." The Company's future success will depend in
part upon its continuing ability to attract and retain highly qualified
personnel to manage the future growth of the Company. There may be no assurance
that the Company will be successful in attracting and retaining such personnel.
Further, the Company's ability to manage growth successfully will require the
Company to continue to improve its management and financial controls. Failure to
do so could have a material adverse effect upon the Company's operating results
and financial condition.
Non-Profit Bond Servicing Market; Ability to Increase Bond Servicing
Revenues
The Company's future financial performance will depend in part upon the
size of the non-profit bond market. The market for bonds issued by non-profit
organizations is subject to fluctuation due to a number of factors beyond the
control of the Company. Moreover, there can be no assurance that the market for
bonds issued by non-profit organizations will continue at or near the levels
reached in 2000 or 1999. The Company's ability to continue to increase its
market share will be dependent upon a number of factors, including the Company's
ability to develop and
19
<PAGE> 20
maintain relationships with the broker/dealers who are primarily responsible for
the sale of such non-profit bonds. See "Dependence Upon Certain Business
Relationships." Revenues from the Company's bond servicing activities accounted
for approximately 66% of the Company's total revenues in fiscal 2000.
Market for Personal Trust Services; Ability to Increase Personal Trust
Service Revenues
The Company intends for the foreseeable future to limit the activities
of its Personal Trust segment to the metropolitan Phoenix area. Therefore, the
Company's future financial performance will depend in part upon the size of the
market for personal trust services in the metropolitan Phoenix area. Revenues
from such activities accounted for approximately 18% of the Company's total
revenues in the fiscal year ended March 31, 2000. The Company's ability to
continue to increase its revenues from personal trust services will be dependent
upon a number of factors, including the Company's ability to develop and
maintain relationships with professionals (such as attorneys and accountants)
who serve as a referral source for these services and the Company's continuing
ability to service personal trust accounts. See "Item 1: Business-Personal Trust
Segment."
Dependence Upon Certain Business Relationships
The Company depends to a significant extent on its relationships with
broker/dealers who are involved in the sale of bonds for non-profit
organizations to refer business to the Company for bond servicing duties
associated with such offerings. As of March 31, 2000, all bond programs for
which the Company was serving as trustee and paying agent had been originated by
sixteen broker/dealers, and four of those broker/dealers had originated bonds
representing approximately 79% of the aggregate principal amount of all
outstanding bonds for which the Company was serving as trustee and paying agent.
The loss of or damage to any one of these relationships, or the failure or
inability of any one of these broker/dealers to initiate a similar number of
non-profit bond offerings in the future, could have a material adverse impact on
the Company and its operations. The Company also depends, to a great extent,
upon its relationships with trust professionals (such as attorneys and
accountants) in the metropolitan Phoenix area to refer opportunities to the
Company to provide personal trust services. The loss of or damage to existing
relationships, or the Company's inability to continue to develop additional
relationships with trust professionals, could
20
<PAGE> 21
have a material adverse impact on the Company and its operations.
Competition
The principal business segments in which the Company is involved are
highly competitive. The Company currently competes with a number of other trust
companies to serve as trustee and paying agent for non-profit bond financings,
including Reliance Trust Company, Herring National Bank, American Church Trust
Company, and Trust Management, Inc. The Company also competes with large banks
and other financial institutions for these services. Other companies that do not
currently provide these services may enter this business. The Company also
competes with large banks and other financial institutions, including other
trust companies, located in the metropolitan Phoenix area for the business of
providing personal trust services. Other companies that do not currently provide
these services may enter this business.
Regulation, Licensing and Supervision; Net Capital Requirements
The Company's operations are subject to ongoing regulation, supervision
and licensing under various federal, state and local statutes, ordinances and
regulations, including but not limited to regulation by the Arizona Department
of Banking. Under applicable rules and regulations of the Arizona Department of
Banking, the Company files periodic reports with the Department and is subject
to periodic examinations by the Department. Additionally, under legislation
effective on July 20, 1996, the Company is required to maintain net capital of
at least $500,000; the Company's net capital was approximately $2.5 million at
March 31, 2000. The foregoing legislation also requires that the Company's net
capital meet certain liquidity requirements. Specifically, $166,666, $333,332
and $500,000 of the Company's net capital must meet the Department's definition
of liquidity by July 19, 1997, July 19, 1998 and July 19, 1999, respectively. At
March 31, 2000, $502,556 of the Company's net capital met the Department's
liquidity requirements. The Company believes that it is currently in substantial
compliance with all applicable federal, state and local laws and regulations.
Change in Securities Laws Affecting Non-Profit Bond Finance Market
Most bond offerings for which the Company serves as trustee and/or
paying agent are made in reliance upon an exemption from
21
<PAGE> 22
registration provided by Section 3(a)(4) of the Securities Act of 1933, as
amended, and similar exemptions from registration provided for under applicable
state securities laws. In the event such federal and/or state exemptions become
unavailable for any reason, the Company believes that the market for non-profit
bond financings would be materially and adversely affected due primarily to the
increased costs associated with registration of such bonds under federal and/or
state laws. The foregoing would have a material adverse impact on the Company's
fees generated from bond servicing activities and, thus, the Company's results
of operations.
Common Stock Dividends
The Company has never paid dividends on its Common Stock. The Company
intends for the foreseeable future to retain any earnings to support the growth
of the Company's business. The Company therefore does not contemplate paying
cash dividends on its Common Stock in the foreseeable future.
Year 2000
As of the date hereof, the Company has not experienced any
Year 2000 problems with its systems nor does the Company anticipate any
problems. However, there can be no guarantee that future system problems related
to Year 2000 will not have a material impact on the Company's operations. The
Company's third party vendors with which it has relationships also did not
experience any Year 2000 problems which materially impacted the Company's
operations. However, there can be no guarantee that future problems with third
party vendors' computer systems related to Year 2000 will not have a material
impact on the Company's operations.
The Company's expenditures required to be Year 2000 compliant
(primarily a reallocation of current personnel's time from other projects to the
year 2000 remediation plan) wee not material, and the Company has expensed all
costs associated with the Year 2000 remediation plan. However, there can be no
assurance that the ultimate cost to identify and implement solutions to future
problems related to Year 2000 will not be material to the Company.
22
<PAGE> 23
Item 7. Financial Statements.
The Company's audited financial statements, containing balance sheets
as of March 31, 2000 and 1999, and related statements of earnings, stockholders'
equity and cash flows for each of the years in the three-year period ended March
31, 2000, are set forth on the following pages.
23
<PAGE> 24
COLONIAL TRUST COMPANY
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report ...................................... 25
Balance Sheets as of March 31, 2000,
and 1999 .................................................... 26
Statements of Earnings for the years
ended March 31, 2000, 1999, and 1998 ........................ 27
Statements of Stockholders' Equity for
the years ended March 31, 2000, 1999,
and 1998 .................................................... 28
Statements of Cash Flows for the Years
ended March 31, 2000, 1999, and 1998 ........................ 29
Notes to Financial Statements ..................................... 30
</TABLE>
24
<PAGE> 25
Independent Auditors' Report
The Board of Directors
Colonial Trust Company:
We have audited the accompanying balance sheets of Colonial Trust
Company (Company) as of March 31, 2000 and 1999, and the related statements of
earnings, stockholders' equity and cash flows for each of the years in the
three-year period ended March 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Colonial Trust
Company as of March 31, 2000 and 1999, and the results of its operations and its
cash flows for each of the years in the three-year period ended March 31, 2000
in conformity with generally accepted accounting principles.
/s/KPMG LLP
Phoenix, Arizona
June 2, 2000
25
<PAGE> 26
COLONIAL TRUST COMPANY
Balance Sheets
March 31, 2000 and 1999
<TABLE>
<CAPTION>
Assets 2000 1999
---------- ---------
<S> <C> <C>
Cash and cash equivalents $ 9,260 175,256
Receivables 802,122 518,395
Note receivable 378,387 419,084
Property and equipment, net 843,095 811,696
Excess of cost over fair value acquired, net 129,081 141,250
Restricted cash 502,556 337,551
Other assets 100,421 106,007
---------- ---------
$2,764,922 2,509,239
========== =========
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $ 197,132 280,464
Income taxes payable 46,301 107,953
Deferred income taxes 7,249 20,295
---------- ---------
250,682 408,712
---------- ---------
Stockholders' equity:
Common stock, no par value. Authorized
25,000,000 shares; issued and
outstanding 755,234 and 761,337 shares
at March 31, 2000 and 1999, respectively 555,177 555,177
Additional paid-in capital 505,347 505,347
Retained earnings 1,453,716 1,040,003
---------- ---------
Total stockholders' equity 2,514,240 2,100,527
Commitments and contingencies
(notes 4 and 10)
---------- ---------
$2,764,922 2,509,239
========== =========
</TABLE>
See accompanying notes to financial statements.
26
<PAGE> 27
COLONIAL TRUST COMPANY
Statements of Earnings
Years ended March 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenue:
Bond servicing revenue $2,592,749 2,006,221 1,582,917
IRA servicing fees - corporate 556,405 448,328 348,660
IRA servicing fees - personal 172,799 120,064 95,331
Trust revenue 521,073 445,569 279,903
Interest revenue 66,027 52,054 39,799
---------- ---------- ----------
Total revenue 3,909,053 3,072,236 2,346,610
General and administrative expenses 3,184,786 2,432,984 1,984,485
---------- ---------- ----------
Earnings before income taxes 724,267 639,252 362,125
Income taxes 292,344 260,294 147,767
---------- ---------- ----------
Net earnings $ 431,923 378,958 214,358
========== ========== ==========
Basic earnings per share $ 0.57 0.49 0.28
========== ========== ==========
Diluted earnings per share $ 0.55 0.49 0.27
========== ========== ==========
Weighted average shares outstanding - basic 758,185 765,768 776,487
========== ========== ==========
Weighted average shares outstanding - diluted 780,907 779,377 790,125
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
27
<PAGE> 28
COLONIAL TRUST COMPANY
Statements of Stockholders' Equity
Years ended March 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Common stock Additional Total
------------ paid-in Retained stockholders'
Shares Amount capital earnings equity
------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1997 777,740 $ 554,942 505,347 496,255 1,556,544
Common stock acquired and
retired (4,811) -- -- (14,433) (14,433)
Net earnings -- -- -- 214,358 214,358
---------- ---------- ---------- ---------- ----------
Balances at March 31, 1998 772,929 554,942 505,347 696,180 1,756,469
Common stock acquired and
retired (11,686) -- -- (35,135) (35,135)
Issuance of common stock
under stock option plan 94 235 -- -- 235
Net earnings -- -- -- 378,958 378,958
---------- ---------- ---------- ---------- ----------
Balances at March 31, 1999 761,337 555,177 505,347 1,040,003 2,100,527
Common stock acquired and
retired (6,103) -- -- (18,210) (18,210)
Net earnings -- -- -- 431,923 431,923
---------- ---------- ---------- ---------- ----------
Balances at March 31, 2000 755,234 $ 555,177 505,347 1,453,716 2,514,240
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
28
<PAGE> 29
COLONIAL TRUST COMPANY
Statements of Cash Flows
Years ended March 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 431,923 378,958 214,358
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 133,000 95,315 82,506
Deferred income taxes (13,046) 8,465 (7,599)
Increase (decrease) in cash resulting from changes in:
Receivables (283,727) (127,637) (240,530)
Other assets 5,586 (558) 60,994
Accounts payable and accrued liabilities (83,332) 148,089 18,765
Income taxes payable (61,652) 60,348 21,988
--------- --------- ---------
Net cash provided by operating activities
128,752 562,980 150,482
--------- --------- ---------
Cash flows from investing activities:
Payment received on note receivable 260,000 -- --
Additions to note receivable (219,303) (29,595) (28,432)
Purchase of property and equipment (152,230) (182,359) (43,362)
Increase in restricted cash (165,005) (169,345) (168,206)
--------- --------- ---------
Net cash used in investing activities
(276,538) (381,299) (240,000)
--------- --------- ---------
Cash flows from financing activity:
Purchase and retirement of common stock (18,210) (35,135) (14,433)
Proceeds from issuance of common stock under stock
option plan -- 235 --
--------- --------- ---------
Net cash used in financing activities
(18,210) (34,900) (14,433)
--------- --------- ---------
Increase(decrease)in cash and cash equivalents
(165,996) 146,781 (103,951)
Cash and cash equivalents at beginning of year 175,256 28,475 132,426
--------- --------- ---------
Cash and cash equivalents at end of year $ 9,260 175,256 28,475
========= ========= =========
Supplemental disclosures:
Income taxes paid $ 367,041 191,481 133,378
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
29
<PAGE> 30
COLONIAL TRUST COMPANY
Notes to Financial Statements
(1) Significant Accounting Policies
(a) Nature of Business
Colonial Trust Company (Colonial or 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, is
regulated by the Arizona State Banking Department, and the Company's common
stock is registered under the Securities Exchange Act of 1934.
Colonial serves as trustee under various bond indentures for issuers of
bonds in 39 states. The issuers are primarily churches and other religious
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 bonds, and in turn,
pays the semiannual principal and interest payments to the bondholders. As of
March 31, 2000, Colonial was serving as trustee for the benefit of the
bondholders on 448 bond offerings totaling approximately $435,000,000 in
original principal amount. The amount of sold and unmatured bonds total
approximately $340,000,000 at March 31, 2000. Colonial also serves as a trustee
of 9,228 self-directed individual retirement accounts for certain bondholders or
employees of religious organizations totaling approximately $151,000,000 at
March 31, 2000.
Colonial also serves as trustee or agent, provides investment management,
administration, and custodial services through its personal trust segment. As
trustee or agent, Colonial receives, holds, invests and tracks the performance
of the various securities held in trust, or investment agency accounts. Colonial
was serving as trustee or agent for 338 accounts with a fair market value
totaling approximately $87,000,000 at March 31, 2000. Colonial also acts as
custodian for self-directed IRA accounts. Colonial held 205 accounts as
custodian with a fair market value of approximately $45,000,000 at March 31,
2000.
(b) Basis of Presentation
On September 24, 1998, the Company's shareholders approved a one-for-ten
reverse common stock split. All share amounts, share prices and earnings per
share have been retroactively adjusted for all periods presented to reflect this
reverse common stock split.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to mates and assumptions that
affect the reported amount of
30
<PAGE> 31
COLONIAL TRUST COMPANY
Notes to Financial Statements
Continued
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(d) Revenue Recognition
Under the trust indentures with organizations issuing bonds, Colonial, for
its services, principally earns revenues based on three fee structures. The
first fee structure allows Colonial to invest trust funds held for disbursement
and retain the gains and earnings therefrom. The second fee structure requires
the issuing institution to pay a percentage of the bond proceeds to the Company
for set-up and printing costs during the first year. Additionally, an annual
maintenance fee is required each succeeding year. The third fee structure
entitles Colonial to interest earnings up to 2.5% of daily trust funds held in
bond program fund accounts in lieu of a set-up fee. Annual maintenance fees and
bond printing costs are charged as a percentage of the related bond issuance.
Colonial also receives fees for services provided as custodian for self-directed
individual retirement accounts.
The profitability of Colonial is dependent upon the ability of investment
broker-dealers to originate bond programs for which Colonial serves as trustee.
At March 31, 2000, approximately 79% of the total bond issues processed were
originated by 4 broker-dealers. For the year ended March 31, 2000, 2
broker-dealers had originated 64% of the aggregate principal amount of all new
bond issues. At March 31, 1999, approximately 78% of the total bond issues
processed were originated by 4 broker-dealers.
In connection with providing investment management, administration and
custodial services, Colonial earns revenue based on two fee structures. The
first fee structure is established as a percentage of the fiduciary assets which
Colonial holds as trustee or agent. Fees are assessed on a quarterly basis to
individual accounts according to the quarter's end fair market value of the
supporting fiduciary assets. The second fee structure relates to an annual fee
which is set up to cover the maintenance of fiduciary assets which Colonial
holds in both trust and self-directed IRA accounts.
At March 31, 2000, 22% of Colonial's trust account assets were held in
trust for members of one family. The combined trust accounts approximated 14% of
Colonial's trust income revenues. At March 31, 1999, 17% of Colonial's trust
assets were held in trust for members of one family. The combined trust accounts
approximated 16% of Colonial's trust income revenues.
31
<PAGE> 32
COLONIAL TRUST COMPANY
Notes to Financial Statements
Continued
(e) Cash Equivalents and Concentration of Credit Risk
Colonial considers all highly liquid debt instruments with original
maturities at the date of purchase of three months or less to be cash
equivalents. Cash equivalents at March 31, 2000 and 1999 consist primarily of
money market accounts which invest primarily in short-term government
securities.
Colonial places its cash in insured financial institutions and United
States government securities with original maturities of three months or less.
At March 31, 2000 and 1999, Colonial had no deposits at financial institutions
in excess of the FDIC insurance limit of $100,000.
(f) Note Receivable
Colonial considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the note. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted at the note's effective interest rate. Impairment losses are charged
to expense. The Company had no impaired notes receivable during fiscal 2000,
1999 and 1998.
(g) Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation on furniture and equipment is recorded on the straight-line method
over the estimated useful lives of the assets ranging from 3 to 5 years.
Colonial's building is depreciated over 39.5 years using the straight-line
method.
(h) Excess of Cost Over Fair Value Acquired (Goodwill)
Goodwill is amortized using the straight-line method over 15 years.
Goodwill is carried net of accumulated amortization of $53,749 and $41,580 at
March 31, 2000 and 1999, respectively.
(i) Income Taxes
Colonial uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a
32
<PAGE> 33
COLONIAL TRUST COMPANY
Notes to Financial Statements
Continued
change in tax rates is recognized in income in the period that includes the
enactment date.
(j) Computation of Earnings Per Common Share
Basic EPS is computed based on weighted average shares outstanding and
excludes any potential dilution from stock options, warrants and other common
stock equivalents. Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock.
(K) Stock Option Plan
In accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, the Company measures
stock based compensation expense as the excess of the market price at the grant
date over the underlying stock exercise price. In accordance with the provisions
of SFAS No. 123, Accounting for Stock-Based Compensation, the Company provides
pro forma net earnings and pro forma earnings per share disclosures for employee
stock option grants as if the fair value of all stock-based awards on the date
of the grant was recognized as expense over the vesting period.
(l) Impairment of Long-Lived Assets
Colonial reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
(m) Reclassifications
Certain reclassifications have been made to prior year balances to conform
to the current year presentation.
(2) Note Receivable
On December 1, 1990, Colonial entered into a Master Note and Letter
Agreement with Church Loans, a real estate investment trust and Colonial's
former parent corporation. The Master Note in the maximum amount of $1,000,000
is due on demand, bears interest at
33
<PAGE> 34
COLONIAL TRUST COMPANY
Notes to Financial Statements
Continued
1% less than the prime interest rate and is unsecured. Amounts advanced to
Church Loans may be repaid and reborrowed.
(3) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
Land $ 157,241 157,241
Building 449,912 434,699
Furniture 179,729 142,573
Equipment 525,777 425,916
------------- ------------
1,312,659 1,160,429
Less accumulated depreciation 469,564 348,733
------------- ------------
$ 843,095 811,696
============= ============
</TABLE>
(4) Lease Commitments
During fiscal 1998, Colonial leased office space and certain equipment
under various non-cancelable operating lease arrangements. As of March 31, 1998,
Colonial no longer leased office space. Rent expense totaled $14,181 for 1998.
(5) Income Taxes
Income taxes amounted to $292,344, $260,294 and $147,767 for 2000, 1999 and
1998, respectively. The actual income taxes differ from "expected" income taxes
for those years (computed by applying the U.S. federal corporate statutory
income tax rate of 34% to earnings before income taxes) as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Computed "expected" income
taxes $ 246,250 217,346 123,123
State taxes (net of federal
income tax benefit) 39,297 36,006 20,055
Other items, net 6,797 6,942 4,589
------------- ------------- -------------
$ 292,344 260,294 147,767
============= ============= =============
Effective income tax rate 40.4% 40.7% 40.8%
============= ============= =============
</TABLE>
34
<PAGE> 35
COLONIAL TRUST COMPANY
Notes to Financial Statements
Continued
Components of income taxes consist of:
<TABLE>
<CAPTION>
Current Deferred Total
-------------- ------------- -------------
<S> <C> <C> <C>
2000:
Federal $ 243,193 (10,389) 232,804
State 62,197 (2,657) 59,540
-------------- ------------- -------------
$ 305,390 (13,046) 292,344
============== ============= =============
1999:
Federal $ 199,234 6,506 205,740
State 52,595 1,959 54,554
-------------- ------------- -------------
$ 251,829 8,465 260,294
============== ============= =============
1998:
Federal $ 123,085 (5,705) 117,380
State 32,281 (1,894) 30,387
-------------- ------------- -------------
$ 155,366 (7,599) 147,767
============== ============= =============
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liabilities at March 31, 2000 and 1999 are presented below:
<TABLE>
<CAPTION>
2000 1999
-------- ---------
<S> <C> <C>
Deferred tax liability--property and
equipment, principally due to differences in
depreciation $7,249 20,295
======== ========
</TABLE>
(6) Stock Option Plans
Colonial's stockholders approved Colonial's Incentive Stock Option Plan for
employees of the Company (the ISOP) and Colonial's Non-Employee Directors Stock
Option Plan (the Directors Plan) on April 25, 1996.
Pursuant to the ISOP, the Colonial's Board of Directors is authorized to
grant either incentive stock options or nonstatutory stock options. The exercise
price of incentive stock options granted under the ISOP must be equal to the
fair market value per share on the date of grant, and the exercise price of
nonstatutory stock options must be at least 50% of the fair market value per
share on the date of grant. A total of 200,000 shares have been reserved for
issuance under the ISOP.
Pursuant to the Directors Plan, each non-employee director received an
option to purchase 5,000 shares on the date the Directors Plan was approved by
Colonial's stockholders and options to purchase 1,500 shares were automatically
granted on January 1, 1997 and on each January 1 thereafter to each person then
serving as a non-employee director of Colonial. The exercise price of all
options granted under the Directors Plan must be equal to the fair market value
per share on the date of grant. A total of 50,000
35
<PAGE> 36
COLONIAL TRUST COMPANY
Notes to Financial Statements
Continued
shares have been reserved for issuance under the Directors Plan.
At March 31, 2000, there were 100,769 shares available for grant under the
ISOP Plan and 17,000 shares available for grant under the Directors Plan. The
per share weighted average fair value of stock options granted during 2000, 1999
and 1998 was $1.05, $.97 and $.97, respectively, on the date of grant using the
Black Scholes Model with the following weighted average assumptions: expected
dividend yield of 0%, volatility of 10%, risk free interest rate of 6.5% and an
expected life of 6 years for 2000, 1999 and 1998.
Colonial applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had Colonial determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123, the
Company's net earnings would have been reduced to the pro forma amount indicated
below for the years ended March 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net earnings:
As reported $ 431,923 $ 378,958 $ 214,358
============= ============= =============
Pro forma $ 420,728 $ 368,255 $ 205,918
============= ============= =============
Earnings per share:
As reported - basic $ .57 $ .49 $ .28
============= ============= =============
As reported - diluted $ .55 $ .49 $ .27
============= ============= =============
Pro forma - basic $ .55 $ .48 $ .27
============= ============= =============
Pro forma - diluted $ .54 $ .47 $ .26
============= ============= =============
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net earnings amounts presented
above because compensation cost is reflected over the options' vesting period of
six years.
A summary of the aforementioned stock option plans follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
March 31, 2000 March 31, 2000 March 31, 2000
----------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
-------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at the
beginning of the year 130,483 $2.69 122,577 $2.67 81,829 $2.50
Granted 8,000 3.25 8,000 3.00 40,748 3.00
Forfeited (6,252) 2.90 -- -- -- --
Exercised -- -- (94) 2.50 -- --
------- ---- ------- ---- ------- ----
Balance at the end of
the year 132,231 $2.71 130,483 $2.69 122,577 $2.67
======= ===== ======= ===== ======= ====
</TABLE>
36
<PAGE> 37
COLONIAL TRUST COMPANY
Notes to Financial Statements
Continued
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Exercisable at the
end of the year 127,231 $2.71 106,483 $2.69 80,577 $2.65
======== ===== ======== ===== ======== =====
</TABLE>
(7) Fair Value of Financial Instruments
The following summary presents a description of the methodologies and
assumptions used to determine the fair value of the Company's financial
instruments.
(a) Cash and Cash Equivalents
The carrying amount is assumed to be the fair value because of the
short-term nature and liquidity of these instruments.
(b) Receivables and Notes Receivable
Fair value is considered to be equal to the carrying value of the accounts
and notes receivables, as they are generally short-term in nature and the
related amounts approximate fair value or are receivable on demand.
(c) Limitations
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Changes in assumptions could significantly affect these
estimates. Since the fair value is estimated as of March 31, 2000 and 1999, the
amounts that will actually be realized or paid at settlement or maturity of the
instruments could be significantly different.
(8) Net Earnings Per Share
A summary of the Company's basic and diluted earnings per share are as
follows:
<TABLE>
<CAPTION>
Years ended March 31
------------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Net earnings $ 431,923 $ 378,958 $ 214,358
============ ============ ===========
Basic EPS - weighted average shares
outstanding 758,185 765,768 776,487
============ ============ ===========
Basic earnings per share $ .57 $ .49 $ .28
============ ============ ===========
Basic EPS - weighted average shares
outstanding 758,185 765,768 776,487
Effect of dilutive securities -
stock options 22,721 13,609 13,638
------------ ------------ -----------
Dilutive EPS - weighted average
shares outstanding 780,967 779,377 790,125
============ ============ ===========
Diluted earnings per share $ .55 $ .49 $ .27
============ ============ ===========
</TABLE>
37
<PAGE> 38
COLONIAL TRUST COMPANY
Notes to Financial Statements
Continued
(9) Business Segments
Operating results and other financial data are presented for the principal
business segments of the Company as of and for the years ended March 31, 2000,
1999 and 1998, respectively. The Company has two distinct business segments
consisting of Corporate Trust services and Personal Trust services.
In computing operating profit by business segment, portions of
administrative expenses and other items not considered direct operating expenses
were considered to be in the Corporate and Other category. Identifiable assets
by business segment are those assets used in each segment of Company operations.
<TABLE>
<CAPTION>
Corporate Personal Corporate
Trust Trust & Other Total
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
March 31, 2000:
Service fee revenue $ 3,149,154 693,872 -- 3,843,026
Interest revenue -- -- 66,027 66,027
---------- -------- --------- ---------
3,149,154 693,872 66,027 3,909,053
Operating expenses:
General and administrative 1,531,112 621,859 898,815 3,051,786
Depreciation and amortization 52,388 7,426 73,186 133,000
---------- -------- --------- ---------
1,583,500 629,285 972,001 3,184,786
---------- -------- --------- ---------
Earnings (loss) before taxes $ 1,565,654 64,587 (905,974) 724,267
========== ======== ========= =========
Identifiable assets $ 783,024 244,919 1,736,979 2,764,922
========== ======== ========= =========
Capital expenditures $ 56,870 11,121 84,239 152,230
========== ======== ========= =========
March 31, 1999:
Service fee revenue $ 2,454,549 565,633 -- 3,020,182
Interest revenue -- -- 52,054 52,054
---------- -------- --------- ---------
2,454,549 565,633 52,054 3,072,236
Operating expenses:
General and administrative 1,213,498 475,427 648,744 2,337,669
Depreciation and amortization 43,887 8,035 43,393 95,315
---------- -------- --------- ---------
1,257,385 483,462 692,137 2,432,984
---------- -------- --------- ---------
Earnings (loss) before taxes $ 1,197,164 82,171 (640,083) 639,252
========== ======== ========= =========
Identifiable assets $ 484,388 190,518 1,834,333 2,509,239
========== ======== ========= =========
Capital expenditures $ 104,646 5,805 71,908 182,359
========== ======== ========= =========
</TABLE>
38
<PAGE> 39
COLONIAL TRUST COMPANY
Notes to Financial Statements
Continued
<TABLE>
<S> <C> <C> <C> <C>
March 31, 1998:
Service fee revenue $ 1,931,577 375,234 -- 2,306,811
Interest revenue - -- 39,799 39,799
---------- -------- --------- ---------
1,931,577 375,234 39,799 2,346,610
---------- -------- --------- ---------
Operating expenses:
General and administrative 840,242 319,892 741,845 1,901,979
Depreciation and amortization 25,907 7,224 49,375 82,506
---------- -------- --------- ---------
866,149 327,116 791,220 1,984,485
---------- -------- --------- ---------
Earnings before taxes $ 1,065,428 48,118 (751,421) 362,125
========== ======== ========= =========
Identifiable assets $ 297,037 155,701 1,495,541 1,948,279
========== ======== ========= =========
Capital expenditures $ 30,142 8,864 4,356 43,362
========== ======== ========= =========
</TABLE>
(10) Commitments and Contingencies
Colonial is subject to the maintenance of a minimum capital requirement of
$500,000 pursuant to State of Arizona (the State) banking regulations all of
which must be "liquid" (as defined by the State) as of March 31, 2000. To
satisfy this requirement, Colonial owns certificates of deposit held with banks
totaling $502,556 at March 31, 2000. These assets are classified as restricted
cash in the accompanying balance sheets as of March 31, 2000.
Colonial is involved in lawsuits and claims incidental to the ordinary
course of its operations. In the opinion of management, based on consultation
with legal counsel, the effect of such matters will not have a material adverse
effect on the Company.
39
<PAGE> 40
Item 7.a Qualitative Risk
The Company does not have significant market risk due to the fact that it
does not have any long-term debt and does not invest in derivatives.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
40
<PAGE> 41
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The following table contains information regarding the directors and
executive officers of the Company at March 31, 2000:
Name Position Age
---- -------- ---
Lynn R. Camp Chairman of the Board 63
and Director
Michael W. Borger Director 45
Gerald G. Morgan Director 44
John K. Johnson President and Chief 42
Executive Officer and
Director
Cecil E. Glovier Sr. Vice President 48
Secretary
Marvin D. Hoeflinger Vice President 57
Christopher J. Olson Vice President/Treasurer 34
Chief Financial Officer
Bruce L. Mitchell Vice President 53
41
<PAGE> 42
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Both Messrs. Camp and
Borger were members of the Board of Directors of Church Loans prior to becoming
directors of the Company.
Lynn R. Camp has served as a director of the Company since June 1990 and as
Chairman of the Board since October 1990. From 1991 until it was sold in June
1999, he served as President, Chief Executive Officer and a director of Turnkey
Computer Systems, Inc. ("Turnkey Computer"). Mr. Camp has served in these
capacities for in excess of five years. Turnkey Computer sells computer
equipment and software and furnishes computer maintenance and repair services in
Amarillo, Texas. Mr. Camp currently serves as a director of and a consultant to
Turnkey Computer.
Michael W. Borger has served as a director of the Company since June 1990.
He previously served as Vice President of the Company from August 1991 until
November 1995. From June 1990 to August 1991 he served as President of the
Company. Mr. Borger is President, Chief Executive Officer and a director of
Turnkey Leasing Corp. ("Turnkey Leasing"). Mr. Borger has served in these
capacities for in excess of five years. Turnkey Leasing, located in Amarillo,
Texas, leases computers, general office equipment and construction equipment to
business users. Turnkey Leasing is also engaged in the business of making
business loans.
Gerald G. Morgan has served as a director of the Company since October
1990. Mr. Morgan is a partner in the law firm of Burdett, Morgan and Thomas,
located in Amarillo, Texas. Mr. Morgan has served in this capacity for a period
in excess of 5 years.
John K. Johnson has served as the Company's President since August 1991. He
previously served as the Company's Vice President from June 1990 to August 1991.
Mr. Johnson was Vice President of Trust Company of America, a trust company
engaged in the business of furnishing trust services in connection with bond
offerings by churches and other non-profit organizations, from June 1979 until
December 1989. Mr. Johnson is employed pursuant to the terms of an employment
agreement with the Company. See "Item 10-Executive Compensation - Employment
Agreements" and Exhibit 10 (f) hereto.
Cecil E. Glovier has served as Senior Vice President/Secretary of the
Company since August 1996. He previously served as the Company's Vice
President/Secretary from November 1995 to August 1996. Prior to that time, he
served as the Company's Secretary/Treasurer from June 1990 to November 1995.
Prior to his employment with the Company, Mr. Glovier was engaged in the
business of furnishing computer programming services for a period in excess of 5
years. During this period he also was engaged as a
42
<PAGE> 43
mutual fund and life insurance sales representative. Mr. Glovier is employed
pursuant to the terms of an employment agreement with the Company. See "Item 10
- Executive Compensation - Employment Agreements" and Exhibit 10(g) hereto.
Marvin D. Hoeflinger has served as Vice President of the Company since
February 1996. Prior to his employment with the Company, Mr. Hoeflinger was
Senior Vice President and a Managing Principal of Reliance Trust Company, a
Georgia full service trust company, from October 1984 until February 1996. Mr.
Hoeflinger is employed pursuant to the terms of an employment agreement with the
Company. See "Item 10 - Executive Compensation - Employment Agreements" and
Exhibit 10(e) hereto.
Christopher J. Olson has served as Vice President/Treasurer of the Company
since November 1995, and as Chief Financial Officer since April 1998. Prior to
his employment with the Company, he served as President of Camelback Trust
Company in Scottsdale, Arizona, from January 1993 to November 1995.
Bruce L. Mitchell has served as Vice President of the Company since January
2000. Prior to his employment with the Company, he served as Vice President of
M&I Bank in Phoenix, Arizona from December 1998 to December 1999. Mr. Mitchell
was also Vice President of Wright Investor Services from April 1993 to September
1998.
Based on information provided to it, the Company believes that all of its
directors and executive officers have complied with Section 16(a) of the
Exchange Act during the fiscal year ended March 31, 2000.
Item 10. Executive Compensation
The following table sets forth certain information concerning compensation
paid during each of the Company's last three fiscal years to Messrs. John K.
Johnson, the Company's Chief Executive Officer, Cecil E. Glovier, the Company's
Senior Vice President and Marvin Hoeflinger, a Company Vice President,
respectively (the "Named Executive Officers"):
43
<PAGE> 44
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
----------------------------- ------------------
Securities
Name & Principal Position Fiscal Underlying
Year Salary Bonus Option/SARS (#)
-------------------------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C>
John K. Johnson 2000 $95,774 $37,687 (a) 0
CEO-President 1999 $85,833 $33,388 (a) 0
1998 $80,000 $19,444 0 (a)
Cecil E. Glovier 2000 $80,369 $37,687 (b) 0
Sr. Vice President 1999 $74,100 $33,388 (b) 0
1998 $69,667 $19,444 15,000(b)(d)
Marvin Hoeflinger 2000 $65,761 $66,180 (c) 3,500(c)(d)
Vice President 1999 $65,000 $79,308 (c) 3,500(c)(d)
1998 $65,000 $13,602 3,500
</TABLE>
(a) On July 1, 1996, Mr. Johnson was granted an option to purchase 30,000
shares of Common Stock of the Company at an exercise price of $2.50 per
share. The option to purchase 15,000 of such shares vested immediately
upon grant. The option to purchase the remaining 15,000 shares vested in
three equal installments of 5,000 each on July 1, 1997, 1998 and 1999,
respectively. Bonus amount excludes $3,873 and $2,870 contributed by the
Company to the 401(k) account for Mr. Johnson for the fiscal years ended
March 31, 2000 and 1999, respectively.
(b) On October 1, 1996, Mr. Glovier was granted an option to purchase 10,000
shares of Common Stock of the Company at an exercise price of $2.50 per
share. The option to purchase 10,000 such shares vested immediately upon
grant. On August 11, 1997, Mr. Glovier was granted an option to purchase
15,000 shares of Common Stock of the Company at an exercise price of $2.50
per share. The option to purchase shares vests in three increments of
5,000 each on August 11, 1998, 1999 and 2000. Bonus amount excludes $4,086
and $2,638 contributed by the Company to the 401(k) account for Mr.
Glovier for the fiscal years ended March 31, 2000 and 1999, respectively.
(c) On January 1, 1998, 1999 and 2000, Mr. Hoeflinger was granted options to
purchase 3,500 shares of Common Stock of the Company at exercise prices
equal to $2.50, $3.00 and $3.25 per share, respectively. The options to
purchase the shares vested immediately. Bonus amount excludes $1,896 and
$2,387 contributed by the Company to the 401(k) account for Mr. Hoeflinger
for the fiscal years ended March 31, 2000 and 1999, respectively.
44
<PAGE> 45
(d) All share amounts and per share exercise prices have been adjusted to
reflect the 1-for-10 reverse stock split which occurred in fiscal 1999.
The following table sets forth certain information concerning option
grants during the Company's last fiscal year to the Company's Named Executive
Officers:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Number of Percent of
Securities Total Options Exercise
Underlying Granted to or Base
Name & Principal Position Options Employees in Price
Granted Fiscal Year ($/sh) Date
-------------------------- -------------- -------------- ---------- --------
<S> <C> <C> <C> <C>
John K. Johnson 0 0 N/A N/A
CEO-President
Cecil E. Glovier 0 0 N/A N/A
Sr. Vice President
Marvin Hoeflinger 3,500 100 $3.25 1/1/00
Vice President
</TABLE>
The following table sets forth certain information concerning (a) stock
option exercises during the Company's last fiscal year by the Company's Named
Executive Officers, and (b) the value of unexercised stock options held by the
Named Executive Officers at March 31, 2000:
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Securities Unexercised
Shares Underlying In-the-Money
Acquired Unexercised Options at
on Value Options at FY-End FY-End ($)
Name & Principal Exercise Realized (#)Exercisable/ Exercisable/
Position (#) ($) Unexercisable Unexercisable
------------------ ---------- --------- --------------- ---------------
<S> <C> <C> <C> <C>
John K. Johnson 0 $0 30,000/0 $22,500/$0
CEO-President
Cecil E. Glovier 0 $0 20,000/5,000 $15,000/$3,750
Sr. Vice President
Marvin Hoeflinger 0 $0 14,000/0 $4,375/$0
Vice President
</TABLE>
45
<PAGE> 46
Employment Agreements
The Company has entered into employment agreements with Mr. Johnson, the
Company's President, Mr. Glovier, the Company's Senior Vice President, and Mr.
Hoeflinger, the Company's Vice President of Marketing.
Mr. Johnson's agreement had a three-year term that originally ran through
June 30, 1999. Under the agreement, Mr. Johnson's base salary was $80,000 per
year. The agreement was amended as of August 27, 1998 to increase the base
salary to $90,000 per year and has been extended through June 30, 2001. The
agreement was amended as of August 1, 1999 to increase the base salary to
$94,500 per year. The agreement will automatically be extended for an additional
one-year term commencing July 1, 2001, unless either the Company or Mr. Johnson
notifies the other at least sixty (60) days prior to the end of the current term
of the intention not to renew the agreement. Mr. Johnson is also entitled to an
annual bonus each year in which the Company generates after-tax net earnings,
calculated according to the following formula: (y) after- tax net earnings per
share, multiplied by (z) a number of shares equal to 10% of the Company's issued
and outstanding shares of Common Stock at March 31, 1998. Upon mutual agreement
between Mr. Johnson and the Company for the year ended March 31, 2000, the
annual bonus was reduced to an amount equal to seven and one-half percent of the
total after-tax net income and was $37,687 or $5,597 less than what would have
been paid under the original bonus agreement. Such bonus, if any, is payable 100
days from the end of the Company's fiscal year. The agreement also provided for
30,000 incentive stock options with an exercise price of $2.50 per share, a
total of 15,000 of which vested immediately upon grant. The remaining 15,000
options vested in three equal installments of 5,000 each on July 1, 1997, 1998
and 1999, respectively. The agreement also contains confidentiality and
non-compete covenants.
Under the agreement with Mr. Glovier, entered into in August 1997, Mr.
Glovier is paid a base salary of $72,000. The agreement was amended as of August
11, 1998 to increase the base salary to $75,600 per year. The agreement was
amended as of August 18, 1999 to increase the base salary to $80,892 per year.
Mr. Glovier is also entitled to an annual bonus in each fiscal year that the
Company generates after-tax net earnings (after payment of income taxes)
calculated according to the following formula: (a) for before-tax net income of
less than $100,000, a bonus amount equal to five percent of the total after-tax
net income; (b)for before-tax net income from $100,000 to $200,000, a bonus
amount equal to six percent of the total after-tax net income; (c) for
before-tax net income from $200,000 to $300,000, a bonus amount equal to seven
percent of the total after-tax net income; and (d) for before-tax
46
<PAGE> 47
net income over $300,000, a bonus amount equal to seven and one-half percent of
the total after-tax net income. Such bonus, if any, shall be paid within 90 days
from the end of the Company's fiscal year. For the fiscal year ended March 31,
2000, Mr. Glovier received a bonus of $37,687 under his employment agreement.
The agreement also provided for 15,000 in incentive stock options with an
exercise price of $2.50 per share, which vest in three equal installments of
5,000 each on August 11, 1998, 1999 and 2000, respectively. Mr. Glovier is also
entitled to health and other insurance benefits on the same basis as the
Company's other executive officers. The agreement also contains confidentiality
and non-compete covenants.
Mr. Hoeflinger's agreement, entered into in February 1996, calls for a
base salary of $65,000 per year, plus potential bonuses payable annually in the
event stated performance goals are met. Mr. Hoeflinger also received an option
to purchase 3,500 shares of the Company's Common Stock on January 1, 1997 and an
option to purchase a like number of shares on January 1, 1998; the exercise
price of the option granted on January 1, 1997 was $2.50 per share, and the
exercise price of the option granted on January 1, 1998 was $3.00 per share. Mr.
Hoeflinger also received an option to purchase an additional 3,500 shares of the
Company's Common Stock on each of January 1, 1999 and January 1, 2000, and is
entitled to receive an option to purchase an additional 3,500 shares on each
successive January 1 thereafter during the term of the agreement. The exercise
price on January 1, 1999 and January 1, 2000 were $3.00 and $3.25 per share,
respectively. The exercise price for any options granted in the future will be
the fair market value of the Company's Common Stock on the date such options are
granted. Mr. Hoeflinger is also entitled to health and other insurance benefits,
reimbursement of reasonable business expenses, and other benefits on the same
basis as the Company's other executive officers. The agreement with Mr.
Hoeflinger runs through December 31, 2000, unless terminated earlier by the
Company for "cause" or for Mr. Hoeflinger's failure to meet certain objective
performance goals contained in the agreement.
Directors' Compensation
The Company's non-employee directors were paid $15,600 in cash as a group
during the fiscal year ended March 31, 2000 for services as directors. Each
director is paid $200 per month for serving as a director and $200 for each
meeting attended. The Chairman is paid an additional $100 per month for serving
as Chairman. The Company's non-employee directors also receive an annual grant
of 1,500 stock options with an exercise price equal to the then-current exercise
price of the Company's Common Stock on the date of grant. The exercise price of
the options granted to such directors during the fiscal year ended March 31,
2000 was $3.25 per share.
47
<PAGE> 48
Directors who are also officers of the Company are not compensated for their
services as directors.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of June 1, 2000, concerning
the Common Stock beneficially owned by each director of the Company, by the
Company's Named Executive Officers, by all officers and directors of the Company
as a group, and by all persons known by the Company to own more than 5% of the
Company's issued and outstanding Common Stock:
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Owner(1) of Class
------------------- ---------------------- --------
<S> <C> <C>
Lynn R. Camp 32,687 shares 3.7%
3517 Tripp
Amarillo, Texas 79121
Michael W. Borger 23,197 shares 2.7%
1602 S. Travis
Amarillo, Texas 79102
Gerald G. Morgan, Jr. 17,762 shares 2.0%
4705 Olsen
Amarillo, Texas 79106
John K. Johnson(2) 41,491 shares 4.8%
3414 E. Clark Road
Phoenix, Arizona 85024
William and Sue Johnson(3) 45,586 shares 5.2%
14001 Interstate 27
Amarillo, Texas 79119
Cecil E. Glovier 28,074 shares 3.2%
16925 Roadrunner Road
Mayer, Arizona 86333
Marvin D. Hoeflinger 21,514 shares 2.5%
545 Matterhorn Way
Alpharetta, Georgia 30022
Directors and Executive
Officers as a Group
(8 persons) 173,501 shares 19.9%
</TABLE>
48
<PAGE> 49
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Shares
not outstanding that are subject to options or warrants exercisable by the
holder thereof within 60 days of June 30, 2000 are deemed outstanding for the
purposes of calculating the number and percentage owned by such shareholder, but
are not deemed outstanding for the purpose of calculating the percentage owned
by each other shareholder listed. Except as otherwise noted, all shares listed
as beneficially owned by a shareholder are actually outstanding. Except as
described above and as otherwise noted, all figures are based upon a total of
741,217 shares of Common Stock issued and outstanding.
(2) The total for Mr. Johnson includes 30,000 shares of Common Stock
subject to immediately exercisable options which have an exercise price of $2.50
per share.
(3) Includes 35,032 shares Amberwood, of which 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.
The Company has no knowledge of any arrangement which may result in a
change of control of the Company.
Item 12. Certain Relationships and Related Transactions.
None.
Item 13. Exhibits and Reports on Form 8-K.
(a)(1) Financial Statements of the Company are set forth in Part II,
Item 7.
(2) Exhibits
Exhibit Number Page Number
-------------- -----------
3. (I) Articles of Incorporation *
(ii) By-Laws *
10. (a) Agreement with Great Nation Investment
Corporation **
(b) Form of IRA Account Agreement **
(c) Form of Trust Indenture Agreement **
49
<PAGE> 50
(d) Agreements between Church Loans & ***
Investments Trust, Ben C. Powell
and Secured Investors Securities,
Inc.
(e) Employment Agreement with Marvin
Hoeflinger ****
(f) Employment Agreement with John K. Johnson *****
(g) Employment Agreement with Cecil Glovier *****
27. Financial Data Schedule *****
* Incorporated by reference to Exhibit No. 3 to the Registrant's Form
10 dated October 24, 1990.
** Incorporated by reference to Exhibit No. 10 to Registrant's Annual
Report on Form 10-KSB dated June 21, 1991.
*** Incorporated by reference to Exhibit No. 10 to Registrant's Form 10
dated October 24, 1990.
**** Incorporated by reference to Exhibit No. 10 to Registrant's Annual
Report on Form 10-KSB dated June 27, 1996.
***** Filed herewith.
(b) Reports on Form 8-K
None.
50
<PAGE> 51
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COLONIAL TRUST COMPANY
BY:/s/ Christopher J. Olson
--------------------------------
Christopher J. Olson
Chief Financial Officer
Date: June 28, 2000
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ Lynn R. Camp Chairman of the Board June 28, 2000
---------------------------
Lynn R. Camp
/s/ Michael W. Borger Director June 28, 2000
---------------------------
Michael W. Borger
/s/ Gerald G. Morgan Director June 28, 2000
---------------------------
Gerald G. Morgan
/s/ John K. Johnson President and June 28, 2000
--------------------------- Director
John K. Johnson (Principal Executive
Officer)
51
<PAGE> 52
Exhibit Index
Exhibit Number Description
-------------- -----------
10 (f) Employment Agreement with John K. Johnson
10 (g) Employment Agreement with Cecil Glovier
27 Financial Data Schedule
