Item 1. Description of Business
Business Development
Development Bancorp, Ltd. (the "Company") Development Bancorp is a
holding company that owns various interests in subsidiaries and investee
companies in the financial services industry in North America and Europe. The
Company was incorporated on August 16, 1984 in the state of Washington under the
name Gold Valley, Inc. for the primary purpose of exploring and developing gold
properties. No commercial ore deposits were developed. In 1986, the Company
acquired an 18.75% interest in an oil partnership consisting of five wells in
Pondera County, Montana. In 1991, the Company sold this partnership interest to
the then officers and directors of the Company on an installment contract. In
1991, the Company canceled this contract from these affiliates in exchange for
investment banking and financial consulting services when it became apparent
that the affiliates were not willing or able to pay. After sale of its
partnership interest, the Company began to seek other business opportunities. On
August 13, 1993, the Company changed its name to Development Bancorp, Ltd. and
effected a 165-for-1 reverse stock split in preparation for a private placement
fund raising. Under the Washington Business Corporation Act, the name change and
the reverse stock split only required approval of the Board of Directors of the
Company and not approval of its shareholders In conjunction with the special
meeting in lieu of the annual meeting, held on October 4, 1993, the Company's
shareholders authorized the issuance of preferred stock, adopted a Stock Option
Plan and ratified the reverse stock split. Following this reorganization, the
Company has directed its efforts towards financial services as well as merchant
banking activities focused on investing in financial service subsidiaries and
partnering with other companies around the world engaged in financial services.
Financial Services
In June 1993 the Company commenced its business of providing financial
services with the organization of an operating subsidiary, Societe Financiere de
Distribution Geneve S.A. (oSFDo). SFD operates in Geneva, Switzerland and is a
Swiss financial company. In fiscal 1995 the Company organized Development
Bancorp Services Limited, an Irish corporation?? ("Ireland"). SFD's and
Ireland's activities consist primarily of financial services, including
financial advisory and transactional support services. Neither Ireland nor SFD
publicly solicits customer deposits and both companies employ other banks as
custodian of customer cash and securities assets, and are therefore exempt from
the banking regulations. Both subsidiaries deal exclusively with institutional
clients in Europe. The Company's European operations are managed by Riccardo
Mortara, president and chairman of the Company. Mr. Mortara has over 20 years
experience in the Swiss banking industry and he is the owner and operator of
Societe Financiere du Seujet, a Swiss trust & portfolio management company.
Certain conflicts of interest do exist (See Conflicts...)
SFD is owned 99.3% by the Company and 0.7% by Mr. Riccardo Mortara, a
managing director of SFD. SFD was capitalized in July, 1993 by a capital
contribution of 427,000 Swiss Francs ("SFr") by the Company and SFr 3,000 by Mr.
Mortara. If not for Mr. Mortara's ownership of SFD, it would be a wholly owned
subsidiary of the Company and under Swiss law the Company would be deemed to be
liable for all of SFD's liabilities. Societe Financiere de Seujet, S.A. is a
shareholder of the Company, and its shares may be deemed beneficially owned by
Mr. Mortara. Following the reorganization of the Company into financial services
and the establishment of the Company's European subsidiaries, the Company has
been active in seeking merchant banking opportunities to invest and partner with
other financial services companies around the world.
Merchant Banking Activities
In September of 1993, the Company invested US$921,000 with an
organization known as PEMP. PEMP is a licensed Canadian financial advisory,
insurance, and fund management group based in Montreal. The Company received
120,000 Class G Shares, or 9%, of the holding company for the PEMP operations,
known as Gestion PEMP, Inc., as well as a royalty to receive a portion of
certain fees from the development of the PEMP network. The Class G shares are
not transferable except in the event of a sale of the entire business. In 1996
and 1995 the
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Company received $0 and $35,017, respectively, in commissions from royalty in
the PEMP Network. No proceeds have been received in 1996 because PEMP is
currently reorganizing its ownership structure and it is anticipated that the
Company's royalty right will be converted into redeemable preferred shares in
late 1997. The PEMP group currently has 5 offices and 6,000 customers throughout
Canada.
In 1996, the Company helped fund PEMP's expansion with the purchase of
4.65 million redeemable preferred shares of the senior holding Company, Gestion
Guychar Inc. for $3.5 million (Canadian dollars). The preferred shares are
non-voting, non-transferable, and non-participating and are redeemed as follows:
$1,250,000 on October 1, 2001, with an annual cumulative dividend of 4%, payable
on October 1 of each year; $1,300,000 on October 1, 2002, with an annual
cumulative dividend of 3.8%, payable on October 1 of each year; and $2,100,000
on October 1, 2003, with an annual cumulative dividend of 3.5% payable on
October 1 of each year. All amounts respecting the preferred shares are in
Canadian dollars. The purchase price of the preferred shares in US dollars was
$3,132,012.
On December 6, 1995, the Company acquired 1,967,1433 shares, or 51%, or
KSM Financial Holdings, Inc. ("KSM") for a purchase price of $250,000. KSM, a
Nevada corporation, owns all of the capital stock of Global Financial Group,
Inc. ("Global"). The management of KSM and Global continued without change after
the acquisition by the Company. Global is a broker deal registered with the
National Association of Securities Dealers, Inc. ("NASD"). Following the initial
acquisition, the Company invested additional sums and negotiated with Kevin
Miller, CEO of KSM and Global and the owner of the 49% remaining stake in KSM,
to acquire his stake. With the Company's assistance, Global quickly grew from
being an agency brokerage with offices in two US cities, to a fully licensed
market maker and underwriter, with offices in ten US cities. The terms of the
acquisition of the remaining stake were finalized in the early summer of 1996
and the acquisition was formally closed on September 6, 1996, making KSM a
wholly owned subsidiary. The additional stake was acquired from Kevin Miller for
110,000 shares of Series B Convertible Preferred Shares of the Company.
While the Company was pleased with Global's initial growth, management
of the subsidiaries were reluctant to fully implement changes or improvements
suggested by the Company, and consistently failed to provide complete financial
information to the Company. The Company believed that the acquisition of the
remaining 49% stake, thus making KSM and Global wholly owned subsidiaries of the
Company, would make KSM and Global management fully answerable. This did not
prove to be the case. Kevin Miller was either unwilling or unable to fully
embrace and implement the suggested direction and changes favored by the
Company. The Company favored revenue building strategies including hiring more
brokers for each office. The Company also favored strategies to have Global
enforce a basic dress code, minimal work hours, and minimal production levels.
The company favored increased compliance and a policy of restricting brokers
from activities that are not completely understood and approved in advance by
Global's head of compliance.
Replacing Kevin Miller was an option but it was also noted that he had
substantial loyalty among the Global workforce - who were increasingly seeing
the Company as an unwanted and meddlesome outsider. At the same time, the
Company was having difficulties understanding the nature of Global's cash flow
needs as well as troubles completing the Company's public reporting - largely
because of less than perfect cooperation from the subsidiaries.
On November 1, 1996, the Company agreed to rescind the acquisition of KSM and
treat all moneys paid by the Company to or on behalf of KSM and Global as a
loan, due and payable in 3 years with 10% interest paid annually.
Kevin Miller signed the recission agreement and wrote in two changes, a 5 year
term and 8% interest, which only he initialed. In the summer of 1997 during
routine audit confirmations, Kevin Miller informed the Company's auditor that
KSM and Global has no intention of ever repaying the Company. In part due to Mr.
Miller's comments and in part for fundamental collectibility concerns, the
auditor has caused the Company to write its investment into Global down to
$250,000. Because of Mr. Miller's current position and his failure to surrender
the Company's Series B Convertible Preferred Shares that he received, the
Company is not certain of the legal effect of the recission or what the proper
terms are. The Company intends to recover the maximum amount possible and is
currently studying litigation should a friendly resolution not be forthcoming.
Unless otherwise stated in this filing, all information herein reflects the
recission of the KSM/Global transaction.
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In the second half of 1997, the Company purchased 7,345 shares of
Societe Financiere Privee ("SFP"), a Swiss bank for US$4,148,293. SFP offers
complete banking and portfolio management services and is publicly traded on the
Swiss Stock Exchange. The Company's ownership of SFP is equal to about 3% of
SFP's outstanding shares. The Company is currently in discussion with SFP to
co-develop and offer certain services in the United States.
Competition
Competition in the Company's areas of focus come from international and
local banks, brokerage firms, and other financial institutions. Most of these
competitors have greater experience and greater financial resources than the
Company.
Employees
The Company has 5 employees, including its officers. The officers of
the Company do not work exclusively for the Company and certain conflicts of
interest exist (See conflicts).
Regulations
SFD is subject to numerous regulations under the Swiss financial
companies statutes. SFD is subject to annual audit requirements; must maintain
an adequate relationship between its equity and its total liabilities, and
between its current assets and liabilities; and is prohibited from engaging in
money laundering. SFD is not permitted to place securities with the general
public, but only with institutional clients, and does not hold custody of cash
for customers. Commissions for securities transactions are not regulated. SFD
opens accounts for each customer in an authorized bank, outside of its own
balance sheet.
Since SFD does not publicly solicit customer deposits, it is exempt
from many reporting and regulatory provisions ordinarily applicable to Swiss
financial companies.
A financial company like SFD which does not publicly recommend itself
for the acceptance of deposits can obtain the status of a bank-like finance
company by means of a decision of the Banking Commission. Based on the
activities of a finance company, the Banking Commission is empowered to
interpret the applicability or non-applicability of certain provisions of the
Swiss Banking Law.
In addition to the general regulations applicable to all Swiss
companies, bank-like companies, not publicly soliciting deposits, have to comply
with the following provisions:
(1)Pursuant to Article 7 of the Swiss Banking Law they are required to
submit to the National Bank their annual balance sheet. If the National Bank
requires it may also require detailed semi-annual balance sheets, as well as any
other information and reports which it may consider necessary, such in
connection with the credit and monetary policy.
(2)To enable the Banking Commission to determine whether a bank-like
finance company does not in fact publicly solicit deposits, it is required to
submit to the Banking Commission an annual balance sheet prepared in accordance
with the Implementing Ordinance to the Swiss Banking Law, an annual report of
the board of directors, and an auditor's report prepared by an independent and
qualified auditing company.
(3)Under Article 8 of the Swiss Banking Law the prior approval of the
Swiss National Bank is required for foreign bond or share issues of SFr 10
million or more floated in Switzerland and for credits and loans to
non-residents in amounts exceeding this sum and with terms of longer than twelve
months. The rule applies to the placement of medium term foreign obligations
with a maturity of twelve months or more, if the amount placed is expected to
total Sfr 3 million within a year. The Swiss National Bank is empowered to
refuse permission or to
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impose conditions if deemed necessary in the light of the Swiss franc exchange
rate, the interest rate trend on the Swiss money and capital markets or the
overall national interest.
In comparison with banks, the advantages of a finance company that is
subject to Articles 7 and 8 of the Swiss Banking Law only consist, for example,
in the fact that in the exercise of its activity it is not bound by the
provisions of the Swiss Banking Law concerning ratios between equity,
liabilities and liquid funds. Moreover, such a finance company would be under no
restriction if, for example, it proposed to grant substantial credit facilities
to a single customer, while real banks are required to maintain an adequate
ratio to their own funds with regard to any single borrower.
There are no other licensing or other requirements known to the Company
which would be required to enable it to compete effectively in the United States
and foreign markets.
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