<PAGE> 1
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
AMENDMENT NO. 2 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
AMERICAN DIVERSIFIED HOLDINGS, INC.
(Name of small business issuer in its charter)
NEVADA 86-0854150
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12100 Wilshire Boulevard, Suite 680
Los Angeles, California 90025
310-442-2660
(Address and telephone number of principal executive offices)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
- ------------------- ------------------------------
NONE N/A
Securities to be registered under Section 12(g) of the Act:
Common Stock
(Title of class)
Series A Preferred Stock
(Title of class)
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DESCRIPTION OF BUSINESS
GENERAL
American Diversified Holdings, Inc. ("the Company"), was incorporated on
February 4, 1997 under Nevada law and is a holding company formed to engage in
the financial services business in the United States and Europe. The Company has
established two wholly-owned subsidiaries: American Diversified Asset
Management, Inc., ("ADAM"), a Nevada corporation formed in October 1997
(formerly named American Diversified Securities, Inc.); and American Diversified
AG Wertspapierhandelsbank a ("ADAG"), a German corporation formed on April 30,
1997 (together the Company and the subsidiaries, including the merged operations
of JBRI (see "JBRI-ADAM Merger" below) into ADAM, are referred to as the
"Group"). The principal business activities of the Group will be to provide
financial services and distribute financial service products to individual and
institutional investors in the United States, Germany and the European Union
("EU") countries. The Group's initial principal activity will be to act as
investment manager and distributor in the United States and the EU for the
Rea-Graham Balanced Fund (the "Fund"), a series mutual fund of Rea-Graham Funds,
Inc., a diversified, open-end investment company registered under the Investment
Company Act of 1940. ADAG is located in Berlin and will provide financial
services and be the initial distributor of the Group's mutual fund products in
Germany and the EU. The Group intends to provide a wide range of commercial and
consumer financial services to customers in the United States and Europe.
JBRI-ADAM MERGER
The merger of James Buchanan Rea, Inc. ("JBRI"), a California
corporation, with and into ADAM became effective on March 31, 1998. The purpose
of the merger was to acquire an existing investment adviser and broker-dealer
firm and establish a presence in the United States for the Company as an
international financial services company. (See "Interest of Management and
Others in Certain Transactions" for a discussion of the terms of the merger and
Notes 1 and 2 of the "Notes to Unaudited Proforma Consolidated Financial
Statements" of the Company as of February 28,1998, for a description of the
financial accounting for the merger.) JBRI is a licensed broker-dealer and a
registered investment advisor under the Investment Advisers Act of 1940. JBRI
has served as the investment advisor and distributor to the Fund since its
inception in 1982. The shareholders of the Fund, at a meeting on January 12,
1998, approved a new investment advisory agreement with ADAM, effective upon
completion of the merger. ADAM will succeed to the business operations of JBRI
and will operate as a broker-dealer and registered investment advisor. ADAM will
succeed as the investment advisor and distributor to the Fund. James Buchanan
Rea, Jr., the former President and registered securities principal of JBRI has
become the President and general securities principal of ADAM. Other than
through the merged operations of JBRI, ADAM does not have an operating history
and has not previously engaged in the investment management business or in the
operation and distribution of mutual funds. At March 31, 1998, the investment
management business of ADAM acquired through the JBRI merger, and the initial
business activities of ADAG, represent the only active business activities of
the Company and the Group.
BUSINESS EXPANSION; CAPITAL GROWTH
The Company's management believes that an international financial
services group with management and offices in both the U.S. and Europe can
attract a clientele of institutional investors, banks, businesses and
individuals. The Group's business strategy is to provide customers of small-to
medium-sized European banks with direct access to American financial services
and an opportunity to invest in tailored U.S. mutual funds, such as the Fund.
The Company believes there is a new and growing market in Germany and the EU for
the distribution of U.S. investment products, particularly mutual fund shares to
individual investors and smaller financial institutions, as European investors
discover that other financial products are available as an alternative to
traditional savings account deposits in commercial banks.
Further, the planned transition to a standard European currency
(the"EURO") in January 1999, is expected to increase the demand for investments
denominated in U.S. dollars. The Company intends to expand the mutual
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fund management and distribution business of ADAM by organizing additional
series funds, initially a small cap value fund, for distribution to U.S. and
European investors. The Company intends to market the Fund and new series funds
to European investors through ADAG. The Company also intends to organize a
German growth fund and distribute it primarily to U.S. investors. The Company
intends to grow the Fund by marketing it in Europe. As the Fund grows in size,
the revenues and profitability of ADAM is expected to increase because ADAM's
revenues and income are variable with the net assets of the Fund and with other
mutual funds that it may manage in the future.
As of March 31, 1998, the Group had 20 full-time employees, 3 of whom
are in the U.S., consisting of the President of the Company and 2 former JBRI
employees, 1 of whom is now the Chief Operating Officer of the Company; and 17
employees in Berlin, Germany, including the Chief Financial Officer of the
Company and 16 ADAG employees, consisting of its Chief Executive Officer and 15
employees who are sales, managerial, asset management, brokerage and
administrative personnel.
ADAG is a licensed distributor of financial products and underwriter in
Germany, and is expected to offer a full range of investments and banking
services through its EU subsidiaries. In order to provide securities brokerage
services, ADAG has applied for a full banking license in Germany, which is
expected to be approved by the end of the 1998 calendar year. ADAG has applied
for membership on the Frankfurt Stock Exchange located in Frankfurt, Germany.
The registration process has been completed and ADAG's membership will become
effective upon approval of ADAG's full banking license. ADAG has completed all
technical preparations necessary to commence operations, including installation
of network links to stock exchanges.
ADAG is presently engaged in mutual fund distribution and asset
management for clients in Germany. Commencing on or about January 2, 1999, after
approval of its full German banking license, ADAG is expected to begin offering
full investment banking and financial services including:
o Full service securities brokerage
o Internet discount brokerage
o Asset management
o Sponsoring and distributing mutual funds
o Underwriting
The Group has assembled a staff of management, brokerage, asset
management and marketing personnel, including several former key employees of
major German banks and their subsidiaries. The Group intends to engage
aggressively in the distribution of mutual funds and other financial products in
Europe through a systematic program of direct marketing to prospective customers
and through referral sources such as banks, insurance providers, attorneys,
accountants and to a lesser extent, personal business contacts.
The Company intends to finance its business expansion through sales of
equity capital in Europe and the U.S. On March 31, 1998, the Company completed a
$5,000,000 private placement of its Series A Preferred Stock at a price of $1
per share in Germany, in an offering that is exempt from U.S. securities laws
under Regulation S. The Company has filed a registration statement (File No.
333-62489) on Form SB-2 for an initial public offering of common stock in the
United States, in order to finance future business expansion. There can be no
assurance that the future offerings will be successful.
MARKET AREA
The Group's European subsidiaries, starting with ADAG, will offer
consumer focused financial services including private money management, full
service and online-brokerage, and U.S. mutual fund distribution to small and
medium sized institutional investors, banks and individual customers in its
immediate market area.
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The Group's initial targeted market area for the distribution of the
Fund and other financial service products in Europe is Berlin, Germany's future
capital and the location of one of Germany's five regional stock exchanges, and
other financial centers in Germany. Over the next two years, the Company's
expansion plans include the formation of subsidiaries and commencement of
financial services businesses in Vienna, Austria, Madrid, Spain, Luxembourg and
Zurich, Switzerland. Initial steps have been taken to establish the Austrian
subsidiary.
LACK OF PROFITABILITY, POTENTIAL LOSSES
Because the Company was only recently formed, there is no history of
operations, other than the historical operations of JBRI prior to its merger
into ADAM. The Group's business expansion plans for Europe and the Untied States
are subject to the risks inherent in the establishment of a new business
enterprise.
From its inception on February 4, 1997 through February 28, 1998, the
Company has experienced aggregate losses of $792,278. (Please see the "Unaudited
Proforma Consolidated Statement of Operations" of the Company for an analysis of
the losses of the Company and JBRI on a proforma basis.) Further, a key element
of the Company's strategy consists of an aggressive marketing plan for its
financial products in Europe. This strategy may result in continued net losses
for the Company during its start-up phase due to start-up costs associated with
the anticipated high marketing costs for the promotion of mutual funds and other
financial services in its market area. Results of operations in the future will
be influenced by numerous factors including, among others, expansion, the
ability of the Company to manage its growth and maintain the quality of its
personnel, and the ability of the Company to implement its strategic plan. The
Company may incur problems, delays, expenses and difficulties in its development
stage, many of which may be beyond the Company's control. These include, but are
not limited to, unanticipated regulatory compliance, marketing problems and
intense competition that may exceed current estimates.
There is no assurance that the Company will ever operate profitably.
MANAGEMENT OF GROWTH
The Company plans to expand its business with the formation of
subsidiaries in Austria, Spain, Luxembourg and Switzerland. To a significant
extent, the Company's future success will be dependent upon its ability to
engage in a successful expansion program and will be dependent, in part, upon
its ability to secure regulatory approvals in its chosen markets, attract
customers for its financial products, maintain adequate financial controls and
reporting systems, manage its growth, and obtain additional capital upon
favorable terms. There can be no assurance that the Company will be able to
successfully implement its planned expansion, finance its growth or manage the
resulting larger operation.
COMPETITION
The investment management business is highly competitive. The Company
encounters significant competition in connection with the operation of its
business in the U.S., but expects initially to encounter only limited
competition for brokerage services and the distribution of U.S. mutual funds to
its targeted potential clientele in its primary marketing area in Germany. As
discussed below, these services are typically provided in Germany today through
banks and savings institutions, which are not primarily engaged in providing
these services to individual investors. The Company will compete with a large
number of investment management firms, commercial banks, insurance companies,
broker-dealers and other financial services providers, which have greater
resources, assets under management, administration capability and offer a
broader array of investment products and services than the Company. Many
competitors devote substantial resources to advertising and marketing their
mutual funds which may adversely affect the ability of the Company's mutual
funds and other new funds to grow. The Company's competitors in the U.S. include
numerous enterprises with extensive experience in the financial services sector.
These competitive conditions may adversely affect the Company's revenues,
profitability and ability to meet its business objectives.
Management of the Company believes it has identified a niche market in
Germany and the EU for providing securities brokerage services to individual and
small institutional investors, including the marketing of U.S. mutual
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fund products. Brokerage services offered by German banks are targeted for large
institutional customers, are expensive and do not address the needs of
individual investors. German banks typically encourage private clients to
maintain savings accounts, and bank personnel typically lack the incentives and
expertise to provide individual customers with U.S. style investment services.
The large U.S. investment firms operating in Germany typically market only to
large institutional clients and require minimum account balances typically in
the $100,000 range. ADAG intends to benefit from the experience and expertise of
ADAM, its U.S. sister subsidiary with an established mutual fund operation and
broker-dealer distribution network, in providing similar services in Germany and
the EU. On the investment banking side, there were only 31 public equity
securities offerings in Germany during 1997, and 58 are scheduled for 1998. The
Company believes there is a strong and growing demand for investment banking and
financial consulting services for emerging growth companies in Germany, from the
early financing through the initial public offering stage.
Factors affecting the Company's business expansion success include: 1)
the abilities, performance records and reputations of its investment managers;
and, 2) its ability to develop new investment products and implement marketing
strategies in the U.S. and Europe. The Company's ability to retain and increase
its investment assets under management could be adversely affected if client
accounts underperform the market or if key investment managers leave the Group.
The marketability of the Company's investment products, primarily mutual funds,
is also dependent, in part, on the relative attractiveness of their investment
strategies and practices under prevailing market conditions. There are
relatively few barriers to entry by new investment management firms or
distributors of U.S.
mutual funds in the EU markets.
REGULATION
The Group's international investment management and broker-dealer
operations are subject to extensive regulation, supervision and licensing under
various U.S. federal and state laws and regulations and under the securities and
corporate laws and regulations of the European countries under which it will
market its financial services. Prior to completing the merger, JBRI received
approval from the National Association of Securities Dealers, Inc. ("NASD") to
its change of ownership through the merger with ADAM. ADAM has filed amendments
to the Form BD and Form ADV of JBRI to reflect the change of ownership and
provide required disclosure information. ADAM will continue the former
operations of JBRI as a registered broker-dealer under the Securities Exchange
Act of 1934(the "1934 Act"), as amended, and as a registered investment advisor
under the Investment Company Act of 1940, as amended. The Company and various
entities of the Group will also be subject to securities regulation in Germany
and the various EU jurisdictions where it establishes business operations or
distributes financial services products.
The securities and investment management laws and regulations generally
grant supervisory agencies and bodies broad administrative powers, including the
power to limit or restrict an investment management firm from conducting
business or distributing products in the event that it fails to comply with such
laws and regulations. Possible sanctions could include the suspension of
business activities for specified periods of time, revocations of licenses to
operate, and other censures and fines.
The Company has reviewed its computer systems and has determined that
they are in compliance with the requirements of the year 2000. The Company also
believes that because of its internal systems and controls and the nature of its
financial contracts, it is not likely to incur any material disruptions,
expenses or losses in connection with any external relationship related to the
year 2000.
SERVICEMARK APPLICATION
The Company has applied for, but not been issued any registered
servicemark for its "AMERICAN DIVERSIFIED(TM)" or "AmDiv(TM)" service-names. No
assurance can be given that the Company will be successful in obtaining these
marks, or that the servicemarks, if obtained, will afford the Company any
competitive advantages. ADAG owns the "AMERICAN DIVERSIFIED" trademark for
Germany, which was registered on February 26, 1998 with the German Patent and
Trademark Office in Munich, registration No. 39745648.
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HISTORY OF JBRI
The initial business of the Company will be the continuation and
expansion of JBRI's investment management services. JBRI was founded in 1961 and
is a licensed broker-dealer and registered investment advisor engaged in
business as a sponsor, investment manager and distributor of mutual funds. JBRI
has served since 1982 as the investment advisor, underwriter and distributor of
the Fund, a series portfolio of Rea-Graham Funds, Inc., a mutual fund series
company founded by James Buchanan Rea, Sr. and Benjamin Graham. Over the past
three years, this has been the principal business activity of JBRI. JBRI
generates revenues through its management fees and distribution fees as
investment advisor, principal underwriter and distributor of the Fund. Prior to
the merger with ADAM, there was no affiliation between JBRI and the Company.
JBRI has served as the Fund's investment advisor since 1979. The Fund
was originally organized as a private limited partnership in 1976 by its two
general partners, Dr. James B. Rea and Benjamin Graham. Mr. Graham authored
"Security Analysis" and "The Intelligent Investor," which are recognized texts
on the fundamental value of common stocks. The Fund was subsequently
incorporated in Maryland and on August 19, 1982, effected a public offering of
its shares as an open end diversified investment company registered under the
Investment Company Act of 1940. The Fund has continued to operate as a separate
series of Rea-Graham Funds, Inc.
Pursuant to the investment advisory agreement, the Fund pays JBRI a
monthly advisory fee equal on an annual basis to 1% of the first $20,000,000 of
the Fund's net assets as of the close of business on the last business day of
each calendar month during the Fund's fiscal year; reduced to 0.75% of such net
assets in excess of $20,000,000 up to $100,000,000; 0.5% of such net assets in
excess of $100,000,000 up to $200,000,000; and 0.45% of all such net assets in
excess of $200,000,000.
The Fund also pays JBRI a distribution fee payable monthly equal on an
annual basis to .35% of the Fund's average daily net assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF JBRI'S FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is based upon and should be read in conjunction
with JBRI's financial statements for the period ending December 31, 1996 and
December 31, 1997, together with the notes related thereto.
RESULTS OF OPERATIONS
Revenues for fiscal year-ended December 31, 1997 were $145,119 as
compared to revenues of $166,059 for the fiscal year-ended December 31, 1996,
representing a cumulative decrease of approximately 12.6%. The decrease in
revenues was primarily due to a reduction of advisory and distribution fees from
the Fund, as the Fund's net assets declined from $11,377,574 to $10,154,957
during this period.
Operating expenses consist of salary expenses, communications costs,
occupancy and equipment rental expenses and other operating expenses. Operating
expenses were $214,973 for the fiscal year-ended December 31, 1997 as compared
to operating expenses of $214,386 for the fiscal year-ended December 31, 1996.
However, operating expenses as a percentage of revenues increased approximately
19% to 148% for fiscal 1997 as compared to 129% for fiscal 1996, as a result of
the decline in revenues due to the decline in the Fund's net assets.
Net losses from operations for the fiscal year-ended 1997 were $69,854
as compared to $48,327 for the prior fiscal year, representing an increase in
net losses of approximately 44.5%. This increase in operating losses is directly
attributable to the decrease in revenues resulting from the reduction in
advisory and distribution fees generated during 1997, as the Fund's net assets
declined.
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LIQUIDITY AND CAPITAL EXPENDITURES
As of December 31, 1997, JBRI had no outstanding long term obligations.
Short term obligations consisted of dealer service fees payable, accounts
payable and accrued expenses totaling $11,946. JBRI has historically funded
operations through cash flows from operations. The Company expects to increase
ADAM's net capital to approximately $200,000 during 1998, in connection with the
expansion of its broker-dealer and mutual fund activities.
JBRI is subject to the net capital rule (Rule 15c3-l) promulgated under
the 1934 Act, which prohibits a broker-dealer from engaging in securities
transactions when its aggregate indebtedness exceeds 15 times its net capital,
as those terms are defined in Rule 15c3-1. The net capital, required net capital
and net capital ratio for JBRI as of December 31, 1997 and 1996 were as follows:
1997 1996
--------- --------
Net Capital $10,199 $58,920
Required Net Capital $ 5,000 $ 5,000
Net Capital Ratio 1.17 to 1 .17 to 1
========= ========
DESCRIPTION OF PROPERTY
The Group currently has two business offices under lease. ADAM has a
one-year lease for office space in Los Angeles from CB Commercial, Inc. at
$2,370 per month, which is the office space formerly occupied by JBRI. ADAG has
entered into a five- year lease expiring January 2003 for office space in Berlin
from 58 Grundstucksverwalt Ungsgesellschaft - Bull and Liedtke, Hamburg, at
$3,700 per month. Both premises are in good condition and are adequately
insured. It is anticipated that the Company will enter into new office leases as
additional subsidiaries are formed and the Group's business activities are
expanded into additional EU countries.
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
MANAGEMENT
The Company is assembling an international team of managers and
entrepreneurs with experience in the Group's market area and a shared commitment
to its future growth and success.
PETER HARTMANN, age 42, Chairman of the Board and Executive
Vice-President of International Development, has over 20 years of experience
with international business development and project management. Between 1992 and
January 1997, Mr. Hartmann served as President and Chief Executive Officer of
EMDC, an international consulting company specializing in project development
with clients in Europe, Russia, Singapore and Vietnam. Although Mr. Hartmann has
only limited experience in the financial services industry, he has extensive
experience in the development of international companies and in mergers and
acquisitions. He was engaged by the Company to structure and develop its
business. Mr. Hartmann speaks five languages. Mr. Hartmann received his MBA
degree from Glasgow College of Technology, in Scotland.
JAMES BUCHANAN REA JR., age 42, Director, President and Chief Executive
Officer, has over 20 years experience in the mutual fund industry, especially in
financial, accounting and operating positions. Mr. Rea is President and Chief
Executive Officer of ADAM, the Company's U.S. investment advisory and brokerage
subsidiary. He served as President of JBRI, the predecessor of ADAM, since 1986.
He is also Chairman of the Board of ADAM, and has managed Rea-Graham Funds, Inc.
(renamed American Diversified Funds, Inc.) since 1986 as president, chief
executive officer and chairman of the board. From 1980 to November 1995 he was
vice president of James Buchanan Rea, Inc., the company founded by his father,
Dr. James Buchanan Rea. He is a registered investment advisor and broker-dealer
with the Commission, NASD, and State of California. Mr. Rea received his
Bachelor of Science degree from the University of Southern California.
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JOEL EPSTEIN, age 38, Executive Vice President of Operations, has over
11 years of professional experience as a CPA. Since April 1995, Mr. Epstein has
been providing financial consulting services for companies, including start-ups,
in various industries. From 1987 to 1995, Mr. Epstein served as Senior Vice
President and chief Financial Officer of the Pilgrim Group, Inc., a mutual fund
group. Prior to that time, Mr. Epstein was employed as an auditor with Peat
Marwick Main & Co. in Los Angeles for over three years. Mr. Epstein received his
Bachelor of Science degrees in Marketing and Accounting from California State
University, Northridge in 1982 and 1984, respectively.
T. MICHAEL GRAF, age 61, Executive Vice President of Asset Management,
has over 28 years of experience in portfolio management, new business
development and client servicing. Mr. Graf has six years of experience managing
an investment management organization. From 1986 to the present, Mr. Graf has
served as First Vice President of Schroder Capital Management, Inc.
("Schroder"). Schroder merged Wertheim Schroder Investment Services into
Schroder Capital Management in July, 1995. Mr. Graf's primary responsibilities
at Schroder have included business development for endowments, foundations and
high net worth individuals in the western half of the U.S. Mr. Graf has also
been responsible for servicing Schroder's institutional and individual clients
on the west coast. Mr. Graf received his MBA degree from Harvard Business School
in 1962 and his Bachelor of Science degree in Petroleum Engineering from
Stanford University in 1960. Mr. Graf is a chartered investment counselor
("CIC") and a chartered financial analyst ("CFA").
ROLAND KUETTNER, age 43, Director, Chief Financial Officer and
Treasurer, qualified as a CPA in 1983 and gained ten years professional
experience in North America (the Pacific Northwest and eastern Canada) before
moving to Germany. As a Manager in the Accounting and Audit Division of Arthur
Andersen & Co., Mr. Kuettner gained extensive experience in dealing with matters
affecting financial reporting and control.
THOMAS C. CORCOVELOS, age 47, Director of the Company, is a partner in
the law firm of Corcovelos & Forry LLP in Manhattan Beach, California. Since
1985, Mr. Corcovelos has served as Corporate Counsel and Federal Securities
Compliance Officer to JBRI, which was merged with and into ADAM, effective March
31, 1998. Mr . Corcovelos received his Bachelor of Science degree from Loyola
University of Los Angeles in 1973, and his law degree from Boalt Hall School of
Law, University of California at Berkeley in 1976.
THOMAS H. FITZGERALD, JR., age 65, Director of the Company, is President
of T.H. Fitzgerald & Co., a Wall Street asset management firm, and a member of
the American Finance Association. Mr. Fitzgerald is also an advisor to the
management of the American Institution of Management and the Market Technician
Association. For more than 18 years Mr. Fitzgerald published the "Money Market
Directory," a world renowned reference book regarding investors and their
portfolio managers.
Messrs. Rea, Hartmann, Corcovelos, Epstein, Graf and Fitzgerald reside
in the U.S. Mr. Kuettner resides in Berlin, Germany.
DEPENDENCE ON KEY MANAGEMENT
The Company will rely on the business and technical expertise of its
executive officers and certain other key employees, particularly its Chief
Executive Officer, James Buchanan Rea, Jr., and its Chairman of the Board and
Vice President of International Development, Peter Hartmann. The loss of the
services of any of these individuals could have a material adverse effect on the
Company. The Company does not maintain key man life insurance on these
individuals. No assurance can be given that their services will be available in
the future. The Company's success will also be dependent on its ability to
attract and retain additional qualified management personnel.
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REMUNERATION OF DIRECTORS AND OFFICERS
EXECUTIVE COMPENSATION
As a newly formed entity, the Company has no prior history of executive
compensation. Mr. Rea received aggregate compensation of $91,765 during 1997, as
President and Chief Executive Officer of JBRI.
The following table sets forth information concerning the compensation
received for the fiscal year ended August 31, 1998 and the base compensation to
be paid during the fiscal year ending August 31, 1999 for services rendered to
the Company in all capacities by the Company's executives. The Company had no
executive officers under employment during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION 1998 1999
- --------------------------- -------- --------
<S> <C> <C>
Peter Hartmann, Chairman of the Board and Executive Vice
President-- International Development (1).......................... $120,000 $180,000
James Buchanan Rea, Jr., Director, President and Chief Executive
Officer (1)........................................................ $ 76,667 $125,000
Joel Epstein, Executive Vice President of Operations................. -0- $125,000
T. Michael Graf, Executive Vice President of Asset Management and
Operations......................................................... -0- $125,000
Ronald Kuettner, Director, Chief Financial Officer and
Treasurer (1)...................................................... $ 66,667 $100,000
</TABLE>
- ----------------
(1) See "Employment Agreements" below for a description of Mr. Rea's, Mr.
Hartmann's and Mr. Kuettner's benefits entitlements. All other compensation
in the form of perquisites and other personal benefits has been omitted
because the aggregate amount of such perquisites and other personal
benefits constituted the lesser of $50,000 or 10% of the total annual
salary and bonus of the named executive for such year.
Directors of the Company who are also employees do not receive cash
compensation for their services as directors or members of committees of the
Board of Directors, but are reimbursed for their reasonable expenses incurred in
connections with attending meetings of the Board of Directors or management
committees. Non-employee directors are expected to be paid a fee of $1,000 per
Board meeting attended, and reimbursement for expenses.
STOCK OPTION GRANTS
The following table sets forth information concerning stock options
granted in June 1998 to each member of the Board of Directors and Executive
Officers under the Company's 1998 Stock Option and Incentive Plan.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Appreciation for
Percent of Total Options Exercise Price 10-Year Option Term
Granted to Employees or Base Price -----------------------------
Name Grant During the Year(1) (S/Share) Date 5%($) 10%($)
- ---- ------ ------------------------ ------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
James B. Rea, Jr. 35,000 35% $ 3.00 6/17/98 $693,158 $1,165,993
Thomas H. Fitzgerald, Jr. 20,000 20% $ 3.00 6/17/98 $396,090 $ 666,247
Thomas C. Corcovelos 20,000 20% $ 3.00 6/17/98 $369,090 $ 666,247
</TABLE>
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EMPLOYMENT AGREEMENTS
Mr. Rea has a three-year employment agreement with ADAM and the Company
to perform the duties of President and Chief Executive Officer of ADAM at an
annual salary of $125,000 per year, and an annual discretionary benefits fund of
$40,000, and the Company provides personal and family medical insurance
coverage. Mr. Rea will also be the designated general securities principal and
financial principal of ADAM. If Mr. Rea is terminated without cause or the
employment agreement is not renewed, he would receive a severance payment equal
to one-quarter of the average annual base salary during the term of his
employment plus an amount equal to one-quarter of the highest annual bonus or
profit-sharing received during his employment. The discretionary benefits
includes life and disability insurance, business automobile expenses, and
business-associated memberships and expenses. Any portion of the benefits fund
not expended during a month is paid as additional compensation. Mr. Rea is also
entitled to participate in all employee plans and benefits that may be
established for executive employees. Bonuses are expected to be determined in
the future by the Board based upon an evaluation of performance against the
Company's strategic business plan and operating budget.
The Company has also entered into employment agreements with Messrs.
Hartmann and Kuettner. Mr. Hartmann's employment agreement provides for a
thirty-month term commencing July 1, 1998, pursuant to which Mr. Hartmann has
agreed to perform the duties of Chairman of the Board and Executive Vice
President -International Development at an initial annual base salary of
$180,000 and an annual discretionary benefits funds of $40,000, generally on the
same terms as Mr. Rea's employment agreement described above, including
severance and bonus provisions. Mr. Kuettner has a three-year employment
agreement with the Company to perform the duties of Chief Financial Officer and
Treasurer at an initial annual salary of $100,000 and an annual discretionary
benefits fund of $40,000, generally on the same terms as the employment contract
for Mr. Rea described above, including severance and bonus provisions.
9
<PAGE> 11
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
The Company declared a reverse 1:10 stock split of its Common Stock,
effective May 26, 1998. The Company recently declared another reverse 1:2 stock
split of its Common Stock, effective August 20, 1998. All amounts of Common
Stock outstanding reflected herein give effect to both reverse stock splits.
Except as otherwise indicated, the following table sets forth certain
information regarding the beneficial ownership of the Company's capital stock as
of August 21, 1998, after giving effect to the conversion of the Series A
Preferred Stock, by: (i) each of the Company's directors and officers, (ii) each
person who beneficially owned more than five percent of the Company's capital
stock, and (iii) all directors and executive officers of the Company as a group.
Unless otherwise indicated, the address of each named beneficial owner is the
same as that of the Company's principal office located at 12100 Wilshire
Boulevard, #680 Los Angeles, California 90025.
<TABLE>
<CAPTION>
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER (2) OWNED OWNED(1)
- ---------------------------------------- ------------ ------------
<S> <C> <C>
COMMON STOCK
Dr. Michael Klug......................................... 489,500 7.2%
Pfalzburger StraBe 20, 10717 Berlin, Germany
Eureka Consulting, Inc................................... 422,000 6.2%
1350 E. Flamingo Road #742, Las Vegas, NV 89119
Prodevco, Inc............................................ 633,000 9.3%
7135 Pintale Drive, Carlsbad, CA 92009
Klaus Conradi............................................ 321,750 4.7%
Kurfurstendamm 15, Berlin, D-10719, Germany
Peter Hartmann........................................... 448,750 6.6%
James Buchanan Rea, Jr................................... 118,750 1.7%
Thomas Corcovelos........................................ 25,000 *
Ronald Kuettner.......................................... 25,000 *
Kurfurstendamm 15, Berlin, D-10719, Germany
Bernward J. Rohmann...................................... 15,000 *
Kurfurstendamm 15, Berlin, D-10719, Germany
Officers and Directors as a group (6 individuals)........ 954,250 14.0%
</TABLE>
- ----------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with the applicable rules
under the 1934 Act. In computing the number of shares beneficially owned by
a person and the percentage ownership of that person, shares of Common
Stock subject to options held by that person that are currently
exercisable, or become exercisable within 60 days from the date hereof, are
deemed outstanding. However, such shares are not deemed outstanding for
purposes of computing the percentage ownership of any other person.
Percentage ownership is based on 6,818,017 shares of Common Stock
outstanding and conversion of the 5,000,000 shares of Series A Preferred
Stock.
(2) Unless otherwise indicated, the address of each of the beneficial owners
named above is 12100 Wilshire Blvd., Suite 680, Los Angeles, California
90025.
PREFERRED STOCK
As of July 1, 1998, the Company had 5,000,000 shares of Series A
Preferred Stock issued and outstanding, held by approximately 320 individual
preferred shareholders. None of the holders of the shares of Series A Preferred
Stock owns more than five percent of the shares. All of these individuals are
residents of Germany and none are affiliated with the Company.
10
<PAGE> 12
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
The merger of JBRI into ADAM was completed and became effective on March
31, 1998. On January 12, 1998, the shareholders of the Fund approved a new
investment advisory agreement with ADAM. Under the terms of the merger, Mr. Rea
received 2,375,000 shares (pre-reverse splits) of the Company's common stock at
the closing in exchange for his 50,500 shares of JBRI stock, and the other JBRI
shareholders received aggregate cash payments of $160,875 in consideration for
their 49,500 shares of JBRI stock, at a value of $3.25 per share. The 2,375,000
shares of the Company's Common Stock issued in connection with the JBRI-ADAM
Merger were converted into 118,750 shares, after giving effect to the Company's
reverse 1:10 stock split, effective May 26, 1998, and the reverse 1:2 stock
split, effective August 20, 1998. Mr. Rea acquired the Company shares without
registration in reliance on the exemption provided by Section 4(2) under the
Securities Act of 1933, as amended (the "Securities Act"). Mr. Rea is a
sophisticated investor knowledgeable in the securities business. He will
continue to serve as President of ADAM, the successor to JBRI. The Company
shares issued to Mr. Rea are "restricted securities" and may not be publicly
resold except pursuant to a registration under the Securities Act, Rule 144 or
other exemption under the Securities Act that may be applicable.
On August 28, 1997, the Company issued 90,000,000 shares of Common Stock
to American Diversified Corporation ("ADC"), a Delaware corporation, the
principal shareholders of which are Messrs. Conradi, Hilger and Hartmann, in
exchange for its contribution of a "Bearer Note" issued by Immofin
Grundstuecksverwaltungsgessellschaft Conradi & Hilger GbRmbH, a partnership
consisting of Messrs. Klaus Conradi and Josef Hilger, two of the Company's
founding shareholders. The shares issued to ADC were converted into 4,500,000
shares, after giving effect to the Company's reverse 1:10 stock split of the
Common Stock, effective May 26, 1998, and reverse 1:2 stock split of the Common
Stock, effective August 20, 1998. The shares issued to ADC have since been sold
and transferred to individual investors, pursuant to applicable exemptions from
registration under U.S. state and federal securities laws. On May 28, 1998, the
Company sold the Bearer Note to an unrelated third party for $ 11,584,186
(including accrued interest). (See Note 8 to "Consolidated Financial
Statements," page F-9) .
SECURITIES BEING OFFERED
No securities are being offered in connection with this filing. There is
no public trading market for the Company's common or preferred stock and there
is no assurance that a trading market will develop. The Company declared a
reverse 1:10 stock split of its common stock effective May 26, 1998; and a
reverse 1:2 stock split of its common stock effective August 20,1998. As of
March 31, 1998, there were 103,027,000 outstanding shares of common stock
(giving effect to the 2,375,000 shares issued to Mr. Rea upon completion of the
JBRI-ADAM merger), issued to the Company's founders and Mr. Rea. As of September
15, 1998, giving effect to the reverse stock splits, there were outstanding
5,151,350 shares of Common Stock held by approximately 35 shareholders, all of
which shares were "restricted securities" under applicable U.S. securities laws
and may not be publicly resold except pursuant to a registration under the
Securities Act, Rule 144 thereunder, or other applicable exception under the
Securities Act. The Company completed the sale of 5,000,000 shares of Series A
Preferred Stock on March 31, 1998 to 384 shareholders, at $1.00 per share
pursuant to a private placement conducted in Europe under the exemption from
U.S. securities laws provided under Regulation S.
DESCRIPTION OF CAPITAL STOCK
The following is a brief description of the material terms of the
Company's capital stock. This description does not purport to be complete and is
subject in all respects to applicable Nevada law and to the provisions of the
Company's Articles of Incorporation and Bylaws, copies of which are on file with
the Commission are incorporated by reference herein.
GENERAL
The Company's authorized equity capitalization consists of 20,000,000
shares of voting common stock, no par value, and 10,000,000 shares of preferred
stock, of which 5,000,000 shares have been designated Series A Preferred Stock,
par value $1.00 per share. The shares of preferred stock may be issued from time
to time in one
11
<PAGE> 13
or more series. The Board of Directors is authorized to fix the number of shares
of any series of preferred stock and to determine the designation of any such
series. The Board of Directors is also authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of preferred stock and, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issue of shares of
that series.
COMMON STOCK
Holders of common stock are entitled to receive dividends when, as and
if declared by the Board of Directors, out of funds legally available therefor.
Dividends on any outstanding shares of preferred stock may be required to be
paid in full before payment of any dividends on the common stock. Upon
liquidation, dissolution or winding up of the Company, holders of common stock
are entitled to share ratably in assets available for distribution after payment
of all debts and other liabilities and subject to the prior rights of any
holders of any preferred stock then outstanding.
Holders of common stock are entitled to one vote per share with respect
to all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the common stock entitled
to vote in any election of directors may elect all of the directors standing for
election, subject to the voting rights (if any) of any series of preferred stock
that may be outstanding from time to time. The Company's Articles of
Incorporation and Bylaws contain no restrictions on the repurchase by the
Company of shares of the common stock or preferred stock. All the outstanding
shares of common stock are, and additional shares of common stock will be, when,
issued, validly issued, fully paid and nonassessable.
PREFERRED STOCK
As of March 31, 1998, the Company had sold 5,000,000 shares of Series A
Preferred Stock, par value $1 per share, pursuant to a private placement
conducted in Germany that is exempt from U. S. securities laws under Regulation
S. The Series A Preferred Stock is entitled to a cumulative preferential
dividend of $.09 per share, when and as declared by the Board of Directors. The
Series A Preferred Stock ranks prior to the common stock as to dividends and as
to distributions in the event of liquidation, dissolution or winding up of the
Company. The Company may redeem the Series A Preferred Stock at any time at the
price of $1 per share, as adjusted to give effect to anti-dilution, plus any
cumulated but unpaid dividends. The shares are convertible into common stock, at
any time in the ratio of three shares of Series A Preferred Stock into one share
of common stock and shall be automatically converted into common stock if the
Company effects a firm commitment public offering registered under the
Securities Act, that results in net proceeds to the Company of at least $10
million.
The Board of Directors is authorized to designate with respect to each
series of preferred stock the number of shares in each such series, the dividend
rates and dates of payment, voluntary and involuntary liquidation preferences,
redemption prices, if any, whether or not dividends shall be cumulative and, if
cumulative, the date or dates from which the same shall be cumulative, the
sinking fund provisions if any, and the terms and conditions on which shares can
be converted into or exchanged for shares of another class or series, and the
voting rights, if any. As of the date hereof, there were no shares of Preferred
Stock issued and outstanding. The Series A Preferred Stock is non-voting. Any
series preferred stock issued will rank prior to the common stock as to
dividends and as to distributions in the event or liquidation, dissolution or
winding up of the Company. The ability of the Board of Directors to issue
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting powers of holders of common stock. The preferred stock will,
when issued, be fully paid and nonassessable.
12
<PAGE> 14
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
There is no current market for the Company's shares of common and
preferred stock and the Company has not declared any cash dividends. As
of March 31, 1998, there are 18 shareholders of record of the Company's
common stock and 384 shareholders of record of the Series A Preferred
Stock.
Item 2. Legal Proceedings.
None
Item 3. Changes in and Disagreements with Accountants.
None
Item 4. Recent Sales of Unregistered Securities.
See "Interest of Management and Others in Certain Transactions" above,
for a description of the Company's common stock issued in the JBRI-ADAM merger.
See "Security Ownership of Management and Certain Securityholders --
Preferred Stock," for a discussion of the 5,000,000 share private placement of
Series A Preferred Stock to 384 shareholders, which was completed on March 31,
1998.
Mr. Peter Hartmann contributed $22,979 in cash and the remainder in
services for the 2,375,000 shares of common stock issued to him as of March
1997.
Item 5. Indemnification of Directors and Officers.
The Articles of Incorporation limit the liability of directors and
officers to the fullest extent permitted under Nevada General Corporation Law.
As allowed by Nevada Revised Statutes, the Articles of Incorporation and Bylaws
of the Company provide that the liability of the directors of the Company for
monetary damages shall be eliminated to the fullest extent permissible under
Nevada law. This is intended to eliminate the personal liability of a director
for monetary damages in an action brought by or in the right of the Company for
breach of a director's duties to the Company or its shareholders except for
liability for acts or omissions that involve intentional misconduct or knowing
and culpable violation of law, for acts or omissions that a director believes to
be contrary the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, for any
transaction from which a director derived an improper personal benefit, for acts
or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of serious injury to the Company or its shareholders, for acts
or omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Company or its shareholders, with
respect to certain contracts in which a director has a material financial
interest and for approval of certain improper distributions to shareholders or
certain loans or guarantees. This provision does not limit or eliminate the
rights of the Company or any shareholder to seek non-monetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
II-1
<PAGE> 15
PART F/S
FINANCIAL STATEMENTS
See "Index to Consolidated Financial Statements" for a listing of the
consolidated financial statements filed with this Form 10-SB.
<PAGE> 16
PART III
Item 2. Description of Exhibits
See "Exhibit Index"
III-1
<PAGE> 17
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AMERICAN DIVERSIFIED HOLDINGS INC. AND SUBSIDIARIES
Independent Auditor's Report.................................................... F -1
Consolidated Balance Sheet as of February 28, 1998 and August 31, 1997.......... F -2
Consolidated Statements of Operations For the Periods From
February 4, 1997 (inception) to August 31, 1997 and February 28,1998
and the Six Months Ended February 28, 1998................................... F -3
Consolidated Statement of Stockholders Equity For the Period From
February 4, 1997 (inception) to August 31, 1997
and the Six Months Ended February 28, 1998................................... F -4
Consolidated Statement of Cash Flows For the Periods From February 4,
1997 (inception) to August 31, 1997 and the Six Months Ended
February 28, 1998............................................................ F -5
Notes to Consolidated Financial Statements...................................... F -6 to F -9
Unaudited Proforma Consolidated Financial Statements............................ F-10
Unaudited Proforma Consolidated Balance Sheet as of February 28, 1998........... F -11
Unaudited Proforma Consolidated Statement of Operations For the
Period From February 4, 1997 (inception) to August 31, 1997.................. F -12
Unaudited Proforma Consolidated Statement of Operations Six Months
Ended February 28,1998....................................................... F-13
Notes to Unaudited Pro Forma Consolidated Financial Statements.................. F -14
JAMES BUCHANAN REA, INC.
Independent Auditor's Report.................................................... F -15
Balance Sheets as of December 31, 1997 and 1996................................. F -16
Statements of Operations For the Years Ended December 31, 1997 and 1996......... F -17
Statements of Changes in Stockholders Equity For the years ended
December 31, 1997 and 1996................................................... F -18
Statements of Cash Flows For the Years Ended December 31, 1997 and 1996......... F -19
Notes to Financial Statements................................................... F -20 to F-22
</TABLE>
<PAGE> 18
[McGladrey and Pullen, LLP letterhead}
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Diversified Holdings, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of American
Diversified Holdings, Inc. and subsidiaries as of August 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the period from February 4, 1997 (inception) to August 31, 1997. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Diversified
Holdings, Inc. and subsidiaries as of August 31, 1997, and the result of their
operations and their cash flows for the period indicated in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
---------------------------
MCGLADREY & PULLEN, LLP
New York, New York
December 22, 1997, except for the last
paragraph of Note 7 as to which the
date is March 31, 1998
F-1
<PAGE> 19
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 28,
1998 August 31,
(Unaudited) 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 306,662 $ 2,264
Debt securities (Note 2) 1,193,049
Capital stock subscriptions receivable (Note 5) 1,842,464 117,000
Prepaid expenses and other 297,592 4,220
Equipment, net of accumulated depreciation of
1998 $3,429; 1997 -0- 40,930 14,320
-----------------------
$3,680,697 $ 137,804
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 615,038 $ 63,577
Bank overdraft 419,911
-----------------------
1,034,949 63,577
-----------------------
Stockholders' Equity (Note 5 and 6):
Series A 9% convertible redeemable cumulative
preferred stock, $1.00 par value; 5,000,000
shares authorized:
Issued and outstanding, 1,432,538 and no shares,
at February 28, 1998 and August 31, 1997,
respectively 1,427,058 Subscribed for but not
paid for and not issued, 2,081,953 and 162,495
shares, at February 28, 1998 and August 31, 1997,
respectively 2,081,953 150,545
Common stock, $.001 par value; 110,000,000 shares
authorized; issued and outstanding 100,652,000 and
10,000,000 shares at February 28, 1998 and August 31,
1997, respectively 10,107,429 96,754
Unpaid subscriptions as of April 17, 1998 and
December 22, 1997, respectively (239,489) (33,545)
Deficit accumulated during the development stage (792,278) (139,527)
Notes receivable from stockholders (Note 7) (9,938,925)
------------------------
2,645,748 74,227
------------------------
$ 3,680,697 $ 137,804
========================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 20
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
----------------------------
Period From Period from
February 4, February 4,
1997 Six months 1997
(inception) to Ended (inception) to
February 28, February 28, August 31,
1998 1998 1997
- ------------------------------------------------- ---------------- -------------- -------------
<S> <C> <C> <C>
Revenue $ $ $
Expenses (Note 3):
Travel and entertainment 93,331 70,845 22,486
Employee compensation and benefits 215,743 194,902 20,841
Professional fees 227,996 161,522 66,474
Advertising and promotion 102,519 95,299 7,220
Administrative 152,669 130,183 22,506
----------------------------------------
792,278 652,751 139,527
----------------------------------------
(Loss) before income taxes (792,278) (652,751) (139,527)
Income taxes
----------------------------------------
NET (LOSS) $ (792,278) $(652,751) $(139,527)
========================================
Average common shares outstanding 51,727,384 100,409,33 10,000,00
3 0
----------------------------------------
Basic and fully diluted (loss)
per common share $ (0.02) $ (0.01) $ (0.01)
=========================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 21
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from February 4, 1997 (inception) to August 31, 1997 and Six Months Ended
February 28, 1998
<TABLE>
<CAPTION>
Series A 9%
Convertible Cumulative Deficit
Preferred Stock Common Stock Accumulated Notes
---------------------- --------------------- During the Receivable
Number of Number of Development Unpaid From
shares Amount shares Amount Stage Subscriptions Stockholder Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance February
4, 1997, date
of inception $ -- $ -- $ -- $ -- $ -- $
Stock Issued:
Common Stock:
For cash at $.01/share 4,750,000 47,795 47,795
For legal and other
services at $.01/share 5,250,000 48,959 48,959
Preferred Stock:
For cash at $1.00 share
paid by December 22,
1997 126,287 117,000 117,000
Unpaid for at
December 22, 1998 36,208 33,545 (33,545)
Net(loss) (139,527) (139,527)
------------------------------------------------------------------------------------------------------
Balance, August 31,
1997 162,495 150,545 10,000,000 96,754 (139,527) (33,545) 74,227
(UNAUDITED)
Stock issued:
Common stock:
For cash at
$.10/share 142,000 15,550 15,550
In exchange for
note receivable
from affiliate
at $.10/share 90,000,000 9,773,260 (9,773,260)
For legal and other
services at
$.11/share 510,000 56,100 56,100
Interest on notes
receivables 165,665 (165,665) --
Preferred stock:
For cash and securities
at $1.00/share,
as of February
28, 1998 1,267,043 1,276,513 33,545 1,310,058
For cash at
$1.00/share, paid
after February 28,
1998 but before
April 17, 1998 1,814,688 1,842,464 1,842,464
Unpaid for by
April 17, 1998 270,265 239,489 (239,489)
Net (loss) (652,751) (652,551)
--------------------------------------------------------------------------------------------------------
Balance, February
28, 1998 3,514,491 $3,509,011 100,652,000 $10,107,429 $(792,278) $(239,489) $(9,938,925) $2,645,748
========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 22
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
-----------------------------
Period From Period from
February 4, February 4,
1997 Six months 1997
(inception) to Ended (inception) to
February 28, February 28, August 31,
1998 1998 1997
- ------------------------------------------------- ---------------- -------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net (loss) $ (792,278) $(652,751) $ (139,527)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Noncash expenses, professional fees 105,059 56,100 48,959
Depreciation 3,529 3,529
Change in assets and liabilities:
Increase in prepaid expenses and other (297,592) (293,372) (4,220)
Increase in accounts payable and accrued
expenses 615,038 551,461 63,577
----------------------------------------------
NET CASH (USED IN) OPERATING ACTIVITIES (366,244) (335,033) (31,211)
----------------------------------------------
Cash Flows from Investing Activities
Purchase of equipment $ (44,459) $ (30,139) $ (14,320)
----------------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of preferred stock 234,009 234,009
Proceeds from issuance of common stock 63,345 15,550 47,795
Increase in bank overdraft 419,911 419,911
----------------------------------------------
Net cash provided by financing activities 712,264 669,470 47,795
----------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 306,662 304,398 2,264
Cash and Cash Equivalents
Beginning -- 2,264 --
----------------------------------------------
Ending $ 306,662 $ 306,662 $ 2,264
==============================================
Supplemental schedule of noncash
financing activities
Issuance of 510,000 for the six months
ended February 28, 1998 and 5,250,000
common shares for the period ended
August 31, 1997 in exchange for
services rendered $ 105,059 $ 56,100 $ 48,959
==============================================
Issuance of 90,000,000 common shares in
exchange for notes receivable $9,773,260 $9,773,260 $
==============================================
Issuance of 1,196,049 preferred shares in
exchange for debt securities $1,193,048 $1,193,048 $
==============================================
</TABLE>
F-5
<PAGE> 23
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED
FEBRUARY 28, 1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
American Diversified Holdings, Inc. (the "Company") was organized on
February 4, 1997 as a provider of financial services in the United States and
Europe. As a development-stage enterprise, the Company has devoted most of its
resources since inception to raising capital and implementing the first stages
of its business plan. The Company's fiscal year ends on the last day of each
August.
The Company has established two wholly owned subsidiaries since its
inception:
<TABLE>
<CAPTION>
Planned Operation
---------------------------------------
<S> <C>
American Diversified AG Wertpapierhandelsbank ("ADAG") Provider of financial services in Germany
American Diversified Asset Management, Inc. ("ADAM") Investment adviser to planned mutual funds
</TABLE>
A summary of the Company's significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned. All
material intercompany accounts and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS: Cash equivalents include highly liquid debt
instruments which have a maturity of three months or less from the date of
purchase and other highly liquid investments which are readily convertible into
cash.
Cash equivalents are stated at cost which approximates market value.
EQUIPMENT: Equipment is reported at cost and includes expenditures for major
improvements. Depreciation will be determined using accelerated methods based on
three to five year estimated useful lives. The equipment was placed in service
during the six months ended February 28, 1998.
FOREIGN CURRENCY TRANSACTIONS: The Company has agreed to fund any cash flow
deficits incurred by ADAG, its European subsidiary. Until such time that ADAG
generates sales revenue the parents functional currency (U.S. $) will be
considered ADAG's functional currency for financial reporting purposes.
INVESTMENT IN DEBT SECURITIES: The Company's investment in debt securities
consists of mortgage-backed securities which are classified as
available-for-sale. Available-for-sale securities are stated at fair value, and
unrealized holding gains and losses, net of the related deferred tax effect, are
reported as a separate component of stockholders' equity.
Premiums and discounts on investments in debt securities are amortized over the
contractual lives of those securities, except for mortgage-backed securities for
which prepayments are probable and predictable which are amortized over the
estimated expected lives of those securities. The method of amortization results
in a constant effect yield on those securities (the interest method). Interest
on debt securities is recognized in income as earned. Realized gains and losses
are determined on the basis of specific identification.
F-6
<PAGE> 24
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED
FEBRUARY 28, 1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carry forwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of cash and cash
equivalents, debt securities and capital stock subscriptions receivable
approximates carrying amounts because of the short term nature of those
instruments.
BASIC LOSS PER COMMON SHARE: The basic loss per common share is based on the net
loss from operations and the weighted average number of shares of common stock
outstanding during the period. Common shares issuable upon conversion of
preferred stock have not been included in the computation because their
inclusion would have had an antidilutive effect (reduced the loss per common
share).
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS: The accompanying financial statements as of
February 28, 1998 and for the six months ended February 28, 1998 are unaudited,
but in the opinion of management, include all adjustments consisting of normal
recurring adjustments necessary for a fair presentation of results of operations
for the interim period. Results for the six months ended February 28, 1998 are
not necessarily indicative of the results that may be expected for the year
ending August 31, 1998.
NOTE 2. INVESTMENT IN DEBT SECURITIES
The following is a summary of the Company's investment in available-for-sale
securities which consist entirely of mortgage-backed securities as of February
28, 1998:
Amortized cost $1,193,049
Gross unrealized gains --
Gross unrealized losses --
----------
Fair value $1,193,049
==========
NOTE 3. RELATED PARTY TRANSACTIONS
The Company has effectively operated out of the offices and residences of the
founding stockholders in the United States and Germany. Legal and other services
provided by the Company's stockholders and reported as operating expenses in the
accompanying financial statements totaled $166,822 (unaudited) during the six
months ended February 28, 1998 and $19,639 in the period ended August 31, 1997.
F-7
<PAGE> 25
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED
FEBRUARY 28, 1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4. LEASE COMMITMENT
In July 1997, ADAG entered into a long term lease for office facilities in
Berlin, Germany. The lease provides for a monthly payment of 5,642 Deutschmarks
and expires in 2002. The lease agreement also requires ADAG to pay monthly
utilities and value added taxes. Future minimum lease commitments at August 31,
1997 are as follows:
1998 $ 38,827
1999 40,667
2000 42,467
2001 44,287
2002 14,964
----------
$ 181,212
==========
NOTE 5. PREFERRED STOCK OFFERING
The Company's Board of Directors has authorized the issuance of 5,000,000 shares
of Series A 9% cumulative convertible redeemable preferred stock. The cumulative
dividends are payable semi-annually, when and as declared, at an annual rate of
$.09 per share commencing January 1, 1998. The Company may at its option, and
subject to certain notification provisions, redeem all or a portion of the
preferred stock at the price of $1.00 per share, plus any accrued and unpaid
dividends. The stockholders do not have the right to demand redemption of the
Series A 9% cumulative convertible preferred stock. Each share is convertible at
the option of the holder into common stock at the rate of three preferred shares
for one share of common stock. In addition, each share of preferred stock shall
be automatically converted into shares of common stock at a conversion price
equal to the initial issue price of the preferred shares, subject to certain
adjustments, immediately upon the closing of a sale of the Company's common
stock in a public offering under the Securities Act of 1933, that results in net
proceeds to the Company of at least $10,000,000.
The Company commenced the sale of preferred stock in Germany under Regulation S,
guidelines established under the Securities Act of 1933 for Securities offers
made outside of the United States during August 1997. The Offering is registered
with the ABundesaufsichtsamt fuer Wertpapierhandel@, the German governmental
agency which regulates German securities transactions. As of August 31, 1997 the
Company received subscriptions for 162,495 preferred shares. Subscriptions
receivable of $117,000 for these shares were collected by September 1997.
UNAUDITED: During the six months ended February 1998 the Company received
subscriptions for an additional 3,351,996 shares of Series A 9% cumulative
convertible redeemable preferred stock of which $1,427,058 were collected before
February 28, 1998 and $1,842,464 collected before April 14, 1998. All
subscriptions for the preferred stock were from unaffiliated investors.
NOTE 6. INCOME TAXES
The Company has approximately $30,000 of federal and state operating loss
carryforwards, which may be utilized to offset future taxable income. The
federal operating loss carryforwards expire in 2012 and the state operating loss
carryforwards expire in 2002. The tax benefit recognized for the net operating
loss has been offset by an equal increase in the valuation allowance for
deferred taxes resulting in no income tax expense or benefit reflected in the
accompanying statement of operations.
F-8
<PAGE> 26
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED
FEBRUARY 28, 1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7. EVENTS SUBSEQUENT TO AUGUST 31, 1997
In September 1997, the Company received additional subscriptions for 1,358,547
additional shares of preferred stock. Also in September 1997, the Company issued
9,000,000 (prior to ten-for-one stock split, see below) shares of its common
stock in exchange for a note receivable (see Note 8) from an affiliate of one of
the Company's shareholders.
In November 1997, the Company's Board of Directors approved a ten-for-one stock
split which increased the number of authorized voting and non-voting shares to
110,000,000. All transactions in the Company's common stock and the earnings per
common share for the periods presented have been adjusted to give retroactive
effect to the stock split as if it had occurred at inception.
On November 24, 1997, the Company signed an agreement to effect a merger with
James Buchanan Rea, Inc. ("JBRI") the investment advisor and distributor of the
Rea-Graham Balanced Fund (the "Fund") since 1982. The merger is subject to the
approval of the Fund's shareholders. The merger, which will be accounted for as
a purchase, will be affected by an exchange of 2,375,000 shares of common stock
and cash of $160,875 for the common stock of JBRI.
On March 31, 1998, the merger of JBRI with and into ADAM became effective.
NOTE 8. NOTE RECEIVABLE FROM STOCKHOLDERS (UNAUDITED)
In connection with the Company's founding, a group of stockholders contributed
their ownership of a "Bearer Note" secured by a first mortgage on certain real
property in Berlin. The note with a face amount 17.5 million Deutschmarks was
valued at $9,773,260 is due on December 31, 1999 and accumulates interest at 4%
per annum. For U.S. accounting purposes the capital contribution and the
accumulated interest thereon of $165,665 are reported as common stock issued and
the note receivable from stockholders is reflected as a reduction of
stockholders' equity until such time the note and accumulated interest are
converted to cash.
F-9
<PAGE> 27
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE SIX MONTHS ENDED
FEBRUARY 28, 1998 IS UNAUDITED)
- --------------------------------------------------------------------------------
UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited proforma consolidated financial statements presented on the
following pages reflect the proforma effect of the acquisition of James Buchanan
Rea, Inc. ("JBRI") and the issuance of notes payable and common stock, as
described in the accompanying notes. The proforma adjustments have been applied
to the historical unaudited consolidated balance sheet of the Company as of
February 28, 1998, the historical consolidated statement of operations for the
fiscal periods ended August 31, 1997 and February 28, 1998, the audited balance
sheet of JBRI as of December 31, 1997 and the unaudited statements of operations
of JBRI for the nine months ended September 30, 1997 and six months ended
December 31, 1997. The acquisition will be accounted for using the purchase
method of accounting. For purposes of the proforma statements, the purchase
price of the assets of JBRI has been allocated to the acquired net assets based
on information currently available with regard to the values of such net assets.
Final adjustments to recorded amounts may differ from the proforma adjustments
presented herein. The proforma statements should be read in connection with the
notes thereto.
F-10
<PAGE> 28
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET
FEBRUARY 28,1998
<TABLE>
<CAPTION>
ASSETS Historical Adjustments As Adjusted
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 306,662 $ 11,366(1)(2) $ 317,998
Debt securities 1,193,049 -- 1,193,049
Accounts receivable -- 13,922(2) 13,922
Capital stock subscriptions receivable 1,842,464 -- 1,842,464
Prepaid expenses 297,592 3,823(2) 301,415
Equipment 40,930 45,344(2) 86,274
Goodwill -- 335,866(2) 335,866
------------------------------------------
$ 3,680,697 $410,321 $4,091,018
==========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 615,038 $ 11,946(2) $ 626,984
Bank overdraft 419,911 -- 419,911
Note payable to affiliate -- 160,875(1) 160,875
------------------------------------------
1,034,949 172,821 1,207,770
------------------------------------------
Stockholders Equity:
Series A 9% convertible redeemable
cumulative preferred stock, $.001
par value: 5,000,000 shares authorized
Issued and outstanding, 1,432,538 shares 1,427,058 -- 1,427,058
Subscription for but not paid for and
not issued, 2,081,953 shares 2,081,953 -- 2,081,953
Common stock, $.001 par value
110,000,000 shares authorized; issued
and outstanding 100,652,000 10,107,429 237,500(2) 10,344,929
Unpaid subscription as of April 17,1998 (239,489) -- (239,489)
Deficit accumulated during the
development stage (792,278) -- (792,278)
Note receivable from stockholders (9,938,925) -- (9,938,925)
-------------------------------------------
2,645,748 237,500 2,883,248
-------------------------------------------
$ 3,680,697 $ 410,321 $ 4,091,018
===========================================
</TABLE>
See Notes to Unaudited Proforma Consolidated Financial Statements
F-11
<PAGE> 29
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM FEBRUARY 4, 1997 (INCEPTION) TO AUGUST 31, 1997
<TABLE>
<CAPTION>
Historical Purchase
American JBRI Accounting
Diversified Note (A) Adjustments Proforma
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ -- $ 96,968 $ -- $ 96,968
------------------------------------------------------------
Expenses(Note 2):
Travel and entertainment 22,486 -- -- 22,486
Employee compensation and
benefits 20,841 84,027 -- 104,868
Professional fees 66,474 9,075 -- 75,549
Advertising and promotion 7,220 16,087 -- 23,307
Insurance -- 17,344 -- 17,344
Administrative 22,506 17,796 -- 40,302
Depreciation and amortization -- 2,663 13,062(4) 15,725
Interest -- -- 7,900(3) 7,900
------------------------------------------------------------
139,527 146,992 20,962 307,481
------------------------------------------------------------
(Loss) before income taxes (139,527) (50,024) (20,962) (210,513)
Income taxes -- --(7) --
------------------------------------------------------------
Net (loss) $ (139,527) $ (50,024) $ (20,962) $ (210,513)
=============================================================
Average common shares
outstanding 10,000,000 2,375,000 12,375,000
-------------------------------------------------------------
Basic and fully diluted (loss)
per common share $ (0.01) $ -- $ -- $ (0.01)
=============================================================
</TABLE>
Note A - JBRI unaudited results of operations are for the nine months ended
September 30, 1997
See Notes to Unaudited Proforma Consolidated Financial Statements.
F-12
<PAGE> 30
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1998
<TABLE>
<CAPTION>
Historical Purchase
American JBRI Accounting
Diversified Note (B) Adjustments Proforma
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ -- $ 82,010 $ -- $ 82,010
-------------------------------------------------------------
Expenses(Note 2):
Travel and entertainment 70,845 -- -- 70,845
Employee compensation and
benefits 194,902 57,245 -- 252,147
Professional fees 161,522 2,685 -- 164,207
Advertising and promotion 95,299 2,631 -- 97,930
Administrative 130,183 17,796 -- 147,979
Depreciation and amortization -- 1,775 11,196(6) 12,971
Interest -- -- 6,837(5) 6,837
-------------------------------------------------------------
652,751 111,411 18,033 781,995
-------------------------------------------------------------
(Loss) before income taxes (652,751) (29,401) (18,033) (700,185)
Income taxes -- -- -- (7) --
-------------------------------------------------------------
Net (loss) $ (652,751) $ (29,401) $ (18,033) $ (700,185)
=============================================================
Average common shares
outstanding 100,409,333 2,375,000 102,784,333
-------------------------------------------------------------
Basic and fully diluted (loss)
per common share $ (0.01) $ -- $ -- $ (0.01)
=============================================================
</TABLE>
Note B -- JBRI unaudited results of operations are for the six months ended
December 31, 1997
See Notes to Unaudited Proforma Consolidated Financial Statements.
F-13
<PAGE> 31
AMERICAN DIVERSIFIED HOLDINGS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The unaudited proforma consolidated balance sheet is presented as if the
acquisition and financing had occurred on February 28, 1998. The unaudited
proforma consolidated statement of operations for the period from February 4,
1997 (inception) through August 31, 1997 was prepared as if the acquisition and
financing had occurred on February 4, 1997. The unaudited proforma consolidated
statement of operations for the six months ended February 28, 1998 was prepared
as if the acquisition and financing had occurred on September 1, 1997.
These proforma financial statements are not necessarily indicative of the
financial position or results of operations that might have occurred had the
acquisition and financing taken place at the beginning of the period or as of
February 28, 1998, or to project the Company's financial position or results of
operations at any future date or for any future period.
Adjustments were made as follows:
(1) Record issuance of notes payable to affiliate for cash portion of
purchase price
Cash 160,875
Notes payable 160,875
(2) Record purchase of the net assets of JBRI in
exchange for cash and stock. Value assigned
to common stock issued for majority interest
reflects a premium of 45% over the cash paid
to minority shareholders of JBRI.
Purchase price allocated as follows:
Cash, receivables and other assets 29,111
Property and equipment 45,344
Goodwill 335,866
Accounts payable 11,946
Cash 160,875
Common stock 237,500
(3) Record interest on notes payable at an annual rate of 8.5%, for the
period from February 4, 1997 through August 31, 1997.
Interest expense 7,900
-------
(4) Record amortization of goodwill over a
period of 15 years for the period
February 4, 1997 through August 31,1997
Amortization expense 13,062
-------
(5) Record interest on notes payable at an
annual rate of 8.5%, for the six
months ended February 28, 1998.
Interest expense 6,837
-------
(6) Record amortization of goodwill over a
period of 15 years for the six
months ended February 28, 1998
Amortization expense 11,196
-------
(7) The tax benefit for the proforma
adjustments has been offset by an equal
increase in the valuation allowance for
deferred taxes resulting in no
income tax expense or benefit reflected
in the purchase accounting adjustments
F-14
<PAGE> 32
[McGladrey & Pullen, LLP letterhead]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
James Buchanan Rea, Inc.
Los Angeles, California
We have audited the accompanying balance sheets of James Buchanan Rea, Inc. as
of December 31, 1997 and 1996, and the related statements of operations, changes
in stockholders' equity and cash flows for the years then ended. 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 James Buchanan Rea, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
----------------------------
MCGLADREY & PULLEN, LLP
New York, New York
March 16, 1998, except
for the last paragraph
of Note 9 as to which the
date is March 31, 1998
F-15
<PAGE> 33
JAMES BUCHANAN REA, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 11,336 $ 60,838
Accounts receivable:
Investment advisory fees 8,462 12,043
Distribution fees 2,951 3,363
Other 2,539
Prepaid expenses 2,136 2,527
Property and equipment, net (Note 2) 45,344 48,495
Deposits 1,687 1,387
------------------------
$ 74,455 $128,653
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 7,744 $ 5,233
Dealer service fees payable 4,202 5,057
------------------------
11,946 10,290
------------------------
Stockholders' Equity (Note 6):
Common stock, no par value; authorized,
issued and outstanding 100,000 shares 7,500 7,500
Additional paid-in capital 198,735 184,735
Accumulated deficit (143,726) (73,872)
------------------------
62,509 118,363
------------------------
$ 74,455 $128,653
========================
</TABLE>
See Notes to Financial Statements.
F-16
<PAGE> 34
JAMES BUCHANAN REA, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Revenue:
Commissions (Note 4) $ 304 $ 590
Advisory fees (Note 4) 104,109 119,035
Distribution fees (Note 4) 36,647 42,582
Interest 1,059 3,852
Other 3,000
-------------------------
145,119 166,059
-------------------------
Expenses (Note 4):
Employee compensation and benefits 112,455 114,662
Communications 2,921 1,613
Occupancy and equipment rental 15,323 16,385
Taxes other than income taxes 800 1,195
Other operating expenses 83,474 80,531
-------------------------
214,973 214,386
-------------------------
(Loss) before income taxes (69,854) (48,327)
Federal and state income taxes (Note 7)
-------------------------
NET (LOSS) $ (69,854) $ (48,327)
=========================
Weighted average number of common shares
outstanding 100,000 100,000
=========================
Net (loss) per common share $ (0.70) $ (0.48)
=========================
</TABLE>
See Notes to Financial Statements.
F-17
<PAGE> 35
JAMES BUCHANAN REA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Stockholders
Stock Capital Deficit Equity
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $7,500 $184,735 $ (25,545) $166,690
Net (loss) (48,327) (48,327)
------------------------------------------------------------
Balance, December 31, 1996 $7,500 184,735 (73,872) 118,363
Additional contributions 14,000 14,000
Net (loss) (69,854) (69,854)
------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $7,500 $198,735 $(143,726) $ 62,509
============================================================
</TABLE>
See Notes to Financial Statements.
F-18
<PAGE> 36
JAMES BUCHANAN REA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) $(69,854) $(48,327)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 3,550 3,496
Change in assets and liabilities:
Decrease in receivables 3,993 2,155
Increase in prepaids and other assets (2,448) 1,065
Increase (decrease) in accounts payable
and accrued expenses 2,511 610
(Decrease) in dealer service fees payable (855) (1,276)
-------------------------
NET CASH (USED IN) OPERATING ACTIVITIES (63,103) (42,277)
-------------------------
Cash Flows from Investing Activities
Purchase of property and equipment (399)
-------------------------
Cash Flows from Financing Activities
Contribution of capital 14,000
-------------------------
(DECREASE) IN CASH AND CASH EQUIVALENTS (49,502) (42,277)
Cash and Cash Equivalents
Beginning 60,838 103,115
-------------------------
Ending $ 11,336 $ 60,838
=========================
</TABLE>
See Notes to Financial Statements.
F-19
<PAGE> 37
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
James Buchanan Rea, Inc. (the Company) is engaged as the investment advisor and
principal underwriter of the Rea- Graham Funds Inc. (the Fund). The Company also
conducts business as an authorized dealer in Fund shares.
The Company operates under the provisions of Paragraph (k)(2)(ii) of Rule 15c3-3
of the Securities and Exchange Commission and, accordingly, is exempt from the
remaining provisions of that Rule.
SIGNIFICANT ACCOUNTING POLICIES
SECURITIES TRANSACTIONS: Securities transactions and related commission income
and expense are recorded on a trade date basis.
REVENUE RECOGNITION: Advisory fees and distribution fees are recognized as
earned.
CASH EQUIVALENTS: Cash equivalents include debt instruments which have a
maturity of three months or less from the date of purchase and other highly
liquid investments which are readily convertible into cash. Cash equivalents are
stated at cost which approximates market value.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and include
expenditures for additions and major improvements. Depreciation is determined
principally by the double-declining-balance method and is based on the following
estimated useful lives:
Life
in Years
--------
Automobiles 5
Capital improvements to executive office 5 - 31
Furniture and equipment 5 - 7
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of cash and cash equivalents
approximate the carrying amount because of the short maturity of those
instruments.
NET LOSS PER COMMON SHARE: The net loss per common share is based on the net
loss from operations and the weighted average number of shares of common stock
outstanding during each year.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
F-20
<PAGE> 38
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Automobiles $ $ 7,525
Capital improvements to executive office 66,925 66,925
Furniture and equipment 29,371 28,972
-------------------------
96,296 103,422
Less accumulated depreciation (50,952) 54,927
-------------------------
$ 45,344 $ 48,495
=========================
</TABLE>
NOTE 3. PROFIT SHARING PLAN
The Company participates in an employee profit sharing plan which covers all
full-time employees. Annual contributions to the profit sharing plan are
determined by the Board of Directors. No contributions were made to the profit
sharing plan for 1997 and 1996.
NOTE 4. RELATED PARTY TRANSACTIONS
The Company is retained as the investment advisor to the Rea-Graham Fund, Inc.
(the "Fund"). Under the terms of the agreement, the Company receives a monthly
fee of 1/12 of 1% of the first $20,000,000 of the Fund's net assets on the last
business day of the month, 1/12 of .75% of the next $80,000,000, 1/12 of .5% of
the next $100,000,000, and 1/12 of .45% of monthly net assets in excess of
$200,000,000.
The Company shares office space, personnel and other administrative costs with
the Fund. Total administrative expenses allocated to the Fund for the years
ended December 31, 1997 and 1996 aggregated $31,233 and $30,004, respectively.
On February 28, 1990, the shareholders of the Fund approved a Plan of
Distribution for the Fund (the Plan). The Plan provides that the Fund will pay
monthly to the Company a distribution fee charged against the assets of the Fund
and equal on an annual basis to .35% of the Fund's average daily net assets,
commencing on April 1, 1990. Distribution fees received for the years ended
December 31, 1997 and 1996 were $36,647 and $42,582, respectively. Included in
other operating expenses is $17,309 and $22,269 representing trail commissions
passed on to other dealers in 1997 and 1996, respectively.
As principal underwriter and authorized dealer in Fund shares, the Company
received commissions of $304 and $590, during 1997 and 1996, respectively.
NOTE 5. TOTAL RENTAL EXPENSE
Total rent expense, exclusive of Fund allocated expenses (Note 4) and net of
sublease rental income of $14,119 in 1995, amounted to $9,133 and $9,380 for the
years ended December 31, 1997 and 1996, respectively.
F-21
<PAGE> 39
JAMES BUCHANAN REA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. NET CAPITAL
The Company is subject to the net capital rule of the Securities and Exchange
Commission. This rule prohibits a broker-dealer from engaging in securities
transactions when its aggregate indebtedness exceeds 15 times its net capital as
those terms are defined in the Rule 15c3-1. Rule 15c3-1 also provides that
equity capital may not be withdrawn or cash dividends paid if the resulting net
capital ratio would exceed ten to one.
The Company's net capital, required net capital, and net capital ratio as of
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------
<S> <C> <C>
Net Capital $ 10,199 $58,920
---------------------
Required net capital $ 5,000 $ 5,000
---------------------
Net capital ratio 1.17 to 1 .17 to 1
-- ------------------
</TABLE>
NOTE 7. INCOME TAXES
The Company has approximately $195,000 and $181,000 of federal and state
operating loss carryforwards, respectively, which may be utilized to offset
future taxable income as of December 31, 1997. The federal operating loss
carryforwards expire from years 2009 to 2012 and the state operating loss
carryforwards from years 1999 to 2002. For the years ended December 31, 1997 and
1996, tax benefits recognized for net operating losses were offset by equal
increase in the valuation allowance for deferred taxes resulting in no income
tax expense or benefit reflected on the Statements of Operations.
NOTE 8. OFF-BALANCE-SHEET RISK
As discussed in Note 1, the Company's customers' securities transactions are
introduced on a fully disclosed basis with its clearing broker-dealer. The
clearing broker-dealer carries all accounts of the Company's customers and is
responsible for execution, collection and payment of funds, and receipt and
delivery of securities, relative to customer transactions. Off-balance-sheet
risk exists due to the possibility that customers may be unable to fulfill their
contractual commitments, in which case the clearing broker-dealer may charge to
the Company any losses it incurs. The Company seeks to minimize this risk
through procedures designed to monitor the creditworthiness of its customers and
to ensure that customer transactions are executed properly by the clearing
broker-dealer.
NOTE 9. PENDING MERGER
On November 24, 1997, the Company entered into an agreement to merge with
American Diversified Asset Management, Inc. (American Diversified) with American
Diversified to be the survivor of the merger. The merger will be affected by an
exchange of 2,375,000 shares of common stock of American Diversified and cash of
$160,875 for the common stock of the Company. The cash proceeds will be utilized
to retire the stock of the minority shareholders of the Company. The merger was
approved by the shareholders of the Fund on January 12, 1998.
On March 31, 1998, the Company's merger into American Diversified Holdings, Inc.
became effective.
F-21
<PAGE> 40
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant has caused this amendment to its registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN DIVERSIFIED HOLDINGS, INC.
(Registrant)
Date: September 23, 1998 By /s/ PETER HARTMANN
--------------------------------
Peter Hartmann
Chairman of the Board
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
- ------- ----------- ------------
<S> <C> <C>
2.1 Articles of Incorporation*
2.1.1 Amendment to Articles of Incorporation dated April 1, 1997**
2.1.2 Amendment to Articles of Incorporation dated November 20, 1997**
2.1.3 Amendment to Articles of Incorporation dated January 12, 1998**
2.1.4 Certificate of Designation re: Series A Preferred Stock, dated
February 4, 1998**
2.2 Bylaws of the registrant*
4.1 Specimen of Common Stock of Registrant*
4.2 Specimen of Series A Preferred Stock of Registrant**
6.1 Form of Investment Advisory Agreement of ADAM with Rea-Graham
Balanced Fund, Inc.**
6.2 Form of Investment Sub-Advisory Agreement of ADAM with Ladas &
Hulings, Inc.**
8.1 Plan and Agreement of Merger and Reorganization among JBRI, ADAM,
the Company and certain shareholders of JBRI.*
9.1 Employment Agreement among Registrant, ADAM and James B. Rea, Jr.**
9.1.2 Employment Agreement between Registrant and Roland Kuettner.**
9.1.3 Employment Agreement between Registrant and Peter Hartmann.+
</TABLE>
- ----------------
* Previously filed with the original Registration Statement on January
14, 1998.
** Previously filed with Amendment No. 1 to the Registration Statement on
Form 10-SB on May 11, 1998.
+ Previously filed with the Company's Registration Statement on Form
SB-2 (333-62489).
